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on Open Economy Macroeconomics |
| By: | Sarthak Behera; Hyeongwoo Kim; Soohyon Kim |
| Abstract: | This paper examines the asymmetric out-of-sample predictability of macroeconomic variables for the real exchange rate between the United States and Korea. While conventional models suggest that the bilateral real exchange rate is driven by the relative economic performance of the two countries, our research demonstrates the superior predictive power of our factor-augmented forecasting models only when factors are obtained from U.S. economic variables, whereas the inclusion of Korean factors fails to enhance predictability and behaves more like noise variables. We attribute the remarkable predictability of American factors to the significant cross-correlations observed among bilateral real exchange rates vis-Ã -vis the U.S. dollar, which suggests a limited influence of idiosyncratic factors specific to small countries. Moreover, we assess our factor-augmented forecasting models by incorporating proposition-based factors instead of macro factors. While macro factors generally exhibit superior performance, it is worth noting that the uncovered interest parity (UIP)-based global factors, with the dollar as the numéraire, consistently demonstrate strong overall performance. On the other hand, the purchasing power parity (PPP) and real uncovered interest parity (RIRP) factors have a limited role in forecasting the dollar/won real exchange rate. Our major findings are grounded in pre-COVID-19 era data, highlighting key insights drawn from periods of relative tranquility. We explore how economic crises act as catalysts, precipitating a separation of the real exchange rate from macroeconomic fundamentals. |
| Keywords: | Dollar/Won Real Exchange Rate; Asymmetric Predictability; Principal Component Analysis; Partial Least Squares; LASSO; Out-of-Sample Forecast |
| JEL: | C38 C53 C55 G17 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2024-02&r=opm |
| By: | Masashige Hamano (Waseda University); Francesco Pappadà (Ca’ Foscari University of Venice and Paris School of Economics); Maria Teresa Punzi (Sim Kee Boon Institute, Singapore Management University) |
| Abstract: | In this paper, we explore the response of optimal monetary policy to uncoordinated trade policies (foreign tariff shocks). We first provide a simple model of open economy with heterogeneous firms and derive a closed-form solution for the optimal monetary policy response to tariff shocks in presence of nominal rigidities. We show that optimal monetary policy is expansionary following foreign tariff hikes. Under nominal rigidities, uncertainty about foreign tariff hikes induces sluggish adjustments in the labor market reallocation between exporters and domestic firms, leading to an incentive for monetary authority to intervene and mitigate the impact of tariff shocks. In an extended model, we then show the response of our economy to a tariff shock under the Ramsey monetary policy, a Taylor Rule and a fixed exchange rate regime. Finally, we provide empirical evidence for the response of domestic monetary policy to foreign tariff shocks using data on Global Antidumping from the US. |
| Keywords: | Optimal Monetary Policy; Tariff Shocks; Exporter Dynamics |
| JEL: | E3 E6 Q54 R1 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:wap:wpaper:2309&r=opm |
| By: | Olivier Cardi; Fatma Hoke; Romain Restout |
| Abstract: | By exploiting the downward trend of profits' taxation observed in OECD countries which is rooted into international competition to attract capital, we identify exogenous variations in the corporate income tax rate. Estimating a SVAR model with long-run restrictions for a panel of eleven OECD countries over 1973-2017, we find that a permanent decline in profits' taxation leads to significant technology improvements which are concentrated in traded industries. The corporate tax cut has also an expansionary effect on hours concentrated in non-traded industries. The country-split shows that technology significantly improves in English-speaking and Scandinavian countries only while hours persistently increase only in continental European countries. To account for the dynamic effects of a corporate tax cut, we consider a two-sector open economy model with tradables and non-tradables and endogenous technology decisions where both capital and technology can be used more intensively. The model can account for the magnitude of technology improvements we estimate empirically as long as the traded sector is intensive in R&D, experiences low costs in the use of the stock of knowledge and also highly benefits from international R&D spillover. While large elasticities of utilization-adjusted-TFP w.r.t. the domestic and international stock of knowledge must be assumed in English-speaking and Scandinavian countries, in accordance with our estimates, we have to allow for sticky wages in continental European countries to account for our evidence. |
| Keywords: | Corporate taxation, SVAR, Open economy, Endogenous technological change, R&D, Hours worked, Tradables and non-tradables, Labor reallocation, Wage stickiness |
| JEL: | E23 E62 F11 F41 H25 O33 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:408700700&r=opm |
| By: | Franziska Bremus; Malte Rieth |
| Abstract: | We study the role of international financial integration in buffering natural disaster shocks, using a large sample of advanced and emerging economies. Conditioning on such exogenous events addresses the endogeneity between financial structures and economic conditions. We document that integration improves shock absorption: output, consumption, and investment are significantly higher after a shock in states of high integration than in states of low integration. However, the benefits of international risk sharing mostly come to advanced economies. Emerging markets only profit from more integration if they have good institutions or high debt assets, whereas higher debt liabilities weaken the recovery. |
| Keywords: | Financial integration, natural disasters, international risk sharing, dynamic panel model, emerging markets |
| JEL: | Q54 E44 F36 F62 G11 G15 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2063&r=opm |
| By: | Arigoni, Filippo; Lenarčič, Črt |
| Abstract: | This paper estimates a Bayesian VAR model on Euro area data and quantifies the reaction of real activity to economic policy uncertainty shocks that originate abroad. Our findings show that US and Chinese uncertainty explains larger shares of fluctuations than European uncertainty. In an extended set-up, we perform a counterfactual simulation and verify the presence of a foreign economic policy uncertainty spillovers channel that magnifies the real effects of US and Chinese uncertainty shocks. The simulation also documents a non-negligible role played by bilateral trading activities in the transmission mechanism of Chinese shocks. In an application with Dutch data, we highlight that structural domestic factors shape region and country-specific uncertainty in the propagation of foreign economic policy uncertainty shocks onto the economy. |
| Keywords: | Uncertainty shocks, Euro area spillovers, real activity, US, China, Bayesian VAR |
| JEL: | C32 E30 Q54 |
| Date: | 2023–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120022&r=opm |
| By: | Jing Cynthia Wu; Yinxi Xie; Ji Zhang |
| Abstract: | Motivated by empirical evidence, we propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We find financial integration features an amplification for a domestic monetary policy shock and a negative spillover for a foreign shock. These results hold for conventional and unconventional monetary policies. Among various aspects of financial integration, the bond duration plays a major role, and our results cannot be replicated by a standard model of perfect risk sharing between households. Finally, we observe an important interaction between financial integration and trade openness, and demonstrate trade alone does not have an economically meaningful impact on monetary policy transmission. |
| JEL: | E40 E5 F30 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32128&r=opm |
| By: | Blagov, Boris; Dirks, Maximilian; Funke, Michael |
| Abstract: | Using Russia as a case study and a global VAR model as a methodological tool, we analyze how heightened geopolitical risk shocks propagate across advanced economies and quantify the economic effects of these events. The global VAR impulse response functions in response to the skyrocketing Russian geopolitical risk shock after Russia's invasion of Ukraine revealed a contraction of GDP and an increase in inflation. Eastern European neighboring countries are particularly affected by the Russian geopolitical risk shock. We also document a strong component of the Russian geopolitical risk shock that is not driven by fossil fuel prices. |
| Abstract: | Unter Verwendung des Fallbeispiels Russland und eines globalen VAR-Modells als methodisches Instrument analysieren wir, wie sich Schocks eines erhöhten geopolitischen Risikos in fortgeschrittenen Volkswirtschaften verbreiten und quantifizieren die wirtschaftlichen Auswirkungen dieser Ereignisse. Die globalen VAR-Impuls-Antwort-Funktionen als Reaktion auf den sprunghaften Anstieg des geopolitischen Risikos in Russland nach dem Einmarsch in die Ukraine zeigen einen Rückgang des BIPs und einen Anstieg der Inflation. Staaten in Osteuropa sind von diesem geopolitischen Risikoschock in Russland besonders betroffen. Ein Großteil der beobachteten Effekte wird nicht durch Energiepreise getrieben. |
| Keywords: | Geopolitical risk, international business cycle transmission, global VAR model, Russia |
| JEL: | C32 E32 F51 F52 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:282988&r=opm |
| By: | Jason Choi; Duong Q. Dang; Rishabh Kirpalani; Diego J. Perez |
| Abstract: | We study the extent to which the perceived cost of losing the exorbitant privilege the US holds in global safe asset markets sustains the safety of its public debt. Our findings indicate that the loss of this special status in the event of a default significantly augments the debt capacity for the US. Debt levels would be up to 30% lower if the US did not have this special status. Most of this extra debt capacity arises from the loss of the convenience yield on US Treasuries, which makes debt more expensive following its loss and provides strong incentives to repay debt. |
| JEL: | F0 F34 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32129&r=opm |
| By: | José Alves; Clarisse Wagner |
| Abstract: | Conditions of fiscal sustainability have been widely studied in the literature. Fiscal reaction functions or cointegration between government revenues and expenditures are two approaches that economists have been paying their attention, not only on a theoretical perspective, but also empirically assessing the sustainability of several economies during different timespans. Whereas a predominant focus has been attributed to primary deficits, little attention has been dedicated to government financial assets contribution to government debt paths. Given that government financial assets represent a large proportion of gross debt accumulation, we enquire about their role on government debt leveraging of economic growth over interest rates, focusing on a channel of gross debt, investment, external balance and ratings, in 27 European Union economies during the period from 2000 to 2022. Large heterogeneities in the statistical characteristics of the series and impacts of financial assets on interest rate-growth rate differentials call for a closer attention to financial assets on a granular approach at individual country level, rather than on the aggregate. Our results highlight the importance of government financial assets holdings to the short and long-run debt trajectories, enhancing or potentially undermining gains from primary deficits consolidation efforts and consequently on the differentials between interest rates and output growth. |
| Keywords: | Public debt; Stock Flow Adjustments; Financial Assets Holdings; ARDL; PMG |
| JEL: | C23 E44 F65 H60 H63 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp03072024&r=opm |
| By: | Katrin Assenmacher; Massimo Ferrari Minesso; Arnaud Mehl; Maria Sole Pagliari |
| Abstract: | We develop a two-country DSGE model with financial frictions to study the transi- tion from a steady-state without CBDC to one in which the home country issues a CBDC. The CBDC provides households with a liquid, convenient and storage-cost- free means of payments which reduces the market power of banks on deposits. In the steady-state CBDC unambiguously improves welfare without disintermediating the banking sector. But macroeconomic volatility in the transition period to the new steady-state increases for plausible values of the latter. Demand for CBDC and money overshoot, thereby crowding out bank deposits and leading to initial declines in investment, consumption and output. We use non-linear solution meth- ods with occasionally binding constraints to explore how alternative policies reduce volatility in the transition, contrasting the effects of restrictions on non-residents, binding caps, tiered remuneration and central bank asset purchases. Binding caps reduce disintermediation and output losses in the transition most effectively, with an optimal level of around 40% of steady-state CBDC demand. |
| Keywords: | Central bank digital currency, open-economy DSGE models, steady- state transition, occasionally binding constraints |
| JEL: | E50 E58 F30 F41 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:803&r=opm |
| By: | Clancy, Daragh; Smith, Donal; Valenta, Vilém |
| Abstract: | Policymakers around the world are encouraging the local production of key inputs to reduce risks from excessive dependencies on foreign suppliers. We analyse the macroeconomic effects of supply chain reorientation through localisation policies, using a global dynamic general equilibrium model. We proxy non-tariff measures, such as the stricter enforcement of regulatory standards, which reduce import quantity but do not directly alter costs and prices. These measures have, so far, been a key component of attempts to reshore production and are an increasingly popular trade policy instrument in general. Focusing on the euro area, we find that localisation policies are inflationary, imply transition costs and generally have a negative long-run effect on aggregate domestic output. The size (and sign) of the impact depends on whether these policies are implemented unilaterally or induce a retaliation from trade partners, and the extent to which they reduce domestic competition and productivity. We provide some recommendations for policymakers considering implementing a localisation agenda. JEL Classification: F13, F41, F45, F62 |
| Keywords: | general equilibrium, reshoring, strategic autonomy |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242903&r=opm |
| By: | Jonathan Eaton; Samuel S. Kortum |
| Abstract: | Interpreting individual heterogeneity in terms of probability theory has proved powerful in connecting behaviour at the individual and aggregate levels. Returning to Ricardo's focus on comparative efficiency as a basis for international trade, much recent quantitative equilibrium modeling of the global economy builds on particular probabilistic assumptions about technology. We review these assumptions and how they deliver a unified framework underlying a wide range of static and dynamic equilibrium models. |
| JEL: | F0 O3 O4 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32062&r=opm |