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on Open Economy Macroeconomics |
| By: | Christoph Gortz (University of Birmingham); Konstantinos Theodoridis (Cardiff University and European Stability Mechanism); Christoph Thoenissen (University of Sheffield) |
| Abstract: | We estimate a novel empirical (state-space) model to study the effects of international and domestic technology trend shocks on the UK economy. We jointly identify anticipated and unanticipated domestic and international technological innovations arising from changes in total factor productivity (TFP) and investment specific technology (IST). The long-run restrictions used to jointly identify the structural trends in the data are informed by a standard two-country structural model. Our results point to large and persistent swings in productivity. International non-stationary TFP and IST shocks explain about 30% and 24% of the variance of UK GDP, respectively. UK-specific TFP and IST shocks are somewhat less important, but still a relevant factor. Notably, it is the anticipated components of these international and domestic productivity shocks, rather than their unanticipated counterparts, which account for the bulk of the volatility in the data. We dissect the historical role of different shocks as drivers of UK labor productivity growth. We find that a decline in the contribution of international IST shocks, combined with weak domestic TFP growth, can explain the widely documented slowdown in UK labor productivity after the financial crisis. A standard two-country model implies widely-used restrictions on the relative price of investment which we find to be inconsistent with our empirical evidence that relies on a minimum of structure. We show that a two-sector version of this model with adjustment cost in investment and costly sectoral labor reallocation can capture the empirical dynamics. |
| Keywords: | International Transmission of Productivity Shocks, Total Factor Productivity, Investment Specific Technology, Small Open Economy Dynamics, News Shocks, State Space Model. |
| JEL: | E32 E3 F41 F44 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:23-05&r=opm |
| By: | Simon P. Lloyd (Bank of England; Centre for Macroeconomics (CFM)); Emile A. Marin (University of California, Davis) |
| Abstract: | How does the conduct of optimal cross-border financial policy change with prevailing trade agreements? We study the joint optimal determination of trade policy and capital-flow management in a two-country, two-good model with trade in goods and assets. While the cooperative optimal allocation is efficient and involves no intervention, a country-planner acting unilaterally can achieve higher domestic welfare at the expense of the rest of the world by departing from free trade in addition to levying capital controls, absent retaliation from abroad. However, time variation in the optimal tariff induces households to over- or under-borrow through its effects on the real exchange rate. In response to fluctuations where incentives for the planner to manipulate the terms of trade inter- and intra-temporallyare aligned—e.g., the availability of domestic goods changes, or when faced with trade disruptions to imports—optimal capital controls are larger when used in conjunction with optimal tariffs. In contrast, when the incentives are misaligned, the optimal trade tariff partly substitutes for the use of capital controls. Accounting for strategic retaliation, we show that committing to a free-trade agreement can reduce incentives to engage in costly capital-control wars for both countries. |
| Keywords: | Capital-Flow Management, Free-Trade Agreements, Ramsey Policy, Tariffs, Trade Policy |
| JEL: | F13 F32 F33 F38 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2306&r=opm |
| By: | Olivier CARDI; Romain RESTOUT |
| Abstract: | Our evidence reveals that the rise in real GDP is uniformly distributed across sectors following a government spending shock while labor growth is concentrated in non-traded industries. A rationale behind these two findings lies in technology which responds endogenously to the government spending shock. While technology improvements are concentrated in traded industries, technological change is biased toward labor (capital) in non-traded (traded) industries. To account for our evidence, we consider a semi-small open economy model with tradables and non-tradables where both capital and technology can be used more intensively. While financial openness amplifies the biasedness of the demand shock toward non-traded goods, labor mobility costs, imperfect substitutability between home- and foreign-produced traded goods and endogenous capital utilization are necessary conditions for giving rise to traded technology improvement. The model can reproduce the size of fiscal multipliers once we let technology adjustment costs together with factor-biased technological change vary across sectors. |
| Keywords: | Sector-biased government spending shocks; Endogenous technological change; Factor-augmenting efficiency; Open economy; Labor reallocation; CES production function; Labor income share. |
| JEL: | E25 E62 F11 F41 O33 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2023-20&r=opm |
| By: | Mr. Nicolas E Magud; Samuel Pienknagura |
| Abstract: | We use panel quantile regressions to study extreme (rather than average) movements in the distribution of the real effective exchange rate (REER) of small open economies. We document that global uncertainty (VIX) and global financial conditions (U.S. monetary policy) shocks have a strong impact on the distribution of the REER changes, with larger impacts in the tails of the distribution, and especially in economies with shallower FX markets, lower central bank credibility, and higher credit risk (i.e., weaker macro fundamentals). Foreign exchange intervention (FXI) partially offsets the impact of these shocks, especially in the left tail (large depreciations) and particularly in economies with weaker fundamentals but, more importantly, when FXI is used sporadically. Thus, our results highlight the importance of deepening FX markets, improving central bank credibility, and strengthening macro fundamentals against the potential dynamic trade-offs of overreliance on a policy that would exacerbate the previously mentioned frictions. While our results point to low effectiveness of capital flow management in preventing large REER movements, they seem to enable more impactful foreign exchange intervention in the immediate aftermath of shocks. |
| Keywords: | Real exchange rates; external shocks; foreign exchange intervention; capital controls |
| Date: | 2023–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/129&r=opm |
| By: | Laura Alfaro (Harvard Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)); Mauricio Calani (Central Bank of Chile); Liliana Varela (London School of Economics (LSE); Centre for Economic Policy Research (CEPR)) |
| Abstract: | This paper shows that, in a world dominated by vehicle currencies, firms engaging in international operations retain currency risk and hedge it real and financially. We employ a unique dataset covering the universe of trade credit, international trade, foreign currency debt, and FX derivatives contracts with firms’ census data in Chile (2005-2018). We document that operational hedging is quantitatively limited, as different maturity, frequency, and amount of FX operations make it difficult to net these exposures. The granular firms complement real hedging using FX financial instruments, which improve their cash flow management and promote their trade and growth. |
| Keywords: | Operational Hedging, FX hedging, FX derivatives, cash flow, foreign currency debt, currency mismatch, trade credit, dominant currency |
| JEL: | F14 F2 F31 F38 F4 G30 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2315&r=opm |
| By: | Martin Bodenstein; Pablo A. Cuba-Borda; Albert Queraltó |
| Abstract: | Turmoil in the banking sector in the U.S. and Europe in early 2023 brought jitters to financial markets and increased concerns about a global risk-off event. Risk-off episodes—periods of increased global risk aversion—are characterized by sharp increases in credit spreads, high volatility in equity markets, and appreciation of reserve currencies |
| Date: | 2023–06–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2023-06-27&r=opm |
| By: | R. LAFROGNE-JOUSSIER (Insee and CREST-Ecole Polytechnique); J. MARTIN (Université du Quéebec à Montréal and CEPR); I. MEJEAN (Sciences Po and CEPR) |
| Abstract: | We use micro-level price data underlying the French producer price index from January 2018 to July 2022, along with external measures of firms' exposure to imported inputs and energy cost shocks, to study the role of external shocks in the recent inflation surge. Within our sample, firms pass through 30% of changes in the price of imported inputs and 100% of changes in energy costs when resetting their prices, conditional on their exposure to these shocks. For the average firm in our data, this implies that a 10% increase in foreign costs leads to a 0.74% rise in output prices, while a 10% energy cost shock induces prices to increase by 0.73%. We examine how pass-through rates vary across firms within and across industries, depending on their size and exposure to shocks. We find that pass-through rates are asymmetric, with positive cost shocks inducing significantly more pass-through than negative shocks. The heterogeneity in exposure to external shocks across firms and sectors drives important differences in inflation dynamics along firms' distribution. To illustrate this, we predict price changes from cumulative imported inputs and energy price changes between January 2021 and July 2022, and find that between 70% and 75% of the variance in predicted price changes happens within 2-digit industries, across firms. The chemical and metal industries are the most impacted by both imported and energy cost shocks, which contribute to an increase in producer prices in those sectors of at least 9% to 14%. |
| Keywords: | Inflation, Energy prices, Imported Inflation, Cost Pass-Through |
| JEL: | F1 F4 L1 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:nse:doctra:2023-13&r=opm |
| By: | Sergi Basco; Giulia Felice; Bruno Merlevede; Martí Mestieri |
| Abstract: | This paper empirically examines the effects of financial crises on the organization of production of multinational enterprises. We construct a panel of European multinational networks from 2003 through 2015. We use as a financial shock the increase in risk premia between August 2007 and July 2012 and build a multinational-specific shock based on the network structure before the shock. Multinationals facing a larger financial shock perform worse in terms of revenue, employment, and growth in the number of affiliates. Lower growth in the number of affiliates operates through a negative effect on domestic and foreign affiliates, and is concentrated in affiliates in a vertical relationship with the parent. These effects built up slowly over time. Negative effects are driven by multinationals with initially more leveraged parents, who adjust to the financial shock by reducing relatively more the number of foreign affiliates. These findings lend support to the hypothesis of financial frictions shaping multinational activity. |
| Keywords: | global financial crisis; Vertical integration |
| JEL: | F14 F23 F44 L22 L23 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:96496&r=opm |