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on Open Economy Macroeconomics |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | This paper characterizes analytically the adjustment of an open economy with a stock collateral constraint to fundamental and nonfundamental shocks. In the model, external borrowing is limited by the value of physical capital. Three results are established: (1) Adjustment to external shocks is nonlinear. In response to small negative output shocks, the economy adjusts as prescribed by the intertemporal approach to the current account, with increases in debt, deficits in the trade and current account balances, and no significant movement in the price of collateral. By contrast, in response to large negative output shocks the economy experiences a sudden stop with debt deleveraging, trade and current account reversals, and a Fisherian deflation of asset prices. (2) Generically, weak fundamentals (low output and high external debt) give rise to multiple equilibria. (3) In this case, the economy is prone to self-fulfilling sudden stops driven by downward revisions of expectations about the value of collateral. |
| JEL: | F41 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22971&r=opm |
| By: | Camila Casas; Federico J. Díez; Gita Gopinath; Pierre-Olivier Gourinchas |
| Abstract: | Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer's currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) terms of trade are stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports and export expansions following depreciations are weak. Using merged firm level and customs data from Colombia we document strong support for the dominant currency paradigm and reject the alternatives of producer currency and local currency pricing. |
| JEL: | E0 F0 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22943&r=opm |
| By: | Pérez Forero, Fernando (Banco Central de Reserva del Perú); Serván, Sergio (Banco Central de Reserva del Perú) |
| Abstract: | The boom and bust of Commodity Prices have had a signi cant macroeconomic impact on commodity-exporter economies. This paper assesses the dynamic impact of Commodity Prices on the Current Account surplus for several commodity-exporter economies. Because these economies share several economic features, and since they are subject to the same external shocks, it is necessary to estimate their behavior simultaneously. Moreover, the impact of these shocks might be di erent along the sample of analysis. Thus, we estimate a Panel VAR model with dynamic inter-dependencies and time varying parameters. Within this framework, we have computed an average current account indicator and studied the responses of individual current account balances to shocks in fuel and metal prices. We have found that our common indicator for the current account follows closely the dynamic pattern of the commodity price index i.e. surpluses (de cit) are usually associated with increases (decreases) in commodity prices, and this indicator is statistically signi cant across the sample of analysis. At the country level, by comparing the impulse response functions, we found that commodity price shocks have a similar e ect across countries, although their magnitude di er. In general, our results suggest that the impact on the current account balances have increased since 2002. In the case of a fuel shock, we do not found signi cant current account responses. However, the evidence for a metal shock is more robust, with higher responses in the case of the metal-exporting countries. |
| Keywords: | Commodity Prices, Current Account, Panel Vector Autoregressions, Bayesian Methods |
| JEL: | C11 C33 E32 F42 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2016-012&r=opm |
| By: | Fabia A. de Carvalho; Marcos R. Castro |
| Abstract: | We use a DSGE model with heterogeneous financial frictions and foreign capital flows estimated with Bayesian techniques for Brazil to investigate optimal combinations of simple macroprudential, fiscal and monetary policy rules that can react to the business and/or the financial cycle. We find that the gains from implementing a cyclical fiscal policy are only significant if macroprudential policy countercyclically reacts to the financial cycle. Optimal fiscal policy is countercyclical in the business cycle and slightly procyclical in the financial cycle |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:453&r=opm |
| By: | Ülke, Volkan |
| Abstract: | This study investigates the effect of the degree of currency substitution on the exchange rate pass-through (ERPT) to import and domestic prices in Turkey, using monthly data between 1998 and 2013. The recursive interacted vector autoregressive (IVAR) specification of Towbin and Weber (2013) is employed, based on McCarthy’s (1999) distribution chain model. Currency substitution is treated as an interaction term in the IVAR specification. The empirical evidence suggests that high currency substitution increases the effect of ERPT to import and domestic prices. |
| Keywords: | Exchange rate pass-through; currency substitution; inflation; interacted VAR. |
| JEL: | C32 E31 E52 F31 |
| Date: | 2015–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:75633&r=opm |
| By: | Anton Korinek |
| Abstract: | In an interconnected world, national economic policies regularly lead to large international spillover effects, which frequently trigger calls for international policy cooperation. However, the premise of successful cooperation is that there is a Pareto inefficiency, i.e. if there is scope to make some nations better off without hurting others. This paper presents a first welfare theorem for open economies that defines an efficient benchmark and spells out the conditions that need to be violated to generate inefficiency and scope for cooperation. These are: (i) policymakers act competitively in the international market, (ii) policymakers have sufficient external policy instruments and (iii) international markets are free of imperfections. Our theorem holds even if each economy suffers from a wide range of domestic market imperfections and targeting problems. We provide examples of current account intervention, monetary policy, fiscal policy, macroprudential policy/capital controls, and exchange rate management and show that the resulting spillovers are consistent with Pareto efficiency, but only if the three conditions are satisfied. Furthermore, we develop general guidelines for how policy cooperation can improve welfare when the conditions are violated. |
| JEL: | D61 F13 F33 F42 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23004&r=opm |
| By: | Svetlana Bekareva; Alexander Baranov; Ekaterina Meltenisova |
| Abstract: | Introduction. The investigation is devoted to the issue of a national financial stability and economic growth. The theme of our investigation is topical because of the modern world economy processes. Some countries have been using different monetary, economic, and political instruments to stimulate growth of their national economies since the 2007 ? 2009 world economic and financial crisis. Some developing countries began suffering from competitiveness losses of their national produces as a result of quantitative easing implemented by some developed countries such as, for example, the USA and Japan, or foreign exchange intervention by the central bank of Switzerland, in order to devaluate their national currencies. An aggressive monetary policy that aimed competitive devaluation led to the currency wars. Currency war is deliberate policy of manipulating exchange rates downwards to increase domestic competitiveness that takes place in many countries at the same time and can lead to economic crisis. What instruments can be used to manipulate exchange rates in the modern international monetary system? It depends on the exchange rate regime announced by a country. Nowadays developed countries mainly use interest rates as a key monetary instrument, and some of them apply a negative interest rate policy. Use of interest rates and quantitative easing by developing countries might have negative effect on the economy. Moreover, a key interest rate (or discount rate) in developing countries sometimes is just an indicator for banking system rates that can stimulate credit activity in a national economy. Specific objectives of the investigation are: 1) to determine effect of using different instruments of monetary policy by developed and developing countries; 2) to assess the results of implementing currency war methods in order to increase their national competitiveness for different countries. Statistical data has been found in the International Monetary Fund database. We applied indices connected with foreign exchange markets and monetary policy for about 50 countries including more than 20 countries which carry out monetary policy of competitive devaluation. Methods of investigation represent econometric analysis. Cluster and panel data analyses were used to determine groups of similar economies and the most powerful group of countries nowadays and find factors influenced competitiveness of regional and national economies connected with chosen indexes which show monetary policy effect. Results of the investigation are as follows. The methods and instruments of monetary policy are different for countries and they have been changing since 2007. They depend on the national and regional features of economic development. The key instrument for developed economies is supposed to be interest rates; not all of the countries with emerging markets can use them effectively. There are countries which have some advantages of currency wars but the global perspectives are vague. Conclusion is connected with determining of the perspectives of further changing in monetary policy by different countries, applying a negative interest rate policy, and currency wars expansion. |
| Keywords: | monetary policy; economic growth; currency war |
| JEL: | F31 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa16p125&r=opm |
| By: | Elod Takats; Judit Temesvary |
| Abstract: | We investigate how the use of a currency transmits monetary policy shocks in the global banking system. We use newly available unique data on the bilateral crossborder lending flows of 27 BIS-reporting lending banking systems to over 50 borrowing countries, broken down by currency denomination (USD, EUR and JPY). We have three main findings. First, monetary shocks in a currency significantly affect cross-border lending flows in that currency, even when neither the lending banking system nor the borrowing country uses that currency as their own. Second, this transmission works mainly through lending to non-banks. Third, this currency dimension of the bank lending channel works similarly across the three currencies suggesting that the cross-border bank lending channel of liquidity shock transmission may not be unique to lending in USD. |
| Keywords: | Cross-border bank lending, bank lending channel, monetary transmission, currency denomination |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:600&r=opm |
| By: | Tasso Adamopoulos; Loren Brandt; Jessica Leight; Diego Restuccia |
| Abstract: | We use household-level panel data from China and a quantitative framework to document the extent and consequences of factor misallocation in agriculture. We find that there are substantial frictions in both the land and capital markets linked to land institutions in rural China that disproportionately constrain the more productive farmers. These frictions reduce aggregate agricultural productivity in China by affecting two key margins: (1) the allocation of resources across farmers (misallocation) and (2) the allocation of workers across sectors, in particular the type of farmers who operate in agriculture (selection). We show that selection can substantially amplify the static misallocation effect of distortionary policies by affecting occupational choices that worsen the distribution of productive units in agriculture. |
| Keywords: | agriculture, misallocation, selection, productivity, China. |
| JEL: | O11 O14 O4 |
| Date: | 2017–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-574&r=opm |
| By: | Rezai, Armon |
| Abstract: | Aggregate demand is influenced by the functional income distribution of an economy and that of its trading partners. This relationship between income distribution and output is analyzed in a short-run two-country Neo-Kaleckian model. The effects of devaluation and redistribution are discussed in detail. Trade and redistribution within one country interact and output increases or decreases with changes in either depending on the specific distributional and exchange rate movements. The Marshall-Lerner condition is shown to be equivalent to the assumption of expansionary devaluation. If devaluation increases output, national redistribution policy toward wage earners is also more likely to be expansionary. (author's abstract) |
| Keywords: | Open Economy; Adding-Up Constraints; International Macroeconomics; Devaluation; Growth; Distribution |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus045:4814&r=opm |
| By: | Mark Mink; Jan Jacobs; Jakob de Haan |
| Abstract: | We argue that if currency union member states have different potential output per capita, output growth rates, or trade balances, the common monetary policy may not be optimal for all of them. Euro area imbalances for potential output and for trade balances are quite large, while output growth imbalances are more modest. Member states with larger imbalances of one type also have larger imbalances of both other types, but a decline of one imbalance need not coincide with a decline of the others. We also show that imbalances are fairly persistent, and are larger in poorer and smaller member states. |
| Keywords: | euro area macroeconomic imbalances; common monetary policy; economic convergence; business cycle synchronization; euro crisis |
| JEL: | E30 F45 O47 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:540&r=opm |