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on Open Economy Macroeconomic |
| By: | Jonathan Heathcote; Fabrizio Perri |
| Abstract: | This paper is structured in three parts. The first part outlines the methodological steps, involving both theoretical and empirical work, for assessing whether an observed allocation of esources across countries is efficient. The second part applies the methodology to the long-run allocation of capital and consumption in a large cross section of countries. We find that countries that grow faster in the long run also tend to save more both domestically and internationally. These facts suggest that either the long-run allocation of resources across countries is inefficient, or that there is a systematic relation between fast growth and preference for delayed consumption. The third part applies the methodology to the allocation of resources across developed countries at the business cycle frequency. Here we discuss how evidence on international quantity comovement, exchange rates, asset prices, and international portfolio holdings can be used to assess efficiency. Overall, quantities and portfolios appear consistent with efficiency, while evidence from prices is difficult to interpret using standard models. The welfare costs associated with an inefficient allocation of resources over the business cycle can be significant if shocks to relative country permanent income are large. In those cases partial financial liberalization can lower welfare. keywords: International risk sharing, Long-run risk, Long-run growth, International business cycles, Real exchange ratejel classification codes: F21, F32, F36, F41, F43, F44 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:476&r=opm |
| By: | Filardo , Andrew J. (BOFIT); Siklos , Pierre L. (BOFIT) |
| Abstract: | This paper examines past evidence of prolonged periods of reserve accumulation in Asian emerging market economies and the direct and indirect implications for monetary stability through the potential impact of such episodes on financial stability. The empirical research focuses on identifying periods of prolonged interventions and correlations with key macrofinancial aggregates. Related changes in central bank balance sheets are also examined, especially in periods when the interventions are linked to strong capital inflows. In particular, we consider whether changes in the central bank's balance sheet from prolonged intervention lead to spillovers to the balance sheet of the private sector. We explore the possible forms of the spillovers and the consequences on asset prices (e.g., housing prices, equity prices, the growth in domestic credit). Policy implications are drawn. Finally, we propose a new indicator of reserves adequacy and excessive foreign exchange reserves accumulation based on a factor model. Two broad conclusions emerge from the stylized facts and the econometric evidence. First, the best protection against costly reserves accumulation is a more flexible exchange rate. Second, the necessity to accumulate reserves as a bulwark against goods price inflation is misplaced. Instead, there is a strong link between asset price movements and the likelihood of accumulating foreign exchange reserves that are costly. |
| Keywords: | foreign exchange reserves accumulation; monetary and financial stability |
| JEL: | D52 E44 F32 F41 |
| Date: | 2013–03–28 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2013_005&r=opm |
| By: | Silvana Tenreyro (London School of Economics); Miklos Koren (Central European University); Francesco Caselli (London School of Economics) |
| Abstract: | Existing wisdom links increased openness to trade to greater macroeconomic volatility, as trade induces a country to specialize, increasing its exposure to sector-specific shocks. Evidence suggests, however, that country-wide shocks are at least as important as sectoral shocks in shaping volatility patterns. We argue that if country-wide shocks are dominant, the impact of trade on volatility can be negative, because trade becomes a source of diversification. For example, trade allows domestic goods producers to respond to shocks to the domestic supply chain by shifting sourcing abroad. Similarly, when a country has multiple trading partners, a domestic recession or a recession in any one of the trading partners translates into a smaller demand shock for its producers than when trade is more limited. Using a calibrated version of the Eaton-Kortum and Alvarez-Lucas model, we quantitatively assess the impact of lower trade barriers on volatility since the 1970s in a broad group of countries. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:539&r=opm |
| By: | Christopher Telmer (Carnegie Mellon University); Batchimeg Sambalaibat (Carnegie Mellon University); Federico Gavazzoni (Carnegie Mellon University) |
| Abstract: | A basic tenet of lognormal asset pricing models is that a risky currency is associated with a low pricing kernel volatility. Empirical evidence implies that a risky currency is associated with a relatively high interest rate. Taken together, these two statements associate high-interest-rate currencies with low pricing kernel volatility. We document evidence suggesting that the opposite is true. We approximate the volatility of the pricing kernel with the volatility of the short interest rate. We find that, across currencies, relatively high interest rate volatility is associated with relatively high interest rates. This contradicts the prediction of lognormal models. One possible reason is that our approximation of the volatility of the pricing kernel is inadequate. We argue that this is unlikely, in particular for questions involving currencies. We conclude that lognormal models of the pricing kernel are inadequate for explaining currency risk and that future work should place increased emphasis on higher moments. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:558&r=opm |
| By: | Kubota, Megumi |
| Abstract: | This paper models empirically the short and long-term behavior of the real exchange rate misalignment -- a key variable in academic and policy circles. The equilibrium real exchange rate is derived from a theoretical model with intertemporal external equilibrium and internal equilibrium (in traded and non-traded markets) based on the current account dynamics and Harrod-Balassa-Samuelson productivity, respectively. This provides a bridge between theory and empirics that links the real exchange rate and its fundamentals (terms of trade, the ratio of net foreign assets to gross domestic product, and productivity differentials). The paper contributes to the literature by: (a) estimating an unrestricted vector error correction model that examines the short-term dynamics of real exchange rate misalignments and links these deviations with shocks to fundamentals from 1970 to 2010, and (b) computing the speed of reversion of real exchange rate misalignments with respect to a fundamentals-based equilibrium level. The paper reconciles two strands of the empirical literature that estimate the half-life of purchasing power parity deviations: one, the linear adjustment model that renders the consensus half-life estimates of purchasing power parity deviations, and another, the non-linear adjustment model of purchasing power parity deviations. The model estimates the half-life of real exchange rate deviations from their fundamental equilibrium at approximately 2.8 years. Consequently, about 25 percent of the real exchange rate deviation from its equilibrium level is corrected in the next year. Approximately 43 percent of the countries in the sample have a half-life of real exchange rate deviations from equilibrium less than 2.5 years -- which is consistent with predictions from non-linear mean reversion models. |
| Keywords: | Currencies and Exchange Rates,Economic Stabilization,Macroeconomic Management,Economic Theory&Research,Debt Markets |
| Date: | 2013–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6411&r=opm |
| By: | Engler, Philipp; Voigts, Simon |
| Abstract: | We show in a dynamic stochastic general equilibrium framework that the introduction of a common currency by a group of countries with only partially integrated goods markets, incomplete financial markets and no labor migration across member states, significantly increases volatility of consumption and employment in the face of asymmetric shocks. We propose a simple transfer mechanism between member countries of the union that reduces this volatility. Furthermore, we show that this mechanism is more efficient than anticyclical policies at the national level in terms of a better stabilization for the same budgetary effects for households while in the long run deeper integration of goods markets could reduce volatility significantly. Regarding its implementation, we show that the centralized provision of public goods and services at the level of the monetary union implies cross-country transfers comparable to the scheme under study. -- |
| Keywords: | monetary union,asymmetric shocks,fiscal policy,fiscal transfers |
| JEL: | F41 F44 E2 E3 E52 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:20132&r=opm |
| By: | Dmitriev, Mikhail; Hoddenbagh, Jonathan |
| Abstract: | We study the conduct of monetary policy in a continuum of small open economies. We solve the model globally in closed form without restricting the elasticity of substitution between home and foreign goods to one. Using this global closed-form solution, we give an exact characterization of optimal monetary policy and welfare with and without international policy cooperation. We consider the cases of internationally complete asset markets and financial autarky, producer currency pricing and local currency pricing. Under producer currency pricing, it is always optimal to mimic the flexible-price equilibrium through a policy of price stability. Under local currency pricing, policy should fix the exchange rate. Even if substitutability differs from one, the continuum of small open economies implies that the share of each country's output in the world consumption basket (and therefore the impact of the country's monopoly power) is negligible. This removes the incentive to deviate from price stability under producer currency pricing or a fixed exchange rate under local currency pricing. There are no gains from international monetary cooperation in all cases examined. Our results stand in contrast to those in the literature on optimal monetary policy for large open economies, where strategic interactions drive optimal policy away from price stability or fixed exchange rates, and gains from cooperation are present, when substitutability differs from one. |
| Keywords: | Open economy macroeconomics; Optimal monetary policy; Price stability. |
| JEL: | E50 F41 F42 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46132&r=opm |
| By: | David Guerreiro |
| Abstract: | This paper is interested in linking formally external disequilibriums to the sovereign debt crisis the EMU is experiencing since 2009. Relying on the CHEER approach that connects the goods market to the capital market, we show that when a country belonging to a monetary union faces external disequilibrium relative to its main partner, the corresponding interest rate differential increases. Moreover, when these imbalances are persistent, it may trigger a balance of payments crisis. Our findings indicate that this phenomenon seems to be at play for the European countries under international assistance. |
| Keywords: | balance of payments crisis, CHEER, debt crisis, external imbalances, Eurozone |
| JEL: | F33 F34 G01 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:wpaper:y:2013:i:118&r=opm |
| By: | C. Bora Durdu (Federal Reserve Board); Ricardo Nunes (Federal Reserve Board); Horacio Sapriza (Federal Reserve Board) |
| Abstract: | This paper builds a model of sovereign debt in which default risk, interest rates, and debt depend not only on current fundamentals but also on news about future fundamentals. News shocks affect equilibrium outcomes because they contain information about the likelihood that the government repays its debt in the future. First, in the model with news shocks not all defaults occur in bad times, bringing the model closer to the data. Second, the news shocks help account for key differences between developing and more developed economies: as the precision of news improves, the model predicts lower variability of consumption, less countercyclical trade balance and interest rate spreads, as well as a higher level of debt more in line with the characteristics of more developed economies. Third, the model also captures the hump-shaped relationship between default rates and the precision of news obtained from the data. Finally, the news shocks have a nonmonotonic effect on the welfare. |
| Keywords: | sovereign default risk; news shocks; endogenous borrowing constraints. |
| JEL: | F34 F41 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1309&r=opm |
| By: | Nicolaas Groenewold (Business School, University of Western Australia) |
| Abstract: | Both before and after the federal election campaign in 2010, Australians were frequently told that they were spared the worst effects of the Global Financial Crisis because of the government’s timely and decisive fiscal stimulus. However, there are at least two other possibilities: monetary policy and foreign demand. This paper assesses the relative importance of these possibilities in driving output in the past few years. It does this within the framework of a structural vector-autoregressive model based on recent literature measuring the effects of fiscal and/or monetary policy on output. The results suggest that the government’s claims are considerably exaggerated. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:uwa:wpaper:12-28&r=opm |