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on Open Economy Macroeconomics |
| By: | Sihao Chen; Michael B. Devereux; Kang Shi; Jenny Xu |
| Abstract: | We explore how consumption heterogeneity affects the international transmission mechanism of monetary shocks and the choice of optimal monetary policy in an open economy. Incorporating two types of agents (Ricardian versus Keynesian) into a standard open economy macro model, we find that there are sizeable ranges of household heterogeneity in which monetary policy become ineffective, but this depends sensitively on the interaction of aggregate demand and relative price effects. We derive the global optimal monetary policy with household heterogeneity under alternative pricing regimes. PPI targeting is still the optimal monetary policy under PCP and can restore the economy to the efficient equilibrium. Under LCP, however, the presence of consumption heterogeneity and currency misalignment implies that CPI inflation targeting is no longer optimal in most cases. Finally, we show that when fiscal instruments such as an import tax and export subsidy are introduced, both currency misalignment and consumption heterogeneity can be eliminated, and even under LCP, PPI targeting is the optimal monetary rule. |
| JEL: | F3 F4 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29835&r= |
| By: | Dix-Carneiro, Rafael; Pessoa, João Paulo; Reyes-Heroles, Ricardo; Traiberman, Sharon |
| Abstract: | We study the role of global trade imbalances in shaping the adjustment dynamics in response to trade shocks. We build and estimate a general equilibrium, multi-country, multi-sector model of trade with two key ingredients: (a) Consumption-saving decisions in each country commanded by representative households, leading to endogenous trade imbalances; (b) labor market frictions across and within sectors, leading to unemployment dynamics and sluggish transitions to shocks. We use the estimated model to study the behavior of labor markets in response to globalization shocks, including shocks to technology, trade costs, and inter-temporal preferences (savings gluts). We find that modeling trade imbalances changes both qualitatively and quantitatively the short- and long-run implications of globalization shocks for labor reallocation and unemployment dynamics. In a series of empirical applications, we study the labor market effects of shocks accrued to the global economy, their implications for the gains from trade, and we revisit the “China Shock” through the lens of our model. We show that the US enjoys a 2.2% gain in response to globalization shocks. These gains would have been 73% larger in the absence of the global savings glut, but they would have been 40% smaller in a balanced-trade world. |
| Keywords: | global trade imbalances; labor market disruption |
| JEL: | F16 |
| Date: | 2021–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:114424&r= |
| By: | Anna Burova (Bank of Russia, Russian Federation); Konstantin Egorov (New Economic School); Dmitry Mukhin (London School of Economics) |
| Abstract: | This paper studies both theoretically and empirically the firm’s choice of currency for its debt. We use a parsimonious model with financial frictions to derive an intuitive sufficient statistic for the share of foreign-currency debt in firm’s liabilities and demonstrate its robustness in several extensions. Due to the risk management considerations, firms are more likely to borrow in dollars when the pass-through of the exchange rate into their profits is higher. We leverage this insight empirically using the micro-level data on loans issued by Russian banks to local firms as well as the data on firms’ balance sheets and cash flows. The data strongly supports the predictions of the model indicating that firms with profits more stable in dollars are more likely to borrow in foreign currency than firms with profits stable in local currency. These results extend to a choice between the euro and the dollar and survive after controlling for firms’ size and export status. Note that our results describe efficiency at the firm level, and they do not have direct implications for macroprudential policy as foreign currency debt may also affect exchange rate volatility, inflation and output. |
| Keywords: | currency choice, invoicing currency, borrowing currency, dollar in global economy, bank loans, exporter status, optimal debt composition |
| JEL: | D22 F31 F34 G11 G21 G32 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps93&r= |
| By: | Francesco Zezza; Gennaro Zezza |
| Abstract: | Starting from the seminal works of Wynne Godley (1999; Godley and Lavoie 2005, 2007a, 2007b), the literature adopting stock-flow consistent (SFC) models for two or more countries has been flourishing, showing that consistently taking into account real and financial markets of two open economies will generate different results with respect to more traditional open economy models. However, few contributions, if any, have modeled two regions in the same country, and our paper aims at filling this gap. When considering a regional context, most of the adjustment mechanisms at work in open economy models--such as exchange rate movements, or changes in interest on public debt--are simply not present, as they are in control of "external" authorities. So, what are the adjustment mechanisms at work? To answer this question, we adapt the framework suggested in Godley and Lavoie (2007a) to consider two regions that share the same monetary, fiscal, and exchange rate policies. We loosely calibrate our model to Italian data, where the South (Mezzogiorno) has both a lower level of real income per capita and a lower growth rate than the North. We also introduce a fragmented labor market, as discouraged workers in the South will move North in hopes of finding commuting jobs. Our model replicates some key features of the Italian economy and sheds light on the interactions between financial and real markets in regional economies with "current account" imbalances. |
| Keywords: | Stock-Flow Consistent; Regional Labor Mobility; Regional Economic Activity and Development |
| JEL: | E12 J61 R12 |
| Date: | 2022–04 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1005&r= |
| By: | Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | Quantitative models of sovereign debt predict that countries should default during deep recessions. However, empirical research on sovereign debt has found a surprisingly large share of "good times" defaults (i.e., defaults that happen when GDP is above trend). Existing evidence also indicates that, on average, defaults happen when output is close to potential. This paper reassesses the empirical evidence and shows that the detrending technique proposed by Hamilton (2018) yields results that are closer to the predictions of standard quantitative models of sovereign debt. |
| Keywords: | Sovereign Debt; Default; Business Cycles |
| JEL: | F34 F32 H63 |
| Date: | 2022–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp06-2022&r= |
| By: | Takashi Kamihigashi (Research Institute for Economics and Business Administration and Center for Computational Social Science, Kobe University, JAPAN); Ryonghun Im (Faculty of Economics, Kwansei Gakuin University, JAPAN) |
| Keywords: | Stock market bubbles; Pure bubbles; Small open economy |
| JEL: | E21 E44 |
| Date: | 2022–03 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2022-15&r= |