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on Open Economy Macroeconomic |
| By: | Horag Choi (Monash University) |
| Abstract: | The 1997-1998 Asian crisis countries experienced drastic collapses of macroeconomic aggregates followed by highly persistent underperformance of economies relative to their pre-crises periods. In this paper, we develop a small open economy model with heterogeneous producers which can explain the evolution of the number of establishments across sizes following the sudden stop in Korea: the larger the size of establishments, the slower the recovery for the number of the establishments. The model shows that the establishment composition can explain 40 percent of the short-run drop in TFP, and almost all of the persistently underperforming Korean TFP from the second year of the sudden stop. With the transition dynamics of the TFP, the model can closely match the responses of the macroeconomic aggregates to the sudden stop in Korea. The model also predicts that this highly persistent behavior of TFP coming from the establishment composition causes output to be 7.7 percent lower than its trend even 20 years after the shock. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:509&r=opm |
| By: | Bignon, Vincent; Breton, Régis; Rojas Breu, Mariana |
| Abstract: | This paper analyzes a two-country model of currency, banks and endogenous default to study whether impediments to credit market integration across jurisdictions impact the desirability of a currency union. We show that when those impediments induce a higher cost for banks to manage cross-border credit compared to domestic credit, welfare may not be maximal under a regime of currency union. But a banking union that would suppress hurdles to banking integration restores the optimality of that currency arrangement. The empirical and policy implications in terms of banking union are discussed. |
| Keywords: | E42; E50; F3; G21; |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:dau:papers:123456789/12105&r=opm |
| By: | Dominik Groll |
| Abstract: | It is conventionally held that countries are worse off by forming a monetary union when it comes to macroeconomic stabilization. However, this conventional view relies on assuming that monetary policy is conducted optimally. Relaxing the assumption of optimal monetary policy not only uncovers that countries do benefit from forming a monetary union under fairly general conditions. More importantly, it also reveals that a monetary union entails the inherent benefit of stabilizing private-sector expectations about future inflation. As a result, inflation rates are more stable in a monetary union |
| Keywords: | Monetary union, macroeconomic stabilization, welfare analysis, history dependence, inflation expectations |
| JEL: | F33 F41 E52 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1881&r=opm |
| By: | He, Xiaoli (University of Groningen); Jacobs, Jan P.A.M. (School of Economics and Finance, University of Tasmania); Kuper, Gerard H. (University of Groningen); Ligthart, Jenny E. (Tilburg 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 calibrated/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. |
| Keywords: | Global Financial Crisis; euro area; monetary policy; fiscal policy; New Neoclassical Synthesis model; Zero Lower Bound |
| JEL: | C51 C52 E63 |
| Date: | 2013–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:tas:wpaper:17209&r=opm |
| By: | Eswar S. Prasad |
| Abstract: | Distributional consequences typically receive limited attention in economic models that analyze the effects of monetary and financial sector policies. These consequences deserve more attention since financial markets are incomplete, imperfect, and economic agents’ access to them is often limited. This limits households’ ability to insure against household-specific (or sector-specific) shocks and magnifies the distributional effects of aggregate macroeconomic fluctuations and associated policy responses. These effects are likely to be even larger in emerging market and low-income economies beset by financial frictions. The political economy surrounding distributional consequences can sometimes lead to policy measures that reduce aggregate welfare. I argue that it is important to take better account of distributional rather than just aggregate consequences when evaluating specific policy interventions as well as the mix of different policies. |
| JEL: | E5 E6 F4 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19668&r=opm |
| By: | Christian A. Belabed; Thomas Theobald; Till van Treeck |
| Abstract: | We develop a three-country, stock-flow consistent macroeconomic model to study the effects of changes in both personal and functional income distribution on national current account balances. Each country has a household sector and a non-household (corporate) sector. The household sector is divided into income deciles, and consumer demand is characterized by upward-looking status comparisons following the relative income hypothesis of consumption. The strength of consumption emulation depends on country-specific institutions. The model is calibrated for the United States, Germany and China. Simulations suggest that a substantial part of the increase in household debt and the decrease in the current account in the United States since the early 1980s can be explained by the interplay of rising (top-end) household income inequality and institutions. On the other hand, the weak domestic demand and increasing current account balances of Germany and China since the mid-1990s are strongly related to shifts in the functional income distribution at the expense of the household sector. |
| Keywords: | income distribution, relatve income hypothesis, household debt, stock flow consistency, current account, institutions |
| JEL: | D31 D33 E21 E25 F32 F41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:126-2013&r=opm |
| By: | Dungey, Mardi (School of Economics and Finance, University of Tasmania); Osborne, Denise (School of Economics and Finance, University of Tasmania) |
| Abstract: | This paper examines the influences of the two largest developed economies, namely the US and the Euro area, on Australia as an exemplar of a small open economy. To do so, we specify and estimate a structural VAR with bilateral linkages between the two large economies, and allow shocks originating there to affect the Australian economy. More specifically, we show the role of foreign demand shocks, the differential effects of US or European sourced inflation and interest rate shocks on the Australian economy, and the relative unimportance of these foreign shocks to variations in the value of the Australian currency |
| Keywords: | VAR, open economy, Australia |
| JEL: | F41 C51 C32 |
| Date: | 2013–10–16 |
| URL: | http://d.repec.org/n?u=RePEc:tas:wpaper:17208&r=opm |
| By: | Jose-Victor Rios-Rull (University of Minnesota); Yan Bai (University of Rochester) |
| Abstract: | The paper explores to what extent demand shocks can solve the open economy puz- zles. To this purpose, we pose a shopping model structure a la Bai, R 퀱os-Rull, and Storesletten (2011) on top of an otherwise standard two-country international real busi- ness cycle model. Shopping for goods take effort, which prevents perfect matching between potential customers and producers. Larger demand in a country increases its consumption for both home and foreign goods. Real exchange rate and terms of trade depreciate in response to the larger demand. Larger demand also induces more shop- ping and so higher output and TFP. Thus, demand shock under our shopping model generates countercyclical terms of trade and solves the Backus-Smith puzzle. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:523&r=opm |
| By: | Andrés Fernández; Alessandro Rebucci; Martín Uribe |
| Abstract: | A growing recent theoretical literature advocates the use of prudential capital control policy, that is, the tightening of restrictions on cross-border capital flows during booms and the relaxation thereof during recessions. We examine the behavior of capital controls in a large number of countries over the period 1995-2011. We find that capital controls are remarkably acyclical. Boom-bust episodes in output, the current account, or the real exchange rate are associated with virtually no movements in capital controls. These results are robust to decomposing boom-bust episodes along a number of dimensions, including the level of development, the level of external indebtedness, or the exchange-rate regime. We also document a near complete acyclicality of capital controls during the Great Contraction of 2007-2009. |
| JEL: | E6 F3 F4 F5 G0 G1 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19671&r=opm |
| By: | Mirko Abbritti; Salvatore Dell'Erba; Antonio Moreno; Sergio Sola |
| Abstract: | This paper introduces global factors within a FAVAR framework in an empirical affine term structure model. We apply our method to a panel of international yield curves and show that global factors account for more than 80 percent of term premia in advanced economies. In particular they tend to explain long-term dynamics in yield curves, as opposed to domestic factors which are instead more relevant to short-run movements. We uncover the key role for global curvature in shaping term premia dynamics. We show that this novel factor precedes global economic and financial instability. In particular, it coincides with immediate expectations of permanent expansionary monetary policy during the recent crisis. |
| Keywords: | Interest rate structures;Bonds;Monetary policy;Developed countries;Economic models;Yield Curve, Global Factors, FAVAR, Affine Term Structure Models, Term Premium |
| Date: | 2013–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/223&r=opm |
| By: | Alexander Klemm |
| Abstract: | Current account deficits imply increasing liabilities to the rest of the world. External sustainability then depends on whether these can be met in the future without defaulting, i.e., normally through trade account surpluses. To run such surpluses without a fall in consumption, capital inflows should be used to increase future output. This paper tentatively finds that current account deficits reversals that follow investment booms are marked by better growth performance than those following consumption booms. It also shows that many recent large current account deficits have been predominantly the result of consumption or non-productive investment booms. |
| Keywords: | Current account deficits;Economic growth;Consumption;Public investment;Economic models;Current Account, Savings, Consumption, Investment. |
| Date: | 2013–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/217&r=opm |
| By: | Jan Behringer; Till van Treeck |
| Abstract: | We analyse the link between income distribution and the current account through a descriptive analysis for the G7 countries and a series of panel estimations for the G7 countries and a larger sample of 20 countries for the period 1972-2007. We find that, firstly, rising personal inequality leads to a decrease of household net lending and the current account, ceteris paribus. The effect is strong for top household income shares, but much weaker for the Gini coefficient of household income. This finding is consistent with consumption externalities resulting from upward-looking status comparisons. Secondly, an increase in the corporate financial balance leads to an increase in the current account, i.e., consumers do not fully 'pierce the corporate veil'. There is also tentative evidence that the corporate net lending and the current account increase as a result of a decline in the share of wages in value added. The joint effects of changes in personal and functional income distribution contribute to a significant degree to explaining the global current account imbalances prior to the Great Recession. |
| Keywords: | Income distribution, current account determinants, household saving, corporate saving, panel data analysis |
| JEL: | C23 E2 E21 F32 F41 G3 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:125-2013&r=opm |
| By: | Rakesh Mohan; Michael Debabrata Patra; Muneesh Kapur |
| Abstract: | The North Atlantic financial crisis of 2008-2009 has spurred renewed interest in reforming the international monetary system, which has been malfunctioning in many aspects. Large and volatile capital flows have promoted greater volatility in financial markets, leading to recurrent financial crises. The renewed focus on the broader role of the central banks, away from narrow price stability monetary policy frameworks, is necessary to ensure domestic macroeconomic and financial stability. Since international monetary cooperation might be difficult, though desirable, central banks in major advanced economies, going forward, need to internalize the implications of their monetary policies for the rest of the global economy to reduce the incidence of financial crises. |
| Keywords: | International monetary system;Monetary policy;Capital flows;Reserves accumulation;Surveillance;Central bank role;Developed countries;Emerging markets;Developing countries;Financial stability;Capital flows, central banks, currency internationalization, international monetary system, financial stability |
| Date: | 2013–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/224&r=opm |
| By: | Martín Rapetti (University of Buenos Aires) |
| Abstract: | A recent body of empirical research has documented a strong association between the level and volatility of the RER and economic growth. This research has relied on a variety of econometric techniques applied to large cross-country data sets. Although the documented positive effects of both RER competitiveness and stability on growth appear to be robust, it is still unclear what the mechanisms driving these associations are. Several explanations have been proposed, but their theoretical examination and empirical validation is still in an infant stage. I analyze the mechanisms that have been proposed and evaluate them in light of the documented empirical evidence. My reading is that two of them adjust to the empirical findings best: the financial globalization channel and the tradable-led growth channel. I conclude that since these mechanisms are not mutually exclusive, both might have some explanatory power. |
| Keywords: | real exchange rate, growth, development, growth econometric |
| JEL: | O24 F43 F31 O11 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2013-11&r=opm |