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on Open Economy Macroeconomics |
| By: | Evans, Martin |
| Abstract: | This paper examines the persistent deterioration in the international external position of the U.S. over the past 60 years. I develop a model without Ponzi schemes and arbitrage opportunities that accounts for both the secular rise and the cyclical variations in the U.S. international debt position. The model estimates quantify the role played by financial and real factors in driving these dynamics, and their impact on the steady state debt position. I find that financial factors raise the steady state debt level by three percent of GDP, and account for 80 percent the cyclical variations. In contrast, real factors associated with trade flows are the dominant drivers of the secular rise in the debt position. I argue that these empirical findings are at odds with recent models of global imbalances that focus on demographics and asymmetric financial development. They also represent a substantial challenge to the view that the U.S. external position is on a sustainable path. |
| Keywords: | Global Imbalances, External Positions, Current Accounts, Trade Flows, Valuation Effects, Stochastic Discount Factors, International Asset Pricing |
| JEL: | E0 E6 F3 F32 F34 F41 |
| Date: | 2015–08–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:66201&r=all |
| By: | Levy Yeyati, Eduardo (Harvard University and Universidad Torcuato di Tella); Zuniga, Jimena (Universidad Torcuato di Tella) |
| Abstract: | Capital flows have been the subject of key policy concern since the Brady plan launched the emerging markets asset class. Their massive volume, coupled with their volatile and procyclical nature, is often associated with a variety of financial and real risks: excess exchange rate volatility (gradual overvaluation and sharp corrections), dollar liquidity crunches, distressed asset sales, and crisis propensity. These risks have changed over time. Emerging market crises in the 1990s and 2000s were inherently driven by financial dollarization and balance sheet effects, the latter were intimately related with capital inflows in the form of growing foreign liability positions. But, now that financial dollarization has receded in the emerging market word (either through debt deleveraging or international reserve accumulation), the focus shifted to the macroeconomic effects of cross market flows, including extended periods of exchange rate misalignment and the amplification of business cycles in a context of large and persistent terms-of-trade shocks and global liquidity swings. Hence, the difficulty of evaluating capital flows based on data mostly from the 1990s and early 2000s. Hence, also, the emphasis on the recent empirical literature that revisits the issue with fresh data and an open mind. |
| Date: | 2015–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp15-025&r=all |
| By: | Gita Gopinath; Sebnem Kalemli-Ozcan; Loukas Karabarbounis; Carolina Villegas-Sanchez |
| Abstract: | Following the introduction of the euro in 1999, countries in the South experienced large capital inflows and low productivity. We use data for manufacturing firms in Spain to document a significant increase in the dispersion of the return to capital across firms, a stable dispersion of the return to labor across firms, and a significant increase in productivity losses from misallocation over time. We develop a model of heterogeneous firms facing financial frictions and investment adjustment costs. The model generates cross-sectional and time-series patterns in size, productivity, capital returns, investment, and debt consistent with those observed in production and balance sheet data. We illustrate how the decline in the real interest rate, often attributed to the euro convergence process, leads to a decline in sectoral total factor productivity as capital inflows are misallocated toward firms that have higher net worth but are not necessarily more productive. We conclude by showing that similar trends in dispersion and productivity losses are observed in Italy and Portugal but not in Germany, France, and Norway. |
| JEL: | D24 E22 F41 O16 O47 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21453&r=all |
| By: | Reinhart, Carmen (Harvard University); Santos, Miguel Angel (Harvard University) |
| Abstract: | The literature on external default has stressed the existence of the so-called debt-intolerance puzzle: developing nations tend to default at debt-to-GDP ratios well bellow those of developed countries. The underestimation or plain omission of domestic debt may account for a fraction of that puzzle. We calculate fiscal revenues coming from financial repression using different methodologies for the case of Venezuela, and look at their correspondence with comprehensive measures of capital flight. In particular, we add to the standard measure of capital flight the over-invoicing of imports, rife in periods of exchange controls. We find that financial repression accounts for public revenues similar to those of OECD economies, in spite of the latter having much higher domestic debt-to-GDP ratios. We also find that financial repression and capital flight are significantly higher in years of exchange controls and interest rate caps. We interpret this as significant evidence suggesting a link between domestic disequilibrium and a weakening of the net foreign asset position via capital flight. |
| JEL: | E66 F32 F34 |
| Date: | 2015–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp15-018&r=all |
| By: | Tarek Alexander Hassan; Thomas Mertens; Tony Zhang |
| Abstract: | We investigate the link between stochastic properties of exchange rates and differences in capital-output ratios across industrialized countries. To this end, we endogenize capital accumulation within a standard model of exchange rate determination with nontraded goods. The model predicts that currencies of countries that are more systemic for the world economy (countries that face particularly volatile shocks or account for a large share of world GDP) appreciate when the price of traded goods in word markets is high. These currencies are better hedges against consumption risk faced by international investors because they appreciate in "bad" states of the world. As a consequence, more systemic countries face a lower cost of capital and accumulate more capital per worker. We estimate our model using data from seven industrialized countries with freely floating exchange rate regimes between 1984-2010 and show that cross-country variation in the stochastic properties of exchange rates accounts for 72% of the cross-country variation in capital-output ratios. In this sense, the stochastic properties of exchange rates map to fundamentals in the way predicted by the model. |
| JEL: | F3 G0 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:21445&r=all |
| By: | Guillermo Escudé (Central Bank of Argentina) |
| Abstract: | A traditional way of thinking about the exchange rate (XR) regime and capital account openness has been framed in terms of the "impossible trinity" or "trilemma", in which policymakers can only have 2 of 3 possible outcomes: open capital markets, monetary independence and pegged XRs. This paper is an extension of Escudé (2012), which focused on interest rate and XR policies, since it introduces the third vertex of the "trinity" in the form of taxes on private foreign debt. These affect the risk-adjusted uncovered interest parity equation and hence influence the SOE´s international financial flows. A useful way to illustrate the range of policy alternatives is to associate them with the faces of a triangle. Each of 3 possible government intervention policies taken individually (in the domestic currency bond market, in the FX market, and in the foreign currency bonds market) corresponds to one of the vertices of the triangle, each of the 3 possible pairs of intervention policies correspond to one of its 3 edges, and the 3 simultaneous intervention policies taken jointly correspond to its interior. This paper shows that this interior, or "possible trinity" is quite generally not only possible but optimal, since the CB obtains a lower loss when it implements a policy with all three interventions. |
| Keywords: | DSGE models, Small Open Economy, monetary and exchange rate policy, capital controls, optimal policy |
| JEL: | E58 O24 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:201563&r=all |
| By: | Eguren-Martin, Fernando (Bank of England) |
| Abstract: | The acceleration in the formation of global imbalances in the period preceding the last financial crisis prompted a revival of the debate on whether exchange rate regimes affect the flexibility of the current account (ie its degree of mean reversion), as originally proposed by Friedman (1953). I analyse this relation systematically using a panel of 180 countries over the 1960–2007 period. In contrast to pioneering work on the subject, I find robust evidence that flexible exchange rate arrangements do deliver a faster current account adjustment among non-industrial countries. Additionally, I try to identify channels through which this effect could be taking place. Evidence suggests that exports respond to expenditure-switching behaviour by consumers when faced with changes in international relative prices. There is mixed evidence of credit acting as an additional avenue of influence. |
| Keywords: | External dynamics; exchange rate regimes; current account imbalances. |
| JEL: | F31 F32 F33 F41 |
| Date: | 2015–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0544&r=all |
| By: | Le Thanh, Binh |
| Abstract: | This paper examines the source of exchange rate fluctuations in Thailand. We employed a structural vector auto-regression (SVAR) model with the long-run neutrality restriction of Blanchard and Quah (1989) to investigate the changes in real and nominal exchange rates from 1994 to 2015. In this paper, we assume that there are two types of shocks which related to exchange rate movements: real shocks and nominal shocks. The empirical analysis indicates that real shocks are the fundamental component in driving real and nominal exchange rate fluctuations. |
| Keywords: | Thailand, real and nominal exchange rates, long run restriction, SVAR |
| JEL: | F3 F31 |
| Date: | 2015–08–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:66322&r=all |
| By: | Mao, Rui (BOFIT); Yao , Yang (BOFIT) |
| Abstract: | This paper empirically studies how a fixed exchange rate regime (FERR) may promote economic growth by undermining the Balassa-Samuelson effect. When total factor produc-tivity (TFP) is faster in the industrial sector than in the non-tradable sectors, an FERR can suppress the Balassa-Samuelson effect if adjustment of domestic prices is subject to nominal rigidities. With WDI data on sectoral value-added and data from the PPP converter provided by the Penn World Table, we are able to estimate the home country’s industrial-service (quasi-) relative-relative TFP in comparison with the United States. Applying those estimates, our econometric exercises then provide robust results that an FERR dampens the Balassa-Samuelson effect and that the real undervaluation that ensues does indeed promote growth. We also explore the channels for undervaluation to promote growth. Lastly, we compare industrial countries and developing countries and find that an FERR has more significant impacts on developing countries than on industrial countries. |
| Keywords: | fixed exchange rate regime; real undervaluation; economic growth |
| JEL: | F31 F43 O41 |
| Date: | 2015–08–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2015_023&r=all |
| By: | Jamal Ibrahim Haidar |
| Abstract: | The Eurozone recent crisis has shown how balance of payments problems in less developed European Monetary Union (EMU) member countries can affect EMU trading partners, spreading the crisis to a larger group of countries. This paper introduces a three-country dynamic general equilibrium model to analyze whether and how terms of trade effects can generate a spillover effect or a currency crisis transmission between countries. Specifically, using a two period model, it incorporates world market clearing conditions for tradables into a new theoretic model, analyzes net capital flow movements between countries, and establishes cross-border macroeconomic linkages. This paper shows how a currency crisis can transmit through the real (trade) sector channel of the economy. |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:309956&r=all |
| By: | Masaaki Fujiiy; Akihiko Takahashi |
| Abstract: | Collateralization with daily margining and the so-called OIS-discounting have become a new standard in the post-crisis financial market. Although there appeared a large amount of literature to deal with a so-called multi-curve framework, a complete picture for a multi-currency setup with currency funding spreads, which are necessary to explain non-zero cross currency basis, can be rarely found since our initial attempts [9, 10, 11]. This note gives an extension of these works regarding a general framework of interest rates for a fully collateralized market. We provide a new formulation of the currency funding spread which is more suitable in the presence of non-zero correlation to the collateral rates. In particular, the last half of the paper is dedicated to develop a discretization of the HJM framework including stochastic collateral rates, LIBORs, foreign exchange rates as well as currency funding spreads with a fixed tenor structure, which makes it readily implementable as a traditional Market Model of interest rates. |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1508.06339&r=all |
| By: | Philip R. Lane (Department of Economics, Trinity College Dublin); |
| Abstract: | This paper examines the cyclical behaviour of country-level macro-financial variables under EMU. Monetary union strengthened the covariation pattern between the output cycle and the Ofinancial cycle, while macro-financial policies at national and area-wide levels were insufficiently counter-cyclical during the 2003-2007 boom period. We critically examine the policy reform agenda required to improve macro-financial stability. |
| Keywords: | EMU, financial stability, macroprudential |
| JEL: | E50 F30 F32 |
| Date: | 2015–08 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:tep0615&r=all |
| By: | Reinhart, Carmen M. (Harvard University); Trebesch, Christoph (Ludwig Maximilian U Munich and CESifo, Munich) |
| Abstract: | This paper studies sovereign debt relief in a long-term perspective. We quantify the relief achieved through default and restructuring in two distinct samples: 1920-1939, focusing on the defaults on official (government to government) debt in advanced economies after World War I; and 1978-2010, focusing on emerging market debt crises with private external creditors. Debt relief was substantial in both eras averaging 21% of GDP in the 1930s and 16% of GDP in recent decades. We analyze the aftermath of debt relief and conduct a difference-in-differences analysis around the synchronous war debt defaults of 1934 and the Baker and Brady initiatives of the 1980s/1990s. The economic landscape of debtor countries improves significantly after debt relief operations, but only if these involve debt write-offs. Softer forms of debt relief, such as maturity extensions and interest rate reductions, are not generally followed by higher economic growth or improved credit ratings. |
| JEL: | E60 F30 H60 N00 |
| Date: | 2015–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp15-028&r=all |