|
on International Finance |
| By: | Shaghil Ahmed; Ozge Akinci; Albert Queraltó |
| Abstract: | Using a macroeconomic model, we explore how sources of shocks and vulnerabilities matter for the transmission of U.S. monetary changes to emerging market economies (EMEs). We utilize a calibrated two-country New Keynesian model with financial frictions, partly-dollarized balance sheets, and imperfectly anchored inflation expectations. Contrary to other recent studies that also emphasize the sources of shocks, our approach allows the quantification of effects on real macroeconomic variables as well, in addition to financial spillovers. Moreover, we model the most relevant vulnerabilities structurally. We show that higher U.S. interest rates arising from stronger U.S. aggregate demand generate modestly positive spillovers to economic activity in EMEs with stronger fundamentals, but can be adverse for vulnerable EMEs. In contrast, U.S. monetary tightenings driven by a more-hawkish policy stance cause a substantial slowdown in activity in all EMEs. Our model also captures the challenging policy tradeos that EME central banks face. We show that these tradeoffs are more favorable when inflation expectations are well anchored. |
| Keywords: | Financial frictions; U.S. monetary policy spillovers; Adaptive expectations |
| JEL: | E32 E44 F41 |
| Date: | 2021–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1321&r= |
| By: | Georgios Georgiadis (European Central Bank); Helena Le Mezo (European Central Bank); Arnaud Mehl (European Central Bank & CEPR); Cedric Tille (Geneva Graduate Institute & CEPR) |
| Abstract: | The US dollar plays a dominant role in the invoicing of international trade, albeit not an exclusive one as more than half of global trade is invoiced in other currencies. Of particular interest are the euro, with a large role, and the renminbi, with a rising role. These two currencies are well suited to contrast the roles of economic fundamentals and policies, as European policy makers have taken a neutral stance in contrast to the promotion of the international role of the renminbi by the Chinese authorities. We assess the drivers of invoicing using the most recent and comprehensive data set for 115 countries over 1999-2019. We find that standard mechanisms that foster use of a large economy’s currency predicted by theory—i.e. strategic complementarities in price setting and integration in cross-border value chains—underpin use of the dollar and the euro for trade with the United States and the euro area. These mechanisms also support the role of the dollar, but not the euro, in trade between non-US and non-euro area countries, making the dollar the globally dominant invoicing currency. Fundamentals and policies have played a contrasted role for the use of the renminbi. We find that China’s integration into global trade has further strengthened the dominant status of the dollar at the expense of the euro. At the same time, the establishment of currency swap lines by the People’s Bank of China has been associated with increases in renminbi invoicing, with an adverse effect on dollar use that is larger than for the euro. |
| Keywords: | International trade invoicing, dominant currency paradigm, markets vs. policies |
| JEL: | F14 F31 F44 |
| Date: | 2021–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2021_28&r= |