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on Open MacroEconomics |
| By: | Matteo Maggiori (UC Berkeley) |
| Abstract: | I provide a framework for understanding the global financial architecture as an equilibrium outcome of the risk sharing between countries with different levels of financial development. The country that has the most developed financial sector takes on a larger proportion of global fundamental and financial risk because its financial intermediaries are better able to deal with funding problems following negative shocks. This asymmetric risk sharing has real consequences. In good times, and in the long run, the more financially developed country consumes more, relative to other countries, and runs a trade deficit financed by the higher financial income that it earns as compensation for taking greater risk. During global crises, it suffers heavier capital losses than other countries, exacerbating its fall in consumption. This country's currency emerges as the world's reserve currency because it appreciates during crises and so provides a good hedge. The model is able to rationalize these facts, which characterize the role of the US as the key country in the global financial architecture. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:146&r=opm |
| By: | Fratzscher, Marcel; Lo Duca, Marco; Straub, Roland |
| Abstract: | The paper analyses the global spillovers of the Federal Reserve’s unconventional monetary policy measures since 2007. First, we find that Fed measures in the early phase of the crisis (QE1), but not since 2010 (QE2), were highly effective in lowering sovereign yields and raising equity markets in the US and globally across 65 countries. Yet Fed policies functioned in a pro-cyclical manner for capital flows to EMEs and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of emerging markets (EMEs) into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US monetary policy since 2007 has contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets. |
| Keywords: | capital flows; emerging markets; Federal Reserve; monetary policy; panel data; portfolio choice; quantitative easing; spillovers; United States |
| JEL: | E52 E58 F32 F34 G11 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9195&r=opm |
| By: | Virginie Coudert; Cécile Couharde; Valérie Mignon |
| Abstract: | The aim of this paper is to study ruptures of exchange-rate pegs by focusing on the fluctuations of the anchor currency. We test for the hypothesis that currencies linked to the USD are more likely to loosen their peg when the USD is appreciating, while sticking to it otherwise. To this end, we estimate smooth-transition regression models for a sample of 28 emerging currencies over the 1994-2011 period. Our findings show that while the real effective exchange rates of most of these countries tend to co-move with that of the USD in times of depreciation, this relationship is frequently reversed when the US currency appreciates over a certain threshold. Such nonlinear effects are especially at stake in Asia where growth is export-oriented. |
| Keywords: | real exchange rates;anchor currency;rupture of pegs;smooth transition regression models |
| JEL: | F31 F33 C22 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2012-21&r=opm |
| By: | Feldkircher, Martin (BOFIT) |
| Abstract: | In this paper, we identify initial macroeconomic and financial market conditions that help explain the distinct response of the real economy of a particular country to the recent global financial crisis. Using four measures of crisis severity, we examine a data set with over 90 potential explanatory factors employing techniques that are robust to model uncertainty. Four findings are of particular note. First, we find empirical evidence for the pivotal role of pre-crisis credit growth in shaping the real economy's response to the crisis. Specifically, a 1% increase in pre-crisis lending translates into a 0.2% increase in the cumulative loss in real output. Moreover, the combination of pronounced growth in lending ahead of the crisis and the country's exposure to external funding from advanced economies is shown to intensify the real downturn. Economies with booming real activity before the crisis are found to be less resilient to the global shock. Buoyant growth in real GDP in parallel with strong growth of credit particularly exacerbated the effects of the recent crisis on the real economy. Finally, we provide empirical evidence on the importance of holding international reserves in explaining the response of the real economy to the crisis. The effect of international reserves accumulation as a shelter to the global shock rises in credit provided by the domestic banking sector. The results are shown to be robust to several estimation techniques, including those allowing for cross-country spillovers. |
| Keywords: | financial crisis; credit boom; international shock transmission; Bayesian model averaging; cross-country analysis; non-linear effects |
| JEL: | C11 C15 E01 O47 |
| Date: | 2012–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2012_026&r=opm |
| By: | Yang, Dennis Tao (University of Virginia) |
| Abstract: | Over the last decade, the internal and external macroeconomic imbalances in China have risen to unprecedented levels. In 2008, China's national savings rate soared to over 53 percent of its GDP, whereas its current account surplus exceeded 9 percent of GDP. The current paper presents a unified framework for understanding the structural causes of these imbalances. I argue that the imbalances are attributable to a set of policies and institutions embedded in the economy. Moreover, the accession of China to the World Trade Organization has dramatically amplified the effects of these structural distortions. I document major trends in aggregate savings, investment, trade, and net foreign asset positions in China, and explore options for policy reforms aimed at rebalancing the Chinese economy. |
| Keywords: | aggregate savings, current account, income distribution, structural distortions, trade policies, China |
| JEL: | E21 O16 F32 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp6964&r=opm |
| By: | John Beirne (European Central Bank); Jana Gieck (International Monetary Fund) |
| Abstract: | This paper provides an empirical assessment of interdependence and contagion across three asset classes (bonds, stocks, and currencies) for over 60 economies over the period 1998 to 2011. Using a global VAR, we test for changes in the transmission mechanism – both within and cross-market changes - during periods of turbulence in financial markets. Our results suggest that within-market effects over the sample period for each asset market are highly significant for advanced economies. For emerging economies, these within-market effects mostly apply to the equity market. Contagion effects within-market are most notable in Latin America and Emerging Asia for equities. Cross-market contagion is identified from global bonds to local stocks in Central and Eastern Europe, but from global stocks to domestic bonds in the case of advanced economies. Impulse responses indicate that in crisis times, the origin of the shock plays an important role on the nature of the global transmission. The evidence suggests that in times of financial crisis, shocks that emanate in the US, particularly equity shocks, lead to risk aversion by investors in equities and currencies globally and in some emerging market bonds. Euro area shocks tend to have the most significant effect within the bond market. Our results have implications for policymakers in terms of understanding financial exposures and vulnerabilities and for investors in relation to portfolio rebalancing and the construction of portfolio diversification strategies across asset classes in crisis and non-crisis times. JEL Classification: F30, G15 |
| Keywords: | Asset markets, contagion, global VAR |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121480&r=opm |