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on Open Economy Macroeconomics |
| By: | Shengxing Zhang (London School of Economics); Keyu Jin (London School of Economics) |
| Abstract: | We analyze a two country stochastic open-economy framework in which countries differ in their ability to create liquid assets. We examine the consequences of this asymmetry on international asset prices and asset creation. Higher volatility, financial integration of emerging markets drive up the liquidity premium of assets created in advanced economies, and also stimulate the latter's production of liquid assets. Financial development (innovation) in advanced economies, on the other hand, also drive up the liquidity premium of these assets, and boost growth in both economies. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1253&r=opm |
| By: | Bacchetta, Philippe; Merrouche, Ouarda |
| Abstract: | Despite international financial disintegration, we document a dramatic increase in dollar borrowing among leveraged Eurozone corporates during the Great Financial Crisis. Using loan-level data, we trace this increase to the twin crisis in the credit market and in funding markets. The reduction in the supply of credit by Eurozone banks caused riskier borrowers to shift to foreign banks, in particular US banks. The coincident rise in the relative cost of euro wholesale funding and the disruptions in the FX swap market caused a rise in dollar borrowing from US banks, especially for firms in export-oriented sectors. Although global bank lending is often reported to amplify the international credit cycle, we show that foreign banking acted as a shock absorber that weathered the real consequences of the credit crunch in Europe. |
| Keywords: | corporate debt; credit crunch; foreign banks; money market |
| JEL: | E44 G21 G30 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10927&r=opm |
| By: | Olivier Blanchard (Peterson Institute for International Economics); Gustavo Adler (International Monetary Fund); Irineu de Carvalho Filho (International Monetary Fund) |
| Abstract: | Many emerging-market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross-country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows. |
| Keywords: | foreign exchange intervention, exchange rate, capital flows, gross capital flows |
| JEL: | E42 E58 F31 F40 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp15-18&r=opm |
| By: | Steven Riddiough (University of Warwick); Lucio Sarno (City University London); Pasquale Della Corte (Imperial College London) |
| Abstract: | We show that a global imbalance risk factor that captures the spread in countries' external imbalances and their propensity to issue external liabilities in foreign currency explains the cross-sectional variation in currency excess returns. The economic intuition is simple: net debtor countries offer a currency risk premium to compensate investors willing to finance negative external imbalances because their currencies depreciate in bad times. This mechanism is consistent with recent exchange rate theory based on capital flows in imperfect financial markets. We also find that the global imbalance factor is priced in the cross sections of other major asset markets. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1215&r=opm |
| By: | Bart Hobijn (Federal Reserve Bank of San Francisco); John Fernald (Federal Reserve Bank of San Francisco) |
| Abstract: | We construct a measure of global TFP growth that covers output of the world's forty largest economies. We decompose this measure to address questions such as, which countries and industries are the main sources of global productivity growth? And how has globalization, by reducing misallocation of resources across global producers, contributed to world productivity? We thus quantify how the world production frontier has shifted out over time and, in a proximate sense, the geographic and industry sources of growth. We also discuss the geographic and industry sources of cost pressures, as well as the extent to which reallocation reflects relative unit production costs. Among other findings, reduced misallocation was more important in the 1990s than in the 2000s. And TFP growth in frontier economies slowed in the runup to the Great Recession. But world TFP growth remained strong because of a speedup in TFP growth in emerging economies. Finally, we discuss implications for understanding patterns of world trade. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed015:1235&r=opm |
| By: | Hertrich, Markus |
| Abstract: | In the aftermath of the recent financial crisis, the central banks of small open economies such as the Czech National Bank and the Swiss National Bank (SNB) both implemented a unilateral one-sided exchange rate target zone vis-a-vis the euro currency to counteract deflationary pressures. Recently, the SNB abandoned its minimum exchange rate regime of CHF 1.20 per euro, arguing that after having analyzed the costs and benefits of this non-standard exchange rate policy measure, it was no longer sustainable. This paper proposes a model that allows central banks to estimate ex-ante the costs of implementing and maintaining a unilateral one-sided target zone and to monitor these costs during the period where it is enforced. The model also offers central banks a tool to identify the right timing for the discontinuation of a minimum exchange rate regime. An empirical application to the Swiss case shows the actual size of these costs and reveals that these costs would have been substantial without the abandonment of the minimum exchange rate regime, which accords with the official statements of the SNB. |
| Keywords: | Foreign exchange reserves, minimum exchange rate, reflected geometric Brownian motion, target zone costs, Swiss National Bank |
| JEL: | E42 E52 E58 E6 E63 F33 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:67839&r=opm |
| By: | Jacob Gyntelberg; Mico Loretan; Tientip Subhanij |
| Abstract: | We demonstrate empirically that not all international capital flows influence exchange rates equally. Capital flows induced by foreign investors' transactions in local stock markets have an impact on exchange rates that is both economically significant and permanent, whereas capital flows induced by foreign investors' transactions in the local government bond market do not. We relate the differences in the price impacts of capital flows to differences in the amounts of private information conveyed by these flows. Our empirical findings are based on novel, daily-frequency datasets on prices and quantities of all transactions undertaken by foreign investors in the stock, bond, and onshore FX markets of Thailand. |
| Keywords: | Order flow, private information, exchange rate models, market microstructure, emerging markets |
| JEL: | C22 E58 F31 F37 G14 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2015-12&r=opm |
| By: | Kyriakos C. Neanidis |
| Abstract: | In this paper, we examine the links among macro-prudential regulation, the volatility of financial flows, and economic growth. In particular, we explore whether macroprudential regulation mitigates the adverse effects of capital flows volatility on economic growth. Using cross-country data for the period 1973-2013, we find that macroprudential regulation promotes economic growth by reducing the negative impact of volatile capital flows. The findings hold for both aggregate capital flows and their various components, while they are also robust for various indicators of macro-prudential policies. The results support the argument that macro-prudential policy rules designed to ensure financial stability are beneficial to long-run economic growth. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:215&r=opm |
| By: | Stefano Bosi (EPEE - Université d'Evry-Val d'Essonne); Cuong Le Van (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, IPAG - Business School); Ngoc-Sang Pham (EPEE - Université d'Evry-Val d'Essonne) |
| Abstract: | We build dynamic general equilibrium models with heterogeneous producers and financial market imperfections. First, we prove the existence of equilibrium. Second, we investigate the role of financial market imperfection in growth and land prices. Third, we introduce land dividends, then define and study land bubbles as well as individual land bubbles. |
| Keywords: | Infinite horizon,general equilibrium,financial market imperfection,land bubbles |
| Date: | 2015–09 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-01223969&r=opm |
| By: | Alberto Botta; Antoine Godin; Marco Missaglia |
| Abstract: | In recent years, Colombia has grown relatively rapidly, but it has been a biased growth. The energy sector (the "locomotora minero-energetica," to use the rhetorical expression of President Juan Manuel Santos) grew much faster than the rest of the economy, while the manufacturing sector registered a negative rate of growth. These are classic symptoms of the well-known "Dutch disease," but our purpose here is not to establish whether or not the Dutch disease exists, but rather to shed some light on the financial viability of several, simultaneous dynamics: (1) the existence of a traditional Dutch disease being due to a large increase in mining exports and a significant exchange rate appreciation; (2) a massive increase in foreign direct investment, particularly in the mining sector; (3) a rather passive monetary policy, aimed at increasing purchasing power via exchange rate appreciation; (4) and more recently, a large distribution of dividends from Colombia to the rest of the world and the accumulation of mounting financial liabilities. The paper shows that these dynamics constitute a potential danger for the stability of the Colombian economy. Some policy recommendations are also discussed. |
| Keywords: | Colombia; Dutch disease; Balance of payments |
| JEL: | F21 F32 F40 |
| Date: | 2015–11 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_853&r=opm |
| By: | Danica Unevska-Andonova (National Bank of the Republic of Macedonia); Dijana Janevska-Stefanova (National Bank of the Republic of Macedonia) |
| Abstract: | In the analysis of public and external debt sustainability the National Bank of the Republic of Macedonia is actively using the IMF’s Debt Sustainability Analysis (DSA) framework. The aim of our analysis is to improve the analytical power of the IMF’s DSA framework, in the case of Macedonia. This paper uses simple framework, based on methodology used in Adler and Sosa (2013), that integrates econometric estimates of the effect of global factors on key domestic variables that determine public and external debt dynamics, within the IMF‘s standard debt sustainability framework. VAR estimation is used in obtaining the forecasts of key domestic variables, conditional on a set of assumed global variables under different global shock scenarios. The results in general suggest that under all shock scenarios, there is negative effect to domestic GDP, however in the case of current account there is negative effect in the beginning of the period of applied shocks, but positive in the later period. Consequently, the expected effect to public debt sustainability is negative for the whole period due to lower real GDP growth. However, regarding external debt sustainability, negative effect is expected in the first year or two due to lower GDP growth and higher current account deficit, yet, in a medium run, external sustainability might not be jeopardized as the lower GDP growth might be neutralized by the lower current account deficit. |
| Keywords: | public debt, external debt, debt sustainability, Macedonia |
| JEL: | C32 E60 F42 F47 |
| Date: | 2015–10 |
| URL: | http://d.repec.org/n?u=RePEc:mae:wpaper:2015-10&r=opm |