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on Open Economy Macroeconomics |
| By: | Farhi, Emmanuel; Tirole, Jean |
| Abstract: | The recent unravelling of the Eurozone’s financial integration raised concerns about feedback loops between sovereign and banking insolvency, and provided an impetus for the European banking union. This paper provides a “double-decker bailout” theory of the feedback loop that allows for both domestic bailouts of the banking system by the domestic government and sovereign debt forgiveness by international creditors or solidarity by other countries. Our theory has important implications for the re-nationalization of sovereign debt, macroprudential regulation, and the rationale for banking unions. |
| Keywords: | bailouts; feedback loop; shared supervision; sovereign and corporate spreads; sovereign default |
| JEL: | F34 F36 G28 H63 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11024&r=opm |
| By: | di Giovanni, Julian; Levchenko, Andrei A.; Mejean, Isabelle |
| Abstract: | This paper investigates the role of individual firms in international business cycle comovement using data covering the universe of French firm-level value added, bilateral imports and exports, and cross-border ownership over the period 1993-2007. At the micro level, controlling for firm and country effects, trade in goods with a particular foreign country is associated with a significantly higher correlation between a firm and that foreign country. In addition, foreign multinational affiliates operating in France are significantly more correlated with the source economy. The impact of direct trade and multinational linkages on comovement at the micro level has significant macro implications. Because internationally connected firms are systematically larger than non-internationally connected firms, the firms directly linked to foreign countries represent only 8% of all firms, but 56% of all value added, and account for 75% of the observed aggregate comovement. Without those linkages the correlation between France and foreign countries would fall by about 0.091, or one-third of the observed average business cycle correlation of 0.29 in our sample of partner countries. These results are evidence of transmission of business cycle shocks through direct trade and multinational ownership linkages at the firm level. |
| Keywords: | comovement; firm-level shocks; international trade; large firms |
| JEL: | F44 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11036&r=opm |
| By: | Heathcote, Jonathan; Perri, Fabrizio |
| Abstract: | In a standard two-country international macro model, we ask whether imposing restrictions on international non contingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. We identify calibrations in which symmetric capital controls improve terms of trade insurance against country-specific shocks and thereby increase welfare for both countries. |
| Keywords: | capital controls; international risk sharing; terms of trade |
| JEL: | F32 F41 F42 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11080&r=opm |
| By: | Cesa-Bianchi, Ambrogio; Imbs, Jean; Saleheen, Jumana |
| Abstract: | It is well known that the bulk of international financial flows across countries are driven by common shocks. In response to these common shocks, we find that capital tends to flow systematically between the same types of countries, while the discrepancy between GDP growth rates widens. Thus, in the data synchronization falls when financial linkages rise, but only so in response to common shocks. In contrast, financial linkages tend to increase the synchronization of business cycles in response to purely country-specific shocks. |
| Keywords: | Business Cycle Synchronization; Common Shocks; Contagion; Financial Linkages; Idiosyncratic Shocks |
| JEL: | E32 F15 F36 G21 G28 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11037&r=opm |
| By: | Margarida Duarte; Diego Restuccia |
| Abstract: | The relative price of services rises with development. A standard interpretation of this fact is that productivity differences across countries are larger in manufacturing than in services. The service sector comprises heterogeneous categories. We document the behavior of relative prices and expenditure shares across two broad classifications of services: traditional services, such as health and education, featuring a rising relative price with development, and non-traditional services, such as communication and transportation, featuring a falling relative price. We find a strong reallocation of real expenditures from traditional to non-traditional services with development. Using a standard multi-sector model extended to incorporate an input-output structure, we show that cross-country productivity differences are much larger in non-traditional services (a factor of 106.5-fold between rich and poor countries) than in manufacturing (only 24.5-fold). Moreover, the productivity difference between non-traditional services and manufacturing is reduced by half when abstracting from intermediate inputs. Development requires solving the productivity problem in non-traditional services in poor countries. |
| Keywords: | Productivity, services, input-output structure, non-traditional services. |
| JEL: | O1 O4 E0 |
| Date: | 2016–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-555&r=opm |
| By: | Han, Xuehui; Wei, Shang-Jin |
| Abstract: | This paper re-examines international transmissions of monetary policy shocks from advanced economies to emerging market economies. It combines three novel features. First, it separates co-movement in monetary policies due to common shocks from spillovers of monetary policies from advanced to peripheral economies. Second, it uses surprises in growth and inflation and the Taylor rule to gauge desired changes in a country’s interest rate if it focuses only on growth and inflation goals. Third, it proposes a specification that can work with the quantitative easing episodes when no changes in US interest rate are observed. We find that a flexible exchange rate regime per se does not deliver monetary policy autonomy (in contrast to the conclusions of Obstfeld (2015) and several others). Instead, some form of capital control appears necessary. Interestingly, a combination of capital controls and a flexible exchange rate may provide the most buffer for developing countries against foreign monetary policy shocks. |
| Keywords: | capital control; exchange rate regime; monetary policy independence; Taylor Rule; trilemma |
| JEL: | E42 E43 E52 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11070&r=opm |
| By: | Brendon, Charles; Corsetti, Giancarlo |
| Abstract: | We review the recent literature on macroeconomic stabilisation policy, with a particular focus on two major challenges that are particular to the post-crisis land- scape. These are, first, how to provide meaningful economic stimulus when the zero lower bound on nominal interest rates is binding. Second, how to design a stabilisation policy for the Eurozone that will remedy the large macroeconomic imbalances among member states. |
| Keywords: | Euro-area crisis; Global Crisis; Stabilization Policies; Zero Lower Bound |
| JEL: | E31 E32 E52 E58 E62 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11088&r=opm |
| By: | Eichengreen, Barry; Lafarguette, Romain; Mehl, Arnaud |
| Abstract: | We analyze the impact of technology on production and trade in services, focusing on the foreign exchange market. We identify exogenous technological changes by the connection of countries to submarine fiber-optic cables used for electronic trading, but which were not laid for purposes related to the foreign exchange market. We estimate the impact of cable connections on the share of offshore foreign exchange transactions. Cable connections between local markets and matching servers in the major financial centers lower the fixed costs of trading currencies and increase the share of currency trades occurring onshore. At the same time, however, they attenuate the effect of standard spatial frictions such as distance, local market liquidity, and restrictive regulations that otherwise prevent transactions from moving to the major financial centers. Our estimates suggest that the second effect dominates. Technology dampens the impact of spatial frictions by up to 80 percent and increases, in net terms, the share of offshore trading by 21 percentage points. Technology also has economically important implications for the distribution of foreign exchange transactions across financial centers, boosting the share in global turnover of London, the world’s largest trading venue, by as much as one-third. |
| Keywords: | exogeneity; foreign exchange market; geography; submarine fiber-optic cables; technology |
| JEL: | F30 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11053&r=opm |
| By: | Acharya, Sushant (Federal Reserve Bank of New York); Bengui, Julien (Federal Reserve Bank of New York) |
| Abstract: | This paper explores the role of capital flows and exchange rate dynamics in shaping the global economy’s adjustment in a liquidity trap. Using a multi-country model with nominal rigidities, we shed light on the global adjustment since the Great Recession, a period when many advanced economies were pushed to the zero bound on interest rates. We establish three main results. First, when the North hits the zero bound, downstream capital flows alleviate the recession by reallocating demand to the South and switching expenditure toward North goods. Second, a free capital flow regime falls short of supporting efficient demand and expenditure reallocations and induces too little downstream (upstream) flows during (after) the liquidity trap. And third, when it comes to capital flow management, individual countries’ incentives to manage their terms of trade conflict with aggregate demand stabilization and global efficiency. This underscores the importance of international policy coordination in liquidity trap episodes. |
| Keywords: | capital flows; international spillovers; liquidity traps; uncovered interest parity; capital flow management; policy coordination; optimal monetary policy |
| JEL: | E52 F32 F42 F44 |
| Date: | 2016–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:765&r=opm |
| By: | Olivier Cardi (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique, Université François Rabelais - Tours); Romain Restout (UCL - Université Catholique de Louvain, BETA - Bureau d'Economie Théorique et Appliquée - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | We use a two-sector neoclassical open economy model with traded and non-traded goods and endogenous markups to investigate the effects of temporary fiscal shocks. One central finding is that theory can be reconciled with evidence once we allow for endogenous markups and assume that the traded sector is more capital intensive than the non-traded sector. More precisely, while both ingredients are essential to produce the real exchange rate depreciation, only the second ingredient is necessary to account for the simultaneous decline in investment and the current account, in line with the evidence. |
| Keywords: | Non-traded Goods, Fiscal Shocks, Investment, Current Account, Endogenous markup. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01252524&r=opm |
| By: | Rey, Hélène |
| Abstract: | This lecture argues that the Global Financial Cycle is a challenge for the validity of the Mundellian trilemma. I present evidence that US monetary policy shocks are transmitted internationally and affect financial conditions even in inflation targeting economies with large financial markets. Hence flexible exchange rates are not enough to guarantee monetary autonomy in a world of large capital flows. |
| Keywords: | Global Financial Cycle; Monetary Policy; Trilemma |
| JEL: | F33 F41 F42 |
| Date: | 2015–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11027&r=opm |