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on Open Economy Macroeconomic |
| By: | Kano, Takashi |
| Abstract: | In an influential paper, Engel and West (2005) claim that the near random-walk behavior of nominal exchange rates is an equilibrium outcome of a variant of present-value models when economic fundamentals follow exogenous first-order integrated processes and the discount factor approaches one. Subsequent empirical studies further confirm this proposition by estimating a discount factor that is close to one under distinct identification schemes. In this paper, I argue that the unit market discount factor implies the counterfactual joint equilibrium dynamics of random-walk ex-change rates and economic fundamentals within a canonical, two-country, incomplete market model. Bayesian posterior simulation exercises of a two-country model based on post-Bretton Woods data from Canada and the United States reveal difficulties in reconciling the equilibrium random-walk proposition within the two-country model; in particular, the market discount factor is identified as being much lower than one. |
| Keywords: | Exchange rates, Present-value model, Economic fundamentals, Random walk, Two- country model, Incomplete markets, Cointegrated TFPs, Debt elastic risk premium |
| JEL: | E31 E37 F41 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2013-07&r=opm |
| By: | Eric T. Swanson; John C. Williams |
| Abstract: | The zero lower bound on nominal interest rates began to constrain many central banks’ setting of short-term interest rates in late 2008 or early 2009. According to standard macroeconomic models, this should have greatly reduced the effectiveness of monetary policy and increased the efficacy of fiscal policy. However, these models also imply that asset prices and private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current level of the monetary policy rate. Thus, interest rates with a year or more to maturity are arguably more relevant for asset prices and the economy, and it is unclear to what extent those yields have been affected by the zero lower bound. In this paper, we apply the methods of Swanson and Williams (2013) to medium- and longer-term yields and exchange rates in the U.K. and Germany. In particular, we compare the sensitivity of these rates to macroeconomic news during periods when short-term interest rates were very low to that during normal times. We find that: 1) USD/GBP and USD/EUR exchange rates have been essentially unaffected by the zero lower bound, 2) yields on German bunds were essentially unconstrained by the zero bound until late 2012, and 3) yields on U.K. gilts were substantially constrained by the zero lower bound in 2009 and 2012, but were surprisingly responsive to news in 2010–11. We compare these findings to the U.S. and discuss their broader implications. |
| Keywords: | Interest rates ; Monetary policy |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2013-21&r=opm |
| By: | Boonman, Tjeerd M. (Groningen University) |
| Abstract: | Sovereign debt crises have regained attention since the recent crises in several European countries. This paper focuses on a particular aspect of the debt crisis literature: the impact of sovereign default on economic growth. Previous research agrees on the negative impact, but not on size and duration. We are particularly interested in the heterogeneity of crisis impacts: Why are some crises deeper and longer than others? And what is the role of business cycles? We analyze four Latin American countries (Argentina, Brazil, Chile and Mexico) for the period 1870-2012, covering 14 sovereign debt defaults. We find that most sovereign defaults start in recessions, and in unfavorable international circumstances. Economic growth is heavily affected in the year of the default and the year after. Then economic growth picks up, but recovery is far from smooth, including periods of recurrent negative growth. We observe strong heterogeneity in the impact, which we attribute to commodity price changes, economic growth and government expenditure in the run-up to the crisis. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugsom:13010-eef&r=opm |
| By: | Charles Ka Yui Leung; Song Shi; Edward Tang |
| Abstract: | This paper studies how commodity price movements have affected local house prices in commodity-dependent economies, Australia and New Zealand. We build a geographically hierarchical empirical model and find that commodity prices influence local house prices directly and also indirectly through macroeconomic variables. While commodity price changes function more like “income shocks” rather than “cost shocks” in both Australia and New Zealand, regional heterogeneity is also observed in terms of differential dynamic responses of local house prices to energy versus non-energy commodity price movements. The results are robust to alternative approaches. Directions for future research are also discussed. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:154&r=opm |
| By: | Mina Kim, (U.S. Bureau of Labor Statistics); Deokwoo Nam, (City University of Hong Kong); Jian Wang (Federal Reserve Bank of Dallas); Jason Wu, (Federal Reserve Board) |
| Abstract: | The interaction between the exchange rate regime, trade firms' price-setting behavior, and exchange rate pass-through (ERPT) is an important topic in international economics. This paper studies this using a goods-level dataset of US-China trade prices collected by the US Bureau of Labor Statistics. We document that the duration of US-China trade prices has declined almost 30% since China abandoned its hard peg to the US dollar in June 2005. A benchmark menu cost model that is calibrated to the data can replicate the documented decrease in price stickiness. We also estimate ERPT of RMB appreciation into US import prices between 2005 and 2008. Goods-level data allows us to estimate that the lifelong ERPT is close to one for goods that have at least one price change, but less than one-half when all goods are included. This nding can be attributed to the fact that around 40% of the goods in never experience a price change, and supports the hypothesis that price changes that take the form of product replacements may bias ERPT estimates downwards. |
| Keywords: | Price Stickiness, Menu cost model, International trade prices, RMB, Exchange rate pass- through |
| JEL: | E31 F14 F31 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:bls:wpaper:ec130080&r=opm |
| By: | Ligthart, Jenny; He, Xiaoli; Jacobs, Jan; Kuper, Gerard (Groningen University) |
| Abstract: | This paper analyses the impact of the Global Financial Crisis on the Euro area utilizing a simple dynamic macroeconomic model with interaction between monetary policy and fiscal policy. The model consists of an IS curve, a Phillips curve, a term structure relation, a debt accumulation equation and a Taylor monetary policy rule supplemented with a Zero Lower Bound, and a fiscal policy rule. The model is alibrated/estimated for EU-16 countries for the period 1980Q1-2009Q4. The impact of the Global Financial Crisis is studied by means of impulse responses following a combined, prolonged aggregate demand and public debt shock. The simulation mimicking the GFC turns out to work fairly well. However, the required size of the shock is quite large. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:rugsom:13011-eef&r=opm |
| By: | Yuko Imura |
| Abstract: | This paper investigates the implications of endogenous trade participation for international business cycles, trade flow dynamics and exchange rate pass-through when price adjustments are staggered across firms. I develop a two-country dynamic stochastic general equilibrium model wherein firms make state-dependent decisions on entry and exit in the export market and the frequency of price adjustment is time-dependent. Consistent with recent empirical findings, producers of traded goods in this model differ in their productivities, trade status and prices. At the aggregate level, quantitative properties of the model successfully reproduce some important characteristics of international business cycle moments in data. In contrast to previous findings in the literature, my model reveals that the inclusion of exporter entry and exit generates large, immediate responses in the number of exporters, export volumes and the export price index following aggregate shocks. I trace this result to the micro-level price stickiness present in my model but absent in existing models of endogenous trade participation. Moreover, I show that productivity heterogeneity rather than price age differences plays a dominant role in firms’ export decisions, and hence the additional realism of endogenous trade participation in the model does not mitigate incomplete exchange rate pass-through arising from nominal rigidity. This suggests that exporter characteristics, market structure and pricing conventions may be critical in analyzing the role of endogenous trade participation for international business cycles and exchange rate pass-through. |
| Keywords: | Business fluctuations and cycles; Exchange rates; International topics |
| JEL: | F44 F12 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:13-30&r=opm |
| By: | Juan Carlos Hatchondo; Leonardo Martinez; Cesar Sosa Padilla |
| Abstract: | We show that some recent sovereign debt restructurings were characterized by (i) the absence of missed debt payments prior to the restructurings, (ii) reductions in the government’s debt burden, and (iii) increases in the market value of debt claims for holders of the restructured debt. Since both the government and its creditors are likely to benefit from such restructurings, we label these episodes as “voluntary” debt exchanges. We present a model in which voluntary debt exchanges can occur in equilibrium when the debt level takes values above the one that maximizes the market value of debt claims. In contrast to previous studies on debt overhang, in our model opportunities for voluntary exchanges arise because a debt reduction implies a decline of sovereign default risk. This is observed in the absence of any effect of debt reductions on future output levels. Although voluntary exchanges are Pareto improving at the time of the restructuring, we show that eliminating the possibility of conducting voluntary exchanges may improve welfare from an ex-ante perspective. Thus, our results highlight a cost of initiatives that facilitate debt restructurings. |
| Keywords: | Sovereign Default, Debt Restructuring, Voluntary Debt Exchanges, Long-term Debt, Endogenous Borrowing Constraints. |
| JEL: | F34 F41 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2013-13&r=opm |
| By: | Marcin Kolasa (National Bank of Poland, Warsaw School of Economics) |
| Abstract: | This paper uses the business cycle accounting framework to investigate the differences between economic fluctuations in Central and Eastern European (CEE) countries and the euro area. We decompose output movements into the contributions of four economic wedges, affecting the production technology, the agents’ intra- and intertemporal choices, and the aggregate resource constraint. We next analyze the observed cross-country differences in business cycles with respect to these four identified wedges. Our results indicate that business cycles in the CEE countries do differ from those observed in the euro area, even though substantial convergence has been achieved after the eastern EU enlargement. The major differences concern the importance of the intraand intertemporal wedges, which account for a larger proportion of output fluctuations in the CEE region and also exhibit relatively little comovement with their euro area counterparts. |
| Keywords: | business cycle accounting; business cycle synchronization |
| JEL: | E32 F44 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:156&r=opm |