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on Open Economy Macroeconomic |
| By: | Mary Amiti; Oleg Itskhoki; Jozef Konings |
| Abstract: | Large exporters are simultaneously large importers. In this paper, we show that this pattern is key to understanding low aggregate exchange rate pass-through as well as the variation in pass-through across exporters. First, we develop a theoretical framework that combines variable markups due to strategic complementarities and endogenous choice to import intermediate inputs. The model predicts that firms with high import shares and high market shares have low exchange rate pass-through. Second, we test and quantify the theoretical mechanisms using Belgian firm-product-level data with information on exports by destination and imports by source country. We confirm that import intensity and market share are the prime determinants of pass-through in the cross-section of firms. A small exporter with no imported inputs has a nearly complete pass-through of over 90%, while a firm at the 95th percentile of both import intensity and market share distributions has a pass-through of 56%, with the marginal cost and markup channels playing roughly equal roles. The largest exporters are simultaneously high-market-share and high-import-intensity firms, which helps explain the low aggregate pass-through and exchange rate disconnect observed in the data. |
| JEL: | F14 F31 F41 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18615&r=opm |
| By: | Goodhart, Charles A; Lee, D J |
| Abstract: | Both the euro-area and the United States suffered an initially quite similar housing and financial shock in 2007/8, with several states in both regions being particularly badly affected. Yet there was never any question that the worst hit US states would need a special bail-out or leave the dollar area, whereas such concerns have worsened in the euro-area. We focus on three badly affected states, Arizona, Spain and Latvia, to examine the working of relative adjustment mechanisms within the currency region. We concentrate on four such mechanisms, relative wage adjustment, migration, net fiscal flows and bank flows. Only in Latvia was there any relative wage adjustment. Intra-EU migration has increased, but is more costly for those involved in the EU (than in the USA). Net federal financing helped Arizona and Latvia in the crisis, but not Spain. The locally focussed structure of banking amplified the crisis in Spain, whereas the role of out-of-state banks eased adjustment in Arizona and Latvia. The latter reinforces the case for an EU banking union. |
| Keywords: | adjustment mechanisms; assymetric shocks; banking union; fiscal transfers; migration; relative unit labour costs |
| JEL: | F36 F40 J60 O52 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9226&r=opm |
| By: | Giulio Bottazzi; Marco Duenas |
| Abstract: | This paper performs an empirical analysis of the international cross sectional distribution of gross domestic product (GDP) growth rates and business cycles. We consider a balanced panel of 91 countries in the period 1960-2010 and two different measures of GDP fluctuations: the logarithmic growth rates and the Hodrick-Prescott cycles. Both measures are characterized by fat-tailed distributions and strong heteroscedasticity. The latter is the result of a scale relation between the variance of the fluctuations and the size of the country. The analysis of the time evolution of these properties shows that distribution tails become asymmetrically fatter during the period of study, suggesting an increased probability of finding high amplitude fluctuations in more recent years. Moreover, we observe significant changes in the scale parameter characterizing the relation between volatility and country size. These findings enrich the discussion about robust properties of business cycles and reveal more evidence about scaling-law relations in economic systems. |
| Keywords: | Growth Rates Distribution; International Business Cycles; Scaling-laws in Economics |
| Date: | 2012–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:ssa:lemwps:2012/22&r=opm |
| By: | YiLi Chien (University of Connecticut); Kanda Naknoi (University of Connecticut) |
| Abstract: | This study proposes that heterogeneous household portfolio choices within a country and across countries offer an explanation for global imbalances. We construct a stochastic growth multi-country model in which heterogeneous agents face the following restrictions on asset trade. First, the degree of US equity market participation is higher than that of the rest of the world. Second, a fraction of households in every country maintains a fixed share of equity in their portfolios. In our calibrated model, which matches the US net foreign asset position and the equity premium, the average US household loads up more aggregate risk than the average foreign household by investing in a risky asset abroad and issuing a risk-free asset. As a result, the US is compensated by a high risk premium and runs trade deficits even as a debtor country. The long-run average trade deficit in our model accounts for more than 50% of the observed US trade deficit. |
| Keywords: | Global Imbalances, Current Account, Risk Premium, Asset Pricing, Limited Participation |
| JEL: | E21 F32 F41 G12 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2012-41&r=opm |
| By: | Raphael Anton Auer; Raphael S. Schoenle |
| Abstract: | In this paper, we examine the extent to which market structure and the way in which it affects pricing decisions of profit-maximizing firms can explain incomplete exchange rate passthrough. To this purpose, we evaluate how pass-through rates vary across trade partners and sectors depending on the mass and size distribution of firms affected by a particular exchange rate shock. In the first step of our analysis, we decompose bilateral exchange rate movements into broad US Dollar (USD) movements and trade-partner currency (TPC) movements. Using micro data on US import prices, we show that the pass-through rate following USD movements is up to four times as large as the pass-through rate following TPC movements and that the rate of pass-through following TPC movements is increasing in the trade partner's sector-specific market share. In the second step, we draw on the parsimonious model of oligopoly pricing featuring variable markups of Dornbusch (1987) and Atkeson and Burstein (2008) to show how the distribution of firms' market shares and origins within a sector affects the trade-partner specific pass-through rate. Third, we calibrate this model using our exchange rate decomposition and information on the origin of firms and their market shares. We find that the calibrated model can explain a substantial part of the variation in import price changes and pass-through rates across sectors, trade partners, and sector-trade partner pairs. |
| Keywords: | Exchange Rate Pass-Through, U.S. Import Prices, Market Structure, Price Complementarities |
| JEL: | E3 E31 F41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2012-14&r=opm |
| By: | Enders, Zeno; Jung, Philip; Müller, Gernot |
| Abstract: | In contrast to the notion that the exchange-rate regime is non-neutral, there is little evidence that EMU has systematically changed the European business cycle. In fact, we find the volatility of macroeconomic variables largely unchanged before and after the introduction of the euro. Exceptions are a strong decline in real exchange rate volatility and a considerable increase in cross-country correlations. To account for this finding, we develop a two-country business cycle model which is able to replicate key features of European data. In particular, the model correctly predicts a limited effect of EMU on standard business cycles statistics. However, further analysis reveals that the euro has changed the nature of the cycle through its impact on the transmission mechanism. Cross-country spillovers have become relatively more, domestic shocks relatively less important in accounting for economic fluctuations under EMU. This explains why there is little change in unconditional volatilities. |
| Keywords: | cross-country spillovers; EMU; euro; European business cycles; exchange rate regime; monetary policy; optimum currency area |
| JEL: | E32 F41 F42 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9233&r=opm |
| By: | Hubert Gabrisch (Halle Institute for Economic Research (IWH)); Karsten Staehr |
| Abstract: | The Euro Plus Pact was approved by 23 EU countries in March 2011. The Pact stipulates a range of quantitative targets meant to strengthen competitiveness and convergence with the ultimate aim of preventing unsustainable financial imbalances from accumulating. This paper uses Granger causality tests and VAR models to assess the direction of causality between changes in the relative unit labour cost and the current account balance. The sample consists of the 27 EU countries for the period 1995–2011. The main finding is that changes in the current account balance affects changes in relative unit labour costs, while there is no discernable effect in the opposite direction. This suggests that the divergence in the unit labour cost between the core countries in Northern Europe and the countries in Southern and Central and Eastern Europe prior to the global financial crisis was partly the result of capital flows from the European core to the periphery. The results call into question the ability of the Euro Plus Pact to avert financial imbalances related to increasing current account deficits in future. |
| Keywords: | European integration, policy coordination, unit labour costs, current account imbalances, economic crisis |
| JEL: | E61 F36 F41 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ost:wpaper:324&r=opm |
| By: | Taylor, Alan M. |
| Abstract: | In broad perspective, there have been essentially two competing views of the global financial crisis, albeit there are some complementarities among them. One view looks across the border: it mainly blames external imbalances, the large-scale mix of unprecedented pattern current account deficits and surpluses which entailed massive and growing net and gross international financial flows in the last decade. The alternative view looks within the border: it finds more fault in the domestic arena of the afflicted countries, attributing the problems to financial systems where risks originated in excessive credit booms in local banks. This paper uses the lens of macroeconomic and financial history to confront these dueling hypotheses with evidence. Of the two, the credit boom explanation stands out as the most plausible predictor of financial crises since the dawn of modern finance capitalism in the late nineteenth century. Historically, we find that global imbalances are not as important as a factor in financial crises as is often perceived, and they have much less correlation with subsequent episodes of financial distress compared to direct indicators like credit drawn from the financial system itself. |
| Keywords: | credit booms; external imbalances; financial crises |
| JEL: | E3 E4 E5 F3 F4 N1 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9255&r=opm |
| By: | Bekkour, Lamia; Jin, Xisong; Lehnert, Thorsten; Rasmouki, Fanou; Wolff, Christian C |
| Abstract: | In this paper, we empirically investigate the impact of the credit risk of Eurozone member countries on the stability of the Euro. In the absence of a common euro bond, euro-area credit risk is induced though the credit default swaps of the member countries. The stability of the euro is examined by decomposing dollar-euro exchange rate options into the moments of the risk-neutral distribution. We document that during the sovereign debt crisis changes in the creditworthiness of member countries have significant impact on the stability of the euro. In particular, an increase in member countries’ credit risk results in an increase of volatility of the dollar-euro exchange rate along with soaring tail risk induced through the risk-neutral kurtosis. We find that member countries’ credit risk is a major determinant of the euro crash risk as measured by the risk-neutral skewness. We propose a new indicator for currency stability by combining the risk-neutral moments into an aggregated risk measure and show that our results are robust to this change in measure. Noticeable is the fact that during the sovereign debt crisis, the creditworthiness of countries with vulnerable fiscal positions is the main risk-endangering factor of the euro-stability. |
| Keywords: | credit default swaps; currency options; currency stability; European sovereign debt crisis; risk-neutral distribution |
| JEL: | G1 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9229&r=opm |
| By: | Raphael Anton Auer |
| Abstract: | What are the drivers of the large Target2 (T2) balances that have emerged in the European Monetary Union since the start of the financial crisis in 2007? This paper examines the extent to which the evolution of national T2 balances can be statistically associated with cross-border financial flows and current account (CA) balances. In a quarterly panel spanning the years 1999 to 2012 and twelve countries, it is shown that while the CA and the evolution of T2 balances were unrelated until the start of the 2007 financial crisis, since then, the relation between these two variables has become statistically significant and economically sizeable. This reflects the partial "sudden stop" to private sector capital that funded CA imbalances beforehand. I next examine how different types of financial flows have evolved over the last years and how this can be related to the evolution of T2 balances. While changes in cross-border positions in the interbank market are associated with increasing T2 imbalances, cross-border inter-office flows between banks belonging to the same financial institution have reduced T2 imbalances. Flows to the banking sector that originate from private investors and non-financial firms are large in magnitude, but are only weakly correlated with the evolution of T2 balances; changes in banks' holdings of foreign government debt and deposit flows are strongly correlated with the post-2007 evolution of T2 balances. Overall, these findings point to a sizeable transfer of risk from the private to the public sector within T2 creditor nations the via the use of central bank liquidity. |
| Keywords: | European Monetary Union, Euro, fiscal divergence, current account imbalances, TARGET2, central bank balance sheet, financial crisis, payment system |
| JEL: | E42 E58 F33 F32 F55 G14 G15 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2012-15&r=opm |
| By: | Acemoglu, Daron; Gancia, Gino A; Zilibotti, Fabrizio |
| Abstract: | To study the short-run and long-run implications on wage inequality, we introduce directed technical change into a Ricardian model of offshoring. A unique final good is produced by combining a skilled and an unskilled product, each produced from a continuum of intermediates (tasks). Some of these tasks can be transferred from a skill-abundant West to a skill-scarce East. Profit maximization determines both the extent of offshoring and technological progress. Offshoring induces skill-biased technical change because it increases the relative price of skill-intensive products and induces technical change favoring unskilled workers because it expands the market size for technologies complementing unskilled labor. In the empirically more relevant case, starting from low levels, an increase in offshoring opportunities triggers a transition with falling real wages for unskilled workers in the West, skill-biased technical change and rising skill premia worldwide. However, when the extent of offshoring becomes sufficiently large, further increases in offshoring induce technical change now biased in favor of unskilled labor because offshoring closes the gap between unskilled wages in the West and the East, thus limiting the power of the price effect fueling skill-biased technical change. The unequalizing impact of offshoring is thus greatest at the beginning. Transitional dynamics reveal that offshoring and technical change are substitutes in the short run but complements in the long run. Finally, though offshoring improves the welfare of workers in the East, it may benefit or harm unskilled workers in the West depending on elasticities and the equilibrium growth rate. |
| Keywords: | Directed Technical Change; Growth and Productivity; Offshoring; Skill Premium |
| JEL: | F43 O31 O33 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9247&r=opm |
| By: | Massimiliano Caporin; Loriana Pelizzon; Francesco Ravazzolo; Roberto Rigobon |
| Abstract: | This paper analyzes the sovereign risk contagion using credit default swaps (CDS) and bond premiums for the major eurozone countries. By emphasizing several econometric approaches (nonlinear regression, quantile regression and Bayesian quantile regression with heteroskedasticity) we show that propagation of shocks in Europe's CDS has been remarkably constant for the period 2008-2011 even though a significant part of the sample periphery countries have been extremely affected by their sovereign debt and fiscal situations. Thus, the integration among the different eurozone countries is stable, and the risk spillover among these countries is not affected by the size of the shock, implying that so far contagion has remained subdue. Results for the CDS sample are confirmed by examining bond spreads. However, the analysis of bond data shows that there is a change in the intensity of the propagation of shocks in the 2003-2006 pre-crisis period and the 2008-2011 post-Lehman one, but the coefficients actually go down, not up! All the increases in correlation we have witnessed over the last years come from larger shocks and the heteroskedasticity in the data, not from similar shocks propagated with higher intensity across Europe. This is the first paper, to our knowledge, where a Bayesian quantile regression approach is used to measure contagion. This methodology is particularly well-suited to deal with nonlinear and unstable transmission mechanisms. |
| Keywords: | Sovereign Risk, Contagion |
| JEL: | E58 F34 F36 G12 G15 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0009&r=opm |
| By: | Victoria Ivashina; David S. Scharfstein; Jeremy C. Stein |
| Abstract: | A large share of dollar-denominated lending is done by non-U.S. banks, particularly European banks. We present a model in which such banks cut dollar lending more than euro lending in response to a shock to their credit quality. Because these banks rely on wholesale dollar funding, while raising more of their euro funding through insured retail deposits, the shock leads to a greater withdrawal of dollar funding. Banks can borrow in euros and swap into dollars to make up for the dollar shortfall, but this may lead to violations of covered interest parity (CIP) when there is limited capital to take the other side of the swap trade. In this case, synthetic dollar borrowing becomes expensive, which causes cuts in dollar lending. We test the model in the context of the Eurozone sovereign crisis, which escalated in the second half of 2011 and resulted in U.S. money-market funds sharply reducing their funding to European banks. Coincident with the contraction in dollar funding, there were significant violations of euro-dollar CIP. Moreover, dollar lending by Eurozone banks fell relative to their euro lending in both the U.S. and Europe; this was not the case for U.S. global banks. Finally, European banks that were more reliant on money funds experienced bigger declines in dollar lending. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2012-74&r=opm |