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on Open Economy Macroeconomics |
| By: | Pierre-Olivier Gourinchas; Thomas Philippon; Dimitri Vayanos |
| Abstract: | We provide an empirical and theoretical analysis of the Greek Crisis of 2010. We first benchmark the crisis against all episodes of sudden stops, sovereign debt crises, and lending boom/busts in emerging and advanced economies since 1980. The decline in Greece’s output, especially investment, is deeper and more persistent than in almost any crisis on record over that period. We then propose a stylized macro-finance model to understand what happened. We find that a severe macroeconomic adjustment was inevitable given the size of the fiscal imbalance; yet a sizable share of the crisis was also the consequence of the sudden stop that started in late 2009. Our model suggests that the size of the initial macro/financial imbalances can account for much of the depth of the crisis. When we simulate an emerging market sudden stop with initial debt levels (government, private, and external) of an advanced economy, we obtain a Greek crisis. Finally, in recent years, the lack of recovery appears driven by elevated levels of non-performing loans and strong price rigidities in product markets. |
| JEL: | E2 E3 E4 E5 E6 F3 F4 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22370&r=opm |
| By: | Antonio Fatás; Lawrence H. Summers |
| Abstract: | The global financial crisis has permanently lowered the path of GDP in all advanced economies. At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Our results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output. |
| JEL: | E32 E62 O4 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22374&r=opm |
| By: | Ersal-Kiziler,Eylem; Nguyen,Ha Minh |
| Abstract: | The pattern of debt flows to peripheral European Monetary Union members seems puzzling: they are mostly indirect and channeled through the large countries of the European Monetary Union. This paper examines to what extent the introduction of the euro and the elimination of the intra-area currency risk can explain this puzzle. A three-country dynamic stochastic general equilibrium framework with endogenous portfolio choice and two currencies is developed. In the equilibrium, the core members of the European Monetary Union emerge as the main group of lenders to the peripheral European Monetary Union members. Outside lenders are pushed from the periphery debt markets because of currency risk. The model generates a pattern of debt flows consistent with the data despite the absence of any exogenous frictions or market segmentations. |
| Keywords: | Currencies and Exchange Rates,Debt Markets,Financial Intermediation,Economic Theory&Research,Emerging Markets |
| Date: | 2016–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:7738&r=opm |
| By: | Iyer, Tara (University of Oxford) |
| Abstract: | The majority of households across emerging market economies are excluded from the financial markets and cannot smooth consumption. I analyze the implications of this for optimal monetary policy and the corresponding choice of domestic versus external nominal anchor in a small open economy framework with nominal rigidities, aggregate uncertainty and financial exclusion. I find that, if set optimally, monetary policy smooths the consumption of financially excluded agents by stabilizing their income. Even though Consumer Price Index (CPI) inflation targeting approximates optimal monetary policy when financial inclusion is high, targeting the exchange rate is appropriate if financial inclusion is limited. Nominal exchange rate stability, upon shocks that create trade-offs for monetary policy, directly stabilizes the import component of financially excluded agents’ consumption baskets, which smooths their consumption and reduces macroeconomic volatility. This study provides a counterpoint to Milton Friedman’s long-standing argument for a float. |
| Keywords: | Asymmetric Risk-Sharing; Fixed Exchange Rates; Financial Exclusion; Optimal Monetary Policy; Emerging Market Economies |
| JEL: | E24 E52 F21 F31 F43 |
| Date: | 2016–06–20 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-2016-06&r=opm |
| By: | Hilary Patroba and Leroi Raputsoane |
| Abstract: | This paper tests the ‘cycle is the trend’ hypothesis. We investigate how far permanent and transitory productivity shocks can account for the dynamics observed in the South African business cycle over the period 1946{2014. By estimating a standard small open economy real business cycle model and its financial frictions augmented counterpart, we show that permanent productivity shocks are more important than transitory ones in explaining this country’s business cycle fluctuations. This finding supports the ‘cycle is the trend’ hypothesis in the South African business cycle. The model with financial frictions successfully mimics the downward-sloping high autocorrelation of trade balance to output ratio observed in the data, whereas the benchmark model produces a at autocorrelation function. Financial frictions such as country risk premium shocks help to explain the uctuations in investment and in the trade balance to output ratio. |
| Keywords: | Small open economy, real business cycle, permanent shock, transitory shock, financial frictions, Bayesian |
| JEL: | E13 E32 F41 F44 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:619&r=opm |
| By: | Rangan Gupta (Department of Economics, University of Pretoria); Hylton Hollander (Department of Economics, Stellenbosch University, Stellenbosch) |
| Abstract: | This paper studies the effects of foreign (real) oil price shocks on key macroeconomic variables for South Africa: a net-importer of oil. We develop and estimate a small open economy new-Keynesian dynamic stochastic general equilibrium model with a role for oil in consumption and production. The substitutability of oil for capital and consumption goods is low, import price pass-through is incomplete, domestic and foreign prices and wages are sticky, and the uncovered interest rate parity condition holds imperfectly. Foreign real oil price shocks have a strong and persistent effect on domestic production and consumption activities and, hence, are a fundamental driver of output, inflation and interest rates in both the short- and long-run. Oil price shocks also generate a trade-off between output and inflation stabilisation. As a result, episodes of endogenous tightening of monetary policy slow the recovery of South Africa's real economy. Our findings go further to suggest an important role for oil prices in predicting the South African output during and after the recession that followed the 2008 global financial crisis. |
| Keywords: | Oil shocks, small open economy, DSGE model, South Africa |
| JEL: | E31 E32 E37 E52 Q41 Q43 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201652&r=opm |
| By: | Dias, Daniel A.; Duarte, Joao B. |
| Abstract: | In this paper we provide an alternative explanation for the price puzzle (Sims 1992) based on the effect of monetary policy on housing tenure choice and the weight of the shelter component in overall CPI. In the presence of nominal or financial frictions, when interest rates increase, the real cost of owning a house increases, and this increase may make some people prefer to rent instead of buying. This change in consumption behavior increases the price of rents relative to other goods. Starting in 1983, homeownership costs are based on a measure of implied owner equivalent rent, which is calculated using observed house rents. This change implies that, directly and indirectly, prices in the rental market almost entirely command the shelter component of CPI, which weighs around 30% in the overall index. When we take these two pieces into account and use CPI net of shelter services as a measure of inflation, we obtain impulse responses of prices to a monetary contraction shock more in line with what is predicted by theory. In addition, our results also suggest that inflation is much less persistent than what is implied by analyses using a measure of inflation that includes shelter services. Our results pass a long list of robustness check exercises and compare well against other explanations of the price puzzle. |
| Keywords: | Price puzzle ; Housing tenure choice ; Monetary policy ; SVAR |
| JEL: | E31 E43 R21 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1171&r=opm |
| By: | Habib, Maurizio Michael; Mileva, Elitza; Stracca, Livio |
| Abstract: | We investigate the impact of movements in the real exchange rate on economic growth based on fi?ve-year average data for a panel of over 150 countries in the post Bretton Woods period. Unlike previous literature, we use external instruments to deal with possible reverse causality from growth to the real exchange rate. Our country-specifi?c instruments are (i) global capital ?flows interacted with individual countries' fi??nancial openness and (ii) the growth rate of official reserves. We ?find that a real appreciation (depreciation) reduces (raises) signi?ficantly annual real GDP growth, more than in previous estimates in the literature. However, our results confi?rm this effect only for developing countries and for pegs. JEL Classification: F31, F43 |
| Keywords: | economic growth, instrumental variables, panel data, real exchange rate |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161921&r=opm |
| By: | Vahagn Galstyan (Department of Economics, Trinity College Dublin); Adnan Velic (Dublin Institute of Technology) |
| Abstract: | This paper examines the effects of debt and distortionary labor taxation on the long-run behavior of the relative price of nontraded goods. At the theoretical level, in a two-sector open economy model we demonstrate that higher public debt, associated with higher taxation, contracts labor supply in both traded and nontraded goods sectors. Relative prices move inversely with relative supply shifts which, in turn, depend on relative factor intensities. At the empirical level, for a panel of advanced economies, we find statistically significant effects of public debt and taxes on the relative price of nontraded goods, with higher debt and taxes associated with higher relative prices. |
| Keywords: | labor taxation, public debt, government spending, relative prices |
| JEL: | F00 F41 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:tep0816&r=opm |
| By: | Niepmann, Friederike; Kerl, Cornelia |
| Abstract: | This paper studies how frictions to foreign bank operations affect the sectoral composition of banks’ foreign positions, their funding sources and international bank flows. It presents a parsimonious model of banking across borders, which is matched to bank-level data and used to quantify cross-border frictions. The counterfactual analysis shows how higher barriers to foreign bank entry alter the composition of international bank flows and may reverse the direction of net interbank flows. It also highlights that interbank lending and lending to non-banking firms respond differently to changes in foreign and domestic conditions. Ultimately, the analysis suggests that policies that change cross-border banking frictions and, thereby, the composition of banks’ foreign activities affect how shocks are transmitted across borders. |
| Keywords: | Global banks ; Interbank market ; International bank flows ; Cross-border banking |
| JEL: | F21 F23 F30 G21 |
| Date: | 2016–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1170&r=opm |
| By: | Oasis Kodila-Tedika (Université de Kinshasa Département d’Eco); Simplice Asongu (Yaoundé/Cameroun); Matthias Cinyabuguma (The World Bank Group) |
| Abstract: | Using cross-country differences in the degree of isolation before the advent of technologies in sea and air transportation, we assess the relationship between geographic isolation and financial development across the globe. We find that pre-historic geographical isolation has been beneficial to development because it has contributed to contemporary cross-country differences in financial development. The relationship is robust to alternative samples, different estimation techniques, outliers and varying conditioning information sets. |
| Keywords: | Financial development; Isolation; Agglomeration; Globalization |
| JEL: | F15 G15 N7 O16 O50 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:agd:wpaper:16/014&r=opm |
| By: | Maria V. Sokolova (IHEID, The Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | This paper shows that a regional bias resulting from trade integration alters the transmission of a country’s monetary policy by shifting the burden of the exchange rate adjustment towards the less integrated trading partners. I first develop a simple model which illustrates how a concentration of trade flows among regional trading partners affects the sensitivity of the trade balance to the terms-of-trade. In particular, the trade balance becomes less sensitive to the terms-of-trade vis-a-vis regional partners and more sensitive to the terms-of-trade vis-a-vis the other country. I then test the implication of the model using a panel of 133 countries between 1985 - 2010 that includes information on Regional Trade Agreements (RTA). I find that movements in the terms-of-trade vis-a-vis non-RTA members affect a country’s trade balance, while movements vis-a-vis RTA partners do not. |
| Keywords: | trade balance, regional trade agreements, competitive depreciation, economic integration, terms-of-trade |
| JEL: | F10 F13 F14 F15 F40 F41 F45 |
| Date: | 2016–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp05-2016&r=opm |
| By: | Simón Sosvilla Rivero (Departamento de Economía Cuantitativa, Facultad de Ciencias Económicas y Empresariales, Universidad Complutense de Madrid.); Maria del Carmen Ramos Herrera (Departamento de Economía Cuantitativa, Facultad de Ciencias Económicas y Empresariales, Universidad Complutense de Madrid.) |
| Abstract: | This paper attempts to identify implicit exchange rate regimes for currencies of new European Union (EU) countries vis-à-vis the euro. To that end, we apply three sequential procedures that consider the dynamics of exchange rates to data covering the period from 1999:01 to 2012:12. Our results would suggest that implicit bands have existed in many sub-periods for almost all currencies under study. This paper provides new empirical evidence that strengthens the hypothesis of that the implemented policies differ from those announced by the monetary authorities, identifying the existence of de facto fixed monetary systems along large number of sub-periods for different currencies. |
| Keywords: | Exchange-rate regimes; Implicit fluctuation bands; Exchange rates. |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:wpaper:1502&r=opm |