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on Open Economy Macroeconomics |
| By: | Robert Kollmann; Beatrice Pataracchia; Rafal Raciborski; Marco Ratto; Werner Roeger; Lukas Vogel |
| Abstract: | The global financial crisis (2008-09) led to a sharp contraction in both Euro Area (EA) and US real activity, and was followed by a long-lasting slump. However, the post-crisis adjustment in the EA and the US shows striking differences -in particular, the EA slump has been markedly more protracted. We estimate a three-region (EA, US and Rest of World) New Keynesian DSGE model (using quarterly data for 1999-2014) to quantify the drivers of the divergent EA and US adjustment paths. Our results suggest that financial shocks were key drivers of the 2008-09 Great Recession, for both the EA and the US. The post-2009 slump in the EA mainly reflects a combination of adverse aggregate demand and supply shocks, in particular lower productivity growth, and persistent adverse shocks to capital investment, linked to the continuing poor health of the EA financial system. Adverse financial shocks were less persistent for the US. The financial shocks identified by the model are consistent with observed performance indicators of the EA and US banking systems. |
| Keywords: | Post-crisis slump, Euro Area, United States, estimated DSGE model, demand and supply shocks and financial shocks |
| JEL: | F4 F3 E2 E3 E5 E6 C5 |
| Date: | 2016–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2016-10&r=opm |
| By: | Marc-André Letendre; Joel Wagner |
| Abstract: | We add agency costs as in Carlstrom and Fuerst (1997) into a two-country, two-good international business-cycle model. In our model, changes in the relative price of investment arise endogenously. Despite the fact that technology shocks are uncorrelated across countries, the relative price of investment is positively correlated across countries in our model, much as it is in detrended U.S./euro area data. We also find that the financial frictions tend to increase the volatility of the terms of trade and the international correlations of consumption, hours worked, output and investment. We then compare this model to an alternative model that also includes risk shocks à la Christiano, Motto and Rostango (2014). We use credit spread data (for the United States) to calibrate the AR(1) process for risk shocks. We find that risk shocks are too small to significantly impact the model’s dynamics. |
| Keywords: | Business fluctuations and cycles, International topics |
| JEL: | E22 E32 E44 F44 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:16-2&r=opm |
| By: | Christian Ebeke; Armand Fouejieu |
| Abstract: | This paper investigates the effects of the adoption of inflation targeting (IT) on the choice of exchange rate regime in emerging markets (EMs), conditional on certain macroeconomic conditions. Using a large sample of EMs and after controlling for the selection bias associated with the adoption of IT, we find that IT countries on average have a relatively more flexible exchange rate regime than other EMs. However, the flexibility of the exchange rate regime shows strong heterogeneity among IT countries depending on their degree of openness and exposure to FX risks. Moreover, we find that the marginal effect of IT adoption on the exchange rate flexibility increases with the duration of the IT regime in place, and with the propensity scores to adopt it. |
| Date: | 2015–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/228&r=opm |
| By: | Atulan Guha (Indian Institute of Management Kashipur) |
| Abstract: | In the context of explaining exchange rate behaviour theories pertaining to the latter have been negligent with regard to the role of foreign exchange reserve. Either it has been excluded as a determinant or treated as a mere residual factor. Yet foreign exchange reserve has been playing a reasonably important role in determining the nominal exchange rate of countries, more specifically for developing countries with current account deficits coupled with substantial capital account surpluses leading to growth in growing foreign exchange reserve. This characteristic of the developing countries shares a similarity with India’s external balances. It may not hold true for the countries with currencies used as international money to a reasonable extent. This paper develops a theoretical framework, in order to understand the exchange rate movement for developing countries by keeping foreign exchange reserve in conjunction with capital flows at the centre stage. It also suggests that the movement of speculative capital needs to be restricted to avoid a currency crisis. |
| Keywords: | Exchange Rate, Foreign Exchange Reserve, Speculative Capital Flows |
| JEL: | F31 F32 F41 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:3305716&r=opm |
| By: | Wenyi Shen; Susan S. Yang; Luis-Felipe Zanna |
| Abstract: | Despite the voluminous literature on fiscal policy, very few papers focus on low-income countries (LICs). This paper develops a new-Keynesian small open economy model to show, analytically and through simulations, that some of the prevalent features of LICs—different types of financing including aid, the marginal efficiency of public investment, and the degree of home bias—play a key role in determining the effects of fiscal policy and related multipliers in these countries. External financing like aid increases the resource envelope of the economy, mitigating the private sector crowding out effects of government spending and pushing up the output multiplier. The same external financing, however, tends to appreciate the real exchange rate and as a result, traded output can respond quite negatively, reducing the overall output multiplier. Although capital scarcity implies high returns to public capital in LICs, declines in public investment efficiency can substantially dampen the output multiplier. Since LICs often import substantial amounts of goods, public investment may not be as effective in stimulating domestic production in the short run. |
| Keywords: | Africa;Fiscal Policy, Low-income Countries, Public Investment, Fiscal Multipliers, Small Open DSGE Models, Aid, investment, government spending, exchange rate, exchange, Fiscal and Monetary Policy in Development, Open Economy Macroeconomics, All Countries, |
| Date: | 2015–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:15/286&r=opm |
| By: | Jonida Bollano (Bank of Albania); Delina Ibrahimaj (Bank of Albania) |
| Abstract: | This paper empirically investigates the determinants of current accounts for a sample of 11 Central and East European Countries outside the Euro area. To this end we rely on the estimation of a panel VAR model with fixed effects over the period Q1 2005 to Q42014. Consistent with existing literature, we show that domestic GDP, the fiscal deficit, and the real effective exchange rate are key determinants of the current accounts of these countries. The dynamic relationships revealed in the paper complement the empirical literature on several fronts by providing new evidence from these emerging market economies. |
| Keywords: | Current account determinants, Central East Europe, P-VAR, GMM estimation |
| JEL: | F31 F32 F41 F42 |
| Date: | 2015–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:iheidwp22-2015&r=opm |
| By: | Dilem Yıldırım (Department of Economics, METU); Ethem Erdem Orman (Republic of Turkey Prime Ministry Undersecretariat of Treasury) |
| Abstract: | This study explores the empirical validity of the Feldstein-Horioka puzzle for China in the presence of structural breaks. To this end, we employ the recently proposed multiple-break cointegration test of Maki (2012), along with the one-break Gregory and Hansen (1996) cointegration test. Once the existence of the cointegration between domestic savings and investment is ensured by allowing for endogenous structural breaks, Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) estimation procedures are implemented to obtain reliable inferences from the cointegrating regression. Empirical results reveal that the relationship between Chinese domestic savings and investment has changed with the regime shift towards flexible exchange rates and the 2008-2009 global financial crises. More specifically, with the introduction of managed floating exchange rate regime, a substantial reduction is observed in the almost unitary saving retention coefficient of the fixed exchange rate period. Furthermore, the correlation has experienced a slight increase since 2009, which coincides with the worldwide protectionist policies adopted in the depth of the global financial crisis. |
| Keywords: | Feldstein-Horioka puzzle, saving-investment association, capital mobility, exchange rate regimes, 2008-2009 global financial crises, cointegration, structural breaks, China |
| JEL: | E21 E22 F21 C22 C51 G01 |
| Date: | 2016–01 |
| URL: | http://d.repec.org/n?u=RePEc:met:wpaper:1601&r=opm |