nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒11‒24
five papers chosen by
Martin Berka
Victoria University of Wellington

  1. Optimal Monetary Policy in an Open Economy under Asset Market Segmentation By Singh, Rajesh; Lahiri, Amartya; Vegh, Carlos A
  2. Global Imbalances: Should We Use Fundamental Equilibrium Exchange Rates? By Saadaoui, Jamel
  3. Accounting for Global Dispersion of Current Accounts By Yongsung Chang; Sun-Bin Kim; Jaewoo Lee
  4. Currency intervention and the global portfolio balance effect: Japanese lessons By Petra Gerlach-Kristen; Robert N McCauley
  5. Determinants of TARGET2 imbalances By Martina Cecioni; Giuseppe Ferrero

  1. By: Singh, Rajesh; Lahiri, Amartya; Vegh, Carlos A
    Abstract: This paper studies optimal monetary policy in a small open economy under flexible prices. The paper's key innovation is to analyze this question in the context of environments where only a fraction of agents participate in asset market transactions (i.e., asset markets are segmented).  In this environment, we study three rules: the optimal state contingent monetary policy; the optimal non-state contingent money growth rule; and the optimal non-state contingent devaluation rate rule.  We compare welfare and the volatility of macro aggegates like consumption, exchange rate, and money under the different rules.  One of our key findings is that amongst non-state contingent rules, policies targeting the exchange rate are, in general, welfare dominated by policies which target monetary aggregates.  Crucially, we find that fixed exchange rates are almost never optimal.  On the other hand, under some conditions, a non-state contingent rule like a fixed money rule can even implement the first-best allocation.
    Keywords: Optimal Monetary Policy; Asset Market Segmentation
    JEL: E42 E60 F F30
    Date: 2012–11–13
  2. By: Saadaoui, Jamel
    Abstract: The reduction of global imbalances observed during the climax of crisis is incomplete. In this context, currencies realignments are still proposed to ensure global macroeconomic stability. These realignments are based on equilibrium rates derived from equilibrium exchange rate models. Among these models, we have the fundamental equilibrium exchange rate (FEER) model introduced by Williamson (1994). This approach is often labelled as normative mainly because the return to the equilibrium is not described in the model. If the FEER is not related neither in the short nor in the long to the real exchange rates, we see no clear justification to intervene in foreign exchange markets based on these equilibrium rates. In this case, the FEER is a normative approach and should not be used to reduce global imbalances. This paper provides empirical evidences robust to cross-sectional dependence that the FEER is related to real exchange rate in the long run and thus could be a useful tool to prevent the resurgence of large global imbalances and associated risks.
    Keywords: Global Imbalances; Equilibrium Exchange Rate; International Monetary Cooperation
    JEL: F32 C23 F41 F31
    Date: 2012–11–10
  3. By: Yongsung Chang (University of Rochester and Yonsei University); Sun-Bin Kim (Yonsei University); Jaewoo Lee (International Monetary Fund)
    Abstract: We develop a multi-country quantitative model of the global distribution of current account and external balances. Countries accumulate domestic capital and foreign assets to smooth consumption over time against exogenous productivity shocks in the presence of liquidity constraints. In equilibrium, optimal consumption and investment responses to persistent productivity shocks imply a degree of intertemporal substitution across countries that can explain up to one-third of the current account dispersion in the data.
    Keywords: Dispersion of Current Accounts, Incomplete Markets, Frictions
    JEL: F32 F34 F44
    Date: 2012–09
  4. By: Petra Gerlach-Kristen; Robert N McCauley
    Abstract: This paper shows that the Japanese foreign exchange interventions in 2003/04 seem to have lowered long-term interest rates in a wide range of countries, including Japan. It seems that this decline was triggered by the investment of the intervention proceeds in US bonds and that a global portfolio balance effect spread the resulting decline in US yields to other bond markets, thus easing global monetary conditions.
    Keywords: Intervention, portfolio balance effect, Japan
    Date: 2012–10
  5. By: Martina Cecioni (Banca d'Italia); Giuseppe Ferrero (Banca d'Italia)
    Abstract: The paper analyzes developments in TARGET2 imbalances within the euro area since 2007, from two perspectives: national central banks’ balance sheets and countries’ balance of payments (BoP). We examine the relationship between TARGET2 balances and the Eurosystem liquidity provision, analyzing how the circulation of the latter has changed during the crisis. We then study BoP developments in Greece, Portugal, Italy and Spain, investigating which of the following explanations accounts for the growing TARGET2 imbalances: (i) current account deficit, (ii) decrease of net inflows of private capital from securities and interbank markets and (iii) run on deposits. The results of our analysis suggest that while the increase in TARGET2 liabilities is related to the current account deficit in Greece, there is no evidence of this in Italy, Spain and Portugal. In all countries the increase is mostly driven by private capital outflows in securities and interbank markets; deposit runs are apparent only in Greece. In Italy, the reduction of capital inflows consisted entirely in a decrease in the interbank market cross-border activity and in portfolio investments by non-residents.
    Keywords: payment system, financial crisis, monetary policy
    JEL: E42 E52
    Date: 2012–09

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