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on Open Economy Macroeconomics |
| By: | Alberto Cavallo; Roberto Rigobon |
| Abstract: | New data-gathering techniques, often referred to as “Big Data” have the potential to improve statistics and empirical research in economics. In this paper we describe our work with online data at the Billion Prices Project at MIT and discuss key lessons for both inflation measurement and some fundamental research questions in macro and international economics. In particular, we show how online prices can be used to construct daily price indexes in multiple countries and to avoid measurement biases that distort evidence of price stickiness and international relative prices. We emphasize how Big Data technologies are providing macro and international economists with opportunities to stop treating the data as “given” and to get directly involved with data collection. |
| JEL: | E31 F3 F4 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22111&r=opm |
| By: | Robert Kollmann |
| Abstract: | This paper analyzes the effects of output volatility shocks on the dynamics of consumption, trade flows and the real exchange rate, in a two-country, two-good world with consumption home bias, recursive preferences, and complete financial markets. When the risk aversion coefficient exceeds the inverse of the intertemporal substitution elasticity, then an exogenous rise in a country’s output volatility triggers a wealth transfer to that country, to compensate for the greater riskiness of the country’s output stream. This risk sharing transfer raises the country’s consumption, lowers its trade balance and appreciates its real exchange rate. In the recursive preferences framework here, volatility shocks account for a non-negligible share of the fluctuations of net exports, net foreign assets and the real exchange rate. These shocks help to explain the high empirical volatility of the real exchange rate and the disconnect between relative consumption and the real exchange rate. |
| Keywords: | international business cycles; international risk sharing; external balance; exchange rate; volatility; consumption-real exchange rate anomaly |
| JEL: | F31 F32 F36 F41 F43 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/228794&r=opm |
| By: | Matthieu Bussière; Julia Schmidt; Natacha Valla |
| Abstract: | This policy brief documents recent trends in international financial flows, based on a newly assembled dataset covering 40 advanced and emerging countries. Specifically, we compare the period since 2012 with the pre-crisis period and highlight four key stylized facts. First, the “Great Retrenchment” that took place during the crisis has proved very persistent, and world financial flows are now down to half their pre-crisis levels. Second, this fall can predominantly be related to advanced economies, especially those in Western Europe, while emerging markets, except Eastern European countries, have been less severely affected until recently. Third, the global patterns of net flows have also recorded significant changes. Overall, net flows have fallen substantially relative to the years preceding the sudden stop, which is to some extent an expression of the changes registered in the current account. Fourth, not all types of flows have shown the same degree of resilience, resulting in a profound change in the composition of international financial flows: while banking flows, which used to account for the largest share of the total before 2008, have collapsed, FDI flows have been barely affected and now represent roughly 45% of global flows. Portfolio flows stand between these two extremes, and within them equity flows have proved more robust than debt flows, which should help to strengthen resilience and deliver genuine cross-border risk-sharing. Having highlighted these stylized facts, this policy brief turns to possible explanations for and likely implications of these changes, regarding international financial stability issues. |
| Keywords: | international financial flows;capital controls;macroprudential policy;financial stability;global imbalances |
| JEL: | F32 F36 F41 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepipb:2016-10&r=opm |
| By: | Frederic Ganon (University of Le Havre - EDEHN); Gilles Le Garrec (OFCE Sciences PO); Vincent Touzé (OFCE, Sciences Po) |
| Abstract: | This paper analyses how the economic, demographic and institutional differences between two regions -one developed and called the North, the other emerging and called the South- drive the international capital flows and explain the world economic equilibrium. To this end, we develop a simple two-period OLG model. We compare closed-economy and open-economy equilibria. We consider that openness facilitates convergence of South’s characteristics towards North’s. We examine successively the consequences of a technological catching-up, a demographic transition and an institutional convergence of pension schemes. We determine the analytical solution of the dynamics of the world interest rate and deduce the evolution of the current accounts. These analytical results are completed by numerical simulations. They show that the technological catching-up alone leads to a welfare loss for the North in reason of capital flows towards the South. If we add to this first change a demographic transition, the capital demand is reduced in the South whereas its saving increases in reason of a higher life expectancy. These two effects contribute to reduce the capital flows from the North to the South. Finally, an institutional convergence of the two pension schemes reduces the South’s saving rate which increases the capital flow from the North to the South. |
| Keywords: | International Capital flows, OLG, Economic convergence, demographic transition |
| JEL: | D91 F40 J10 O33 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:1609&r=opm |
| By: | Vahagn Galstyan (Department of Economics, Trinity College Dublin); Adnan Velic (Dublin Intitute of Technology) |
| Abstract: | In this paper we empirically analyze nonlinearities in short-run real exchange rate dynamics. Our findings suggest that real exchange rate misalignments are considerably less persistent and more volatile during times of high debt. Assessing the variance of changes in misalignments, we retrieve evidence indicating that the nominal exchange rate and inflation differentials are more important determinants in states of high debt than in states of low debt. Overall, our results imply that nonlinearities have non-negligible implications for the mechanics of real exchange rate adjustment in emerging markets. |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:tep0416&r=opm |
| By: | Olivier Jeanne; Damiano Sandri |
| Abstract: | Financially closed economies insure themselves against current-account shocks using international reserves. We characterize the optimal management of reserves using an open-economy model of precautionary savings and emphasize several results. First, the welfare-based opportunity cost of reserves differs from the measures often used by practitioners. Second, under plausible calibrations the model is consistent with the rule of thumb that reserves should be close to three months of imports. Third, simple linear rules can capture most of the welfare gains from optimal reserve management. Fourth, policymakers should place more emphasis on how to use reserves in response to shocks than on the reserve target itself. |
| JEL: | F32 F41 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22139&r=opm |
| By: | Vincent Duwicquet (CLERSE - Centre lillois d'études et de recherches sociologiques et économiques - CNRS - Centre National de la Recherche Scientifique - Université Lille 1 - Sciences et technologies); Jacques Mazier (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - Université Sorbonne Paris Cité (USPC) - CNRS - Centre National de la Recherche Scientifique); Jamel Saadaoui (BETA - Bureau d'Economie Théorique et Appliquée - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The euro crisis shed lights on the nature of alternative adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, it remains very few efficient alternative mechanisms. At the level of the whole eurozone the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. This paper gives a new evaluation of these exchange rate misalignments inside the eurozone, using a FEER approach, and examines the evolution of competitiveness. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and Eurobonds issuance. Three main results are found. Firstly, facing a competitiveness loss in southern countries due to exchange rates misalignments, increasing intra-European financing by banks of northern countries or other institutions could contribute to reduce the debt burden and induce a partial recovery but public debt would increase. Secondly, the implementation of Eurobonds as a tool to partially mutualize European sovereign debt would have a rather similar positive impact, but with a public debt limited to 70 percent of GDP. Finally, Eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire zone with stabilized current account imbalances. However, the creation of a European institution in charge of the issuance of the Eurobonds would face strong political obstacles. |
| Keywords: | Euro Crisis, Exchange Rate Misalignments, Eurobonds, Interest Rate |
| Date: | 2016–03–23 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cepnwp:hal-01295438&r=opm |