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on Open Economy Macroeconomics |
| By: | Juan Carlos Conesa; Timothy J. Kehoe |
| Abstract: | By preemptive austerity, we mean a policy that increases taxes to deter potential rollover crises. The policy is so successful that the usual danger signal of a rollover crisis, a high yield on new bonds sold, does not show up because the policy eliminates the danger. Mechanically, high taxes make the safe zone in the model - the set of sovereign debt levels for which the government prefers to repay its debt rather than default - larger. By announcing a high tax rate at the beginning of the period, the government ensures that tax revenue will be high enough to service sovereign debt becoming due, which deters panics by international lenders but is ex-post suboptimal. That is why, as it engages in preemptive austerity, the government continues to reduce the level of debt to a point where, asymptotically, high taxes are no longer necessary. |
| Keywords: | Debt crises; Rollover crisis; Fiscal policy; Labor taxes; Eurozone |
| JEL: | E60 F30 F40 H20 H30 |
| Date: | 2023–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:97226&r=opm |
| By: | Martin Bodenstein; Pablo A. Cuba-Borda; Nils M. Gornemann; Ignacio Presno; Andrea Prestipino; Albert Queraltó; Andrea Raffo |
| Abstract: | We develop a two-country macroeconomic model that we fit to a set of aggregate prices and quantities for the U.S. and the rest of the world. In addition to a standard array of shocks, the model includes time variation in agents’ preference for safe bonds. We allow for a component of this time variation to be common across countries and biased toward dollar-denominated safe assets, and refer to this component as global flight to safety (GFS). We find that GFS shocks are the most important shocks driving world business cycles, and are also important drivers of activity in the U.S. and especially abroad. An adverse GFS shock lowers global GDP and inflation, widens global corporate credit spreads, and appreciates the dollar. These effects are very close to those obtained from a structural VAR which uses the excess bond premium (Gilchrist and Zakraj¡sek, 2012) as proxy for global flight to safety. |
| Keywords: | Macroeconomic activity; Econometrics and economic theory; International economics |
| JEL: | H22 F30 E32 |
| Date: | 2023–10–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:97204&r=opm |
| By: | Kuusi, Tero; Ali-Yrkkö, Jyrki |
| Abstract: | Abstract We examine how the Covid-19 shock was transmitted from the foreign, upstream parts of value chains to domestic (downstream) production. After categorizing global value chains based on their home-producer industry and country, we quantify the multiplier effect of the transmitted shock on the entire value chain by considering changes in home production. The upstream shock was measured using world input-output data, and our analysis relies on the upstream dependence on the early shock in China during 1-4/2020, employing a differences-in-differences research setup. Our findings reveal that the impact was large: For every percentage point of dependence on the Chinese value chain, there was a 1.3 percent larger contraction in domestic production. In essence, the multiplier effect of the manufacturing contraction amplified the direct foreign shock by an order of magnitude. These effects varied across industries and regions, with the most substantial multiplier effects observed in highly digitalized, high-R&D industries, particularly in the EU and North America. Furthermore, we provide evidence on the dynamics of adjustment. |
| Keywords: | Global value chains, Shock, Infection, Covid-19, Transmission, Transmit, Linkage |
| JEL: | F21 F23 F13 F62 L24 |
| Date: | 2023–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:rif:wpaper:109&r=opm |
| By: | Mr. Pragyan Deb; Julia Estefania-Flores; Melih Firat; Davide Furceri; Siddharth Kothari |
| Abstract: | This paper revisits the transmission of monetary policy by constructing a novel dataset of monetary policy shocks for an unbalanced sample of 33 advanced and emerging market economies during the period 1991Q2-2023Q2. Our findings reveal that tightening monetary policy swiftly and negatively impacts economic activity, but the effects on inflation and inflation expectations takes time to fully materialize. Notably, there exist significant heterogeneities in the transmission of monetary policy across countries and time, depending on structural characteristics and cyclical conditions. Across countries, monetary policy is more effective in countries with flexible exchange rate regime, more developed financial systems, and credible monetary policy frameworks. In addition, we find that monetary policy transmission is stronger when uncertainty is low, financial conditions are tight and monetary policy is coordinated with fiscal policy—that is, when the stances move in the same direction. |
| Keywords: | Monetary policy transmission; heterogeneity; inflation; statedependence |
| Date: | 2023–10–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/204&r=opm |
| By: | Amy Smaldone; Mark L. J. Wright |
| Abstract: | An analysis looks at whether developing countries are facing pressures similar to those in the 1980s, when higher interest rates helped trigger a wave of defaults in sovereign debt. |
| Keywords: | sovereign debt; default; developing countries |
| Date: | 2023–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:l00001:96745&r=opm |
| By: | António Afonso; José Alves; Sofia Monteiro |
| Abstract: | We analyze domestic, foreign, and central banks holdings of public debt for 31 countries for the period of 1989-2022, applying panel regressions and quantile analysis. We conclude that an increase in sovereign risk raises the share of domestic banks’ portfolio of public debt and reduces the percentage holdings in the case of central banks. Better sovereign ratings also increase (decrease) the share of commercial (central) banks’ holdings. Furthermore, the effects of an increment in the risk for domestic investors have increased since the 2010 financial crisis. |
| Keywords: | banking, sovereign debt, sovereign risk, financial crisis, ratings |
| JEL: | C21 E58 G24 G32 H63 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10692&r=opm |
| By: | Lu\'is A. V. Cat\~ao; Jan Ditzen; Daniel Marcel te Kaat |
| Abstract: | We show that fluctuations in the ratio of non-core to core funding in the banking systems of advanced economies are driven by a handful of global factors of both real and financial natures, with country-specific factors playing no significant roles. Exchange rate flexibility helps insulate the non-core to core ratio from such global factors but only significantly so outside periods of major global financial disruptions, as in 2008-2009. |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2310.11552&r=opm |
| By: | Sami Alpanda; Uluc Aysun; Serdar Kabaca |
| Abstract: | We evaluate, both empirically and theoretically, the spillover effects that debt-financed fiscal policy interventions of the United States have on other economies. We first consider a two-country dynamic stochastic general equilibrium model with international portfolio rebalancing effects arising from an imperfect substitutability between short- and long-term domestic and foreign bonds. The model shows that US fiscal expansions financed by long-term debt issuance would, on net, hinder economic activity in the rest of the world (ROW). This is despite the standard trade channel’s net positive effect on the ROW economy given the depreciation in the ROW currency. The fall in ROW output occurs mainly due to the increase in the ROW term premia and long-term rates through the portfolio rebalancing channel. This is because the relative demand for ROW long-term bonds decreases following the increase in the supply of US long-term bonds accompanying the fiscal expansion. Testing the predictions of our theoretical model by using panel regressions and vector autoregressions, we find empirical support for the negative relationship between ROW output and US fiscal spending. The data also confirm the positive relationship between ROW term spreads and US fiscal spending. |
| Keywords: | Economic models; Fiscal policy; International topics |
| JEL: | E3 E32 E6 E62 F4 F41 F44 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:23-56&r=opm |