|
on Open Economy Macroeconomics |
| By: | Stelios S. Fourakis; Loukas Karabarbounis |
| Abstract: | Advanced economies borrowed substantially during the Covid recession to fund their fiscal policy. The Covid recession differed from the Great Recession in that sovereign debt markets remained calm and spreads barely responded. We study the experience of Greece, the most extreme manifestation of the puzzling behavior of spreads during Covid. We develop a small open economy model with long-term debt and default, which we augment with official lenders, heterogeneous households and sectors, and Covid constraints on labor supply and consumption demand. The model is quantitatively consistent with the observed boom-bust cycle of Greece before Covid and salient observations on macro aggregates, government debt, and the sovereign spread during Covid. The spread is stable despite a rise in external borrowing during Covid, because lockdowns were perceived as transitory and the bailouts of the 2010s had tilted the composition of debt at the beginning of Covid away from defaultable private debt. The ECB's policy of purchasing debt in secondary markets during Covid did not stabilize spreads so much, but allowed the government to provide transfers that reduced inequality. |
| JEL: | E20 E58 E60 F34 F44 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32044&r=opm |
| By: | Alberto Botta; Danilo Spinola; Giuliano Toshiro Yajima; Gabriel Porcile |
| Abstract: | This paper studies the relationship between financial integration, external debt sustainability, and fiscal policy space in emerging and developing (EDE) countries. We do so by applying Pasinetti’s “geometry of debt sustainability” to EDE countries and analysing how it is shaped by exposure to global financial cycles. Through the lenses of Pasinetti’s theoretical framework, we study whether global finance opens “windows of opportunities” or creates more constraints for EDE countries in offering fiscal support for structural changes, including green structural transformations. This analysis is crucial for tackling the pressing issue of the climate crisis. We suggest EDE countries may face a “gridlock”. Global finance and pressures to keep external debt sustainable make them struggle to maintain vital public investment and enact counter-cyclical fiscal actions. Lack of fiscal space in turn exacerbates technological backwardness, which feeds back in the form of more binding external constraints and tighter “surveillance” by international creditors. We support our theoretical analysis with an econometric study over a sample of 55 countries from 1980-2018. Capital controls and external macroprudential policy emerge as fundamental policies enabling EDE countries to adeptly manoeuvre through debt challenges without falling into the pitfalls of stagnation and enduring technological underdevelopment. |
| Keywords: | Financial globalisation, fiscal space, structural change |
| JEL: | F65 O14 O23 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2401&r=opm |
| By: | Kleinman, Benny; Liu, Ernest; Redding, Stephen J.; Yogo, Motohiro |
| Abstract: | We generalize the closed-economy neoclassical growth model (CNGM) to allow for costly goods trade and capital flows with imperfect substitutability between countries. We develop a tractable, multi-country, quantitative model that matches key features of the observed data (e.g., gravity equations for trade and capital holdings) and is well suited for analyzing counterfactual policies that affect both goods and capital market integration (e.g., U.S.-China decoupling). We show that goods and capital market integration interact in non-trivial ways to shape impulse responses to counterfactual changes in productivity and goods and capital market frictions and the speed of convergence to steady-state. |
| Keywords: | economic growth; international trade; capital flows |
| JEL: | F10 F21 |
| Date: | 2023–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:121381&r=opm |
| By: | Hakan Yilmazkuday (Department of Economics, Florida International University) |
| Abstract: | This paper estimates the pass-through of different shocks into different U.S. prices that are important for policy makers. The investigation is based on a structural vector autoregression model, where quarterly data are used. The empirical results depict oil price pass-through, exchange rate pass-through, import-price pass-through, and producer price pass-through into import prices, producer prices, and consumer prices for the U.S. economy. Policy implications suggest that achieving and sustaining consumer price stability highly depend on monitoring the developments in oil prices, followed by import prices and producer prices. |
| Keywords: | Pass-Through, Oil Prices, Exchange Rates, Import Prices, Producer Prices, Consumer Prices |
| JEL: | E31 F31 Q43 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:2401&r=opm |
| By: | Giancarlo Corsetti; Seung Hyun Maeng |
| Abstract: | Discretionary governments may choose to default on their liabilities after issuing new debt, creatingintra-period uncertainty that may raise borrowing costs in a self-fulfilling manner. We show that, toeliminate this disruptive prospect, governments optimally build up reserves to ensure post-auctionrepayment in all circumstances. Intra-period risk naturally provides the foundations for a theory ofreserve accumulation. Optimal reserve policy shields the economy from disruptive (off-equilibrium)risk, substantially containing the costs and size of precautionary debt over-issuance. The modelexplains why governments hold large amounts of reserves and appear reluctant to use them facingfundamental shocks. |
| Keywords: | Sovereign default, Foreign reserves, Self-fulfilling crises, Expectations, Discretionary Fiscal Policy, Debt sustainability |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:rsc:rsceui:2013_53&r=opm |
| By: | Taeyoung Doh; Choongryul Yang |
| Abstract: | We set- up a two-sector New Keynesian model with input-output linkages to study the persistently high inflation during the post-COVID-19 period. We include multiple shocks as well as several amplification channels of these shocks in a parsimonious model to quantify the relative importance of each factor. We calibrate the model to match the pre-COVID-19 data and alter parameters governing 1) the fiscal rule, 2) inflation feedback in the monetary policy rule, 3) elasticity of substitution among intermediary inputs in production, and 4) the size of a sectoral demand shift shock to explain the post-COVID-19 data. We obtain estimates of shocks in the model to fit goods inflation data during the post-COVID-19 period and use aggregate inflation to test the model’s ability to explain the recent inflationary episode. Although aggregate demand shocks and a sectoral demand shift shock have played a significant role in the initial inflation surge during 2021, the propagation of these shocks into the persistently high aggregate inflation was also helped by lower inflation feedback in the monetary policy response relative to the pre-COVID-19 period. Compared with other changes in parameters, this alteration of the monetary policy rule best fits the level and persistence of the post-COVID-19 aggregate inflation. While lowering the elasticity of substitution among intermediary inputs can match the level of inflation, it does a poorer job of explaining the persistence of inflation compared with allowing changes in the monetary policy rule. |
| Keywords: | inflation persistence; COVID-19; sectoral reallocation; inflation feedback; production friction |
| JEL: | E62 E63 |
| Date: | 2023–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:97656&r=opm |
| By: | Xiwen Bai; Jesús Fernández-Villaverde; Yiliang Li; Francesco Zanetti |
| Abstract: | We study the causal effects and policy implications of global supply chain disruptions. We construct a new index of supply chain disruptions from the mandatory automatic identification system data of container ships, developing a novel spatial clustering algorithm that determines real-time congestion from the position, speed, and heading of container ships in major ports around the globe. We develop a model with search frictions between producers and retailers that links spare productive capacity with congestion in the goods market and the responses of output and prices to supply chain shocks. The co-movements of output, prices, and spare capacity yield unique identifying restrictions for supply chain disturbances that allow us to study the causal effects of such disruptions. We document how supply chain shocks drove inflation during 2021 but that, in 2022, traditional demand and supply shocks also played an important role in explaining inflation. Finally, we show how monetary policy is more effective in taming inflation after a global supply chain shock than in regular circumstances. |
| Date: | 2023–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:1033&r=opm |
| By: | Patricia Gomez-Gonzalez (Fordham University, Department of Economics); Gabriel Mathy (American University) |
| Abstract: | This paper assesses whether the British public debt featured a convenience yield during the Classical Gold Standard (1718-1913), as the US does in modern times. Our em- pirical results support this thesis. Increases in the British debt-to-GDP ratio decrease British public debt’s convenience yield between 8 and 20 basis points, qualitatively sim- ilar to the behavior of US public debt yields post-1926. Interestingly, the relationship between US yields and US public debt during the Classical Gold Standard counters previous findings for modern US times. International public debt yield spreads between other Gold Standard core countries and Britain were consistently positive and averaged 55 basis points, even though currency and sovereign risk were negligible at that time for the countries chosen. |
| Keywords: | Convenience yield, Safe asset, Liquidity, Gold Standard, Core countries |
| JEL: | E42 G12 G15 H63 N21 N23 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:frd:wpaper:dp2024-01er:dp2024-01&r=opm |
| By: | Federico S. Mandelman; Yang Yu; Francesco Zanetti; Andrei Zlate |
| Abstract: | We document a slowdown in low-skilled immigration that began around the onset of the Great Recession in 2007, which was associated with a subsequent rise in low-skilled wages, a decline in the skill premium, and labor shortages in service occupations. Falling returns to education also coincided with a decline in the educational attainment of native workers. We then develop and estimate a stochastic growth model with endogenous immigration and training to rationalize these facts. Lower immigration leads to higher wages for low-skilled workers but also to higher consumer prices and lower aggregate consumption. Importantly, the decline in the skill premium reduces the incentive to train native workers and hurts aggregate productivity over time, which reduces welfare. We assess the implications of stimulus policies implemented during the COVID-19 pandemic and show that the shortage of low-skilled immigrant labor amplified the increase in consumer prices, partially eroding the effectiveness of stimulus. |
| Keywords: | international labor migration; skill premium; task upgrading; heterogeneous workers |
| JEL: | F16 F22 F41 |
| Date: | 2024–01–16 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:97633&r=opm |
| By: | Haarburger, Richard; Stemmler, Henry |
| Abstract: | This paper studies how automation technology affects market power in the global economy. We develop a theoretical model in which firms' markups are endogenous to factor input choices based on technology levels, but are also affected by technology adoption of other domestic and foreign firms. In an empirical analysis, we find that market power, measured as the markup of price over marginal cost, declines on average with higher levels of automation. However, there is substantial heterogeneity, with firms in the highest revenue and markup quintile gaining market power. Moreover, we find that exposure to foreign automation increases competition in the local market. |
| Keywords: | Automation, Markups, Robots, Market Concentration |
| JEL: | O33 F41 F12 D43 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:281378&r=opm |