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on Open Economy Macroeconomics |
| By: | Luca Fornaro; Federica Romei |
| Abstract: | We study optimal monetary policy during times of exceptionally high global demand for tradable goods, relative to non-tradable services. The optimal monetary response entails a rise in inflation, which helps rebalance production toward the tradable sector. While the inflation costs are fully beared domestically, however, part of the gains in terms of higher supply of tradable goods spill over to the rest of the world. National central banks may thus fall into a coordination trap, and implement an excessively tight monetary policy during tradable goodsdriven recoveries. |
| Keywords: | Asymmetric shocks, reallocation, monetary policy, international monetary cooperation, inflation, global supply shortages |
| JEL: | E32 E44 E52 F41 F42 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1814&r= |
| By: | Xing Guo; Pablo Ottonello; Diego Perez |
| Abstract: | This paper examines how monetary policy affects the asymmetric effects of globalization. We build an open-economy heterogeneous-agent New Keynesian model (HANK) in which households differ in their income, wealth, and real and financial integration with international markets. We use the model to reassess classic questions in international macroeconomics, but from a distributional perspective: What are the effects of monetary policy and external shocks in open economies? And how do alternative exchange-rate regimes compare? Our analysis yields two main takeaways. First, heterogeneity in households’ international integration is a central dimension that drives the inequality in the consumption responses to external shocks more so than do income and wealth. Second, households’ heterogeneity reveals the presence of a stabilization-inequality trade-off for the conduct of monetary policy in open economies, with fixed exchange-rate regimes leading to amplified but less unequal consumption responses to external shocks. |
| Keywords: | Monetary policy; Exchange rate regimes |
| JEL: | E32 E52 F41 F44 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:22-6&r= |
| By: | Karsten Kohler; Engelbert Stockhammer |
| Abstract: | While flexible exchange rates are commonly regarded as shock absorbers, heterodox views suggest that they can play a pro-cyclical role in emerging markets. This article provides theoretical and empirical support for this view. Drawing on post-Keynesian and structuralist theory, we propose a simple model in which flexible exchange rates in conjunction with external shocks become endogenous drivers of boom-bust cycles, once financial effects from foreign-currency debt are accounted for. We present empirical evidence for regular cycles in nominal US-dollar exchange rates in several emerging markets that are closely aligned with cycles in economic activity. An econometric analysis suggests the presence of a cyclical interaction mechanism between exchange rates and output, in line with the theoretical model, in Chile, South Africa, and partly the Philippines. Further evidence indicates that such exchange rate cycles cannot exclusively be attributed to external factors, such as commodity prices, US monetary policy or the global financial cycle. We therefore argue that exchange rate cycles in emerging markets are driven by the interplay of external shocks and endogenous cycle mechanisms. Our argument implies that exchange rate management may be beneficial for macroeconomic stability. |
| Keywords: | Exchange rates, emerging markets, boom-bust cycles, structuralism, global financial cycle, commodity prices |
| JEL: | C32 E12 E32 F31 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2205&r= |