|
on Open Economy Macroeconomics |
| By: | Mr. Suman S Basu; Ms. Gita Gopinath |
| Abstract: | The Mundell-Fleming IS-LM approach has guided generations of economists over the past 60 years. But countries have experienced new problems, the international finance literature has advanced, and the composition of the global economy has changed, so the scene is set for an updated approach. We propose an Integrated Policy Framework (IPF) diagram to analyze the use of multiple policy tools as a function of shocks and country characteristics. The underlying model features dominant currency pricing, shallow foreign exchange (FX) markets, and occasionally-binding external and domestic borrowing constraints. Our diagram includes the use of monetary policy, FX intervention, capital controls, and domestic macroprudential measures. It has four panels to explore four key trade-offs related to import consumption, home goods consumption, the housing market, and monetary policy. Our extended diagram adds fiscal policy into the mix. |
| Keywords: | integrated policy framework; monetary policy; foreign exchange intervention; capital controls; macroprudential policy; fiscal policy |
| Date: | 2024–02–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/038&r=opm |
| By: | Fabio Ghironi; Daisoon Kim; G. Kemal Ozhan |
| Abstract: | We study international trade and macroeconomic dynamics triggered by the imposition of sanctions. We begin with a tractable two-country model where Home and Foreign countries have comparative advantages in production of differentiated consumption goods and a commodity (e.g., gas), respectively. Home imposes sanctions on Foreign. Financial sanctions exclude a fraction of Foreign agents from the international bond market. Gas sanctions take the form of a ban on gas trade, equivalent to an appropriate price cap in our model. Differentiated goods trade sanctions exclude a fraction of Foreign and Home exporters from international trade. All sanctions lead to resource reallocation in both economies. Exchange rate movements reflect the direction of reallocation and the type of sanctions imposed rather than the success of the sanctions. Welfare analysis shows that gas sanctions are more costly for Home, while differentiated consumption goods trade sanctions are more costly for Foreign. A third country that refrains from joining the sanctions mitigates welfare losses in Foreign, but refraining from joining the sanctions is beneficial for the third country. These findings highlight the importance and the difficulty of international coordination when imposing sanctions. |
| JEL: | F31 F41 F42 F51 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32188&r=opm |
| By: | Saleem Bahaj (UCL); Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM)) |
| Abstract: | China’s current account transactions use an offshore international currency, the CNH, that co-exists as a parallel currency with the mainland domestic currency, the CNY. The CNH is freely used, but by restricting its exchange for CNY, the authorities can enforce capital controls. Sustaining these controls requires tight management of the money supply and liquidity to keep the exchange rate between the dual currencies pegged. After describing how the central bank implements this system, we find a rare instance of identified, exogenous, transitory increases in the supply of money and estimate by how much they depreciate the exchange rate. Theory and evidence show that elastically supplying money in response to demand shocks can maintain a currency peg. Liquidity policies complement these monetary interventions to deal with the pressure on the peg from financial innovation. Finally, deviations from the CNH/CNY peg act as a pressure valve to manage the exchange rate between the yuan and the US dollar. |
| Keywords: | Chinese monetary policy, Gresham’s law, Goodhart’s law, Money markets, RMB |
| JEL: | F31 F33 E51 G15 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2401&r=opm |
| By: | Birru, Justin (Ohio State U); Wynter, Matthew (Stony Brook U) |
| Abstract: | We show that sentiment influences the demand for foreign stocks, as identified by international portfolio flows between investors in the United States and investors in 44 other countries. We document two channels through which sentiment affects flows. First, inflows are higher to countries with higher sentiment. Second, higher sentiment in a given country is associated with lower outflows from that country to bilateral trade partners, suggesting that sentiment in one country can have spillover effects on demand for assets in other countries. The combined sentiment effects are associated with economically meaningful implications for net flows. Finally, we consider country closed-end funds and find evidence of pricing effects of sentiment. |
| JEL: | F30 F32 G11 G14 G15 |
| Date: | 2023–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:ohidic:2023-16&r=opm |
| By: | Federle, Jonathan; Meier, André; Müller, Gernot J.; Mutschler, Willi; Schularick, Moritz |
| Abstract: | In an integrated global economy, the economic fallout of war is not confined to the country where the conflict is fought but spills over to other countries. We study the economic effects of large interstate wars using a new data set spanning 150 years of data for more than 60 countries. War on a country's territory typically leads to an output decline of 30 percent and a 15 percentage point increase in inflation. We find large negative effects also for countries that are geographically close to the war site, irrespective of their participation in the war. Output in neighboring countries falls by more than 10 percent over 5 years, and inflation rises by 5 percentage points on average. Negative spillovers decline with geographic distance and increase in the degree of trade integration with the war site. For very distant countries, output spillovers can turn positive so that wars create winners and losers in the international economy. We rationalize these findings in an international business cycle model, calibrated to capture key features of the data. As the war destroys capital in the war site and productivity falls, trade with nearby economies decreases, generating an endogenous supply-side contraction abroad. |
| Keywords: | Interstate Wars, Business Cycles, Spillovers, Distance, Supply Shocks, InternationalTransmission |
| JEL: | F40 F50 E50 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:283893&r=opm |
| By: | José De Gregorio; Pablo García; Emiliano E. Luttini; Marco Rojas |
| Abstract: | We revisit a central question for international macroeconomics: the response of export prices and quantities to movements in the exchange rate (ER). We use granular export data for Chile and study how the effects of ER movements vary over time with the currency of invoicing and the destination of exports. For prices, we find that the short-run effects of bilateral ER movements vanish when controlling for U.S. dollar ER, which supports dominant currency pricing. However, over longer horizons a more significant role is played by bilateral ER movements, in line with the predictions of producer currency pricing. These dynamics do not depend on the invoicing currency. The results we find for quantities support the view that bilateral exchange rate movements contribute to macroeconomic adjustment through export volumes over the medium term. |
| JEL: | F14 F31 F41 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32175&r=opm |
| By: | Souad Baya (INSEA - Institut National de Statistique et d’Economie Appliquée [Rabat]); Mohamed Simoh (UAE - Université Abdelmalek Essaâdi); Ghizlan Loumrhari (UAE - Université Abdelmalek Essaâdi) |
| Abstract: | The economic debate surrounding the impact of exchange rate fluctuations on prices has sparked in-depth discussions, leading to several conclusions supported by empirical literature. Fundamentally, it exerts significant pressure on competitiveness, price stability, and other fundamental macroeconomic variables. The primary objective of this study is to theoretically and empirically examine the effects of exchange rate fluctuations on inflation. Specifically, this paper aims to assess the Pass-Through coefficient from the exchange rate to domestic prices and analyze its evolution over time. To account for the reciprocal interactions between inflation and exchange rate variations, we will use a model based on quarterly data covering the period from Q1-2000 to Q4-2021. Conclusions drawn from the analysis of impulse response functions and variance decomposition indicate that any shock to the exchange rate results in a significant inflation response. Furthermore, this reaction appears to reflect an incomplete degree of the transmission mechanism. Additionally, our findings have shown that the mentioned coefficient experienced a surge from the first to the second period, similar to various advanced economies that underwent an increase in Pass-Through over time. |
| Abstract: | Le débat économique autour de l'impact des fluctuations des taux de change sur les prix a suscité des discussions approfondies, conduisant à plusieurs conclusions étayées par la littérature empirique. Fondamentalement, il exerce une pression importante sur la compétitivité, la stabilité des prix ainsi que d'autres variables macroéconomiques fondamentales. L'objectif fondamental de cette étude consiste à examiner de manière théorique et empirique les effets des fluctuations du taux de change sur l'inflation. Plus précisément, ce document vise à évaluer le coefficient de transmission du taux de change aux prix intérieurs et à analyser son évolution au fil du temps. Afin de prendre en compte les interactions réciproques entre l'inflation et les variations du taux de change, nous allons utiliser un modèle basé sur des données trimestrielles couvrant la période de T1-2000 à T4-2021. Les conclusions déduites de l'examen des fonctions de réponse impulsionnelle et de la décomposition de la variance indiquent que tout choc sur le taux de change génère une réponse significative de l'inflation. De plus, cette réaction semble refléter un degré incomplet du mécanisme de transmission. Également, nos résultats ont montré que ledit coefficient a subi une flambée de la première à la deuxième période, comme différente s économies avancées, ayant connu une augmentation du Pass-Through dans le temps. |
| Keywords: | Real Exchange Rate pass-through, SVAR, shocks, imported inflation, impulse responses, variance decomposition, Pass-through du Taux de Change Réel, chocs, inflation importé, réponses impulsionnelles, décomposition de la variance |
| Date: | 2024–01–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04450899&r=opm |
| By: | Jiang, Zhengyang (Northwestern U); Krishnamurthy, Arvind (Stanford U); Lustig, Hanno (Stanford U) |
| Abstract: | We characterize the relation between exchange rates and their macroeconomic funda- mentals without committing to a specific model of preferences, endowment or menu of traded assets. When investors can trade home and foreign currency risk-free bonds, the exchange rate (conditionally) appreciates in states of the world that are worse for home investors than foreign investors. This prediction is at odds with the empirical evidence and can only be overturned (unconditionally) if the deviations from U.I.P. are large and exchange rates are highly predictable. Without bond Euler equation wedges, it is impossible to match the empirical exchange rate cyclicality (the Backus-Smith puzzle) and the deviations from U.I.P. (the Fama puzzle) as well as the lack of predictability (the Meese-Rogoff puzzle). To relax this trade-off, we need Euler equation wedges consistent with a home currency bias, home bond convenience yields or financial repression. |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:stabus:4158&r=opm |
| By: | Bada Han; Rashad Ahmed; Joshua Aizenman; Yothin Jinjarak |
| Abstract: | We explore the role of sectoral debt dynamics in shaping business cycles in a sample of 52 Emerging Market Economies (EMEs) and Frontier Market Economies (FMEs) from 2005 to 2021. Higher household debt levels and growth are associated with significantly slower GDP growth in more developed EMEs but not in less developed EMEs and FMEs. We also examine the relationship between US dollar cycles, sectoral debt levels and growth, and economic activity. Among developed EMEs, higher expected household debt growth magnifies the impact of US dollar fluctuations on economic activity, with significant but less persistent effects on consumption and more persistent effects on investment. Our empirical findings highlight the important role of household debt dynamics in relatively developed EMEs. |
| JEL: | F34 F41 F44 F62 G51 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32174&r=opm |