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on Open Economy Macroeconomics |
| By: | Christopher Erceg (Monetary and Capital Markets Department, IMF); Marcin Kolasa (Monetary and Capital Markets Department, IMF); Jesper Lindé (Monetary and Capital Markets Department, IMF); Haroon Mumtaz (School of Economics & Finance, Queen Mary University London); Pawel Zabczyk (Monetary and Capital Markets Department, IMF) |
| Abstract: | We study alternative approaches to the withdrawal of prolonged unconventional monetary stimulus (“exit strategies”) by central banks in large, advanced economies. We first show empirically that large-scale asset purchases affect the exchange rate and domestic and foreign term premiums more strongly than conventional short-term policy rate changes when normalizing by the effects on domestic GDP. We then build a two-country New Keynesian model that features segmented bond markets, cognitive discounting and strategic complementarities in price setting that is consistent with these findings. The model implies that quantitative easing (QE) is the onlyeffective way to provide monetary stimulus when policy rates are persistently constrained by the effective lower bound, and that QE is likely to have larger domestic output effects than quantitative tightening (QT). We demonstrate that “exit strategies” by large advanced economies that rely heavily on QT can trigger sizeable inflation-output tradeoffs in foreign recipient economies through the exchange rate and term premium channels. We also show that these tradeoffs are likely to be stronger in emerging market economies, especially those with fixed exchange rates. |
| Keywords: | Monetary Policy, Quantitative Easing, International Spillovers |
| JEL: | C54 E52 E58 F41 |
| Date: | 2024–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:978&r= |
| By: | Lukas Boer; Mr. Jaewoo Lee |
| Abstract: | We estimate shocks that explain most of the variation in the current account at business cycle frequencies and over the long run. We then explore, using a standard open-economy macro model, which macroeconomic shocks are behind the empirical dominant drivers of the current account at business-cycle frequency. Rather than financial shocks or aggregate shocks to supply or demand, shocks to the relative demand between home and foreign goods are found to play a pivotal role in current account dynamics. |
| Keywords: | Current Account; Exchange Rates; Relative Demand; Open- Economy Model |
| Date: | 2024–04–26 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/092&r= |
| By: | Mauricio Barbosa-Alves (University of Minnesota); Javier Bianchi (Federal Reserve Bank of Minneapolis); César Sosa-Padilla (University of Notre-Dame/NBER) |
| Abstract: | This paper investigates how a government should manage international reserves whenit faces the risk of a rollover crisis. We ask, should the government accumulate reservesor reduce debt to make itself less vulnerable? We show that the optimal policy entailsinitially reducing debt, followed by a subsequent increase in both debt and reserves asthe government approaches a safe zone. Furthermore, we uncover that issuing additionaldebt to accumulate reserves can lead to a reduction in sovereign spreads. |
| Keywords: | International reserves, sovereign debt, rollover crises. |
| JEL: | E4 E5 F32 F34 F41 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:321&r= |
| By: | Raza, Hamid; Laurentjoye, Thibault; Randrup Byrialsen, Mikael; Valdecantos, Sebastián |
| Abstract: | This paper provides an assessment of the different channels through which monetary, fiscal and income policies affect prices and output in a small open economy and discuss which policy measures are effective and feasible in the face of inflationary shocks. We build a stock-flow-consistent model using sectoral data for Denmark. We then replicate the inflationary environment faced by Denmark and several other countries after the Covid-19 crisis. While taking monetary tightening as a forced policy response for a small open economy with fixed exchange rate, we explore a number of policies that, within the current institutional and legal framework, can potentially mitigate the effects of inflation. Our conclusion is that a close coordination of fiscal and income policies can help reduce the effects of adverse shocks to income without increasing inflation. Furthermore, we find that of all the policies implemented, monetary policy has the most dramatic effects on public debt sustainability. |
| Keywords: | Macroeconomía; Política Económica; Inflación; Dinamarca; |
| Date: | 2023–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:nmp:nuland:4077&r= |
| By: | Raza, Hamid; Laurentjoye, Thibault; Randrup Byrialsen, Mikael; Valdecantos, Sebastián |
| Abstract: | After decades of relative consumer price stability, inflation is now making a come-back as a central topic in economic and political discussions, against a backdrop of various policy challenges. The aim of this paper is to provide a nuanced assessment of the different channels through which monetary, fiscal and income policies can affect prices and output in a small open economy, as well as discuss which policy measures are desirable and practically feasible when such an economy experiences inflationary shocks. To do so, we adopt a comprehensive modelling approach and build an empirical stock-flow-consistent model using sectoral national account data for Denmark over the period 2005Q1-2020Q1. We then replicate the inflationary environment in which Denmark and several other countries are currently operating and introduce a monetary policy reaction which leads to a modest reduction in inflation at the cost of further contracting the economy. Taking monetary tightening as a forced policy response in the case of a small open economy with fixed exchange rate, we explore a number of policies that, within the current institutional and legal framework, can potentially mitigate the adverse effects of inflation. Specifically, we introduce fiscal interventions - in the form of tax cuts on income and production - along with wage- and price-based income policies. Our main conclusion is that a close coordination of fiscal and income policies can help reduce the effects of adverse shocks to income without increasing inflation. Finally, we address a question of political relevance by exploring the effects of different policies on public budget and debt. Overall, we find that of all the policies implemented, monetary policy has the most dramatic effects on public debt sustainability. |
| Keywords: | Macroeconomía; Política Económica; Inflación; Dinamarca; |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:nmp:nuland:4080&r= |
| By: | José Cristi; Ṣebnem Kalemli-Özcan; Mariana Sans; Filiz D. Unsal |
| Abstract: | We study the international transmission of U.S. monetary policy (FED hikes) and a strong U.S. dollar. Both of these variables are endogenous and thus we follow the recent developments in the literature to measure the exogenous components of each from the perspective of the rest of the world (ROW). We show that while U.S. monetary policy shocks act as financial shocks increasing risk premia in emerging markets, a shock to U.S. dollar does not generate the same effect. |
| JEL: | F30 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32330&r= |
| By: | Raphael Auer; Mathieu Pedemonte; Raphael Schoenle |
| Abstract: | Is inflation (still) a global phenomenon? We study the international co-movement of inflation based on a dynamic factor model and in a sample spanning up to 56 countries during the 1960-2023 period. Over the entire period, a first global factor explains approximately 58% of the variation in headline inflation across all countries and over 72% in OECD economies. The explanatory power of global inflation is equally high in a shorter sample spanning the time since 2000. Core inflation is also remarkably global, with 53% of its variation attributable to a first global factor. The explanatory power of a second global factor is lower, except for select emerging economies. Variables such as a broad dollar index, the US federal funds rate, and a measure of commodity prices positively correlate with the first global factor. This global factor is also correlated with US inflation during the 70s, 80s, the GFC, and COVID. However, it lags these variables during the post-COVID period. Country-level integration in global value chains accounts for a significant proportion of the share of both local headline and core inflation dynamics explained by global factors. |
| Keywords: | globalization; inflation; Phillips curve; monetary policy; global value chain; international inflation synchronization |
| JEL: | E31 E52 E58 F02 F41 F42 F14 F62 |
| Date: | 2024–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:98253&r= |
| By: | Valérie Mignon; Cécile Couharde; Carl Grekou; Florian Morvillier |
| Abstract: | This paper provides an in-depth analysis of the link between exchange rate misalignments and economic growth for a large sample of 170 countries over the 1973-2019 period. We rely on new cross-country data on multilateral currency misalignments and cross-quantile regressions to demonstrate that the seemingly divergent views of the Washington Consensus and the export-led growth theory on the role of currency undervaluations in promoting economic growth can be reconciled. Although any significant departures from the equilibrium exchange rate levels are found undesirable, we show that undervaluations are more likely to stimulate economic growth in developing countries. However, this positive impact is observed only up to certain thresholds of development level and currency undervaluation. Consequently, strategies in the poorest countries that systematically undervalue currencies in real terms to foster growth should be carefully tailored, as they raise the risk for these economies of switching from a positive to a less favorable growth regime, depending on both their specific wealth level and the extent of their currency undervaluation. |
| Keywords: | Cross-quantile regressions; economic growth; multilateral currency misalignments; undervaluations. |
| JEL: | F31 O47 C32 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2024-14&r= |
| By: | Paduano, Stephen |
| Abstract: | This paper discusses how the United Kingdom can make use of its idle exchange equalisation account to support its global economic objectives in an era of fiscal consolidation — when limited political appetite for further taxing and borrowing, combined with interest rates, have reduced the UK’s ability to finance its international interests. It does so with particular attention to the UK’s $40 billion in idle and illiquid Special Drawing Rights (SDRs). The illiquidity of these SDRs is a hindrance to the “policy-readiness†of the UK’s foreign exchange reserves. This paper discusses how rechanneling those SDRs—e.g., through the purchase of an SDR bond issued by a multilateral development bank—would serve the dual function of boosting the liquidity of the UK’s foreign-exchange reserves (a key objective of the UK’s reserve managers) whilst supporting the UK’s global economic interests (providing additional financing to the MDBs). This paper also draws lessons from how other countries have made use of their idle foreign-exchange reserves to support global economic objectives, such as the United States with its Exchange Stabilization Fund in the 1980s and 1990s. |
| Keywords: | Public debt, sustainability, Private sector, Social outcomes, International Monetary Fund, World Bank, Special Drawing Rights, foreign aid, global development, international financial architecture, United Kingdom, Bank of England |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:notfdl:2309&r= |
| By: | Baqir, Reza; Diwan, Ishac; Rodrik, Dani |
| Abstract: | Badly hurt by a series of negative shocks and increasingly shut-off from capital markets, many developing countries are at risk of falling into a debt crisis. The current global financial architecture reacts through the negotiation of complex packages that include the debtor country, international financial institutions (IFIs), and external creditors. The debtor must promise to “adjust†; the IFIs must put up new loans and enforce conditionality; and creditors must accept some amount of debt and debt service reduction. In this paper, we discuss how the diverse aspects of such adjustment-cum-debt restructuring packages can be evaluated in a coherent fashion. A unified treatment of such packages allows us to highlight important questions that tend to be less evident when studying them in isolation. |
| Keywords: | Debt overhang, development and growth, debt restructuring, policy conditionality, multilateral development banks |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:notfdl:2301&r= |
| By: | Luca Tausch; Jeffrey Althouse |
| Abstract: | The theory of ecologically unequal exchange (EUE) suggests that there exists an asymmetric transfer of biophysical resources from the periphery to the core. Despite ample evidence demonstrating this fact, the theory fails to account for the complex role of the semi-periphery, or how global (inter-country) and domestic (intra-country) environmental inequalities between regions are connected. To fill this gap, we rely on an environmentally extended multi-regional input-output (EEMRIO) model to provide empirical evidence for China's involvement in global (G-EUE) and domestic (D-EUE) ecologically unequal exchange from 1987 to 2017. While being a net exporter of energy to all income groups, we show that China is a net exporter of land, labour, and materials to the core, but a net importer of land, labour, and materials from the periphery and the semi-periphery. On the domestic level, we show that the wealthy East Coast zone is the only net importer of embodied energy and TiVA, while all other economic zones are net exporters of embodied energy to the East Coast zone. While China continues to be exploited by the core, it has fuelled its ascent in the world-system by creating its own peripheries from which it extracts natural resources, as well as by creating extractive peripheries within its borders. Our results suggest the need to move beyond a simple core-periphery dichotomy when studying the world ecological system: EUE arises through a multi-tiered hierarchy that depends on uneven biophysical flows between regions both domestically and globally. |
| Keywords: | Ecologically unequal exchange, China, Embodied trade flows, Environmentally extended multi-regional input-output analysis, Inter- and Intra-Country Inequality, International Trade, Structural Decomposition Analysis |
| JEL: | Q56 Q57 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:imk:fmmpap:100-2024&r= |
| By: | Cohen, Daniel; Harnoys-Vannier, Brendan |
| Abstract: | The recent era of low interest rates and ample liquidity caused a large increase in external indebtedness throughout the Global South. This note documents both the magnitude and the rising diversity of the debt involved, at a time when markets are shutting down. We build upon the latest World Bank International Debt Statistics, recategorizing countries based on their vulnerability before the Covid crisis hit and their level of development. |
| Keywords: | external indebtedness, portfolio diversification, net transfers, DSSI |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:notfdl:2303&r= |
| By: | Pablo Zarate; Mathias Dolls; Steven J. Davis; Nicholas Bloom; Jose Maria Barrero; Cevat Giray Aksoy |
| Abstract: | We use two surveys to assess why work from home (WFH) varies so much across countries and people. A measure of cultural individualism accounts for about one-third of the cross-country variation in WFH rates. Australia, Canada, the UK, and the US score highly on individualism and WFH rates, whereas Asian countries score low on both. Other factors such as cumulative lockdown stringency, population density, industry mix, and GDP per capita also matter, but they account for less of the variation. When looking across individual workers in the United States, we find that industry mix, population density and lockdown severity help account for current WFH rates, as does the partisan leaning of the county in which the worker resides. We conclude that multiple factors influence WFH rates, and technological feasibility is only one of them. |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11081&r= |
| By: | Jaerim Choi (School of Economics, Yonsei University); Masahiro Endoh (Faculty of Business and Commerce, Keio University); Akira Sasahara (Faculty of Economics, Keio University) |
| Abstract: | This study investigates the effects of imports from China and exports to the rest of the world on labor markets using the data from two major trading partners of China: Japan and the US. An analysis shows that imports of final goods from China and exports to the rest of the world have the same effects on manufacturing employment in the two countries: the former effect is negative, and the latter is positive. In contrast, imported inputs are shown to have different effects on manufacturing employment across the two countries: positive in Japan but negative in the US. We show that these contrasting effects relate to the extent to which these countries integrate into global value chains. In particular, we focus on areas specializing in more downstream sectors in the two countries and uncover that cheaper access to Chinese intermediate inputs allow Japanese input buyers to boost manufacturing employment through input-output linkages. However, the US experienced negative employment effects in those areas, suggesting that the US input buyers do not take advantage of the complementary effects of global value chains, especially with China. |
| Keywords: | The China trade shock, imported inputs, exports, global value chains, manufacturing employment |
| JEL: | F14 F16 F66 |
| Date: | 2024–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:keo:dpaper:2024-012&r= |
| By: | Alice Albonico; Guido Ascari; Qazi Haque |
| Abstract: | We estimate a medium-scale DSGE model for the Euro Area allowing and testing for indeterminacy since the introduction of the euro until mid-2023. Our estimates suggest that monetary policy in the euro area was passive, leading to indeterminacy and self-fulfilling dynamics. Indeterminacy dramatically alters the transmission of fundamental shocks, particularly for inflation whose responses are inconsistent with standard economic theory. Inflation increases following a positive supply or a negative demand shock. Consequently, demand shocks look like supply shocks and vice versa, making the dynamics of the model under indeterminacy challenging to interpret. However, this finding is not robust across different assumptions on the way the sunspot shock is specified in the estimation. Both under determinacy and indeterminacy, the model estimates a natural rate of interest that turned positive after the recent inflation episode. |
| Keywords: | monetary policy, indeterminacy, euro area, business cycle fluctuations, inflation |
| JEL: | E32 E52 C11 C13 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:535&r= |
| By: | Bibi, Samuele; Valdecantos, Sebastián |
| Abstract: | In the period 2000-2019, Peru enjoyed sustained GDP growth and a long period of macroeconomic stability; as a result, poverty was reduced markedly in comparison to the 1980s and early 1990s, when the country faced severe recessions and hyperinflation. This positive economic performance coincided with the implementation of a mainstream macroeconomic framework which, alongside favourable external conditions, allowed for continuous external financing of current account deficits, mainly through foreign direct investment (FDI). Against the background of current debates regarding the resurgence of debt crises and the advocacy of FDI as a way to avoid such crises, this article uses balance of payments and international investment position statistics to assess whether Peru's acquired macroeconomic stability can be deemed sustainable. Drawing on the contributions of the Latin American structuralist school and more recent analyses that have raised concerns, the article shows that Peru's external position has taken on a Ponzi profile, casting doubt on the idea that FDI is a superior way of external financing compared to external debt. It concludes with a discussion of the social and environmental implications of Peru's widely praised macroeconomic framework, highlighting the limits that peripheral economies face when their growth relies excessively on external financing. |
| Keywords: | Macroeconomía; Estabilidad Económica; Inversiones Extranjeras; Perú; |
| Date: | 2023–09–24 |
| URL: | http://d.repec.org/n?u=RePEc:nmp:nuland:4078&r= |
| By: | Bandiera, Oriana (London School of Economics); Kotia, Ananya (London School of Economics); Lindenlaub, Ilse (Yale University); Moser, Christian (Columbia University); Prat, Andrea (Columbia University) |
| Abstract: | Are labor markets in higher-income countries more meritocratic, in the sense that worker-job matching is based on skills rather than idiosyncratic attributes unrelated to productivity? If so, why? And what are the aggregate consequences? Using internationally comparable data on worker skills and job skill requirements of over 120, 000 individuals across 28 countries, we document that workers' skills better match their jobs' skill requirements in higher-income countries. To quantify the role of worker-job matching in development accounting, we build an equilibrium matching model that allows for cross-country differences in three fundamentals: (i) the endowments of multidimensional worker skills and job skill requirements, which determine match feasibility; (ii) technology, which determines the returns to matching; and (iii) idiosyncratic matching frictions, which capture the role of nonproductive worker and job traits in the matching process. The estimated model delivers two key insights. First, improvements in worker-job matching due to reduced matching frictions account for only a small share of cross-country income differences. Second, however, improved worker-job matching is crucial for unlocking the gains from economic development generated by adopting frontier endowments and technology. |
| Keywords: | skills, sorting, matching, multidimensional heterogeneity, development accounting, wage inequality, gender, migration |
| JEL: | C78 E24 J24 J31 O11 O12 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp16938&r= |