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on Open Economy Macroeconomics |
| By: | Enrique G. Mendoza |
| Abstract: | Macroprudential policy holds the promise of becoming a powerful tool for preventing financial crises. Financial amplification in response to domestic shocks or global spillovers and pecuniary externalities caused by Fisherian collateral constraints provide a sound theoretical foundation for this policy. Quantitative studies show that models with these constraints replicate key stylized facts of financial crises, and that the optimal financial policy of an ideal constrained-efficient social planner reduces sharply the magnitude and frequency of crises. Research also shows, however, that implementing effective macroprudential policy still faces serious hurdles. This paper highlights three of them: (i) complexity, because the optimal policy responds widely and non-linearly to movements in both domestic factors and global spillovers due to regime shifts in global liquidity, news about global fundamentals, and recurrent innovation and regulatory changes in world markets, (ii) lack of credibility, because of time-inconsistency of the optimal policy under commitment, and (iii) coordination failure, because a careful balance with monetary policy is needed to avoid quantitatively large inefficiencies resulting from violations of Tinbergen’s rule or strategic interaction between monetary and financial authorities. |
| JEL: | E44 E5 F34 F4 G01 G28 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22868&r=opm |
| By: | Emmanuel Farhi (Harvard University); Matteo Maggiori (Harvard University) |
| Abstract: | We propose a simple model of the international monetary system. We study the world supply and demand for reserve assets denominated in different currencies under a variety of scenarios: under a Hegemon vs. a multi-polar world; when reserve assets are abundant vs. scarce; under a gold exchange standard vs. a floating rate system; away from or at the zero lower bound (ZLB). We rationalize the Triffin dilemma which posits the fundamental instability of the system, the common prediction regarding the natural and beneficial emergence of a multi-polar world, the Nurkse warning that a multi-polar world is more unstable than a Hegemon world, and the Keynesian argument that a scarcity of reserve assets under a gold exchange standard or at the ZLB is recessive. We show that competition among few countries in the issuance of reserve assets can have perverse effects on the total supply of reserve assets. Our analysis is both positive and normative. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed016:1543&r=opm |
| By: | J. Paul Dunne (School of Economics, University of Cape Town); Christine S. Makanza (School of Economics, University of Cape Town) |
| Abstract: | The debate on global current account imbalances continues to develop, with growing interest in the macroeconomic instability and widening current account deficits faced by emerging markets. Literature establishes that the current account behaves differently depending on macroeconomic circumstances in countries, so approaches to managing external imbalances should be country tailored. Despite this realisation, there is a lack of investigation into drivers of the current account and the impact of macroeconomic policy on current account dynamics in emerging markets. To address this, the study estimates an SVAR model to analyse the effect of fiscal shocks on the current account. This helps to understand how fiscal shocks shape current account developments, and establishes the usefulness of fiscal consolidation in managing current account deficits by determining whether the twin deficits approach to managing the external balance holds in middle income countries. The study goes further to analyse the channels through which fiscal shocks are transmitted to the current account to understand how current account management policies should be formulated. The study contributes to the literature by providing a case study of South Africa, an emerging economy characterised by large current account deficits, macroeconomic volatility, a well developed financial sector, and a dataset which has not been exploited to understand the external balance. A particularly interesting finding is that expansionary fiscal shocks improve the current account through household savings and public investment , which is a departure from the twin deficits hypothesis. |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:ctn:dpaper:2016-03&r=opm |
| By: | Isoré, Marlène |
| Abstract: | This paper develops a two-country model in which transmission of financial shocks arises despite a flexible exchange rate regime and substitutable financial assets, contrary to the open-economy literature results under these two conditions. The search and matching approach first accounts for the time needed to restore normal functioning of financial markets following a disruption. It also allows dissociating two types of financial shocks: (i) pure liquidity contractions imply negative co-movements of home and foreign outputs, so that the model nests the standard open macroeconomy results as a particular case; (ii) shocks to banks’ capitalization costs in one country do generate international financial contagion. |
| Keywords: | international contagion, financial multiplier, financial crises, credit rationing, open economy macroeconomics, search and matching theory |
| JEL: | C78 E44 E51 F41 F42 G01 G15 |
| Date: | 2016–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2016_028&r=opm |
| By: | Alexandre Lucas Cole (LUISS "Guido Carli" University); Chiara Guerello (LUISS "Guido Carli" University); Guido Traficante (European University of Rome) |
| Abstract: | We build a Two-Country Open-Economy New-Keynesian DSGE model of a Currency Union, with a debt-elastic government bond spread and incomplete international financial markets, to study the e ects of government debt deleveraging. We evaluate the stabilization properties and welfare implications of di erent deleveraging schemes and instruments, under a range of alternative shocks and under alternative scenarios for fiscal policy coordination, bringing to policy conclusions for the proper government debt management in a Currency Union. We find that: a) coordinating on the net exports gap and consolidating budget constraints across countries when deleveraging provides more stabilization, b) taxes are a better instrument for deleveraging compared to government consumption or transfers, c) by backloading the deleveraging process one can achieve greater stabilization over time, d) deleveraging government debt increases the volatility and persistence of the economy after other shocks. Our policy prescriptions for the Eurozone are to reduce government debt more gradually over time and less during recessions, to do so using distortionary taxes, while concentrating on reducing international demand imbalances and maybe creating some form of fiscal union. |
| Keywords: | Sovereign Debt, International Policy Coordination, Monetary Union, New Keynesian. |
| JEL: | H63 E63 F42 F45 E12 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:lui:celegw:1603&r=opm |
| By: | Miyamoto, Wataru (Bank of Canada); Nguyen, Thuy Lan (Santa Clara University); Sheremirov, Viacheslav (Federal Reserve Bank of Boston) |
| Abstract: | Using panel data on military spending for 125 countries, we document new facts about the effects of changes in government purchases on the real exchange rate, consumption, and current accounts in both advanced and developing countries. While an increase in government purchases causes real exchange rates to appreciate and increases consumption significantly in developing countries, it causes real exchange rates to depreciate and decreases consumption in advanced countries. The current account deteriorates in both groups of countries. These findings are not consistent with standard international business-cycle models. We investigate whether the difference between advanced economies and developing countries in the responses of real exchange rates to spending shocks can be explained by alternative hypotheses. |
| Keywords: | military spending; fiscal policy; real exchange rates; twin deficit; risk sharing |
| JEL: | E3 F3 F4 |
| Date: | 2016–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:16-14&r=opm |
| By: | Joshua Aizenman; Yin-Wong Cheung; Hiro Ito |
| Abstract: | Using an uneven panel of 135 countries from 1995 to 2014, we investigate the link between interest rates and private saving, and focus on whether the interest rate effect is dominated by the income (i.e., negative) or the substitution (i.e., positive) effect. With the baseline estimation, we find that the real interest rate has the substitution effect on private saving only for a full-country sample and a group of Asian economies. We also examine if low real - or nominal - interest rates have any impact on the link between the real interest rate and the private saving rate. We find that among developing countries, when the nominal interest rate is not too low, we detect the substitution effect of the real interest rate on private saving. However, among industrial and emerging economies, the substitution effect is detected only when the nominal interest rate is lower than 2.5%. In contrast, emerging-market Asian countries are found to have the income effect when the nominal interest rate is below 2.5%. When we examine the interactive effects between the real interest rate and the variables for economic conditions and policies, we find that the real interest rate has a negative impact - i.e., income effect - on private saving if any output volatility, old dependency, or financial development is above a certain threshold. Further, when the real interest rate is below 1.5%, greater output volatility would lead to higher private saving in developing countries. Lastly, we find that old dependency ratios, public healthcare expenditure, and financial development have negative impacts on private saving, but such impacts in absolute values tend to become smaller as the real interest rate becomes lower. |
| JEL: | F3 F41 F42 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22872&r=opm |
| By: | Hang Zhou |
| Abstract: | This paper revisits the definition of monetary policy autonomy and develops a new method to identify autonomy regimes of a set of countries. Compared to the traditional identification approach, which only focuses on the base country interest rate, monetary policy autonomy discussed in this paper is jointly determined by how the interest rate responds to foreign monetary policy as well as its domestic inflation and real GDP. Using a Bayesian Markov Switching model for the monetary policy function, I estimate policy responses in two regimes, and obtain measures of monetary policy autonomy in the estimation process. Testing the method with case studies and simulated data demonstrates the robustness of the approach under different scenarios. Applying the method to the data of a set of advanced countries, I find monetary policy autonomy decreases when exchange rate is fixed or capital control is loosened, which is consistent with the open economy trilemma. |
| JEL: | C22 E52 F33 F41 |
| Date: | 2016–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2016:pzh699&r=opm |