nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒10‒09
eight papers chosen by
Martin Berka
University of Auckland

  1. On What States Do Prices Depend? Answers from Ecuador By Craig Benedict; Mario J. Crucini; Anthony Landry
  2. Real Interest Rates over the Long Run By Yi, Kei-Mu; Zhang, Jing
  3. Sovereign Risk, Currency Risk, and Corporate Balance Sheets By Wenxin Du; Jesse Schreger
  4. Gravity in FX R^{2}: Understanding the Factor Structure in Exchange Rates By Lustig, Hanno; Richmond, Robert J.
  5. International Banking and Cross-Border Effects of Regulation : Lessons from the United States By Jose M. Berrospide; Ricardo Correa; Linda S. Goldberg; Friederike Niepmann
  6. Why Are Exchange Rates So Smooth? A Segmented Asset Markets Explanation By Chien, YiLi; Lustig, Hanno; Naknoi, Kanda
  7. Monetary Policy Rule, Exchange Rate Regime, and Fiscal Policy Cyclicality in a Developing Oil Economy By Algozhina, Aliya
  8. The euro as an international currency By Agnès Bénassy-Quéré

  1. By: Craig Benedict; Mario J. Crucini; Anthony Landry
    Abstract: In this paper, we argue that differences in the cost structures across sectors play an important role in firms’ decisions to adjust their prices. We develop a menu-cost model of pricing in which retail firms intermediate trade between producers and consumers. An important facet of our analysis is that the labor-cost share of retail production differs across goods and services in the consumption basket. For example, the price of gasoline at the retail pump is predicted to adjust more frequently and by more than the price of a haircut because of the high volatility in wholesale gasoline prices relative to the wages of unskilled labor, even when both retailers face a common menu cost. This modeling approach allows us to account for some of the cross-sectional differences observed in the frequency of price adjustments across goods. We apply this model to Ecuador to take advantage of inflation variations and the rich panel of monthly retail prices.
    Keywords: Inflation and prices, Transmission of monetary policy
    JEL: E3 E5 F3 F33
    Date: 2016
  2. By: Yi, Kei-Mu (Federal Reserve Bank of Minneapolis); Zhang, Jing (Federal Reserve Bank of Chicago)
    Abstract: Long-term interest rates have a crucial influence on virtually all major financial decisions faced by households, businesses and governments. This paper reviews several decades of data on long-term rates internationally, explores several factors that determine them and discusses implications of this evidence. {{p}} The data indicate declining long-term rates since the 1980s, converging internationally at very low levels. This implies that the rate decline is not due to the Great Recession or to the early 2000s downturn. It further suggests a higher likelihood than before of hitting the zero bound on nominal interest rates as well as sustained rate convergence as global financial integration proceeds. {{p}} Furthermore, evidence of a downward trend in global fixed investment, coupled with the main finding of declining long-term interest rates, suggests that forces leading to declining global investment demand may be more important than those leading to increased saving in explaining current trends in long-term rates.
    Date: 2016–09–29
  3. By: Wenxin Du (Federal Reserve Board); Jesse Schreger (Harvard Business School, Business, Government and the International Economy Unit)
    Abstract: We construct a new dataset of 14 emerging markets and show that sovereigns increasingly borrow from foreigners in local currency but the private sector continues to borrow in foreign currency. We show that a higher reliance on foreign currency corporate financing is associated with more sovereign default risk. We introduce local currency sovereign debt and private currency mismatch into a standard sovereign debt model to examine how the currency composition of corporate borrowing affects the sovereign's incentive to inflate or default. A calibration of the model generates the empirical patterns of currency and sovereign credit risk over the last decade.
    Date: 2016–09
  4. By: Lustig, Hanno (Stanford University); Richmond, Robert J. (UCLA)
    Abstract: Exchange rates strongly co-vary against their base currency. We uncover a gravity equation in this factor structure: the key determinant of a country's exchange rate beta on the common base factor is the country's distance from the base country. The farther the country, the larger the beta. For example, the beta of the CHF/USD exchange rate on the dollar factor is determined by the distance between Switzerland and the United States. Shared language, legal origin, shared border, resource similarity and colonial linkages also significantly lower the betas. On average, the exchange rates of peripheral countries tend to have high Rsquareds in factor regressions, while central countries have low Rsquareds. A no-arbitrage model of exchange rates replicates this distance-dependent factor structure when the exposure of pricing kernels to global risk factors is more similar for closer country pairs.
    Date: 2015–10
  5. By: Jose M. Berrospide; Ricardo Correa; Linda S. Goldberg; Friederike Niepmann
    Abstract: Domestic prudential regulation can have unintended effects across borders and may be less effective in an environment where banks operate globally. Using U.S. micro-banking data for the first quarter of 2000 through the third quarter of 2013, this study shows that some regulatory changes indeed spill over. First, a foreign country's tightening of limits on loan-to-value ratios and local currency reserve requirements increase lending growth in the United States through the U.S. branches and subsidiaries of foreign banks. Second, foreign tightening of capital requirements shifts lending by U.S. global banks away from the country where the tightening occurs to the United States and to other countries. Third, tighter U.S. capital regulation reduces lending by large U.S. global banks to foreign residents.
    Keywords: Macroprudential policies ; International banking ; Bank credit ; Spillovers
    JEL: F42 F44 G15 G21
    Date: 2016–09–06
  6. By: Chien, YiLi (Federal Reserve Bank of Saint Louis); Lustig, Hanno (Stanford University); Naknoi, Kanda (University of CT)
    Abstract: Empirical work on asset prices suggests that pricing kernels have to be almost perfectly correlated across countries. If they are not, real exchange rates are too smooth to be consistent with high Sharpe ratios in asset markets. However, the cross-country correlation of macro fundamentals is far from perfect. We reconcile these empirical facts in a two-country stochastic growth model with segmented markets. A large fraction of households either do not participate in the equity market or hold few equities, and these households drive down the cross-country correlation in aggregate consumption. Only a small fraction of households participate in international risk sharing by frequently trading domestic and foreign equities. These active traders are the marginal investors, who impute the almost perfect correlation in pricing kernels. In our calibrated economy, we show that this mechanism can quantitatively account for the excess smoothness of exchange rates in the presence of highly volatile stochastic discount factors.
    JEL: F10 F31 G12 G15
    Date: 2015–11
  7. By: Algozhina, Aliya
    Abstract: This paper constructs a dynamic stochastic general equilibrium model of joint monetary and fiscal policy for a developing oil economy to find an appropriate monetary rule combined with pro-/countercyclical and neutral fiscal stance based on a loss measure. The model captures a set of structural specifics: two monetary instruments–interest rate and foreign exchange interventions, two fiscal instruments–public consumption and public investment, two production sectors–oil and non-oil, and the two types of households–optimizers and rule-of-thumb households. It further includes a Sovereign Wealth Fund, the foreign debt of private sector via collateral constraint, and a world oil price shock. The loss measure is chosen as an equal summation of variances in in ation, output, and real exchange rate to be minimized by Taylor rule’s parameters in a small open economy. The foreign exchange interventions distinguish between managed and exible exchange rate regime. Fiscal policy cyclicality is referred to the oil output response of public consumption and public investment. Impulse response functions to the negative world oil price shock are analyzed at exible and rigid prices.
    Keywords: oil economy, monetary policy, fiscal policy, exchange rate, oil price shock, interventions, SWF
    JEL: E31 E52 E62 E63 F31 F41 H54 H63 Q33 Q38
    Date: 2016–05
  8. By: Agnès Bénassy-Quéré (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The euro, in spite of having many of the required attributes put forward by the theoretical literature and past experience, has failed to fulfill all the criteria that would enable it to rival the dollar as an international currency. This does not mean that the euro cannot achieve a status similar to that of the dollar; however, the window of opportunity may not last much more than a decade before the renminbi overtakes the euro. European monetary unification has never explicitly sought for its currency to gain an international status. This makes sense insofar as the key elements required for the euro to expand internationally are also those to be pursued internally: GDP growth; a fiscal backing to the single currency; a deep, liquid and resilient capital market; and a unified external representation of the euro area.
    Keywords: currency internationalization,euro
    Date: 2015–03

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