|
on Open Economy Macroeconomics |
| By: | Michael B. Devereux; James Yetman |
| Abstract: | In this paper we examine how monetary policy should respond to nominal exchange rates in a New Keynesian open economy model that allows for a non-trivial role for sterilised intervention. The paper develops the argument against the backdrop of the evolving policy-making environment of Asian economies. Sterilised intervention can be a potent tool that offers policymakers an additional degree of freedom in maximising global welfare. We show that the gains to sterilised intervention are greater when goods market integration is low and exchange rate pass-through is high. However, increased financial internationalisation reduces the effectiveness of sterilised intervention, as the international policy trilemma becomes more relevant. Unsterilised intervention may also have a role to play, although the potential welfare gains from this are generally smaller. Most central banks in Asia have actively used sterilised foreign exchange intervention as a policy tool to smooth exchange rates. But, over time, declining exchange rate pass-through and the increasing international integration of financial and goods markets will tend to reduce the efficacy of sterilised intervention. Given the limited effectiveness of unsterilised intervention, our model implies that the role of exchange rate movements in the optimal setting of monetary policy in Asia is decreasing. |
| JEL: | F3 F41 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20252&r=opm |
| By: | Epstein, Brendan (Board of Governors of the Federal Reserve System (U.S.)); Mukherjee, Rahul (IHEID); Ramnath, Shanthi (U.S. Treasury Department) |
| Abstract: | We examine the extent to which differences in international tax rates may account for the small correlations of per capita consumption fluctuations across countries. Theory implies a close relationship between relative consumption growth, and consumption and capital income tax rate differentials. We find strong empirical evidence for this relationship. Idiosyncratic output fluctuations account for the majority of cross country consumption growth variability, but trends in tax differentials are informative about the dynamic evolution of international risk sharing. In particular, adjusting for capital taxes reveals an intuitive positive relationship between financial connectedness and risk sharing that is absent in baseline measures. |
| Keywords: | International risk sharing; business cycle accounting; taxes |
| JEL: | F41 F44 H29 |
| Date: | 2014–06–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1110&r=opm |
| By: | Michael D. Bordo; Ehsan U. Choudhri; Giorgio Fazio; Ronald MacDonald |
| Abstract: | Historical data for over hundred years and 14 countries is used to estimate the long-run effect of productivity on the real exchange rate. We find large variations in the productivity effect across four distinct monetary regimes in the sample period. Although the traditional Balassa-Samuelson model is not consistent with these results, we suggest an explanation of the results in terms of contemporary variants of the model that incorporate the terms of trade mechanism. Specifically we argue that changes in trade costs over time may affect the impact of productivity on the real exchange rate over time. We undertake simulations of the modern versions of the Balassa-Samuelson model to show that plausible parameter shifts consistent with the behavior of trade costs can explain the cross-regime variation of the productivity effect. |
| JEL: | F31 F41 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20228&r=opm |
| By: | Beatrice Pataracchia; Robert Kollmann; Marco Ratto; Werner Roeger; Jan in’t Veld |
| Abstract: | We study the joint dynamics of foreign capital flows and real activity during the recent boom-bust cycle of the Spanish economy, using a three-country New Keynesian model with credit-constrained households and firms, a construction sector and a government. We estimate the model using 1995Q1-2013Q2 data for Spain, the rest of the Euro Area (REA) and the rest of the world. We show that falling risk premia on Spanish housing and non-residential capital, a loosening of collateral constraints for Spanish households and firms, as well as the fall in the interest rate spread between Spain and the REA fuelled the Spanish output boom and the persistent rise in foreign capital flows to Spain, before the global financial crisis. During and after the global financial crisis, falling house prices, and a tightening of collateral constraints for Spanish borrowers contributed to a sharp reduction in capital inflows, and to the persistent slump in Spanish real activity. The credit crunch was especially pronounced for Spanish households. |
| JEL: | C11 E21 E32 E62 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0519&r=opm |
| By: | Olivier de Bandt; Tovonony Razafindrabe |
| Abstract: | Relying on a novel dataset of detailed micro-data on import prices, this paper explores the close link that exists between nominal import price rigidity and the extent of exchange rate pass-through (ERPT). We show that previous evidence in favor of incomplete and low value of ERPT in the empirical literature may be explained by two factors: the relative importance of small variations in the exchange rate and, mainly, nominal rigidity. Once nominal rigidity is taken into account, we nd for French manufacturers that ERPT may be incomplete in the short run, but with relatively high value, and complete in the long run. In addition, assessing non-linearity and asymmetry issues, we provide evidence that the shape of the import price reaction function is distorted by the presence of nominal rigidity. Indeed, the linearity assumption is veri ed once nominal rigidity is taken into account. However, in the case where it is rejected, the import price reaction function is concave rather than convex, indicating that rms aim at protecting market shares. As a consequence, the common belief that "prices rise faster than they fall" is the results of nominal import price rigidity as far as ERPT is concerned. |
| Keywords: | Exchange rate pass-through, nominal rigidity, import price |
| JEL: | F31 E31 C23 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2014-36&r=opm |
| By: | Yuri Ponomarev (Gaidar Institute for Economic Policy); Pavel Trunin (Gaidar Institute for Economic Policy); Alexei Uluykaev (Ministry of Economic Development) |
| Abstract: | In The article provides estimates of short-run and medium-run exchange rate pass-through into domestic prices in Russia during the period of 2000–2012 using vector error correction model. Exchange rate pass-through asymmetry estimates, its assessments on different sub-periods and exchange rate volatility effect on pass-through are also provided. |
| Keywords: | exchange rate pass-through, asymmetry of exchange rate pass-through, exchange rate volatility, inflation, monetary policy, vector error correction model. exchange rate pass-through, asymmetry of exchange rate pass-through, exchange rate volatility, inflation, monetary policy, vector error correction model. |
| JEL: | C32 E31 E52 F31 F41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:gai:wpaper:0099&r=opm |
| By: | Thi-Hong-Hanh Pham (LEMNA - Laboratoire d'économie et de management de Nantes Atlantique - Université de Nantes : EA4272) |
| Abstract: | This paper studies the determinants of sovereign bond yields in nine emerging Asian countries over the period 1994-2012. In the long-run, we first reveal that sovereign bond yields weakly and negatively depends on the changes in public debt. This result is not consistent with the theoretical hypothesis that rising government debt may foster sovereign bond yields through the default risk. Second, we fail to find out a long-run relationship between potential economic growth and sovereign borrowing costs in emerging Asia. Lastly, this paper evidences the preliminary interventions of emerging Asian authorities in separating government debt management from monetary management. |
| Keywords: | Debt market; Sovereign bond yields; Emerging Asia; Panel analysis. |
| Date: | 2014–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-01012093&r=opm |
| By: | Wong, Sara A.; Petreski, Marjan |
| Abstract: | This study investigates if and how different episodes of large net inflows – export boom, remittances, FDIs, or aid – caused Dutch disease in Latin American countries. We investigate this disease – i.e. the decline of manufacturing output – with special reference to the channels through which it works, to the crisis period and to the role of China for LAC. The study conducts analyses at the 3-digit International Standard Industrial Classification level for manufacturing industries. Our results robustly suggest that export, aid and remittances booms may indeed have an adverse impact on the rate of growth of exportable industries. The exchange rate overvaluation has proven to be the channel through which these capital booms induced decline of manufacturing output growth, but only after the work monetary and fiscal policies is considered. The crisis likely softened the Dutch disease effects in LAC. We find China exporting manufactures to some of the LAC does not significantly affect the manufacturing growth of other fellow LAC, but depending on the type of manufacture industry and country considered China may play a negative or positive role for LAC’s manufacturing through the work on third-market competition: Mexican manufacturing suffering significant negative impacts while for the rest of Latin American countries studied the effect of China may be positive. |
| Keywords: | Dutch disease, manufacturing value added, excess appreciation, Latin America |
| JEL: | N66 O14 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57056&r=opm |