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on Open Economy Macroeconomics |
| By: | Javier Bianchi; Louphou Coulibaly |
| Abstract: | This paper studies the transmission channels of monetary and macroprudential policies in an open economy framework and evaluates the normative implications for international spillovers and global welfare. An analytical decomposition uncovers the prominent role of expenditure switching for monetary policy, while macroprudential policy operates primarily through intertemporal substitution. We show that the risk of a liquidity trap generates a monetary policy tradeoff between stabilizing current output and containing capital inflows to lower the likelihood of a future recession, but leaning against the wind is not necessarily optimal. Finally, contrary to emerging policy concerns, capital controls can enhance global stability. |
| JEL: | E21 E23 E43 E44 E52 E62 F32 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30038&r= |
| By: | Ha Bui; Zhen Huo; Andrei A. Levchenko; Nitya Pandalai-Nayar |
| Abstract: | We introduce information frictions into a tractable quantitative multi-country multi-sector model with global value chains. Producers in a sector do not perfectly observe contemporaneous shocks to other countries and sectors, and their output decisions respond to their idiosyncratic beliefs about worldwide productivity innovations. We discipline agents' information sets with new quarterly data containing the frequencies of country-industry-specific economic news reports by 11 leading newspapers in the G7 plus Spain. Newspapers in each country publish articles on select events in both domestic and partner-country sectors, and not every event is reported worldwide. We show that (i) greater news coverage is associated with smaller GDP forecast errors by professional forecasters; (ii) the dispersion of forecast errors shrinks with higher news coverage; and (iii) sectors more covered in the news exhibit stronger hours growth synchronization, and more so if they trade more with each other. We use these reduced form facts to discipline the key parameters in the new theory---the precision of the vectors of public and private signals about country-sector productivities. We find that (i) imperfect ``news'' about economic fundamentals can be a quantitatively important source of international fluctuations and (ii) the effects of information frictions are amplified by the global production network. These information frictions appear as correlated labor wedges in standard models without dispersed information. |
| JEL: | F4 F41 F44 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30033&r= |
| By: | Arce, Fernando |
| Abstract: | This paper proposes a quantitative theory of the interaction between private and public debt in an open economy. Excessive private debt increases the frequency of financial crises. During such crises the government provides fiscal bailouts financed with risky public debt. This response may cause a sovereign debt crisis, which is characterized by a higher probability of a sovereign default. The model is quantitatively consistent with the evolution of private debt, public debt, and sovereign spreads in Spain from 1999 to 2015, and provides an estimate of the degree of overborrowing, its effect on the spreads, and the optimal macroprudential policy. |
| Keywords: | Bailouts; credit frictions; financial crises; macroprudential policy; sovereign default |
| JEL: | E32 E44 F41 G01 G28 |
| Date: | 2021–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:113176&r= |
| By: | Patrick Alexander; Sami Alpanda; Serdar Kabaca |
| Abstract: | We provide empirical evidence of the causal effects of changes in financial intermediaries’ net worth on the aggregate economy. Our strategy identifies financial shocks as high-frequency changes in the market value of intermediaries’ net worth in a narrow window around their earnings announcements, based on US tick-by-tick data. Using these shocks, we estimate that news of a 1% decline in intermediaries’ net worth leads to a 0.2% to 0.4% decrease in the market value of nonfinancial firms. These effects are more pronounced for firms with high default risk and low liquidity and when the aggregate net worth of intermediaries is low. |
| Keywords: | Business fluctuations and cycles; Exchange rate regimes; Exchange rates; Foreign reserves management; International financial markets; International topics |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:22-25&r= |
| By: | Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge |
| Abstract: | Global inflation has risen sharply from its lows in mid-2020, on rebounding global demand, supply bottlenecks, and soaring food and energy prices, especially since the Russian Federation’s invasion of Ukraine. Markets expect inflation to peak in mid-2022 and then decline, but to remain elevated even after these shocks subside and monetary policies are tightened further. Global growth has been moving in the opposite direction: it has declined sharply since the beginning of the year and, for the remainder of this decade, is expected to remain below the average of the 2010s. In light of these developments, the risk of stagflation—a combination of high inflation and sluggish growth—has risen. The recovery from the stagflation of the 1970s required steep increases in interest rates by major advanced-economy central banks to quell inflation, which triggered a global recession and a string of financial crises in emerging market and developing economies. If current stagflationary pressures intensify, they would likely face severe challenges again because of their less well-anchored inflation expectations, elevated financial vulnerabilities, and weakening growth fundamentals. |
| JEL: | E31 E32 E52 Q43 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2022-41&r= |
| By: | Zefeng Chen; Zhengyang Jiang; Hanno Lustig; Stijn Van Nieuwerburgh; Mindy Z. Xiaolan |
| Abstract: | We study three centuries of U.K. fiscal history. Before WW-I, when the U.K. dominated global bond markets, the U.K.’s government debt was not always fully backed by its future surpluses, even after accounting for the seigniorage revenue from convenience yields. As predicted by theories of safe asset determination, investors concentrate extra fiscal capacity in a single country, the global safe asset supplier, based on relative macro fundamentals, and its debt growth may temporarily outstrip what is warranted by its own macro fundamentals. After the relative deterioration in U.K. fundamentals, due to the run-up in debt during WW-I and WW-II, bond investors focused exclusively on the U.K’s own macro fundamentals. Since then the U.K. debt has been fully backed by surpluses. |
| JEL: | E43 E62 G12 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30059&r= |
| By: | Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko |
| Abstract: | Using surveys of firms around the world, we review existing evidence on how firms form their macroeconomic expectations. Several facts stand out. First, the mean inflation forecasts of firms often deviate significantly from those of professional forecasters and households. Second, disagreement about inflation among firms is large. Third, firms often change their short-run and long-run inflation expectations jointly and by similar amounts. Fourth, firms in economies with a history of low and stable inflation are inattentive to inflation and monetary policy, but this is less true in countries with more volatile environments. Fifth, firms form expectations about inflation and the real economy jointly, but the way in which they do can differ widely across countries. Finally, we show that conditioning on firms’ inflation expectations generates a stable Phillips curve relationship. We also review evidence showing that exogenous variation in the macroeconomic expectations of firms affects their decisions. |
| JEL: | E03 E30 E40 E5 |
| Date: | 2022–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:30042&r= |