nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒01‒14
six papers chosen by
Martin Berka
University of Auckland

  1. Capital Controls or Macroprudential Regulation? By Anton Korinek; Damiano Sandri
  2. Betting the House By Òscar Jordà; Moritz HP. Schularick; Alan M. Taylor
  3. The Risky Capital of Emerging Markets By Joel M. David; Espen Henriksen; Ina Simonovska
  4. The long and the short of it: Sovereign debt crises and debt maturity By Raquel Fernández; Alberto Martin
  5. Wealth Effects on World Private Financial Saving By Ray C. Fair
  6. Sacrifice Ratios for Euro Area Countries – New Evidence on the Costs of Price Stability By Ansgar Belke; Tobias Böing

  1. By: Anton Korinek; Damiano Sandri
    Abstract: We examine the effectiveness of capital controls versus macroprudential regulation in reducing financial fragility in a small open economy model in which there is excessive borrowing because of externalities associated with financial crises and contractionary exchange rate depreciations. We find that both types of instruments play distinct roles: macroprudential regulation reduces the indebtedness of leveraged borrowers whereas capital controls induce more precautionary behavior for the economy as a whole, including for savers. This reduces crisis risk by shoring up aggregate net worth and mitigating the transfer problem that occurs during crises. In advanced countries where the risk of large contractionary depreciations is more limited, the role for capital controls subsides. However, macroprudential regulation remains essential in our model to mitigate booms and busts in asset prices.
    JEL: E44 F34 F41
    Date: 2014–12
  2. By: Òscar Jordà; Moritz HP. Schularick; Alan M. Taylor
    Abstract: Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.
    JEL: C14 C38 E32 E37 E42 E44 E51 E52 F41 G01 G21 N10 N20
    Date: 2014–12
  3. By: Joel M. David; Espen Henriksen; Ina Simonovska
    Abstract: Emerging markets exhibit high returns to capital, the ‘Lucas Paradox,’ alongside volatile growth rate regimes. We investigate the role of long-run risks, i.e., risk due to fluctuations in economic growth rates, in leading to return differentials across countries. We take the perspective of a US investor and outline an empirical strategy to identify risky growth shocks and quantify their implications. Long-run risks account for 60-70% of the observed return disparity between the US and a group of the poorest countries. At the individual country level, our model predicts average returns that are highly correlated with those in the data (0.61).
    JEL: E22 F21 G12 O4
    Date: 2014–12
  4. By: Raquel Fernández; Alberto Martin
    Abstract: We present a simple model of sovereign debt crises in which a country chooses its optimal mix of short and long-term debt contracts subject to standard contracting frictions: the country cannot commit to repay its debts nor to a specific path of future debt issues, and contracts cannot be made state contingent. We show that in order to satisfy incentive compatibility the country must issue short-term debt, which exposes it to roll-over crises and inefficient repayments. We examine two policies -restructuring and reprofiling- and show that both improve ex ante welfare if structured correctly. Key to the welfare results is the country's ability to choose its debt structure so as to neutralize any negative effects resulting from redistribution of payments across creditors in times of crises.
    Keywords: sovereign debt, dilution, optimal maturity, restructuring, reprofiling, IMF.
    JEL: F33 F34 F36 F41 G15
    Date: 2014–12
  5. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper shows that about 70 percent of the variance of the yearly change in the world private financial saving rate can be explained by lagged changes in world stock and housing prices for the sample period 1982-2013. The results suggest that increased fluctuations in asset prices since 1995 have led to increased fluctuations in the world private financial saving rate. Wealth effects on private demand appear to be large.
    Keywords: Financial saving, World economy, Wealth effects
    JEL: E21 E44 F41
    Date: 2014–12
  6. By: Ansgar Belke; Tobias Böing
    Abstract: The purpose of this article is to deliver new estimates of the sacrifice ratio of Euro area countries. A high sacrifice ratio means a large loss of gross domestic product (GDP) or employment for a given reduction in inflation. In order to estimate the cost of adjustments in inflation rates by the sacrifice ratio, we apply, firstly, a structural vector autoregressive technique following Cecchetti and Rich (2001) and, secondly, one by Ball (1994) based on historical disinflationary episodes. Our findings indicate that most countries have sacrifice ratios of between –1 and 2 per cent of real GDP for a reduction in inflation of one percentage point. In some cases, these estimates deliver negative sacrifice ratios.
    Keywords: Sacrifice ratio; structural adjustment; Euro area; VAR; episode method; Phillips curve
    JEL: E31 F49
    Date: 2014–11

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