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on Open Economy Macroeconomic |
| By: | Valentina Bruno; Hyun Song Shin |
| Abstract: | We investigate global factors associated with cross-border capital flows. We formulate a model of gross capital flows through the international banking system and derive a closed form solution that highlights the leverage cycle of global banks as being a prime determinant of the transmission of financial conditions across borders. We then test the predictions of our model in a panel study of 46 countries and find that global factors dominate local factors as determinants of banking sector capital flows. |
| JEL: | F32 F34 F36 G21 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19038&r=opm |
| By: | Matteo Cacciatore; Giuseppe Fiori; Fabio Ghironi |
| Abstract: | The wave of crises that began in 2008 reheated the debate on market deregulation as a tool to improve economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. Regulation affects producer entry costs, employment protection, and unemployment benefits. We first characterize optimal monetary policy when regulation is high in both countries and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International synchronization of reforms can eliminate policy tradeoffs generated by asymmetric deregulation. |
| JEL: | E24 E32 E52 F41 J64 L51 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19025&r=opm |
| By: | Michael D. Bordo; Angela Redish |
| Abstract: | The international gold standard of the late nineteenth century has been described as a system of ‘spontaneous order’, capturing the idea that its architects at the time were fashioning domestic monetary systems which created a system of fixed exchange rates almost as a by-product. In contrast the framers of the Bretton Woods System were intentional in building an international monetary system and so it is by advocates of designing an international monetary order. In this paper we examine the transition from spontaneous order circa 1850 to designed system and then back towards spontaneous order in the late twentieth century, arguing that it is an evolution with multiple stops and starts, and that the threads that underlie the general tendency through these hesitations are the interplay between monetary and fiscal factors and the evolution of the financial system. This transformation is embedded within deep evolving political fundamentals including the rise of democracy, nationalism, fascism and communism and two world wars. |
| JEL: | E00 N1 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19026&r=opm |
| By: | Taiji Furusawa (Hitotsubashi University); Taiji Furusawa, Noriyuki Yanagawa (The University of Tokyo) |
| Abstract: | We construct a simple two-country model that enables us to examine the interactions between trade in goods and international capital movement under financial imperfection. We show that they are complements in the sense that trade in goods facilitates capital outflow from the South, which is either financially less-developed or endowed less capital than the North. This complementarity disappears if financial institution is perfect or almost perfect; trade in goods and capital movement are substitutes as traditional literature shows in such cases. We also show the possibility that capital account liberalization entails capital leakage from the manufacturing industries to an inferior investment opportunity. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf316&r=opm |
| By: | Mirdala, Rajmund |
| Abstract: | Exchange rate regimes evolution in the European transition economies refers to one of the most crucial policy decision in the beginning of the 1990s employed during the initial stages of the transition process. During the period of last two decades we may identify some crucial milestones in the exchange rate regimes evolution in the European transition economies. due to existing diversity in exchange rate arrangements in the European transition economies in the pre-ERM2 period there seems to be two big groups of countries - “peggers” (Bulgaria, Estonia, Latvia, Lithuania) and “floaters” (Czech republic, Hungary, Poland, Romania, Slovak republic, Slovenia). Despite the fact, there seems to be no real prospective alternative to euro adoption for the European transition economies, we emphasize disputable effects of sacrificing monetary sovereignty in the view of positive effects of exchange rate volatility and exchange rate based adjustments in the country experiencing sudden shifts in the business cycle. In the chapter we analyze effects of the real exchange rate volatility on real output and inflation in ten European transition economies. From estimated VAR model (recursive Cholesky decomposition is employed to identify structural shocks) we compute impulse-response functions to analyze responses of real output and inflation to negative real exchange rate shocks. Results of estimated model are discussed from a prospective of the fixed versus flexible exchange rate dilemma. To provide more rigorous insight into the problem of the exchange rate regime suitability we estimate the model for each particular country employing data for two subsequent periods 2000-2007 and 2000-2011. |
| Keywords: | exchange rate volatility, economic growth, economic crisis, vector autoregression, variance decomposition, impulse-response function |
| JEL: | C32 F32 F41 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46879&r=opm |
| By: | Simone Meier |
| Abstract: | This paper analyzes the way in which international financial integration affects the transmission of monetary policy in a New Keynesian open economy framework. It extends Woodford’s (2010) analysis to a model with a richer financial markets structure, allowing for international trading in multiple assets and subject to financial intermediation costs. Two different forms of financial integration are considered, in particular an increase in the level of gross foreign asset holdings and a decrease in the costs of international asset trading. The simulations in the calibrated model show that none of the analyzed forms of financial integration undermine the effectiveness of monetary policy in influencing domestic output and inflation. Under realistic parameterizations, monetary policy is more, rather than less, effective as the positive impact of strengthened exchange rate and wealth channels more than offsets the negative impact of weakened interest rate channels. The paper also analyzes the interaction of financial integration with trade integration, varying both the importance of trade linkages and the degree of exchange rate pass-through. These interactions show that the positive effects of financial integration are amplified by trade integration. Overall, monetary policy is most effective in parameterizations with the highest degree of both financial and real integration. |
| Keywords: | Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:145&r=opm |
| By: | Aikaterini Karadimitropoulou; Miguel Leon-Ledesma |
| Abstract: | Do sector-specific factors common to all countries play an important role in explaining business cycle co-movement? We address this question by analyzing international co-movements of value added (VA) growth in a multi-sector dynamic factor model. The model contains a world factor, country-specific factors, sector-specific factors, and idiosyncratic components. We estimate the model using Bayesian methods for 30 disaggregated sectors in the G7 economies for the 1974-2004 period. Our findings show that, although there is a substantial role for sector-specific factors, fluctuations are dominated by country-factors. The world factor appears to play a minimal role because, when using aggregate data, the world factor captures both the factor common to all countries and industries and the factor common to the same industry across countries. We then examine how these factors evolved as globalization deepened over the past two decades. Our results suggest that business cycles at a disaggregate level have not become more synchronized internationally. This is mainly driven by a substantial fall in the volatility of world shocks during the globalization period, rather than a lower sensitivity of sectoral growth to world factors. Our results also reveal that world factors appear to be more important for industries with a higher level of international vertical integration. |
| Keywords: | dynamic factors; disaggregated business cycles; international co-movement |
| JEL: | E32 F44 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1307&r=opm |
| By: | Randall K. Filer; Dragana Stanisic |
| Abstract: | The current literature shows a significant negative impact of terrorism on countries' economies. We explore this relationship in more detail. Using an unbalanced panel of over 160 countries for up to 25 years and the Global Terrorism Database (GTD) we show a decrease in FDI as a consequence of terrorism. We also find evidence that FDI flows are more sensitive to terrorism than either portfolio investments or external debt flows. Finally, we test the hypothesis that terrorism has negative spill-over effects on FDI flows into neighboring countries and find evidence that cultural but not geographical closeness matters. |
| Keywords: | capital flow; terrorism; FDI; spill-over effect; |
| JEL: | D74 H56 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:cer:papers:wp480&r=opm |
| By: | Yvonne Adema (Erasmus University Rotterdam); Lorenzo Pozzi (Erasmus University Rotterdam) |
| Abstract: | We investigate the cyclicality of the private savings to GDP ratio for a panel of 19 OECD countries over the period 1971-2009. We find robust evidence that the private savings ratio is countercyclical. Three theories unambiguously predict a higher private savings ratio during recessions: a Ricardian offset effect, the presence of credit constraints, and precautionary savings. We find evidence only for the latter theory. Our estimations take into account a large number of econometric complications: persistence in the savings ratio, endogeneity of the regressors, cross-country parameter heterogeneity, cross-sectional dependence, stationarity issues, omitted variables, and instrument strength. |
| Keywords: | Private Savings, Business Cycles, Ricardian offset, Credit Constraints, Precautionary Savings, Dynamic Panel, Cross-Sectional Dependence |
| JEL: | C23 E21 E32 |
| Date: | 2012–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:2012144&r=opm |