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on Open Economy Macroeconomic |
| By: | Olivier Accominotti; Barry Eichengreen |
| Abstract: | We present new data documenting European capital issues in major financial centers from 1919 to 1932. Push factors (conditions in international capital markets) perform better than pull factors (conditions in the borrowing countries) in explaining the surge and reversal in capital flows. In particular, the sharp increase in stock market volatility in the major financial centers at the end of the 1920s figured importantly in the decline in foreign lending. We draw parallels with Europe today. |
| JEL: | F0 F4 N0 N14 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19580&r=opm |
| By: | Ángel Estrada; Jordi Galí; David López-Salido |
| Abstract: | We study the extent of macroeconomic convergence/divergence among euro area countries. Our analysis focuses on four variables (unemployment, inflation, relative prices and the current account), and seeks to uncover the role played by monetary union as a convergence factor by using non-euro developed economies and the pre-EMU period as control samples |
| JEL: | E24 F31 O47 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19561&r=opm |
| By: | Oscar Bajo-Rubio; Carmen Díaz-Roldán; Vicente Esteve |
| Abstract: | In this paper, we provide a test of the sustainability of external imbalances in the OECD countries over the years 1970-2007, i.e., before the beginning of the international financial crisis. Specifically, we deal with the case of those countries that have experienced current account deficits in more than half of the years throughout the period of analysis, and address the recent critique of Bohn (2007) on unit root and cointegration tests of the intertemporal budget constraint. |
| Keywords: | External imbalances, Sustainability, Current account. |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:uae:wpaper:1013&r=opm |
| By: | Juan Carlos Cuestas (Department of Economics, The University of Sheffield); Paulo José Regis (Department of Economics, Xi'an Jiaotong-Liverpool University) |
| Abstract: | The role the real exchange rate plays in determining current account balances has gathered momentum as East and Southeast Asian countries have seen increasingly positive current account balances. This paper analyses the evolution of current accounts in the region. A cointegrating relationship between the real effective exchange rate and the ratio of the current account balance to the GDP is tested, based on both linear and nonlinear models. The half-life of current account imbalances is relatively short, implying high capital mobility. Results point to the existence of a long-run relationship, and in most cases the causality runs from the exchange rate to the current account. |
| Keywords: | emerging markets, current account, half-life, East and Southeast Asia. |
| JEL: | C22 E32 F15 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2013015&r=opm |
| By: | Benjamin Carton; Karine Hervé |
| Abstract: | We assess the evolution of real exchange rate misalignments within the euro area from a Fundamental Equilibrium Exchange Rate (FEER) approach. We test the robustness of the results by comparing three different estimations of the output gap. Whatever the output gap assumption, Southern countries were massively overvalued before the euro area crisis. However, the magnitude of the adjustment since is sensitive to the output gap. In particular, Greece has not registered any improvement considering an output gap that captures the financial cycle (10-15 years) instead of the business cycle (5 years). Spain and Portugal have significantly reduced their misalignment but against France and Italy instead of Germany. As a consequence, imbalances in the euro area have not reduced. |
| Keywords: | Exchange Rates;Current Account Adjustment;Euro Area |
| JEL: | F31 F32 F36 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2013-32&r=opm |
| By: | Valentina Bruno (American University); Hyun Song Shin (Princeton University) |
| 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. |
| Keywords: | cross-border banking flows, bank leverage, global banks |
| JEL: | F32 F33 F34 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:237a%20shin&r=opm |
| By: | Valentina Bruno (American University); Hyun Song Shin (Princeton University) |
| Abstract: | We study the dynamics linking monetary policy with bank leverage and show that adjustments in leverage act as the linchpin in the monetary transmission mechanism that works through fluctuations in risk-taking. Motivated by the evidence, we formulate a model of the risk-taking channel of monetary policy in the international context that rests on the feedback loop between increased leverage of global banks and capital flows amid currency appreciation for capital recipient economies. |
| Keywords: | Bank leverage, monetary policy, capital flows, risk-taking channel |
| JEL: | F32 F33 F34 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:237b%20shin&r=opm |
| By: | Hui Jun ZHANG; Jean-Marie DUFOUR; John W. GALBRAITH |
| Abstract: | Understanding and measuring the relative roles of different causal channels between commodity prices and exchange rates has important implications in financial decision making, especially for market participants with short horizons. From a macroeconomic perspective, this can also be useful for interpreting exchange rate movements, financial market monitoring and monetary policy. Basic economic reasoning on currency demand suggests that the currencies of countries whose exports depend heavily on a particular commodity should be strongly influenced by its price, so commodity price movements should lead (Granger-cause) exchange rate movements (macroeconomic/trade mechanism). In contrast, the present value model of forward-looking exchange rates suggests reverse causation, i.e. exchange rates should Granger-cause commodity prices (expectations mechanism). We examine empirically the causal relationship between commodity prices and exchange rates, using data on three commodities (crude oil, gold, copper) and three countries (Canada, Australia, Chile), over the period 2000-2009. To go beyond pure significance tests of non-causality and to provide a relatively complete picture of the links, measures of the strength of causality for different horizons and directions are estimated and compared. Since low-frequency data may easily fail to capture important features of the relevant causal links in volatile financial markets – such as foreign exchange and commodity markets – high-frequency (daily and 5-minute) data are exploited. Both unconditional and conditional (given general stock market conditions) causality measures are considered, and allowance for “dollar effects” is made by considering non-U.S. dollar variables. We identify clear causal patterns: (1) Granger causality between commodity prices and exchange rates is visible in both directions; (2) it is stronger at short horizons, and becomes weaker as the horizon increases; (3) causality from commodity prices to exchange rates is stronger than causality in the reverse direction across multiple horizons: the ratios of causality measures in two different directions can be quite high (for example, as high as 5 or 10 in favor of causation from commodity prices to exchange rates), especially at short horizons; (4) eliminating dollar effects weakens causality from exchange rates to commodity prices, and reveals a more definite pattern where causality from commodity prices to exchange rates dominates across multiple horizons. In contrast with earlier results on the non-predictability of exchange rates, we find that the macroeconomic/trade-based mechanism plays a central role in exchange rate dynamics, despite the financial features of these markets. |
| Keywords: | multi-horizon causality, causality measures, commodity prices, exchange rates, stock prices, high-frequency data, spurious causality, financial markets |
| JEL: | F31 G15 G17 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:mtl:montec:14-2013&r=opm |
| By: | Dominic Quint; Pau Rabanal |
| Abstract: | In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and financial frictions, and hence both monetary and macroprudential policy can play a role. We find that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but their effects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads. |
| Keywords: | Monetary policy;Euro Area;European Economic and Monetary Union;Macroprudential Policy;Credit expansion;Economic models;Monetary Policy, EMU, Basel III, Financial Frictions. |
| Date: | 2013–10–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/209&r=opm |
| By: | Valentina Bruno (American University); Hyun Song Shin (Princeton University) |
| Abstract: | It is a cliché that the world has become more connected, but the financial crisis and the boom that preceded it have focused attention on the global factors behind credit growth and capital flows. Calvo, Leiderman and Reinhart (1993, 1996) famously distinguished the global "push" factors for capital flows from the country?specific "pull" factors, and the BIS report on global liquidity (the Landau report) has highlighted the role of cross?border banking in the transmission of financial conditions (BIS (2011)). |
| Keywords: | credit growth, boom, financial crisis, capital flows |
| JEL: | D02 D21 E32 E50 F30 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:237shin&r=opm |
| By: | Edwin M. Truman (Peterson Institute for International Economics) |
| Abstract: | The European and Asian financial crises are the two most recent major regional crises. This paper compares their origins and evolution. The origins of the two sets of crises were different in some respects, but broadly similar. The two sets of crises also shared similarities in their evolution, but here the differences were more significant. The European crisis countries received more external financial support, despite the fact that they involved more solvency issues while the Asian crises involved more liquidity issues. On balance, the reform programs in the European crises were less demanding and rigorous than in the Asian crises. Partly as a consequence, the negative impacts on the global economy have been larger. Author Edwin M. Truman draws three lessons from this analysis: First, history will repeat itself; there will be other external financial crises. Second, other countries have a stake in appropriate crisis management. Third, the International Monetary Fund (IMF) and other countries were mistaken in treating the European crises as individual country crises rather than as a crisis for the euro area as a whole that demanded policy conditionality on all members of the euro area. |
| Keywords: | financial crises, Asian financial crises, European financial crises, International Monetary Fund, European Central Bank, crisis management, policy coordination, macroeconomic policies, banking policies |
| JEL: | F3 F20 F31 F32 F3 F34 F36 F42 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp13-9&r=opm |