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on Open Economy Macroeconomic |
| By: | Mitchener, Kris James (University of Warwick); Wandschneider, Kirsten (Occidental College) |
| Abstract: | We examine the first widespread use of capital controls in response to a global or regional financial crisis. In particular, we analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the Great Depression. We find evidence that they stemmed gold outflows in the year following their imposition; however, time-shifted, difference-indifferences (DD) estimates of industrial production, prices, and exports suggest that exchange controls did not accelerate macroeconomic recovery relative to countries that went off gold and floated. Countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold. Time series regressions further demonstrate that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy. Even so, capital controls remained in place as instruments for manipulating trade flows and for preserving foreign exchange for the repayment of external debt. |
| Keywords: | capital controls, financial crises, Great Depression, interwar gold standard |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:cge:warwcg:131&r=opm |
| By: | Pintus, P. A.; Suda, J. |
| Abstract: | This paper develops a simple business-cycle model in which financial shocks have large macroeconomic effects when private agents are gradually learning their economic environment. When agents update their beliefs about the unobserved process driving financial shocks to the leverage ratio, the responses of output and other aggregates under adaptive learning are significantly larger than under rational expectations. In our benchmark case calibrated using US data on leverage, debt-to-GDP and land value-to-GDP ratios for 1996Q1-2008Q4, learning amplifies leverage shocks by a factor of about three, relative to rational expectations. When fed with the actual leverage innovations, the learning model predicts the correct magnitude for the Great Recession, while its rational expectations counterpart predicts a counter-factual expansion. In addition, we show that procyclical leverage reinforces the impact of learning and, accordingly, that macro-prudential policies enforcing countercyclical leverage dampen the effects of leverage shocks. Finally, we illustrate how learning with a misspecified model that ignores real/financial linkages also contributes to magnify financial shocks. |
| Keywords: | Borrowing Constraints, Collateral, Leverage, Learning, Financial Shocks, Recession |
| JEL: | E32 E44 G18 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:440&r=opm |
| By: | Maurice Kugler (UNDP); Oren Levintal (Department of Economics, Bar-Ilan University); Hillel Rapoport (Paris School of Economics, University Paris 1 Pantheon-Sorbonne) |
| Abstract: | The gravity model has provided a tractable empirical framework to account for bilateral flows not only of manufactured goods, as in the case of merchandise trade, but also of financial flows. In particular, recent literature has emphasized the role of information costs in preventing larger diversification of financial investments. This paper investigates the role of migration in alleviating information imperfections between home and host countries. We show that the impact of migration on financial flows is strongest where information problems are more acute (that is, for more informational sensitive investments and between more culturally distant countries) and for the type of migrants that are most able to enhance the flow of information, namely, skilled migrants. We interpret these differential effects as additional evidence pointing to the role of information in generating home-bias and as new evidence of the role of migration in reducing information frictions between countries. |
| Keywords: | Migration, international financial flows, international loans, gravity models, information asymmetries |
| JEL: | F21 F22 O1 |
| URL: | http://d.repec.org/n?u=RePEc:crm:wpaper:1317&r=opm |
| By: | Uluc Aysun (University of Central Florida, Orlando, FL); Sanglim Lee (Korea Energy Economics Institute, 132 Naesonsunhwan-ro, Uiwang-si, Gyeonggi-do, Korea) |
| Abstract: | This paper shows that the deviation from the uncovered interest parity (UIP) condition is equally large in advanced and emergingmarket economies. Using monthly data, and a GARCH-M model we find that a large share of these deviations in both country groups are explained by time varying risk premium. To more clearly identify risk premium shocks, we then estimate a two country, New Keynesian, DSGE model using a Bayesian methodology and quarterly data. The results suggest that at the quarterly frequency, the large deviations from the UIP condition and the high explanatory power of risk premium is only observed for emerging market economies. |
| Keywords: | Uncovered Interest Rate Parity, Forward Premium Puzzle, Time Varying Risk Premium |
| JEL: | E32 E44 F31 F33 F44 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfl:wpaper:2013-03&r=opm |