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on Open Economy Macroeconomic |
| By: | Lane, Philip R.; McQuade, Peter |
| Abstract: | Europe experienced substantial cross-country variation in domestic credit growth and cross border capital flows during the pre-crisis period. We investigate the inter-relations between domestic credit growth and international capital flows over 1993-2008, with a special focus on the 2003-2008 boom period. We establish that domestic credit growth in European countries is strongly related to net debt inflows but not to net equity inflows. This pattern also holds for an extended sample of 54 advanced and emerging economies. JEL Classification: E51, F32, G15 |
| Keywords: | financial globalisation, financial stability, macro-prudential regulation |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131566&r=opm |
| By: | Nuño, Galo; Thomas, Carlos |
| Abstract: | We document the cyclical dynamics in the balance sheets of US leveraged financial intermediaries in the post-war period. Leverage has contributed more than equity to fluctuations in total assets. All three variables are several times more volatile than GDP. Leverage has been positively correlated with assets and (to a lesser extent) GDP, and negatively correlated with equity. These findings are robust across financial subsectors. We then build a general equilibrium model with banks subject to endogenous leverage constraints, and assess its ability to replicate the facts. In the model, banks borrow in the form of collateralized risky debt. The presence of moral hazard creates a link between the volatility in bank asset returns and bank leverage. We find that, while standard TFP shocks fail to replicate the volatility and cyclicality of leverage, volatility shocks are relatively successful in doing so. JEL Classification: E20, G10, G21 |
| Keywords: | call option, cross-sectional volatility, Financial intermediaries, leverage, limited liability, Moral Hazard, put option, short-term collateralized debt |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131524&r=opm |
| By: | Moritz Schularick (Free University of Berlin); Alan Taylor (University of Virginia); Oscar Jorda (Federal Reserve Bank of San Francisco) |
| Abstract: | This paper studies the role of credit in the business cycle, with a focus on private credit overhang. Based on a study of the universe of over 200 recession episodes in 14 advanced countries between 1870 and 2008, we document two key facts of the modern business cycle: financial-crisis recessions are more costly than normal recessions in terms of lost output; and for both types of recession, more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries. In addition to unconditional analysis, we use local projection methods to condition on a broad set of macroeconomic controls and their lags. Then we study how past credit accumulation impacts the behavior of not only output, but also other key macroeconomic variables such as investment, lending, interest rates, and inflation. The facts that we uncover lend support to the idea that nancial factors play an important role in the modern business cycle. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:71&r=opm |
| By: | Ca' Zorzi, Michele; Muck, Jakub; Rubaszek, Michał |
| Abstract: | This paper brings three new insights into the Purchasing Power Parity (PPP) debate. First, we show that a half-life PPP model is able to forecast real exchange rates (RER) better than the random walk (RW) model at both short and long-term horizons. Secondly, we find that this result holds only if the speed of adjustment to the sample mean is calibrated at reasonable values rather than estimated. Finally, we find that it is also preferable to calibrate, rather than to elicit as a prior, the parameter determining the speed of adjustment to PPP. JEL Classification: C32, F31, F37 |
| Keywords: | Exchange rate forecasting, half-life, purchasing power parity |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131576&r=opm |
| By: | Pancaro, Cosimo |
| Abstract: | This paper studies current account reversals in industrial countries across different exchange rate regimes. There are two major findings which have important implications for industrial economies with external imbalances: first, triggers of current account reversals differ between exchange rate regimes. While the current account deficit and the output gap are significant predictors of reversals across all regimes, reserve coverage, credit booms, openness to trade and the US short term interest rate determine the likelihood of reversals only under more rigid regimes. Conversely, the real exchange rate affects the probability of experiencing a reversal only under flexible arrangements. Second, current account reversals in advanced economies do not have an independent effect on growth. This result holds not only for industrial economies in general but also for countries with fixed exchange rate regimes in particular. JEL Classification: F32, F41 |
| Keywords: | current account, exchange rate regime, reversals |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131547&r=opm |
| By: | Fratzscher, Marcel; Lo Duca, Marco; Straub, Roland |
| Abstract: | The paper analyses the global spillovers of the Federal Reserve’s unconventional monetary policy measures. First, we find that Fed measures in the early phase of the crisis (QE1) were highly effective in lowering sovereign yields and raising equity markets, especially in the US relative to other countries. Fed measures since 2010 (QE2) boosted equities worldwide, while they had muted impact on yields across countries. Yet Fed policies functioned in a procyclical manner for capital flows to emerging markets (EMEs) and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of EMEs into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US unconventional measures have contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets. JEL Classification: E52, E58, F32, F34, G11 |
| Keywords: | Capital flows, emerging markets, Federal Reserve, monetary policy, panel data, policy responses, Portfolio Choice, quantitative easing, United States |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131557&r=opm |
| By: | Martin Feldkircher (Oesterreichische Nationalbank); Roman Horvath; Marek Rusnak |
| Abstract: | In this paper, we examine whether pre-crisis leading indicators help explain pressures on the exchange rate (and its volatility) during the globalfinancial crisis. We use a unique data set that covers 149 countries and 58 indicators, and estimation techniques that are robust to model uncertainty. Our results are threefold: First and foremost, we find that price stability plays a pivotal role as a determinant of exchange rate pressures. More specifically, the currencies of countries that experienced higher inflation prior to the crisis tend to be more affected in times of stress. Second, we investigate potential effects that vary with the level of pre-crisis inflation. In this vein, our results reveal that domestic savings reduce the severity of pressures in countries that experienced a low-inflation environment prior to the crisis. Finally, we find evidence of the mitigating effects of international reserves on the volatility of exchange rate pressures. |
| Keywords: | Exchange market pressures, financial crisis |
| JEL: | F31 F37 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:ost:wpaper:332&r=opm |
| By: | Stracca, Livio |
| Abstract: | This paper is an event study focusing on the global effects of the euro debt crisis in 2010-2013. After identifying 18 key exogenous crisis events, I analyse the impact on equity returns, exchange rates and government bond yields in 12 advanced and 13 emerging countries. The main effect of euro debt crisis events is a rise in global risk aversion accompanied by fall in equity returns, in particular in the …financial sector, in advanced countries (but not in emerging countries). The effect on bond yields is not statistically significant for the whole set of countries, but is significant and negative for key advanced countries such as the US and the UK. The paper also analyse the transmission channels by looking at how pre-crisis country characteristics influence the strength and direction of the spill-over, concluding that the transmission hinges more on trade than on fi…nance. JEL Classification: F3 |
| Keywords: | Contagion, Euro debt crisis, global risk aversion, spill-over |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131573&r=opm |
| By: | Maurice Kugler; Oren Levintal (Bar-Ilan University); Hillel Rapoport (Bar-Ilan University) |
| 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 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:biu:wpaper:2013-05&r=opm |
| By: | Ca' Zorzi, Michele; Chudik, Alexander |
| Abstract: | This paper studies the influence of aggregating across space when (i) testing the PPP theory or more generally pair-wise cointegration and (ii) evaluating the PPP puzzle. Our contribution is threefold: we show that aggregating foreign data and applying an ADF test may lead to erroneously reject the PPP hypothesis. We then show, on the basis of theoretical arguments as well as Monte Carlo experiments, that a sizable bias in the estimates of half-life deviations to PPP may be due to the effect of aggregation across space. We finally illustrate empirically the importance of spatial considerations when estimating the speed of price convergence among euro area countries. JEL Classification: C23, F41 |
| Keywords: | aggregation across space, cointegration, Half-life estimates, PPP, price convergence |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131534&r=opm |
| By: | Mehl, Arnaud |
| Abstract: | I estimate the transmission of large global volatility shocks in international equity markets from the earlier (pre-1914) to the modern era of globalisation. To that end, I identify 43 such shocks over the period 1885-2011, defined as significant increases in unanticipated volatility in US equity markets, which I relate to well-known historical events. My estimates suggest that the response of global equity markets to these shocks in a panel of 16 countries is both statistically significant and large economically. On average, global equity market valuations correct by about 20% in the month when a shock occurs. There is substantial heterogeneity in responses both across countries and time, however, which can be partly explained by differences in global trade integration. I find no evidence that other potential theoretical determinants, such as output composition, country fundamentals or global policy responses matter, by contrast. These results shed light on a neglected aspect of globalisation, which creates opportunities but also heightens the exposure of economies to acute surges in global uncertainty and risk aversion. JEL Classification: F30, F31, N20 |
| Keywords: | equity markets, Globalisation, international linkages, large global volatility shocks |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131548&r=opm |
| By: | Buss, Adrian |
| Abstract: | In this paper, we conduct an analysis of the implications of capital controls for financial stability. We study a financial transaction (Tobin) tax applicable to cross-border capital flows in a multi-good, multi-country dynamic equilibrium model with incomplete financial markets and heterogeneous agents. The results derived from the model suggest that the impact of capital controls may vary considerably across market segments. In currency markets, capital controls reduce the volatility. However, in international stock markets, their introduction amplifies price movements, thus, increases the volatility; but it reduces a country's vulnerability to external shocks, thereby limiting spillover effects. JEL Classification: F21, F31, G12, G15 |
| Keywords: | Capital controls, financial stability, financial transaction (Tobin) tax, General Equilibrium, incomplete financial markets |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131578&r=opm |
| By: | Matteo Maggiori (NYU) |
| Abstract: | I show that the US dollar earns a safety premium versus a basket of foreign currencies and that this premium is particularly high in times of global financial stress. These findings support the view that the dollar acts as the reserve currency for the international monetary system and that it is a natural safe haven in times of crisis, when a global flight to quality toward the reserve currency takes place. During such episodes, investors are willing to earn negative expected returns as compensation for holding safe dollars. I estimate the time varying dollar safety premium by using instrumental variable techniques to condition information down. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:75&r=opm |
| By: | Vespignani, Joaquin L.; Ratti, Ronald A. |
| Abstract: | There are marked differences in the effect of increases in monetary aggregates in China, Japan and the U.S. on Euro area economic and financial variables over 1999-2012. Increases in monetary aggregates in China are associated with significant increases in the world price of commodities and with increases in Euro area inflation, industrial production and exports. Results are consistent with shocks to China’s M2 facilitating domestic growth with expansionary consequences for the Euro area economy. In contrast, increases in monetary aggregates in Japan are associated with significant appreciation of the Euro and decreases in Euro area industrial production and exports. Production of goods highly competitive with European goods in Japan and expenditure switching in Japan are consistent with the results. U.S. monetary expansion has relatively small effects on the Euro area over this period compared to results reported in the literature for earlier sample periods. |
| Keywords: | International monetary transmission, China’s monetary aggregates, Euro area Commodity prices |
| JEL: | E52 E58 F31 F42 |
| Date: | 2013–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:49153&r=opm |
| By: | Hilde C. Bjørnland; Leif Anders Thorsrud |
| Abstract: | Traditional studies of the Dutch disease do not typically account for productivity spillovers between the booming energy sector and non-oil sectors. This study identifes and quantifes these spillovers using a Bayesian Dynamic Factor Model (BDFM). The model allows for resource movements and spending effects through a large panel of variables at the sectoral level, while also identifying disturbances to the real oil price, global demand and non-oil activity. Using Norway as a representative case study, we find that a booming energy sector has substantial spillover effects on the non-oil sectors. Furthermore, windfall gains due to changes in the real oil price also stimulates the economy, but primarily if the oil price increase is caused by global demand. Oil price increases due to, say, supply disruptions, while stimulating activity in the technologically intense service sectors and boosting government spending, have small spillover effects on the rest of the economy, primarily because of reduced cost competitiveness. Yet, there is no evidence of Dutch disease. Instead, we find evidence of a two-speed economy, with non-tradables growing at a much faster pace than tradables. Our results suggest that traditional Dutch disease models with a fixed capital stock and exogenous labor supply do not provide a convincing explanation for how petroleum wealth affects a resource rich economy when there are productivity spillovers between sectors. |
| Keywords: | Resource boom, oil prices, Dutch disease, learning by doing, two-speed economy, Bayesian Dynamic Factor Model (BDFM) |
| JEL: | C32 E32 F41 Q33 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0015&r=opm |
| By: | Nickel, Christiane; Tudyka, Andreas |
| Abstract: | We investigate the impact of fiscal stimuli at different levels of the government debt-to-GDP-ratio for a sample of 17 European countries from 1970 to 2010. This is implemented in an interacted panel VAR framework in which all coefficient parameters are allowed to change continuously with the debt-to-GDP ratio. We find that responses to government spending shocks exhibit strong non-linear behaviour. While the overall cumulative effect of a spending shock on real GDP is positive and significant at moderate debt-to-GDP ratios, this effect turns negative as the ratio increases. The total cumulative effect on the trade balance is negative at first but switches sign at higher levels of debt. Consequently, depending on the degree of public indebtedness, our results accommodate long-run fiscal multipliers which are greater and smaller than one or even negative as well as twin deficit and twin divergence behaviour within one sample and time period. From a policy perspective, these results lend additional support to increased prudence at high public debt ratios because the effectiveness of fiscal stimuli to boost economic activity or resolve external imbalances may not be guaranteed. JEL Classification: E62, F32, F41, C32, C11 |
| Keywords: | Bayesian estimation, debt dynamics, Fiscal Policy, non-linearities, panel-VAR, trade account |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131513&r=opm |
| By: | Josef Schroth (Bank of Canada) |
| Abstract: | The paper studies the design of optimal fiscal rules for members of a monetary union when there are privately observed shocks to countries’ social cost of domestic taxation. First, I show that optimal fiscal rules prescribe policy coordination in the sense of domestic taxation efforts that are positively correlated across member countries. In particular, coordination achieves higher ex-ante joint welfare than any fixed upper bound on domestic deficits. Second, I show that a history of asymmetric domestic taxation efforts leads to tighter policy coordination in the sense of an emergence of retaliatory fiscal policies. As a result, past disagreement leads to an increase in expected domestic deficits across the monetary union. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:74&r=opm |