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on Open MacroEconomics |
| By: | Pierre-Olivier Gourinchas; Maurice Obstfeld |
| Abstract: | A key precursor of twentieth-century financial crises in emerging and advanced economies alike was the rapid buildup of leverage. Those emerging economies that avoided leverage booms during the 2000s also were most likely to avoid the worst effects of the twenty-first century's first global crisis. A discrete-choice panel analysis using 1973-2010 data suggests that domestic credit expansion and real currency appreciation have been the most robust and significant predictors of financial crises, regardless of whether a country is emerging or advanced. For emerging economies, however, higher foreign exchange reserves predict a sharply reduced probability of a subsequent crisis. |
| JEL: | E32 E51 F32 F34 G15 G21 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17252&r=opm |
| By: | Martin S. Feldstein |
| Abstract: | The real trade weighted value of the dollar fell 11 percent against the Federal Reserve Bank’s index of major currencies during the 12 months through May 2011 and 31 percent during the past ten years. Four strong market forces are likely to cause further declines over the next several years: a portfolio rebalancing by major international investors who regard their portfolios as overweight dollars, the large US current account deficit, a Chinese policy to raise consumption, and interest rate differences that make dollar investments less attractive. A declining dollar could have a powerful positive effect on the short-run performance of the American economy by raising exports (now more than $1.3 trillion) and inducing American consumers to shift from imports to American made products and services. Without a boost to demand from an increase in net exports, the U.S. recovery is likely to remain weak and could run out of steam. There are of course also negative effects of a falling dollar: reducing the real value of any given level of personal incomes by raising the cost to households of the imported products that they consume and creating inflationary pressures as import prices rise. |
| JEL: | E3 F0 F31 F4 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17260&r=opm |
| By: | Berka, Martin; Devereux, Michael B. |
| Abstract: | We study a newly constructed panel data set of relative prices for a large number of consumer goods among 31 European countries over a 15 year period. The data set includes eurozone members both before and after the inception of the euro, floating exchange rate countries of western Europe, and emerging market economies of Eastern and Southern Europe. We find that there is a substantial and continuing deviation from PPP at all levels of aggregation, both for traded and non-traded goods, even among eurozone members. Real exchange rates exhibit two clear properties in the sample; a) they are closely tied to GDP per capita relative to the European average, at all levels of aggregation and for both cross country time series variation, b) they are highly positively correlated with cross country and time series variation in the relative price of non-traded goods. We then construct a simple two-sector endowment economy model of real exchange rate determination which exhibits these two properties, calibrated to match the data. Simulating the model using the historical relative GDP per capita for each country, we find that for most countries, there is a very close fit between the actual and simulated real exchange rate. |
| Keywords: | real exchange rate, GDP, European countries, relative prices, |
| Date: | 2011–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:vuw:vuwecf:1687&r=opm |
| By: | Cˆmdric TILLE (Graduate Institute of International and Development Studies and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research) |
| Abstract: | The current crisis has led to an unprecedented collapse in international capital flows, with substantial heterogeneity across regions. Asian economies were relatively unaffected, despite having been the center of the storm in the crisis of the late 1990s. The contraction in capital flows for Asian countries was limited to the most acute phase of the crisis following the collapse of Lehman Brothers, after which capital flows rebounded. We find that the stronger performance of Asia primarily reflects its more limited reliance on international banking compared to Europe and the United States. We find little evidence that the drivers of capital flows had a differentiated impact in Asia. Finally, we show that while higher initial levels of foreign reserves did not insulate countries from a turnaround in private capital flows, a larger use of reserves at the height of the crisis limited the contraction in gross private outflows. |
| Keywords: | International Capital Flows, Banking Integration, Crisis |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:202011&r=opm |
| By: | Bussière, M.; Chudik, A.; Mehl, A. |
| Abstract: | This paper uncovers the response pattern to global shocks of euro area countries' real effective exchange rates before and after the start of Economic and Monetary Union (EMU), a largely open ended question when the euro was created. We apply to that end a newly developed methodology based on high dimensional VAR theory. This approach features a dominant unit to a large set of over 60 countries' real effective exchange rates and is based on the comparison of two estimated systems: one before and one after EMU. We find strong evidence that the pattern of responses depends crucially on the nature of global shocks. In particular, post-EMU responses to global US dollar shocks have become similar to Germany's response before EMU, i.e. to that of the economy that used to issue Europe's most credible legacy currency. By contrast, post-EMU responses of euro area countries to global risk aversion shocks have become similar to those of Italy, Portugal or Spain before EMU, i.e. of economies of the euro area's periphery. Our findings also suggest that the divergence in external competitiveness among euro area countries over the last decade, which is at the core of today's debate on the future of the euro area, is more likely due to country-specific shocks than to global shocks. |
| Keywords: | Euro, Real Effective Exchange Rates, Weak and Strong Cross Sectional Dependence, High-Dimensional VAR, Identification of Shocks. |
| JEL: | C21 C23 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:336&r=opm |
| By: | Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Giovanni Lombardo (European Central Bank) |
| Abstract: | A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. We contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. We compare the cooperative Ramsey monetary policy with standard policy benchmarks (e.g. PPI stability) as well as with the optimal Ramsey policy in a currency area. We show that the two-country perspective offers new insights on the trade-offs faced by the monetary authority. Our main results are the following. First, strict PPI targeting (nearly optimal in our model if credit frictions are absent) becomes excessively procyclical in response to positive productivity shocks in the presence of financial frictions. The related welfare losses are non-negligible, especially if financial imperfections interact with nontradable production. Second, (asymmetric) foreign currency debt denomination affects the optimal monetary policy and has important implications for exchange rate regimes. In particular, the larger the variance of domestic productivity shocks relative to foreign, the closer the PPI-stability policy is to the optimal policy and the farther is the currency union case. Third, we find that central banks should allow for deviations from price stability to offset the effects of balance sheet shocks. Finally, while financial frictions substantially decrease attractiveness of all price targeting regimes, they do not have a significant effect on the performance of a monetary union agreement. |
| Keywords: | financial frictions, open economy, optimal monetary policy |
| JEL: | E52 E61 E44 F36 F41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:91&r=opm |
| By: | Cédric Durand (CEMI - Centre d'étude des modes d'industrialisation - Ecole des Hautes Etudes en Sciences Sociales (EHESS), CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris-Nord - Paris XIII - CNRS : UMR7234); Antonia Lòpez-Villavicencio (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris-Nord - Paris XIII - CNRS : UMR7234) |
| Abstract: | In this paper, we analyze the differences in the sensibility of the distribution and transportation margin to exchange rate variations among different sectors in several European countries between 1995 and 2007. On the one hand, we provide new evidence that the margin reacts to exchange rate movements, a fact that may help to explain the still unresolved puzzle concerning the incomplete pass-through of the exchange rate to consumer prices. On the other hand, we look for indications of the characteristics of global value chains governance through the evolution of distributional margins. In addition, in order to draw more subtle conclusions, one original feature of this work is that we empirically allow for asymmetrical reactions of distributional margins to depreciations or appreciation, an effect that was previously ignored in the literature. |
| Keywords: | Distribution's margin, globalization, asymmetries, exchange rate |
| Date: | 2011–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cepnwp:hal-00611862&r=opm |
| By: | William D. Craighead (Department of Economics, Wesleyan University); David R. Hineline (Department of Economics, Richard T. Farmer School of Business, Miami University) |
| Abstract: | This paper extends the study of current account reversals by considering the implications for the composition of output and employment. It is shown that decreases in current account deficits imply increases in tradable relative to nontradable output and/or declines in investment. The impact of current account “rebalancing” should therefore be expected to vary considerably across sectors of an economy. This inter-sectoral variation is studied by examining the dynamics of output, employment and prices using data for 55 sectors of the economy during 14 industrial country reversal episodes. The output and employment declines associated with current account reversals are most clearly evident in investment-related sectors, while sectors related to primary commodities generally perform relatively well following reversals. Reversals are also followed by increases in relative inflation for tradable goods sectors. |
| Keywords: | Temporal Current Account |
| JEL: | F3 F4 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2011-002&r=opm |
| By: | Sarno, Lucio; Schneider, Paul; Wagner, Christian |
| Abstract: | We study the properties of foreign exchange risk premiums that can explain the forward bias puzzle, defined as the tendency of high-interest rate currencies to appreciate rather than depreciate. These risk premiums arise endogenously from the no-arbitrage condition relating the term structure of interest rates and exchange rates. Estimating affine (multi-currency) term structure models reveals a noticeable tradeoff between matching depreciation rates and accuracy in pricing bonds. Risk premiums implied by our global affine model generate unbiased predictions for currency excess returns and are closely related to global risk aversion, the business cycle, and traditional exchange rate fundamentals. |
| Keywords: | exchange rates; forward bias; predictability; term structure |
| JEL: | E43 F31 G10 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8503&r=opm |
| By: | Nils Jannsen; Melanie Klein |
| Abstract: | This paper analyzes the international transmission effects of euro area monetary policy shocks in to other western European countries, namely the United Kingdom, Sweden, Switzerland, Denmark, and Norway. For this purpose, we use a structural VAR model of the euro area and augment it consecutively by the foreign variables of interest. We find that a monetary policy shock in the euro area leads to a largely similar change in the interest rate and in GDP in these other western European countries. The effects on their exchange rates are limited and their trade balances usually are unaffected. Our results suggest that the income absorption effect to be more important than the expenditure switching effect in the international transmission of monetary policy and that exchange rate stabilization seems to be of some concern to monetary policy makers in small open economies |
| Keywords: | Monetary policy, international transmission, euro area, vector autoregression |
| JEL: | C32 E52 F41 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1718&r=opm |
| By: | Lopez, C.; Murray, C J.; Papell, D H. |
| Abstract: | This article analyzes the hysteresis hypothesis in the unemployment rates of the four French overseas regions (Guadeloupe, Martinique, Guyana, Reunion) [FORs] over the period 1993-2008. We use standard univariate and panel unit root tests, among them Choi (2006) and Lopez (2009) that account for cross-sectional dependence and have improved performance when the number of countries and the time dimension of the data are limited. Our results cannot reject the null hypothesis of a unit root and so find evidence supporting hysteresis in the unemployment rates for the FORs. |
| Keywords: | PPP puzzle, median-unbiased, persistence. |
| JEL: | C22 F31 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:338&r=opm |