nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2014‒02‒02
29 papers chosen by
Martin Berka
Victoria University of Wellington

  1. The People's Republic of China's Growth, Stability, and Use of International Reserves By Aizenman, Joshua; Jinjarak, Yothin; Marion, Nancy P.
  2. Tapering talk : the impact of expectations of reduced federal reserve security purchases on emerging markets By Eichengreen, Barry; Gupta, Poonam
  3. Social Implications of Fiscal Policy Responses During Crises By Carlos A. Vegh; Guillermo Vuletin
  4. Bubble Thy Neighbor: Portfolio Effects and Externalities from Capital Controls By Straub, Roland; Forbes, Kristin; Fratzscher, Marcel; Kostka, Thomas
  5. Sources of International Business Cycles: The Role of Real Supply Shocks Revisited By Gehrke, Britta; Yao, Fang
  6. Fiscal Devaluation in a Monetary Union By Philipp Engler; Giovanni Ganelli; Juha Tervala; Simon Voigts
  7. Fiscal Divergence and Current Account Imbalances in Europe By Schnabl, Gunther; Wollmershäuser, Timo
  8. Sovereign Default Risk Premia and State-Dependent Twin Deficits By Hürtgen, Patrick; Rühmkorf, Ronald
  9. The Expectations-Driven U.S. Current Account By Krause, Michael; Hoffmann, Mathias; Laubach, Thomas
  10. Capital Controls: a Normative Analysis By Anna Lipinska; Bianca De Paoli
  11. Feeding the Global VAR with theory: Is German wage moderation to blame for European imbalances? By Bettendorf, Timo
  12. Renegotiation Policies in Sovereign Defaults By Arellano, Cristina; Bai, Yan
  13. Two Tales of Adjustment: East Asian Lessons for European Growth By Anusha Chari; Peter Blair Henry
  14. Exchange Rate and Price Dynamics at the Zero Lower Bound By Kaufmann, Daniel; Bäurle, Gregor
  15. Macroeconomic Consequences of Terms of Trade Episodes, Past and Present By Tim Atkin; Mark Caputo; Tim Robinson; Hao Wang
  16. Efficient CPI-Based Taylor Rules in Small Open Economies By Rodrigo Caputo; Luis Oscar Herrera
  17. Capital Inflows and Exchange Rate Volatility in Korea By Kyuil Chung
  18. Explaining the German trade surplus: An analysis with an estimated DSGE model By Vogel, Lukas; Kollmann, Robert; Ratto, Marco; Roeger, Werner; In 't Veld, Jan
  19. Exchange Rate Pass-Through to Domestic Prices under Different Exchange Rate Regimes By Mirdala, Rajmund
  20. International Liquidity and Exchange Rate Dynamics By Xavier Gabaix; Matteo Maggiori
  21. Determinants of real exchange rates: An empirical investigation By Kakkar, Vikas; Yan, Isabel
  22. Exchange rate pass-through into German import prices - a disaggregated perspective By Belke, Ansgar; Beckmann, Joscha; Verheyen, Florian
  23. Determinants of Internal and External Imbalances within the Euro Area By Georg Dettmann
  24. Relative Sectoral Prices and Population Ageing: A Common Trend By Max Groneck; Christoph Kaufmann
  25. Conditions for a Beneficial Monetary Union under Suboptimal Monetary Policy By Groll, Dominik
  26. China, the Dollar Peg and U.S. Monetary Policy By Tervala, Juha
  27. Household Debt During the Financial Crisis: Micro-Evidence from Chile By Roberto Álvarez; Luis Opazo
  28. On the (In)effectiveness of Fiscal Devaluations in a Monetary Union By von Thadden, Leopold; Lipinska, Anna
  29. Imperfect Financial Markets, External Debt, and the Cyclicality of Social Transfers By Frömel, Maren

  1. By: Aizenman, Joshua (Asian Development Bank Institute); Jinjarak, Yothin (Asian Development Bank Institute); Marion, Nancy P. (Asian Development Bank Institute)
    Abstract: In the run-up to the financial crisis, the world economy was characterized by large and growing current account imbalances. Since the onset of the crisis, the People’s Republic of China and the United States have rebalanced. As a share of gross domestic product, their current account imbalances are now less than half their pre-crisis levels. For the People’s Republic of China, the reduction in its current account surplus post-crisis suggests a structural change. Panel regressions for a sample of almost 100 economies over the thirty-year period, 1983–2013, confirm that the relationship between current account balances and economic variables such as performance, structure, wealth, and the exchange rate, changed in important ways after the financial crisis.
    Keywords: current account imbalances; structural change; financial crisis; PRC; international reserves
    JEL: F32 O57
    Date: 2014–01–27
  2. By: Eichengreen, Barry; Gupta, Poonam
    Abstract: In May 2013, Federal Reserve officials first began to talk of the possibility of tapering their security purchases. This tapering talk had a sharp negative impact on emerging markets. Different countries, however, were affected very differently. This paper uses data on exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why. It finds that emerging markets that allowed the real exchange rate to appreciate and the current account deficit to widen during the prior period of quantitative easing saw the sharpest impact. Better fundamentals (the budget deficit, the public debt, the level of reserves, or the rate of economic growth) did not provide insulation. A more important determinant of the differential impact was the size of the country's financial market: countries with larger markets experienced more pressure on the exchange rate, foreign reserves, and equity prices. This is interpreted as showing that investors are better able to rebalance their portfolios when the target country has a relatively large and liquid financial market.
    Keywords: Debt Markets,Currencies and Exchange Rates,Emerging Markets,Economic Theory&Research,Macroeconomic Management
    Date: 2014–01–01
  3. By: Carlos A. Vegh; Guillermo Vuletin
    Abstract: This paper studies the social implications of fiscal policy responses to crises in Latin America over the last 40 years and in the Eurozone during the aftermath of the global financial crisis. We focus on the behavior of four social indicators: the poverty rate, income inequality, unemployment rate, and domestic conflict. We find a causal link from counteryclical (procyclical) fiscal policy responses to reductions (increases) in all four social indicators. These results call into question recent claims on "expansionary fiscal austerity."
    JEL: E62 F41
    Date: 2014–01
  4. By: Straub, Roland; Forbes, Kristin; Fratzscher, Marcel; Kostka, Thomas
    Abstract: We use changes in Brazil s tax on capital inflows from 2006 to 2011 to test for direct portfolio effects and externalities from capital controls on investor portfolios. The analysis is structured based on information from investor interviews. We find that an increase in Brazil s tax on foreign investment in bonds causes investors to significantly decrease their portfolio allocations to Brazil in both bonds and equities. Investors simultaneously increase allocations to other countries that have substantial exposure to China and decrease allocations to countries viewed as more likely to use capital controls. Much of the effect of capital controls on portfolio flows appears to occur through signalling i.e. changes in investor expectations about future policies rather than the direct cost of the controls. This evidence of significant externalities from capital controls suggests that any assessment of controls should consider their effects on portfolio flows to other countries. --
    JEL: F32 F42 G11
    Date: 2013
  5. By: Gehrke, Britta; Yao, Fang
    Abstract: This paper re-examines the role of real supply shocks in international business cycles. In contrast to previous studies, we extend the concept of supply shocks beyond the productivity shock towards labor supply shocks. Our analysis simultaneously identifies five real and nominal disturbances in a unified framework. We identify a structural VAR by imposing sign restrictions from a New Open Economy Macro model. We find evidence that real supply disturbances account for 15% 25% of real exchange rate and trade balance fluctuations of the US vis- -vis an aggregate of industrialized countries . The real exchange rate is further driven by nominal shocks originating in financial markets. In light of these results, real exchange rate adjustments serve as an important absorber of asymmetric real supply shocks. --
    JEL: C32 F31 F41
    Date: 2013
  6. By: Philipp Engler; Giovanni Ganelli; Juha Tervala; Simon Voigts
    Abstract: Between 1999 and the onset of the economic crisis in 2008 real ex-change rates in Greece, Ireland, Italy, Portugal and Spain appreciated relative to the rest of the euro area. This divergence in competitiveness was reflected in the emergence of current account imbalances. Given that exchange rate devaluations are no longer available in a monetary union, one potential way to address such imbalances is through a fiscal devaluation. We use a DSGE model calibrated to the euro area to investigate the impact of a fiscal devaluation, modeled as a revenue-neutral shift from employers' social contributions to the Value Added Tax. We find that a fiscal devaluation carried out in `Southern European countries' has a strong positive eect on output, but a mild effect on the trade balance of these countries. In addition, the negative eect on `Central-Northern countries' output is weak.
    Keywords: Fiscal Devaluation, Fiscal Policy, euro area, currency union, current account
    JEL: E32 E62 F32 F41
    Date: 2014–01
  7. By: Schnabl, Gunther; Wollmershäuser, Timo
    Abstract: Since the breakdown of the Bretton Woods System diverging current account positions in Europe have prevailed. While the Southern and Western European countries have tended to run current account deficits, the current accounts of the Central and Northern European countries, in particular Germany, have tended to be in surplus. The paper scrutinizes the role of diverging fiscal policy stances for current account imbalances in Europe since the early 1970s under alternative institutional monetary arrangements (floating exchange rates, European Monetary System, and European Monetary Union). It sheds light on the interaction of fiscal and monetary policies with respect to their impact on the current account and analyses the role of exchange rate changes and credit facilities as adjustment mechanisms for current account imbalances. Panel regressions reveal a robust impact of fiscal policy divergence on current account imbalances, which to a large extent is independent from the exchange rate regime, but which turns out to be contingent on the monetary policy stance. --
    JEL: E62 E52 F32
    Date: 2013
  8. By: Hürtgen, Patrick; Rühmkorf, Ronald
    Abstract: This paper studies the impact of the state-dependent risk of a government default on the correlation of the scal balance and current account. We use a small open economy model where nonlinear risk premia arise endogenously when the government operates close to its scal limit, i.e. the maximum capacity of a country to repay its debt. The presence of the possible sovereign default leads to dynamics of sovereign debt which cause taxes to rise and increase the dispersion of resulting tax levels. In line with data for industrialized countries household saving increases at high debt-to-GDP levels and the correlation of the scal balance and current account decreases. We calibrate the model to Greece and simulate the debt crisis as a result of negative TFP shocks and nd that the model dynamics t to the data. --
    JEL: E62 F32 H31
    Date: 2013
  9. By: Krause, Michael; Hoffmann, Mathias; Laubach, Thomas
    Abstract: Since 1991, survey expectations of long-run output growth for the U.S. relative to the rest of the world exhibit a pattern strikingly similar to that of the U.S. current account, and thus also to global imbalances. We show that this finding can to a large extent be rationalized in a two-region stochastic growth model simulated using expected trend growth filtered from observed productivity. In line with the intertemporal approach to the current account, a major part of the buildup of the U.S. current account deficit appears to be driven by the optimal response of households and firms to improved growth prospects. --
    JEL: F32 O40 D83
    Date: 2013
  10. By: Anna Lipinska (Federal Reserve Board); Bianca De Paoli (Federal Reserve Bank of New York)
    Abstract: Countries' concerns with the value of their currency have been extensively studied and documented in the literature. Capital controls can be (and often are) used as a tool to manage exchange rate áuctuations. This paper investigates whether countries can benefit from using such tool. We develop a welfare based analysis of whether (or, in fact, how) countries should tax international borrowing. Our results suggest that restricting international capital flows with the use of these taxes can be beneficial for individual countries although it would limit cross-border pooling of risk. This is because while consumption risk-pooling is important, individual countries also care about domestic output áuctuations. Moreover, the results show that countries decide to restrict the international flow of capital exactly when this flow is crucial to ensure cross-border risk-sharing. Our findings point to the possibility of costly "capital control wars" and, thus, significant gains from international policy coordination.
    Date: 2013
  11. By: Bettendorf, Timo
    Abstract: This paper analyses the importance of German wage moderation in the context of European imbalances. Using information from a New Keynesian small open economy model with labor market frictions, we derive sign restrictions for a wage markup shock. This information enables us to identify a German wage markup shock by imposing restrictions on the impulse response functions of German variables in a Global VAR model. We find that negative German wage markup shocks do generally cause an improvement of the domestic trade balance and a deterioration of foreign trade balances in the Euro Area. However, they account only for a limited proportion of trade balance forecast error variances. Hence, German wage moderation cannot be the lone driver of European imbalances. --
    JEL: F41 F32 F10
    Date: 2013
  12. By: Arellano, Cristina (Federal Reserve Bank of Minneapolis); Bai, Yan (University of Rochester)
    Abstract: This paper studies an optimal renegotiation protocol designed by a benevolent planner when two countries renegotiate with the same lender. The solution calls for recoveries that induce each country to default or repay, trading off the deadweight costs and the redistribution benefits of default independently of the other country. This outcome contrasts with a decentralized bargaining solution where default in one country increases the likelihood of default in the second country because recoveries are lower when both countries renegotiate. The paper suggests that policies geared at designing renegotiation processes that treat countries in isolation can prevent contagion of debt crises.
    Keywords: Renegotiation policy; Contagion; Sovereign default
    JEL: F30 G01
    Date: 2014–01–10
  13. By: Anusha Chari; Peter Blair Henry
    Abstract: Paths into the Asian Crisis of 1997-98 and the recent global financial crisis were similar, but the roads out could not be more different. Common wisdom has it that on impact Asia endured fiscal austerity imposed by the IMF whereas the IMF recommended stimulus in the case of the advanced nations at the epicenter of the crisis in 2008-09. While the IMF did recommend different policies to begin with, the fiscal adjustment in Asia was far more modest than is commonly known and the switch from stimulus to austerity in Europe was quite abrupt. The difference in fiscal stance helps explain the difference in the post-crisis paths of output and employment in the two regions.
    JEL: E62 E65 F4 F43 O11 O57
    Date: 2014–01
  14. By: Kaufmann, Daniel; Bäurle, Gregor
    Abstract: In this paper, we analyse nominal exchange rate and price dynamics after risk shocks with short-term interest rates constrained by the zero lower bound (ZLB). We show with a stylized theoretical model that temporary risk shocks may lead to permanent shifts of the exchange rate and the price level if a central bank anchors long-run inflation expectations. In line with this theoretical prediction, we find empirical evidence for Switzerland, that the responses of the exchange rate and the price level to a temporary risk shock are permanent. Our theoretical discussion shows that adopting a credible long-run price level target rather than a long-run inflation target avoids these permanent shifts of the exchange rate and the price level. --
    JEL: C32 E31 E52
    Date: 2013
  15. By: Tim Atkin (Reserve Bank of Australia); Mark Caputo (Reserve Bank of Australia); Tim Robinson (Reserve Bank of Australia); Hao Wang (Reserve Bank of Australia)
    Abstract: The early 21st century saw Australia experience its largest and longest terms of trade boom. This paper places this recent boom in a long-run historical context by comparing the current episode with earlier cycles. While similarities exist across most episodes, current macroeconomic policy frameworks and settings are quite different to those of the past. This mitigated the broader macroeconomic consequences of the upswing and as the terms of trade decline may do likewise.
    Keywords: commodity prices; terms of trade; macroeconomic policy
    JEL: E30 E60 N17
    Date: 2014–01
  16. By: Rodrigo Caputo; Luis Oscar Herrera
    Abstract: In a standard New-Keynesian model for a small open economy, we derive the efficient CPI inflationbased Taylor rule. We conclude that the natural rate of interest, based on CPI inflation, must be directly linked to the foreign interest rate, as well as to domestic productivity shocks. In this way this rule ensures that the real ex-ante CPI interest rate moves in the face of domestic and foreign shocks so as to induce efficient movements in consumption. The empirical evidence, on the other hand, shows that inflation-targeting central banks respond to movements in the foreign interest rate (Fed funds rate), besides reacting to expected CPI inflation and to the domestic output gap.
    Date: 2013–07
  17. By: Kyuil Chung (The Bank of Korea)
    Abstract: High exchange rate volatility threatens international trade and exacerbates the currency mismatch problem, hence generating economic instability. However, low exchange rate volatility may cause another problem. Low volatility induces speculative capital inflows as speculative investors, who are usually concerned both with the interest rate differential and exchange rate risk, become concerned with the interest rate differential only. In this paper we use several techniques to identify the relationship between exchange rate volatility and capital inflows in Korea. First, estimation of a Markov switching model shows that all kind of capital inflows increase under low volatility regimes, while capital inflows with the exception of FDI all decrease under high volatility regimes. Second, estimation of a multivariate GARCH-in-Mean Model and the impulse response function derived from it provide evidence that lower exchange rate volatility tends to increase most types of capital inflows other than FDI. These results imply that a medium level of exchange rate volatility is most beneficial for economic stability
    Date: 2013
  18. By: Vogel, Lukas; Kollmann, Robert; Ratto, Marco; Roeger, Werner; In 't Veld, Jan
    Abstract: The paper estimates a structural model to analyse the drivers of Germany's external surplus since the start of EMU. The analysis suggests that the most important factors behind the build-up of Germany's external surplus have been the disappearance of country risk premia in the context of EMU, which has led to the convergence of interest rates in the euro area, strong growth in emerging economies with the associated increase in the demand for German exports, exogenous changes in savings behaviour and wage moderation/labour market reform in Germany. Germany's trade surplus has reduced net exports in the rest of the euro area and the rest of the world alike, but spillover for GDP is likely to be positive. --
    JEL: F41 C54 F32
    Date: 2013
  19. By: Mirdala, Rajmund
    Abstract: Responsiveness of exchange rates to external price shocks as well as their ability to serve as a traditional vehicle for a transmission of these shocks to domestic prices is affected by exchange rate arrangement adopted by monetary authorities. As a result, exchange rate volatility determines the overall dynamics of pass-through effects and associated absorption capability of exchange rate. Ability of exchange rates to transmit external (price) shocks to the national economy represents one of the most discussed areas relating to the current stage of the monetary integration in the European single market. The problem is even more crucial when examining crisis related redistributive effects. In the paper we analyze exchange rate pass-through to domestic prices in the European transition economies. We estimate VAR model to investigate (1) responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and (2) effect of the unexpected exchange rate shift to domestic price indexes to examine its distribution along the internal pricing chain. To provide more rigorous insight into the problem of exchange rate pass-through to the domestic prices in countries with different exchange rate arrangements we estimate models for two subsequent periods 2000-2007 and 2000-2012. Our results suggest that there are different patterns of exchange rate pass-through to domestic prices according to the baseline period as well as the exchange rate regime diversity.
    Keywords: exchange rate pass-through, inflation, VAR, Cholesky decomposition, impulse-response function
    JEL: C32 E31 F41
    Date: 2013–12
  20. By: Xavier Gabaix; Matteo Maggiori
    Abstract: We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus impacting both the level and volatility of exchange rates. Our theory of exchange rate determination in imperfect financial markets not only rationalizes the empirical disconnect between exchange rates and traditional macroeconomic fundamentals, but also has real consequences for output and risk sharing. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. We derive conditions under which heterodox government financial policies, such as currency interventions and taxation of capital flows, can be welfare improving. Our framework is flexible; it accommodates a number of important modeling features within an imperfect financial market model, such as non-tradables, production, money, sticky prices or wages, various forms of international pricing-to-market, and unemployment.
    JEL: E2 E42 E44 F31 F32 F41 F42 G11 G15 G20
    Date: 2014–01
  21. By: Kakkar, Vikas (BOFIT); Yan, Isabel (BOFIT)
    Abstract: The large and persistent deviations of nominal exchange rates from their purchasing power parities comprise a key stylized fact in international economics. This paper sheds light on these persistent deviations by combining two disparate strands of empirical work. The first strand focuses on real economic shocks such as sectoral technology shocks suggested by the celebrated Balassa-Samuelson model, whereas the second strand emphasizes monetary shocks which create persistent effects on both the real interest rate and the real exchange rate. We also hypothesize a third factor which may affect real exchange rates – shocks to the global financial system, which we proxy by the real price of gold. Although each factor in isolation has limited explanatory power, we find that these three factors in conjunction can successfully explain the medium to long run move-ments in 14 bilateral U.S. dollar real exchange rates from 1970 to 2006. The three factors are sectoral total factor productivity differentials, real interest rate differentials, and the real price of gold, representing real shocks, monetary shocks, and shocks to the global financial system, respectively. We document evidence suggesting that bilateral U.S. dollar real ex-change rates are cointegrated with these three factors.
    Keywords: purchasing power parity; Balassa-Samuelson model; cointegration
    JEL: F31 F41
    Date: 2014–01–08
  22. By: Belke, Ansgar; Beckmann, Joscha; Verheyen, Florian
    Abstract: This study analyzes the exchange rate pass-through into German import prices based on disaggregated data taken on a monthly basis between 1995 and 2012. Our main contribution is twofold: firstly, we employ various time-series techniques to analyze data for different product categories, and also cointegration techniques to carefully distinguish between short-run and long-run pass-through coefficients. Secondly, in a panel data approach we estimate time-varying pass-through coefficients and explain their development with regard to various macroeconomic factors. Our results show that long-run pass-through is only partly observable and incomplete, while short-run pass-through shows a more unique character, although heterogeneity across product groups does exist. We are also able to identify several macroeconomic factors which determine changes in the degree of pass-through, which is especially relevant for policymakers. --
    JEL: F41 F14 E31
    Date: 2013
  23. By: Georg Dettmann (Department of Economics (University of Verona))
    Abstract: The widening of global current account balances has been an important subject of academic debate in recent years. Several authors have pointed out that there has been a direct link between the world financial crisis in 2007/ 09 and the so called euro crisis since 2010. Structural imbalances, similar to the ones that caused the global financial crisis, might have also been the underlying cause for the events that finally triggered the euro crisis. The current state of literature focuses on the current account side of the problem rather than onto the financial accounts. The purpose of this paper is to show that the capital flows that were created by the particular structure of the EMU were not sustainable. Therefore we will conduct a simplified three country model that shows the capital flows into the EMU and inside the EMU. We find that the core EMU countries served as intermediaries for external investors. We show how this caused the imbalances in the according financial accounts and that a rebalancing of internal current accounts will not be sufficient to stop the Target2 balances from diverging. The EMU ended in an equilibrium in which a system that seemed to have come to a halt after the beginning of the euro crisis is still going on, and there is no mechanism for the core countries to stop the unbalanced capital flows. We will start by elaborating how the same trade shock that hit the US in a symmetrical way, hit the single EMU member statesí Balance-of-Payments asymmetrically. The current reforms only aim on the current account side of the problem and leave out the distortions in the financial accounts. A rebalancing of current accounts will not be sufficient, as long as the bilateral linkages with external trade partners are not balanced with the according financial accounts.
    Keywords: Euro Crisis, Intra-EMU Imbalances, Sovereign Debt Crisis, Current Account Imbalances, Target2, Balance-of-Payment Crisis
    JEL: E42 E58 F32 F34
    Date: 2014–01
  24. By: Max Groneck; Christoph Kaufmann
    Abstract: Demographic change raises demand for non-tradable old-age related services relative to tradable commodities. This demand shift increases the relative price of non-tradables and thereby causes real exchange rates to appreciate. We claim that the change in demand affects prices via imperfect intersectoral factor mobility. Using a sample of 15 OECD countries between 1970 and 2009, we estimate a robust increase of relative prices due to population ageing. Further findings confirm the relevance of imperfect factor mobility: Countries with more rigid labour markets experience stronger price effects.
    Keywords: Demographic change, relative price of non-tradables, real exchange rate
    JEL: J11 F41 E39
    Date: 2014–01–17
  25. By: Groll, Dominik
    Abstract: The New Keynesian DSGE literature has come to the consensus that, from the perspective of business cycle stabilization, countries are worse off in terms of welfare by forming a monetary union. This consensus, however, is based on the assumption of monetary policy being optimal. Using a standard two-country model, this paper shows that under suboptimal monetary policy, countries may gain in welfare by forming a monetary union, highlighting an important inherent benefit of fixing the exchange rate. Whether countries benefit from a monetary union depends primarily on the degree of price stickiness and how monetary policy is conducted: If prices are rather sticky and if monetary policy is not very aggressive towards inflation, forming a monetary union is beneficial. In contrast, asymmetries in the degree of price stickiness between countries are not of any importance for a monetary union to be welfare-enhancing or not. --
    JEL: F41 F33 E52
    Date: 2013
  26. By: Tervala, Juha
    Abstract: I examine the transmission of expansionary U.S. monetary policy in case where developing countries-including China-peg their currencies to the dollar. I evaluate the value of the dollar peg as a fraction of consumption that households would be willing to pay for the dollar peg to remain as well off under the dollar peg as under a flexible exchange rate. The value of the dollar peg is positive for the dollar bloc because the U.S. can no longer improve its terms of trade at the dollar bloc's expense. This provides a rationale for fixing the exchange rate. If the expenditure switching effect is weak, the peg is harmful to the U.S., providing a rationale for criticism of China's exchange rate policy.
    Keywords: Dollar peg; dollar bloc; monetary policy; open economy macroeconomics; beggar-thy-neighbor
    JEL: E32 E52 F30 F41 F44
    Date: 2014–01–27
  27. By: Roberto Álvarez; Luis Opazo
    Abstract: We examine evidence from a data panel from 2006 to 2009 to explore how chilean households were affected by the negative income shock observed during the recent financial crisis. our results show that there is a negative and significant relationship between income shocks and changes in consumption debt. this suggests that increasing debt allowed households to smooth consumption during the financial crisis and provides new empirical evidence about the importance of financial constraints in a developing country. we find evidence of heterogeneous effects by type of consumption debt and across households. our results show that reduction in income increased indebtedness with banking institutions, but not with non-banking creditors. across households, these results are driven mainly by those with financial assets and low levels of indebtedness before the crisis.
    Date: 2013–07
  28. By: von Thadden, Leopold; Lipinska, Anna
    Abstract: This paper explores the fiscal devaluation hypothesis in a model of a monetary union characterised by national fiscal and supranational monetary policy. We show that a unilateral tax shift towards indirect taxes in one of the countries produces small but non-negligible long-run effects on output and consumption within and between the two countries only when international financial markets are perfectly integrated. In contrast to the existing literature, we find that short-run effects are not always amplified by nominal wage rigidities. We document also how short-run effects of the tax shift depend on the choice of the inflation index stabilised by the central bank and on whether the tax shift is anticipated. --
    JEL: E61 E63 F42
    Date: 2013
  29. By: Frömel, Maren
    Abstract: This paper deals with fiscal policy over the business cycle when international financial markets are imperfect. I document evidence that government expenditure tends to be more procyclical the higher is the borrowing cost for a sovereign. Decomposing government expenditure components shows that the cyclical correlations of government social transfers are the most important components driving cross-country differences in the behavior of government spending over the business cycle. I build a simple model of optimal fiscal policy in the presence of income inequality where government spending is financed by costly taxation and by external debt in form of a risk free bond. Government spending consists of a public good which provides direct utility, and of social transfers that can be targeted towards low income agents. When additional frictions are in the form of exogenous borrowing constraints, the government runs a procyclical tax and transfer policy in the neighbourhood of the constraint and a counteryclical policy when asset or debt holdings are not close to the constraint. The need to smooth both aggregate consumption and tax cost over the business cycle deliver the qualitative difference in transfer policy when the government cannot borrow enough. The procyclicality of transfers is stronger the tighter is the borrowing constraint in this model. In contrast, government spending on public goods is always procyclical. The results implied by the theoretical model are qualitatively consistent with the data and emphasize the need to decompose government expenditure to understand fiscal procyclicality. --
    JEL: E62 F34 F41
    Date: 2013

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