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on Open Economy Macroeconomics |
| By: | Julian di Giovanni; Ṣebnem Kalemli-Özcan; Alvaro Silva; Muhammed A. Yildirim |
| Abstract: | We estimate a multi-country multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–2023 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/Euro exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020–2021. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021–2022. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the US relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation. |
| JEL: | F40 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31887&r=opm |
| By: | Singh, Rajesh |
| Abstract: | This paper compares the welfare under two standard alternative exchange rate regimes, fixed and flexible, in a stochastic dynamic general equilibrium two-country setting. Conventional wisdom holds that countries often prefer low exchange-rate variability to stabilize trade. This may explain the observed `fear of floating' in emerging markets -- although most of them claim to adopt a flexible system, in reality they often intervene to peg. We show that under incomplete capital markets a fixed exchange rate regime unambiguously increases trade and improves welfare. This provides a potential explanation for the observed exchange rate policies in emerging markets. |
| Date: | 2023–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genstf:202311061509510000&r=opm |
| By: | Mathilde Lebrand (World Bank, Prospects Group); Garima Vasishtha (World Bank, Prospects Group); Hakan Yilmazkuday (Department of Economics, Florida International University) |
| Abstract: | This paper investigates the effects of real energy price shocks on current account balances of 45 emerging market and developing economies. The investigation is based on country-specific structural vector autoregression models, where alternative specifications and identification schemes are considered for robustness purposes. The empirical results suggest that one percent of a positive real oil price shock results in up to 0.11 (0.08) percentage points of a cumulative improvement (deterioration) in current account balances of oil exporters (importers) after five years, whereas one percent of a positive real natural gas price shock results in up to 0.06 (0.04) percentage points of a cumulative improvement (deterioration) in current account balances of natural gas exporters (importers) after five years. Real coal price shocks result in higher current account balances of oil exporters and natural gas exporters, suggesting substitution of coal with oil and natural gas in such cases. When contributions of alternative real energy prices to the variance of current account balances are compared, real oil price shocks dominate those of real natural gas and real coal prices. The empirical results investigating the effects of oil demand versus oil supply shocks on current account balances suggest that oil demand shocks (rather than oil supply shocks) result in similar reactions of current account balances to real oil price shocks, supporting the view that the effects of oil demand shocks are different from those of oil supply shocks. The results are robust to the consideration of country-specific changes in real GDP and real effective exchange rates. |
| Keywords: | Current account balance, Oil prices, Natural gas prices, Coal prices, Energy prices |
| JEL: | F32 F41 Q41 Q43 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:2305&r=opm |
| By: | Martín Fuentes, Natalia; Born, Alexandra; Bremus, Franziska; Kastelein, Wieger; Lambert, Claudia |
| Abstract: | This paper investigates the contribution of capital markets to international risk sharing in the euro area over the 2000Q1-2021Q1 period. It provides three main contributions: First, the estimation of country-specific vector autoregressions (VAR) shows that shock absorption through capital markets remains modest, particularly in the southern euro area. Second, we analyse the geographical patterns of the capital channel. While risk sharing between southern and northern euro area countries led the improvements in income smoothing at the beginning of the 2000s, intra-regional capital flows supported income smoothing in the recent past. Third, based on a panel threshold VAR, we analyse how the composition of external capital positions impacts the capital channel. Long-term portfolio debt assets and liabilities as well as equity liabilities significantly improved income smoothing. The effect is more pronounced for northern countries, in line with their larger cross-border portfolios, when compared to the southern countries. Regarding foreign direct investment, only northern countries benefited from inward positions. JEL Classification: C23, E62, G11, G15 |
| Keywords: | capital channel, CMU, external financial structure, international risk sharing, panel threshold vector autoregression (TVAR) model |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232864&r=opm |
| By: | Johnny Cotoc; Alok Johri; Cesar Sosa-Padilla |
| Abstract: | Nations vary widely in how often they are governed by left-wing governments. Using data from 56 nations over 45 years, we find that the propensity of a nation to elect the left is positively correlated with both the average level and volatility of their sovereign spreads. To explain these facts, we build a quantitative sovereign default model in which two policymakers (left and right) alternate in power. Reelection probabilities are increasing in government spending, with the left having a small advantage (as found in the data). We use variation in the responsiveness of reelection probabilities to government spending in order to create economies that elect the left more or less frequently in equilibrium. We call these the left leaning and the right leaning economy. The left leaning economy faces worse borrowing terms due to higher default risk. Moreover, both policymakers have a greater reluctance for fiscal austerity and choose a higher share of government spending as compared to their counterparts in the right leaning economy. These features imply large welfare losses for households. |
| Keywords: | Sovereign default; Interest rate spread; Political turnover; Left-wing; Right-wing; Cyclicality of fiscal policy |
| JEL: | F34 F41 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2023-04&r=opm |
| By: | Lahiri, Amartya; Singh, Rajesh |
| Abstract: | We investigate the welfare implications of alternative monetary policy rules in a small open economy with access to world capital markets. Financial market access is costly and induces an endogenous segmentation of households into non-traders who never participate and traders who only participate intermittently in asset markets. The model can reproduce standard business cycle moments of open economies including a countercyclical current account even though the model has no capital and investment. Our main policy result is that procyclical monetary policy outperforms both the Taylor rule and inflation targeting in this environment. Given widespread evidence of endemic financial exclusion throughout the world, these results suggest caution in importing monetary policy prescriptions tailored for developed countries into emerging economies. |
| Date: | 2023–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genstf:202311061804290000&r=opm |
| By: | Auer, Raphael; Burstein, Ariel; Lein, Sarah (University of Basel); Vogel, Jonathan |
| Abstract: | What are the unequal effects of changes in consumer prices on the cost of living? In the context of changes in import prices (driven by, e.g., changes in trade costs or exchange rates), most analyses focus on variation across households in initial expenditure shares on imported goods. However, the unequal welfare effects of non-marginal foreign price changes also depend on differences in how consumers substitute between imported and domestic goods, on which there is scant evidence. Using data from Switzerland surrounding the 2015 appreciation of the Swiss franc, we provide evidence that lower-income households have higher price elasticities. We quantify the contribution of heterogeneous elasticities for the unequal welfare effects of observed price changes between 201415 and for counterfactual shocks to the mean and dispersion of import price changes. |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:bsl:wpaper:2023/09&r=opm |
| By: | Rojas, Luis E.; Thaler, Dominik |
| Abstract: | The feedback loop between sovereign and financial sector insolvency has been identified as a key driver of the European debt crisis and has motivated an array of policy proposals. We revisit this “doom loop” focusing on governments’ incentives to default. To this end, we present a simple 3-period model with strategic sovereign default, where debt is held by domestic banks and foreign investors. The government maximizes domestic welfare, and thus the temptation to default increases with externally-held debt. Importantly, the costs of default arise endogenously from the damage that default causes to domestic banks’ balance sheets. Domestically-held debt thus serves as a commitment device for the government. We show that two prominent policy prescriptions – lower exposure of banks to domestic sovereign debt or a commitment not to bailout banks – can backfire, since default incentives depend not only on the quantity of debt, but also on who holds it. Conversely, allowing banks to buy additional sovereign debt in times of sovereign distress can avert the doom loop. In an extension we show that in the context of a monetary union (such as the euro area) similar unintended negative consequences may arise from the pooling of debt (such as European safe bond aka. ESBies). A backstop by the central bank (such as the ECB’s Transmission Protection Instrument) can successfully disable the loop if precisely calibrated. JEL Classification: E44, E6, F34 |
| Keywords: | bailout, doom loop, ESBies, self-fulfilling crises, sovereign default, transmission protection instrument |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232869&r=opm |
| By: | Zuzana Gric; Jan Janku; Simona Malovana |
| Abstract: | Using a sample of nearly 980, 000 new derivative transactions from about 1, 700 unique institutions, we explore sectoral differences in currency derivatives usage in the Czech financial sector from 2020 to 2022. We find that larger financial institutions, institutions that are part of complex financial groups, and institutions with higher foreign exposure are more likely to engage in currency derivative transactions. Contrary to other studies, we find that financially stable institutions use currency derivatives more frequently, reflecting the long-term stability of the Czech financial system. However, the significance of key characteristics varies across financial segments. Banks are less sensitive to changes in leverage, while liquidity is crucial for investment funds. |
| Keywords: | Currency derivatives, EMIR, FX derivatives, GLEIF, market-based finance |
| JEL: | F30 G15 G23 G32 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2023/12&r=opm |