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on Open Economy Macroeconomics |
| By: | Julian Di Giovanni (Federal Reserve Bank of New York, CEPR - Center for Economic Policy Research - CEPR); Andrei A Levchenko (University of Michigan System, NBER - National Bureau of Economic Research [New York] - NBER - The National Bureau of Economic Research, CEPR - Center for Economic Policy Research - CEPR); Isabelle Mejean (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR) |
| Abstract: | This paper uses a dataset covering the universe of French firm-level value added, imports, and exports over the period 1995-2007 and a quantitative multi-country model to study the international transmission of business cycle shocks at both the micro and the macro levels. Because the largest firms are the most likely to trade internationally, foreign shocks are transmitted to the domestic economy primarily through the large firms. We first document a novel stylized fact: larger French firms are significantly more sensitive to foreign GDP growth. We then implement a quantitative framework calibrated to the full extent of the observed heterogeneity in firm size, exporting, and importing. We simulate the propagation of foreign shocks to the French economy and report one micro and one macro finding. At the micro level heterogeneity across firms predominates: 45 to 75% of the impact of foreign fluctuations on French GDP is accounted for by the "foreign granular residual"-the term capturing the larger firms' greater responsiveness to the foreign shocks. At the macro level, firm heterogeneity attenuates the impact of foreign shocks, with the GDP responses 10 to 20% larger in a representative firm model compared to the baseline model. |
| Keywords: | granularity, shock transmission, aggregate fluctuations, input linkages, international trade |
| Date: | 2023–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04208350&r=opm |
| By: | Bippus, Balduin (University of Cambridge); Lloyd, Simon (Bank of England); Ostry, Daniel (Bank of England) |
| Abstract: | Using data on the external assets and liabilities of global banks based in the UK, the world’s largest centre for international banking, we identify exogenous cross-border banking flows by constructing novel granular instrumental variables. In line with the predictions of a new granular international banking model, we show empirically that cross-border flows have a significant causal impact on exchange rates. A 1% increase in UK-based global banks’ net external US dollar-debt position appreciates the dollar by 2% against sterling. While we estimate that the supply of dollars from abroad is price-elastic, our results suggest that UK-resident global banks’ demand for dollars is price-inelastic. Furthermore, we show that the causal effect of banking flows on exchange rates is state dependent, with effects twice as large when banks’ capital ratios are one standard deviation below average. Our findings showcase the importance of banks’ risk-bearing capacity for exchange-rate dynamics and, therefore, for insulating their domestic economies from global financial shocks. |
| Keywords: | Capital flows; exchange rates; financial frictions; granular instrumental variables; international banking |
| JEL: | E00 F00 F30 |
| Date: | 2023–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1043&r=opm |
| By: | Liliana Rojas-Suarez (Center for Global Development) |
| Abstract: | This paper uses a straightforward Resilience Indicator, constructed from a small set of economic and institutional variables, to show that by 2019, prior to the COVID-19 pandemic and subsequent global shocks, it was possible to identify emerging markets and developing countries that would encounter serious economic and financial problems if an external shock were to materialize. The list of developing countries identified as less resilient in 2019 using this simple methodology closely aligns with the World Bank’s 2022 compilation of countries in distress or at high risk of external debt distress. Furthermore, the emerging market economies that this indicator identified as the least resilient in 2019 were countries that had either defaulted or were teetering on the edge of default by 2022. Identifying countries that are most vulnerable to large external shocks can assist policymakers and the international community in directing their efforts towards crisis prevention, thereby avoiding the detrimental consequences of financial crises on development. |
| Keywords: | Emerging markets, developing countries, financial crisis, debt, defaults, economic resilience, external shocks |
| JEL: | E60 F32 F34 G01 G15 H60 H63 |
| Date: | 2023–10–05 |
| URL: | http://d.repec.org/n?u=RePEc:cgd:wpaper:655&r=opm |
| By: | Pierre-Olivier Gourinchas; Philippe Martin; Todd Messer |
| Abstract: | Despite a formal ‘no-bailout clause, ’ we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal, and Spain, ranging from roughly 0.5% (Ireland) to a whopping 43% (Greece) of 2010 output during the Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a ‘Southern view’ of the crisis (transfers did not help) and a ‘Northern view’ (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of ‘kicking the can down the road.’ Mapping the model to the estimated transfers, we find that the main purpose of the outsized Greek bailout was to prevent an exit from the eurozone and possible contagion. Bailouts to avoid sovereign default were comparatively modest. |
| Keywords: | Euro area; Monetary Union; Sovereign debt; bailouts |
| Date: | 2023–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/177&r=opm |
| By: | Méndez-Vizcaíno, Juan Camilo; Moreno-Arias, Nicolás |
| Abstract: | This paper presents a comprehensive framework examining fiscal sustainability in developing economies. It integrates public capital, labor informality, and global liquidity shocks in a two-sector DSGE model for a small open economy, revealing their intricate interplay and nonlinear impact on State-Dependent Debt Limits. The framework highlights the significance of initial public capital levels and efficiency in determining the benefits of public investment. High informality rates erode the tax base, compromising the efficiency of public capital for fiscal purposes by weakening revenue generation relative to costs. Adverse global liquidity shocks may significantly contract the fiscal limit distribution only if they are perceived as permanent. Through model calibration and sensitivity exercises on Colombia's fiscal limit distribution, quantitative analyses shed light on underlying mechanisms. Findings challenge the frequent practice of cutting public investment in response to declining revenues, emphasizing it can actually reduce fiscal space. The framework underscores the importance of assessing fiscal policy consolidations aimed at ensuring debt sustainability and responses to global shocks using a structural model, while stressing the fiscal benefits of informality-reducing reforms. |
| Keywords: | Public Debt;Labor informality;public investment;Fiscal limit;Fiscal space;fiscal sustainability;Global liquidity |
| JEL: | E32 E62 H20 H30 H50 H60 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:13049&r=opm |
| By: | Chan, Jenny (Bank of England); Diz, Sebastian (Central Bank of Paraguay); Kanngiesser, Derrick (Bank of England) |
| Abstract: | How does household heterogeneity affect the transmission of an energy price shock? What are the implications for monetary policy? We develop a small, open-economy TANK model that features labour and an energy import good as complementary production inputs (Gas-TANK). Given such complementarities, higher energy prices reduce the labour share of total income. Due to borrowing constraints, this translates into a drop in aggregate demand. Higher price flexibility insures firm profits from adverse energy price shocks, further depressing labour income and demand. We illustrate how the transmission of shocks in a RANK versus a TANK depends on the degree of complementarity between energy and labour in production and the degree of price rigidities. Optimal monetary policy is less contractionary in a TANK and can even be expansionary when credit constraints are severe. Finally, the contractionary effect of an energy price shock on demand cannot be generalised to alternate supply shocks, as the specific nature of the supply shock affects how resources are redistributed in the economy. |
| Keywords: | Energy prices; inflation; household heterogeneity; monetary policy |
| JEL: | E21 E23 E31 E52 F41 |
| Date: | 2023–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1041&r=opm |
| By: | Kim, Sei-Wan (Ewha Womans University); Park, Donghyun (Asian Development Bank); Tian, Shu (Asian Development Bank) |
| Abstract: | Increasing oil and food prices and persistent supply chain disruptions in 2022 contributed to inflation in advanced economies that had not been seen in decades. This pushed up interest rates, which in turn led to higher yields in global bond markets. This study examines two distinct channels that transmit advanced economy inflation to emerging market bond yields by employing a novel multivariable smooth transition autoregressive–vector autoregressive (STAR-VAR) model. Our empirical analysis yields two new key findings. First, advanced economy inflation has a significant effect on regime changes between expansion and contraction in emerging market bond yields. Second, the shortrun effect of advanced economy inflation on the bond yields of emerging markets is asymmetric between the expansion and contraction regimes. The effect is mostly positive in both regimes but stronger in a bond yield’s contraction regime. This suggests that the response of emerging market bond yields to advanced economy inflation does not necessarily follow a simple Fisher equation relationship. |
| Keywords: | bond yields; inflation; advanced economy; emerging market; regime change; smooth transition autoregressive model |
| JEL: | C40 C51 F14 |
| Date: | 2023–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0695&r=opm |
| By: | Eleonora Cavallaro (University of Rome, Sapienza); Ilaria Villani (European Central Bank) |
| Abstract: | We focus on the structural and stability dimensions of financial development and build an index to benchmark EU financial systems against their potential to enhance resilient growth and international risk sharing. We have the following results. (i) Based on the transitional dynamics of the index over 2000-2019, EU financial systems are converging towards a clustered pattern; (ii) our measure of financial development is highly significant in growth regressions, suggesting that greater openness, market-based financing, and equity positions, longer debt maturities, and enhanced stability are key to stable growth; (iii) financial asymmetries have implications for the heterogeneous vulnerability to domestic output shocks: the risk sharing mechanism is more effective in financially resilient economies that benefit by the contribution of the capital market channel, while a larger fraction of the GDP shocks remains unsmoothed in less resilient economies that feature a considerable down-seizing of the saving channel in the post-global financial crisis. |
| Keywords: | Financial resilience, financial asymmetries, growth, volatility, risk sharing |
| JEL: | F |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:inf:wpaper:2023.12&r=opm |
| By: | Mr. Anil Ari; Mr. Carlos Mulas-Granados; Mr. Victor Mylonas; Mr. Lev Ratnovski; Wei Zhao |
| Abstract: | This paper identifies over 100 inflation shock episodes in 56 countries since the 1970s, including over 60 episodes linked to the 1973–79 oil crises. We document that only in 60 percent of the episodes was inflation brought back down (or “resolved”) within 5 years, and that even in these “successful” cases resolving inflation took, on average, over 3 years. Success rates were lower and resolution times longer for episodes induced by terms-of-trade shocks during the 1973–79 oil crises. Most unresolved episodes involved “premature celebrations”, where inflation declined initially, only to plateau at an elevated level or re-accelerate. Сountries that resolved inflation had tighter monetary policy that was maintained more consistently over time, lower nominal wage growth, and less currency depreciation, compared to unresolved cases. Successful disinflations were associated with short-term output losses, but not with larger output, employment, or real wage losses over a 5-year horizon, potentially indicating the value of policy credibility and macroeconomic stability. |
| Keywords: | Inflation Shocks; Disinflation; Monetary Policy; 1973–79 Oil Crises; Termsof- Trade Shocks |
| Date: | 2023–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/190&r=opm |