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on Open Economy Macroeconomics |
| By: | Enrique Alberola-Ila; Gianluca Benigno |
| Abstract: | We study the response of a three-sector commodity-exporter small open economy to a commodity price boom. When the economy has access to international borrowing and lending, a temporary commodity price boom brings about the standard wealth effect that stimulates demand and has long-run implications on the sectoral allocation of labor. If dynamic productivity gains are concentrated in the traded goods sector, the commodity boom crowds out the traded sector and delays convergence to the world technology frontier. Financial openness by stimulating current demand, amplifies the crowding out effect and may even lead to a growth trap, in which no resources are allocated to the traded sector. From a normative point of view, our analysis suggests that capital account management policies could be welfare improving in those circumstances. |
| Keywords: | Commodity Resource Curse, Dutch-Disease, Financial Openness, Endogenous Growth |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:609&r=opm |
| By: | Jordà, Òscar; Schularick, Moritz; Taylor, Alan M. |
| Abstract: | Fixing the exchange rate constrains monetary policy. Along with unfettered cross-border capital flows, the trilemma implies that arbitrage, not the central bank, determines how interest rates fluctuate. The annals of international finance thus provide quasi-natural experiments with which to measure how macroeconomic outcomes respond to policy rates. Based on historical data since 1870, we estimate the local average treatment effect (LATE) of monetary policy interventions and examine its implications for the population ATE with a trilemma instrument. Using a novel control function approach we evaluate the robustness of our findings to possible spillovers via alternative channels. Our results prove to be robust. We find that the effects of monetary policy are much larger than previously estimated, and that these effects are state-dependent. |
| Keywords: | fixed exchange rates; instru- mental variables; interest rates; local average treatment effect; local projections; monetary experiments; trilemma |
| JEL: | E01 E30 E32 E44 E47 E51 F33 F42 F44 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11801&r=opm |
| By: | Stefan Avdjiev; Bryan Hardy; Sebnem Kalemli-Ozcan; Luis Servén |
| Abstract: | We construct a new data set for gross capital inflows during 1996–2014 for 85 countries at a quarterly frequency. We decompose debt inflows by borrower type: banks, corporates and sovereigns. Using our new data, we present dynamic and cross sectional patterns in capital inflows as a function of global push factors and countries’ own business cycles. This exercise reveals that patterns evident in aggregate capital flows data do not hold up consistently across different borrower types. When global risk appetite is low, as proxied by high VIX, capital flows into banks and corporates decline both in advanced economies (AE) and in emerging markets (EM). This is also true for EM sovereigns but not for AE, whose sovereign borrowing does not respond to VIX. Banks’ and corporates’ borrowing, both in EM and in AE are procyclical, whereas EM’s sovereigns exhibit counter-cyclical borrowing. Capital inflows are procyclical in all assets classes except for portfolio debt inflows to EM, which exhibit a countercyclical pattern driven mainly by EM sovereigns and to some extent by EM corporates. Our results highlight the importance of separating capital flows by borrower type for understanding potential systemic risks related to capital flows, and show the difficulty of establishing robust stylized facts about capital flows’ dynamics in a mixed sample of emerging and advanced countries. |
| JEL: | F00 F2 F21 F3 F32 F41 F42 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23116&r=opm |
| By: | Cesa-Bianchi, Ambrogio (Bank of England); Eguren-Martin, Fernando (Bank of England); Thwaites, Gregory (Bank of England) |
| Abstract: | This paper provides novel empirical evidence showing that foreign financial developments are a powerful predictor of domestic banking crises. Using a new data set for 38 advanced and emerging economies over 1970–2011, we show that credit growth in the rest of the world has a large positive effect on the probability of banking crises taking place at home, even when controlling for domestic credit growth. Our results suggest that this effect is larger for financially open economies, and is consistent with transmission via cross-border capital flows and market sentiment. Direct contagion from foreign crises plays an important role, but does not account for the whole effect. |
| Keywords: | Financial crises; global credit cycle; banking; financial stability; sentiment |
| JEL: | E32 E44 E52 G01 |
| Date: | 2017–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0644&r=opm |
| By: | Mary Everett (Central Bank of Ireland); Vahagn Galstyan (Trinity College Dublin) |
| Abstract: | This paper studies the bilateral determinants of the international asset positions of banks, and subsequent bilateral adjustment during the global financial crisis and ensuing recovery phase. We find empirical support for traditional gravity-type variables. Exploiting a comprehensive dataset of bilateral bank assets, combined with a cross-country database on capital controls and macroeconomic policies, empirical evidence is provided for the effects of macroeconomic tools on the portfolio reallocation of internationally active banks. Specifically, higher current account balances in recipient countries are associated with higher inflows in debt assets, while restrictions on asset inflows and higher central bank reserves are related to lower cross-border flows of bank investment during the crisis and post-crisis periods, with heterogeneous effects across asset type. Finally, stronger institutions in recipient countries are positively associated with the international investment of banks, with inflows to debt assets being the most sensitive asset category across the financial cycle. |
| Keywords: | Cross-Border Banking, Loans, International Portfolio Securities, Capital Controls, Institutional Quality |
| JEL: | F30 F41 G15 G21 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:tcd:tcduee:tep0317&r=opm |
| By: | Matthias Gubler; Christoph Sax |
| Abstract: | This paper explores the robustness of the Balassa-Samuelson (BS) hypothesis. We analyze an OECD country panel from 1970 to 2008 and compare three data sets on sectoral productivity, including newly constructed data on total factor productivity. Overall, our within- and between-dimension estimation results do not support the BS hypothesis. Over the last two decades, we find a robust negative relationship between productivity in the tradable sector and the real exchange rate, even after including the terms of trade to control for the deviations from the law of one price. Earlier supportive findings depend on the choice of the data set and the model specification. |
| Keywords: | Real Exchange Rate, Balassa-Samuelson Hypothesis, Panel Data Estimation, Terms of Trade |
| JEL: | F14 F31 F41 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2017-01&r=opm |
| By: | McGrattan, Ellen R. (Federal Reserve Bank of Minneapolis); Waddle, Andrea L. (University of Richmond) |
| Abstract: | In this paper, we estimate the impact of increasing costs on foreign producers following a withdrawal of the United Kingdom from the European Union (popularly known as Brexit). Our predictions are based on simulations of a multicountry neoclassical growth model that includes multinational firms investing in research and development (R&D), brands, and organizational capital that are used nonrivalrously by their subsidiaries at home and abroad. For the main simulation, we assume that U.K. investments in the European Union face the same restrictions as Norway’s and that E.U. investments in the United Kingdom are treated reciprocally. We find a significant fall in foreign investment and production by U.K. firms, and a small but positive welfare gain for U.K. citizens. Following the Brexit, the United Kingdom increases international lending, which finances the production of others, both domestically and abroad. In the European Union, declines in investment and production are modest, but the welfare of non-U.K. citizens is lower. If, during the transition, the United Kingdom reduces current restrictions on other major foreign investors, such as the United States and Japan, domestic production and investment in the United Kingdom fall by less, and the welfare of U.K. citizens rises by more. |
| Keywords: | Brexit; Foreign investment; FDI; United Kingdom; European Union |
| JEL: | F23 F41 O33 O34 |
| Date: | 2017–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:542&r=opm |
| By: | Olivier Blanchard (Peterson Institute for International Economics); Guido Lorenzoni (Northwestern University); Jean Paul L'Huillier (Einaudi Institute for Economics and Finance) |
| Abstract: | Despite interest rates being very close to zero, US GDP growth has been anemic in the last four years largely due to lower optimism about the future, more speci?cally to downward revisions in growth forecasts, rather than legacies of the past. Put simply, demand is temporarily weak because people are adjusting to a less bright future. The authors suggest that downward revisions of productivity growth may have decreased demand by 0.5 to 1.0 percent a year since 2012. This explanation, if correct, has important implications for policy and forecasts. It may weaken the case for secular stagnation, as it suggests that the need for very low interest rates to sustain demand may be partly temporary. It also implies that, to the extent that investors in ?nancial markets have not fully taken this undershooting into account, the current yield curve may underestimate the strength of future demand and the need for higher interest rates in the future. The authors' hypothesis is not an alternative to the secular stagnation hypothesis but a twist on it. They do not question that interest rates will probably be lower in the future than they were in the past but argue that, for a while, they may be undershooting their long-run value. |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb17-6&r=opm |
| By: | Gauti B. Eggertsson; Neil R. Mehrotra; Jacob A. Robbins |
| Abstract: | This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different than in the standard New Keynesian framework. Using a 56-period quantitative lifecycle model, a standard calibration to US data delivers a natural rate ranging from -1% to -2%, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates. |
| JEL: | E31 E32 E5 E52 E58 E6 E62 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23093&r=opm |
| By: | Brunnermeier, Markus; James, Harold; Landau, Jean-Pierre |
| Abstract: | Book description: Why is Europe’s great monetary endeavor, the Euro, in trouble? A string of economic difficulties in Greece, Ireland, Spain, Italy, and other Eurozone nations has left observers wondering whether the currency union can survive. In this book, Markus Brunnermeier, Harold James, and Jean-Pierre Landau argue that the core problem with the Euro lies in the philosophical differences between the founding countries of the Eurozone, particularly Germany and France. But the authors also show how these seemingly incompatible differences can be reconciled to ensure Europe’s survival. As the authors demonstrate, Germany, a federal state with strong regional governments, saw the Maastricht Treaty, the framework for the Euro, as a set of rules. France, on the other hand, with a more centralized system of government, saw the framework as flexible, to be overseen by governments. The authors discuss how the troubles faced by the Euro have led its member states to focus on national, as opposed to collective, responses, a reaction explained by the resurgence of the battle of economic ideas: rules vs. discretion, liability vs. solidarity, solvency vs. liquidity, austerity vs. stimulus. Weaving together economic analysis and historical reflection, The Euro and the Battle of Ideas provides a forensic investigation and a roadmap for Europe’s future. |
| JEL: | B26 E58 N14 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc16:145852&r=opm |
| By: | Roman Stöllinger (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | We put forward the hypothesis that increasing specialisation in the production of non-tradable output has a negative impact on the current account balance. This tradability hypothesis is directly derived from a two-sector inter-temporal current account model. To test it empirically we develop a value-added based tradability index which captures the tradability of a country’s output. Applied to a large sample of European countries, our empirical model provides strong evidence for a positive relationship between the current account balance and the tradability index. The main policy implication is that the anxieties about ‘de-industrialisation’ in large parts of Europe seem justified with a view to growing external imbalances. |
| Keywords: | current account, tradability index, tradable goods, structural change, value added exports |
| JEL: | F41 F32 F10 F14 |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:wii:wpaper:134&r=opm |
| By: | Avdjiev, Stefan; Hardy, Bryan; Kalemli-Ozcan, Sebnem; Servén, Luis |
| Abstract: | We construct a new data set for gross capital inflows during 1996-2014 for 85 countries at a quarterly frequency. We decompose debt inflows by borrower type: banks, corporates and sovereigns. Using our new data, we present dynamic and cross sectional patterns in capital inflows as a function of global push factors and countries' own business cycles. This exercise reveals that patterns evident in aggregate capital flows data do not hold up consistently across different borrower types. When global risk appetite is low, as proxied by high VIX, capital flows into banks and corporates decline both in advanced economies (AE) and in emerging markets (EM). This is also true for EM sovereigns but not for AE, whose sovereign borrowing does not respond to VIX. Banks' and corporates' borrowing, both in EM and in AE are procyclical, whereas EM's sovereigns exhibit counter-cyclical borrowing. Capital inflows are procyclical in all assets classes except for portfolio debt inflows to EM, which exhibit a countercyclical pattern driven mainly by EM sovereigns and to some extent by EM corporates. Our results highlight the importance of separating capital flows by borrower type for understanding potential systemic risks related to capital flows, and show the difficulty of establishing robust stylized facts about capital flows' dynamics in a mixed sample of emerging and advanced countries. |
| Date: | 2017–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11806&r=opm |
| By: | Nathalia Rios Ballesteros; Thomas Goda |
| Abstract: | Natural resource-seeking foreign direct investment (FDI) rose substantially during the last two decades as global commodity prices soared. This type of FDI typically is expected to improve the current accounts of recipient countries. Notwithstanding the commodity boom, however, current account balances of many commodity-producing developing economies were negative during 1995–2013. Considering 31 commodity-producing countries, we find that the average net effect of a 1% increase in natural resource-seeking FDI was a 0.23% decline in the current account (measured as percentage of GDP). This surprising result can be explained by the repatriation of profits. |
| Keywords: | Foreign Direct Investment (FDI); net primary income (NPI); profit repatriation; current account; balance of payments; natural resources |
| JEL: | F21 O11 O24 |
| Date: | 2017–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:col:000122:015298&r=opm |
| By: | Harald Hau (University of Geneva, Swiss Finance Institute, Centre for Economic Policy Research (CEPR), and CESifo (Center for Economic Studies and Ifo Institute)) |
| Abstract: | This paper (i) proposes a simple multi-currency model of speculative foreign exchange (FX) trading, (ii) uses a natural experiment to identify the implied components of the optimal trading strategy, and (iii) proposes a new spectral inference method to strengthen the statistical evidence on the predicted shortrun exchange rate dynamics. Cross-sectional currency hedging effects are shown to be qualitatively large in their price impact and can contribute to the disconnect between exchange rates and fundamentals. |
| Keywords: | Speculation, Limited Arbitrage, Hedging, Exchange Rate Disconnect |
| JEL: | G11 G14 G15 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1207&r=opm |