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on Open Economy Macroeconomic |
| By: | Leonardo Martinez (International Monetary Fund); Juan Hatchondo (Federal Reserve Bank of Richmond); Javier Bianchi (NYU and Wisconsin) |
| Abstract: | A long-standing puzzle of international capital flows is why countries hold large amount of external debt and foreign reserves at the same time. To address this puzzle, we propose a sovereign default model where the government decides jointly over the accumulation of long-duration bonds and foreign reserves. When calibrated to the data, the model can successfully explain the simultaneous holdings of debt and foreign reserves. We also show that the relationship between reserves and default risk may be non-monotonic. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:1125&r=opm |
| By: | James MacGee (UWO); Chris Hajzler (University of Otago) |
| Abstract: | We construct a unique panel of retail food prices in 69 Canadian and 51 U.S. cities during the Interwar (1920-40) period. Surprisingly, we find that average relative price dispersion across cities within Canada and the U.S., and the role of distance in accounting for cross-city price differences, was very similar to estimates from the 1980s and 1990s. We also find large changes in the importance of the Canada-U.S. border during the Interwar period. While increased price differences between Canadian and U.S. cities coincide with the end of the gold-standard (and the move to floating nominal exchange rates), large relative and absolute price differences persist even after the Canada-U.S. nominal exchange rate returned to parity. The substantial "thickening" of the border in the 1930s appears to reflect dramatic changes in trade policy and the degree of market integration during this period. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:1126&r=opm |
| By: | Lukasz Drozd (University of Pennsilvania) |
| Abstract: | This paper evaluates the performance of leading micro-founded pricing-to-market frictions vis-a-vis a set of robust stylized facts about international prices. In order to make that evaluation meaningful, we embed each friction into a unified IRBC framework and parameterize the models in a uniform way. Our goal is to evaluate the broad-based applicability of these frictions for policy-oriented DSGE modeling by documenting their strengths and weaknesses. We make three points: (i) the mechanisms generating pricing to market are not always neutral to business cycle dynamics of quantities, (ii) some mechanisms require producer markups at least 50% to account for the full range of estimates of the empirical exchange rate pass-through to export prices of 35%-50%, (iii) some frictions crucially depend on a particular driver of uncertainty in the underlying model. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:1108&r=opm |
| By: | Elod Takáts; Christian Upper |
| Abstract: | We find that declining bank credit to the private sector will not necessarily constrain the economic recovery after output has bottomed out following a financial crisis. To obtain this result, we examine data from 39 financial crises, which - as the current one - were preceded by credit booms. In these crises the change in bank credit, either in real terms or relative to GDP, consistently did not correlate with growth during the first two years of the recovery. In the third and fourth year, the correlation becomes statistically significant but remains small in economic terms. The lack of association between deleveraging and the speed of recovery does not seem to arise due to limited data. In fact, our data shows that increasing competitiveness, via exchange rate depreciations, is statistically and economically significantly associated with faster recoveries. Our results contradict the current consensus that private sector deleveraging is necessarily harmful for growth. |
| Keywords: | creditless recovery, financial crises, deleveraging, household debt, corporate debt |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:416&r=opm |
| By: | Aizenman, Joshua (Asian Development Bank Institute); Jinjarak, Yothin (Asian Development Bank Institute) |
| Abstract: | This paper explores the stability of the key conditioning variables accounting for real estate valuation before and after the crisis of 2008–2009, in a panel of 36 countries, for the period of 2005:I–2012:IV, recognizing the incidence of global financial crisis. Our paper validates the robustness of the association between the real estate valuation of lagged current account patterns, both before and after the crisis. The results are supportive of both current account and credit growth channels, with the animal-spirits and momentum channels playing the most important role in the boom and bust of real estate valuation. |
| Keywords: | current account; real estate; credit supply; global crisis; housing boom |
| JEL: | F15 F21 F32 R21 R31 |
| Date: | 2013–07–23 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0429&r=opm |
| By: | Karl Whelan (University College Dublin) |
| Abstract: | The introduction of the euro meant that countries with sovereign debt problems could not use monetisation and devaluation as a way to prevent default. The institutional structures of the euro were also widely thought to prevent a country in difficulties being bailed out by other euro members or having its sovereign debt purchased by the ECB. Despite these restrictions, there was relatively little discussion about sovereign default in pre-EMU debates among economists and financial markets priced in almost no default risk in the pre-crisis years. The crisis has seen bailouts and bond purchases by the ECB but there has also been a sovereign default inside the euro and further defaults seem likely. The introduction of the euro was intended to bring greater stability by ending devaluations triggered by self-fulfilling runs on a currency. While this particular scenario can no longer happen, this paper discusses mechanisms whereby expectations that a country may leave the euro can lead to this outcome occurring. |
| Keywords: | Euro Crisis, Sovereign Default |
| Date: | 2013–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201309&r=opm |
| By: | Hyeongwoo Kim; Deockhyun Ryu |
| Abstract: | This paper estimates the degree of persistence of 16 long-horizon real exchange rates relative to the US dollar. We use nonparametric operational algorithms by El-Gamal and Ryu (2006) for general nonlinear models based on two statistical notions: the short memory in mean (SMM) and the short memory in distribution (SMD). We found substantially shorter maximum half-life (MHL) estimates than the counterpart from linear models, which is robust to the choice of bandwidth with exceptions of Canada and Japan. |
| Keywords: | Real Exchange Rate; Purchasing Power Parity; Short Memory in Mean; Short-Memory in Distribution; mixing; Max Half-Life; Max Quarter-Life |
| JEL: | C14 C15 C22 F31 F41 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2013-08&r=opm |
| By: | Gaetano D’Adamo (University of Valencia); Riccardo Rovelli (University of Bologna and IZA) |
| Abstract: | This paper studies the role of the exchange rate regime in the process of price convergence in Europe. During the last decade, a large strand of literature has flourished which studies the importance of the Balassa-Samuelson hypothesis in explaining nominal convergence. However, a general result of this literature is that such hypothesis can only explain a minor part of the excess inflation registered in European catching-up countries, while other factors may be at play. The role of the exchange rate regime in convergence in Europe, however, has so far been overlooked. First, we model the (endogenous) choice of the exchange rate regime and, in a second stage, estimate a Balassa-Samuelson type of regression for each regime. The results show that, for countries which pegged to or adopted the euro, the effect of a 1% increase in dual productivity growth (i.e. the difference between traded and non-traded sector productivity growth) on the dual inflation differential is more than twice as big as that of “flexible” countries. Our results suggest that too early adoption of the euro may per se foster excess inflation in a catching-up country which cannot be accounted for by the process of real convergence. |
| Keywords: | Exchange Rate Regimes, Balassa-Samuelson Effect, Inflation, Euro adoption |
| JEL: | C34 E52 F31 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:eec:wpaper:1314&r=opm |
| By: | Georg Dettmann (Department of Economics (University of Verona)) |
| Abstract: | The emergence of international current account imbalances has dominated the economic debate for several years and has been considered one of the main reasons for the turbulences in the world economy since 2007. Economic theory suggests that an economy cannot run persistent current account deficits without depleting its net foreign assets. Nevertheless, for most of the 2000s the US net foreign liabilities grew at a rate below the one of the cumulative current account deficit. To investigate on the mechanisms that allow the US to do so, this paper sets up a two country DGE model with asymmetric liquidity constraints. The model will show that there is a permanent wealth transfer from the world to the US. The unique position of the US not only allows them to run persistent current account deficits, but also imposes a permanent decay on the American current account. As the issuer of the world key currency in an asymmetric world monetary system, the US can make use of Seigniorage and valuation effects to be able to run a continuous current account deficit. These mechanisms work in favour of their net foreign bond holdings, but let their CA further deteriorate. The corresponding one-way capital flows were part of the distortions that laid the ground for the world financial crisis 2007-2009. Future will show if a multi polar world with several (regional) reserve currencies emerges. |
| Keywords: | Seigniorage, NFA Positions, Current Account, DGE, Two Country Model, Borrowing Constraints, International Monetary Theory |
| JEL: | E41 E42 E47 E51 F31 F32 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:ver:wpaper:11/2013&r=opm |