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on Open Economy Macroeconomics |
| By: | Katheryn Russ; Jay C. Shambaugh; Sanjay R. Singh |
| Abstract: | In his papers during the lead up to the birth of the European Monetary Union, Obstfeld considered whether the countries forming the EMU were sufficiently similar to survive a single monetary policy—and more importantly, whether they had the capacity to adjust to asymmetric shocks given a single monetary and exchange rate policy. The convention at the time was to take the United States as the baseline for a smoothly functioning currency union. We document the evolution of the literature on regional labor market adjustment within the United States, expanding on stylized facts illustrating how stratification in local labor market outcomes appears far more persistent today than 30 years ago in the context of what Obstfeld and Peri (1998) call non-adjustment in unemployment rates. We then extend the currency union literature by adding an additional consideration: differences in regional cyclical sensitivity. Using measures of cyclicality and Obstfeld-Peri-type non-adjustment, we explore the characteristics of places that can get left behind when local labor markets respond differently to national shocks and discuss implications for policy. |
| JEL: | F15 F16 F45 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31519&r=opm |
| By: | Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain |
| Abstract: | How should monetary policy respond to excessive capital in•ows that appreciate the currency and widen the external de•cit? Using the workhorse two-country open-macro model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, and solve for the optimal targeting rules under cooperation. The optimal monetary stance is expansionary if the exchange rate pass-through (ERPT) on import prices is complete, contractionary if nominal rigidities attenuate ERPT. Excessive capital in•ows, however, may lead to currency undervaluation instead of overvaluation for some parameter values. The optimal stance is then invariably expansionary to support domestic demand. JEL Classification: E44, E52, E61, F41, F42 |
| Keywords: | asset markets and risk sharing, currency misalignment, exchange rate pass-through, international policy cooperation, optimal targeting rules, trade imbalances |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232843&r=opm |
| By: | J. Scott Davis; Eric Van Wincoop |
| Abstract: | The empirical literature shows that gross capital inflows and outflows both decline following a negative global shock. However, to generate a positive co-movement between gross inflows and outflows, the theoretical literature relies on asymmetric shocks across countries. We present a model where there is heterogeneity across investors within countries, but there are no asymmetries across countries. We show that a negative global shock (rise in global risk-aversion) generates an identical drop in gross inflows and outflows. The within-country heterogeneity relates to the willingness of investors to hold risky assets and foreign assets. |
| Keywords: | capital flows; retrenchment; Portfolio Heterogeneity |
| JEL: | F30 F40 |
| Date: | 2023–08–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:96609&r=opm |
| By: | Dainauskas, Justas |
| Abstract: | The U.S. invoices nearly all of its imports and exports in U.S. dollars. The U.S. terms of trade should therefore be “neutral” to movements in the U.S. dollar against other currencies. However, I find that the U.S. dollar pass-through into the U.S. terms of trade is: (i) on average positive and significant (31%); and (ii) it exhibits persistent time variation in the range of 10–60% over the period of 1990–2018. I argue that this can be explained by the changing primary commodity share in U.S. imports and the fact that commodity prices are invoiced, but not always “sticky”, in U.S. dollar terms. Without primary commodities, such as petroleum and crude oil, pass-through roughly halves and becomes relatively stable over time. Unlike trade in manufactured goods and services (i.e. non-commodities), trade in commodities thus preserves the conventional link between the exchange rate, terms of trade, and the current account. |
| Keywords: | commodity prices; current account; dominant currency paradigm; exchange rate pass-through; state-space model; terms of trade |
| JEL: | J1 F3 G3 |
| Date: | 2023–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:120000&r=opm |
| By: | Francois de Soyres; Erik Frohm; Emily Highkin; Carter Mix |
| Abstract: | This paper studies the role of expectations in driving export adjustment. We assemble bilateral data on spot exchange rates, one year ahead exchange rate forecasts and HS2-product export data for 11 exporting countries and 64 destinations, covering the 2006–2014 period. Results from fixed effects regressions and an instrumental variables approach show that expectations of exchange rate changes are an important channel for export adjustment. A one percent expected exchange rate depreciation over the next year is associated with a 0.96 percent increase in the extensive margin (entry of new exporters) in the 2SLS regression, with statistically insignificant effects on total exports or the intensive margin. We provide intuition for these findings with a simple model with heterogeneous firms and sticky prices, and use our model to discuss the implications of anticipation for subsequent export growth and trade elasticity measurement. |
| Keywords: | exchange rates; heterogeneous firms; international trade |
| JEL: | F1 |
| Date: | 2023–07–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:96661&r=opm |
| By: | Fabio Ghironi; Daisoon Kim; Galip Kemal Ozhan |
| Abstract: | This paper studies international trade and macroeconomic dynamics triggered by economic sanctions, and the associated welfare losses, in a calibrated, three-country model of the world economy. We assume that there are two production sectors in each country, and the sanctioned country has a comparative advantage in production of a commodity (for convenience, gas) needed to produce final, differentiated consumption goods. We consider three types of sanctions: sanctions on trade in final goods, financial sanctions, and gas trade sanctions. We calibrate the model to an aggregate of countries currently imposing sanctions on Russia (the European Union, the United Kingdom, and the United States), Russia, and an aggregate of third countries (China, India, and Turkey). We show that, instead of reflecting the success of sanctions, exchange rate movements reflect the type of sanctions and the direction of the resulting within-country sectoral reallocations. Our welfare analysis demonstrates that the sanctioned country’s welfare losses are significantly mitigated, and the sanctioning country’s losses are amplified, if the third country does not join the sanctions, but the third country benefits from not joining. These findings highlight the necessity, but also the challenge, of coordinating sanctions internationally. |
| Keywords: | Economic models; Exchange rates; International topics |
| JEL: | F31 F42 F51 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-46&r=opm |
| By: | Øistein Røisland; Tommy Sveen; Ragnar Torvik |
| Abstract: | We develop a theory for the optimal interaction between monetary and fiscal policy. While one might initially think that monetary and fiscal policy should pull in the same direction, we show within a simple model that this is not always the case. If there are small costs of changing the interest rate, it is optimal that monetary policy and fiscal policy pull in opposite directions when the economy is hit by an inflation or exchange rate shock. The reason is that monetary policy affects inflation through both the demand channel and the exchange rate channel, while fiscal policy only affects inflation through the demand channel. Therefore, monetary policy has a comparative advantage in stabilizing inflation, while fiscal policy has a comparative advantage in stabilizing output. Only when the costs of changing the interest rate are sufficiently high will it be optimal for monetary and fiscal policy to pull in the same direction. We also analyse how tax deduction for interest payments affects the monetary policy transmission. Such an interest subsidy improves goal achievement in response to inflation and exchange rate shocks, but the opposite is true in response to demand shocks. |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0118&r=opm |
| By: | Clancy, Daragh (Central Bank of Ireland and University of Limerick); Valenta, Vilém (European Central Bank); Smith, Donal (Organisation for Economic Cooperation & Development) |
| Abstract: | Policymakers around the world are (re)considering the trade-off between efficiency and resilience inherent in global supply chains. Many have introduced legislation seeking to encourage the local production of key inputs to reduce risks from excessive dependencies on external suppliers. We analyse the macroeconomic effects of localisation policies, such as reshoring and friend-shoring production, using a novel non-tariff mechanism in a global dynamic general equilibrium model. We find that localisation policies imply transition costs and their long-term impact on aggregate domestic output are generally negative. The size (and sign) of the impact depends on whether these policies are implemented unilaterally or as part of a global shift and, most importantly, the extent to which they lead to a reduction in domestic competition and productivity. Untargeted localisation policies are also unlikely to achieve their goal of improving macroeconomic resilience, as sensitivity to regional shocks increases, while resilience to global shocks improves only marginally. Based on these findings, we provide some tentative recommendations for policymakers considering implementing a localisation agenda. |
| Keywords: | Euro area; Friendshoring; Reshoring; Strategic autonomy. |
| JEL: | F13 F41 F45 F62 |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:5/rt/23&r=opm |
| By: | Gomes, Sandra (Bank of Portugal, UECE/REM); Jacquinot, Pascal (European Central Bank); Lozej, Matija (Central Bank of Ireland) |
| Abstract: | Differences in labour market institutions and regulations between countries of the monetary union can cause divergent responses even to a common shock. We augment a multi-country model of the euro area with search and matching framework that differs across Ricardian and hand-to-mouth households. In this setting, we investigate the implications of cross-country heterogeneity in labour market institutions for the conduct of monetary policy in a monetary union. We compute responses to an expansionary demand shock and to an inflationary supply shock under the Taylor rule, asymmetric unemployment targeting, and average inflation targeting. For each rule we distinguish between cases with zero weight on the unemployment gap and a negative response to rising unemployment. Across all rules, responding to unemployment leads to lower losses of employment and higher inflation. Responding to unemployment reduces cross-country differences within the monetary union and the differences in consumption levels of rich and poor households. |
| Keywords: | DSGE Modelling, Business cycles, Search and matching, Monetary Union. |
| JEL: | E24 E32 E43 E52 F45 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:3/rt/23&r=opm |