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on Open Economy Macroeconomics |
| By: | Serdar Kabaca |
| Abstract: | This paper studies the effects of quantitative easing (QE) in a small open economy dynamic stochastic general-equilibrium model with international portfolio balancing. Portfolios are classified as imperfectly substitutable short-term and long-term subportfolios, each including domestic and foreign bonds. Unlike in standard small open economy models, both domestic and foreign bonds may be traded internationally. The model links the domestic term premium to the global term premium, and the implication of the model on the effectiveness of QE policies in reducing the domestic term premium depends crucially on the degree of substitutability between domestic and foreign bonds. The estimated model implies that QE in small open economies is expected to be much less effective on long-term yields because of the high substitutability between home and foreign assets found in the data. In the model, this causes the effect on the exchange rate to be limited. The paper also shows that foreign investors’ access to the domestic debt market is essential when evaluating the QE policy; ignoring foreign investors’ access would mistakenly make the policy look more effective. |
| Keywords: | International topics, Transmission of monetary policy |
| JEL: | E52 F41 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:16-55&r=opm |
| By: | Akinci, Ozge (Federal Reserve Bank of New York); Queralto, Albert (Board of Governors of the Federal Reserve System) |
| Abstract: | Credit spreads display occasional spikes and are more strongly countercyclical in times of financial stress. Financial crises are extreme cases of this nonlinear behavior, featuring deep recessions and sharp losses in bank equity. We develop a macroeconomic model with a banking sector in which banks’ leverage constraints are occasionally binding and equity issuance is endogenous. The model captures the nonlinearities in the data and produces quantitatively realistic crises. Endogenous equity issuance makes crises infrequent but does not prevent them altogether. Macroprudential policy designed to enhance banks’ incentive to issue equity lowers the probability of a crisis and increases welfare. |
| Keywords: | financial intermediation; sudden stops; leverage constraints; occasionally binding constraints; financial stability policy |
| JEL: | E32 E44 F41 |
| Date: | 2016–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:802&r=opm |
| By: | Buch, Claudia M. (Deutsche Bundesbank); Goldberg, Linda S. (Federal Reserve Bank of New York) |
| Abstract: | The development of macroprudential policy tools has been one of the most significant changes in banking regulation in recent years. In this multi-study initiative of the International Banking Research Network, researchers from fifteen central banks and two international organizations use micro-banking data in conjunction with a novel data set of prudential instruments to study international spillovers of prudential policy changes and their effects on bank lending growth. The collective analysis has three main findings. First, the effects of prudential instruments sometimes spill over borders through bank lending. Second, international spillovers vary across prudential instruments and are heterogeneous across banks. Bank-specific factors like balance sheet conditions and business models drive the amplitude and direction of spillovers to lending growth rates. Third, the effects of international spillovers of prudential policy on loan growth rates have not been large on average. However, our results tend to underestimate the full effect by focusing on adjustment along the intensive margin and by analyzing a period in which relatively few countries implemented country-specific macroprudential policies. |
| Keywords: | international banking; macroprudential; regulation; spillovers; lending |
| JEL: | F34 G01 G21 |
| Date: | 2016–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:801&r=opm |
| By: | Rajmund Mirdala (Department of Economics at the Faculty of Economics, Technical University of Kosice, Slovak Republic) |
| Abstract: | Vulnerability of exchange rates to the external price shocks as well as their absorption capabilities represents one of the most discussed area in the fixed versus flexible exchange rate dilemma. Ability of exchange rates to serve as a traditional vehicle for a transmission of external shocks to domestic prices is affected by exchange rate arrangement adopted by monetary authorities. As a result, exchange rate volatility determines the overall dynamics of pass-through effects and associated absorption capability of exchange rate. Ability of exchange rates to transmit external (price) shocks to the national economy represents one of the most discussed areas relating to the current stage of the monetary integration in the European single market. The problem is even more crucial when examining crisis related redistributive effects. In the paper we analyze exchange rate pass-through to domestic prices in the European transition economies. We estimate VAR model to investigate (1) responsiveness of exchange rate to the exogenous price shock to examine the dynamics (volatility) in the exchange rate leading path followed by the unexpected oil price shock and (2) effect of the unexpected exchange rate shift to domestic price indexes to examine its distribution along the internal pricing chain. Our results indicate that there are different patterns of exchange rate passthrough to domestic prices according to the baseline period as well as the exchange rate regime diversity. |
| Keywords: | exchange rate pass-through, inflation, VAR, Cholesky decomposition, impulse-response function |
| JEL: | C32 E31 F41 |
| Date: | 2016–10 |
| URL: | http://d.repec.org/n?u=RePEc:ost:wpaper:361&r=opm |
| By: | Rogelio Mercado Jr. (Newcastle Business School, Northumbria University) |
| Abstract: | This paper looks into the transition of a surge episode to a stop episode and differentiates between two types of surges, namely surges that end in stops and surges that end in normal episodes. Previous studies on capital flows show that surges end in output contraction, crises, and reversals of capital inflows. However, when one looks closely at the data, more than half of surges end in normal episodes at least four quarters following the last surge quarter. This study focuses on global and domestic factors that strongly correlate with the transition of surges to either stop or normal episodes, as well as which factors correlate with the magnitude of gross inflows for these two types of surges. The results show that the higher likelihood of experiencing surges ending in stops is significantly correlated with lower global risk aversion and with higher domestic output gap. The estimates also indicate that surges ending in stops are different from surges ending in normal episodes. For instance, while global risk aversion and domestic credit are significant for both surges, larger gross capital inflows are significantly correlated with higher global commodity prices for surges ending in stops, but with lower commodity prices for surges ending in normal episodes. |
| Keywords: | capital inflows, surges, stops, push and pull factors |
| JEL: | F30 F32 F36 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:tep2016&r=opm |
| By: | Martijn Boermans; Robert Vermeulen |
| Abstract: | In this paper we show empirically how international investment positions are determined by investor heterogeneity and individual security characteristics. We do so by estimating a gravity model with newly available data that contains both domestic and international holdings of individual sectors from euro area countries in individual bonds and stocks. The five holding sectors (banks, insurers, pension funds, investment funds and households) all face barriers to international investments, but these differ both across sectors and between their bond and stock holdings. Furthermore, individual security characteristics affect portfolio choice across investors differently. For bonds we find that currency denomination, coupon type, maturity and eligibility as collateral for ECB transactions stand out. For equities we find that market values, currency denomination and dividend payments are important. Since holder sectors vary in size across countries we posit that cross-country differences in sectoral composition may lead to different transmission effects of financial shocks. |
| Keywords: | international investment patterns; investor heterogeneity; securities holdings statistics |
| JEL: | F36 G11 G15 G20 |
| Date: | 2016–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:531&r=opm |
| By: | Rogelio Mercado Jr. (Newcastle Business School, Northumbria University) |
| Abstract: | This paper sets out to assess whether gross capital inflows to the Philippines are expansionary or contractionary in line with the model predictions and empirical findings of Blanchard et al. (2015). The results indicate that gross inflows are expansionary to output and credit growth. But contrary to the model predictions and empirical findings of Blanchard et al. (2015), we find that private bond inflows to the Philippines are expansionary. Bond inflows may have expansionary impact on output and credit growth if the exchange rate is managed, if the domestic capital market is underdeveloped, if the country receives small bond inflows, and if proceeds from debt issuance are channelled to productive investments. Similar to Blanchard et al. (2015), non-bond inflows have a positive overall impact on output and credit growth despite receiving relatively small foreign direct investment inflows. |
| Keywords: | capital inflows, output growth, credit growth |
| JEL: | F32 F41 F43 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:tep2116&r=opm |