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on Open Economy Macroeconomics |
| By: | Chari, V. V. (Federal Reserve Bank of Minneapolis); Dovis, Alessandro (University of Pennsylvania); Kehoe, Patrick J. (Federal Reserve Bank of Minneapolis) |
| Abstract: | We offer a theoretically based narrative that attempts to account both for the formation of the European Monetary Union (EMU) and for the challenges it has faced. Lack of commitment to policy plays a central role in this narrative and leads to four policy implications for EMU redesign. |
| Date: | 2017–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmep:17-3&r=opm |
| By: | Bacchetta, Philippe; van Wincoop, Eric |
| Abstract: | Modern open economy macro models assume the continuous adjustment of international portfolio allocation. We introduce gradual portfolio adjustment into a global equity market model. Our approach differs from related literature in two key dimensions. First, the time interval between portfolio decisions is stochastic rather than fixed, leading to a smoother response to shocks. Second, rather than only considering asset returns, we also use data on portfolio shares to confront the model to the data. Conditional on reasonable risk aversion, we find that the data is consistent with infrequent portfolio decisions, with a frequency of at most once in 15 months on average. |
| Keywords: | gradual portfolio adjustment; international portfolio allocation; predictable excess returns |
| JEL: | F30 F41 G11 G12 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:11983&r=opm |
| By: | Nikhil Patel; Zhi Wang; Shang-Jin Wei |
| Abstract: | The real effective exchange rate (REER) is one of the most cited statistical constructs in open-economy macroeconomics. We show that the models used to compute these numbers are not rich enough to allow for the rising importance of global value chains. Moreover, because different sectors within a country participate in international production sharing at different stages, sector level variations are also important for determining competitiveness. Incorporating these features, we develop a framework to compute REER at both the sector and country level and apply it on inter-country input-output tables to study the properties of the new measures of REER for 35 sectors in 40 countries. |
| Keywords: | global value chains, real effective exchange rate measurement |
| JEL: | F1 F3 F4 F6 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:637&r=opm |
| By: | Raju Huidrom; M. Ayhan Kose; Franziska Ohnsorge |
| Abstract: | The seven largest emerging market economies - China, India, Brazil, Russia, Mexico, Indonesia, and Turkey - constituted more than one-quarter of global output and more than half of global output growth during 2010-15. These emerging markets, which we call EM7, are also closely integrated with other countries, especially with other emerging and frontier markets. Given their size and integration, growth in EM7 could have significant cross-border spillovers. We provide empirical estimates of these spillovers using a Bayesian vector autoregression model. We report three main results. First, spillovers from EM7 are sizeable: a 1 percentage point increase in EM7 growth is associated with a 0.9 percentage point increase in growth in other emerging and frontier markets and a 0.6 percentage point increase in world growth at the end of three years. Second, sizeable as they are, spillovers from EM7 are still smaller than those from G7 countries (Group of Seven of advanced economies). Specifically, growth in other emerging and frontier markets, and the global economy would increase by one-half to three times more due to a similarly sized increase in G7 growth. Third, among the EM7, spillovers from China are the largest and permeate globally. |
| Keywords: | Business cycles, spillovers, external shocks, China, EM7, G7 |
| JEL: | E32 F20 F42 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2017-37&r=opm |
| By: | Zi-Yi Guo (Wells Fargo Bank, N.A.) |
| Abstract: | Standard international real business cycle (IRBC) models formulated by Backus, Kehoe, and Kydland (BKK, 1992) have been considered a natural starting point to assess the quantitative implications of dynamic stochastic general equilibrium (DSGE) models in an open economy environment. Since the standard IRBC model under assumptions of flexible prices and perfect competition cannot replicate all the observed characteristics of international business cycles, a number of extended models with more realistic features have been developed in the past two decades. We introduce a noisy information structure into an otherwise standard international real business cycle model with two countries. When domestic firms observe current foreign technology with some noise, predictions of the model on international correlation can be very different from those of a standard perfect information model. We show that the model can explain: (i) positive output correlation both in complete and incomplete market models; (ii) consumption correlation smaller than output correlation with an introduction of information-constrained consumers; and (iii) observation of both positive and negative productivity-hours correlation in two countries. |
| Keywords: | Cross-country correlations; Imperfect information; Incomplete markets |
| JEL: | E32 F41 G15 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iefpro:4507458&r=opm |
| By: | Mohaddes, K.; Raissi, M. |
| Abstract: | This paper studies the impact of commodity terms of trade (CToT) volatility on economic growth (and its sources) in a sample of 69 commodity-dependent countries, and assesses the role of Sovereign Wealth Funds (SWFs) and quality of institutions in their long-term growth performance. Using annual data over the period 1981.2014, we employ the Cross-Sectionally augmented Autoregressive Distributive Lag (CS-ARDL) methodology for estimation to account for cross-country heterogeneity, cross-sectional dependence, and feedback effects. We find that while CToT volatility exerts a negative impact on economic growth (operating through lower accumulation of physical capital and lower TFP), the average impact is dampened if a country has a SWF and better institutional quality (hence a more stable government expenditure). |
| Keywords: | Economic growth, commodity prices, volatility, sovereign wealth funds. |
| JEL: | C23 E32 F43 O13 O40 |
| Date: | 2017–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1710&r=opm |
| By: | Raju Huidrom (WorldBank, Development Prospects Group); M. Ayhan Kose (WorldBank, Development Prospects Group; Brookings Institution; CEPR, and CAMA); Franziska L. Ohnsorge (WorldBank, Development Prospects Group; CAMA) |
| Abstract: | The seven largest emerging market economies China, India, Brazil, Russia, Mexico, Indonesia, and Turkey constituted more than one-quarter of global output and more than half of global output growth during 2010-15.These emerging markets, which we call EM7,are also closely integrated with other countries, especially with other emerging and frontier markets. Given their size and integration, growth in EM7 could have significant cross-border spillovers. We provide empirical estimates of these spillovers using a Bayesian vector auto regression model. We report three main results. First, spillovers from EM7 are sizeable: a 1 percentage point increase in EM7 growth is associated with a 0.9 percentage point increase in growth in other emerging and frontier markets and a 0.6 percentage point increase in world growth at the end of three years. Second, sizeable as they are, spillovers from EM7 are still smaller than those from G7 countries (Group of Seven of advanced economies). Specifically, growth in other emerging and frontier markets, and the global economy would increase by one-half to three times more due to a similarly sized increase in G7 growth. Third, among the EM7, spillovers from China are the largest and permeate globally. |
| Keywords: | Business cycles; spillovers; external shocks; China; EM7; G7. |
| JEL: | E32 F20 F42 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1710&r=opm |
| By: | Belke, Ansgar; Osowski, Thomas |
| Abstract: | Building on the growing evidence on the importance of large data sets for empirical macroeconomic modeling, we estimate a large-scale FAVAR model for 18 OECD member countries. We quantify the global effects of economic policy uncertainty shocks and check whether the signs, the magnitude, and the persistence profile are consistent with the literature on the real and financial sector effects of uncertainty. In that respect, we compare the impacts of a US and a Euro area uncertainty shock. According to our results, an increase in uncertainty has a strong negative impact on economic activity, consumer prices, equity prices, and interest rates. Uncertainty shocks cause deeper recessions in Continental Europe (except Germany) than in Anglo-Saxon countries. This pattern is compatible with the view that continental Europe still suffers from institutions which prevent flexible markets. And US uncertainty shocks have a bigger impact than their European counterparts. Uncertainty does not only impact that country where the shock originates but also has large cross-border effects. In that respect, Switzerland turns out to be the most affected non-Euro area European country. We also find a high degree of synchronization among the responses of national variables to a (foreign) uncertainty shock, indicating evidence of an international business cycle. With respect to the responses of national long-term interest rates to an uncertainty shock, our results reveal a strong "North-South" divide within EMU with rates decreasing less significantly in the South. Another important result is that uncertainty shocks emerging in one region quickly raise uncertainty outside the region of origin which appears to be an important transmission channel of uncertainty. |
| Keywords: | economic policy uncertainty,Europe,FAVAR analysis,large-scale econometric models,option value of waiting,uncertainty effects,international uncertainty spillovers,United States |
| JEL: | C32 F42 D80 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:689&r=opm |
| By: | Hwa, Tng Boon (Bank Negara Malaysia); Raghavan, Mala (Tasmanian School of Business & Economics, University of Tasmania); Huey, Teh Tian (Bank Negara Malaysia) |
| Abstract: | This paper studies the causes and effects of portfolio flows in Malaysia. We use Structural Vector Autoregression (SVAR) and Autoregressive Distributed Lag (ARDL) models to analyse the interactions among portfolio flows, global and domestic macro and financial variables within a common empirical framework. Three findings emerge: First, the SVAR estimations show that global and domestic factors play transitory roles in driving Malaysia’s net portfolio flows. A subsample analysis from the ARDL model highlights that domestic factors play an increasingly important role in attracting portfolio inflows as Malaysia liberalised its exchange rate regime and capital flow restrictions. Second, higher net portfolio flows lead to exchange rate appreciation, higher equity prices and credit expansion. The effects are visible in the exchange rate, followed by equity prices and credit. Third, in the transmission of higher portfolio flows to growth, the positive effects from higher equity prices and credit are partially offset by the dampening effect from the appreciating exchange rate on output. While the contribution of portfolio flow’s effects on output variance is low, the impulse responses of output does change to portfolio flow shocks, suggesting that portfolio flows are tail risks to growth and that the risks magnify when the flows are large and volatile. |
| Keywords: | international portfolio flows; open economy; financial economics; SVAR model |
| JEL: | C52 E44 F41 G15 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:tas:wpaper:23512&r=opm |
| By: | Katarina Juselius (Department of Economics, University of Copenhagen) |
| Abstract: | A theory-consistent CVAR scenario describes a set of testable regularieties one should expect to see in the data if the basic assumptions of the theoretical model are empirically valid. Using this method, the paper demonstrates that all basic assumptions about the shock structure and steady-state behavior of an an imperfect knowledge based model for exchange rate determination can be formulated as testable hypotheses on common stochastic trends and cointegration. This model obtained a remarkable support for almost every testable hypothesis and was able to adeqautely account for the long persistent swings in the real exchange rate. |
| Keywords: | Theory-Consistent CVAR, Imperfect Knowledge, Theory-Based Expectations, International Puzzles, Long Swings, Persistence |
| JEL: | F31 F41 G15 G17 |
| Date: | 2017–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:1707&r=opm |
| By: | Vitor Trindade (University of Missouri, Department of Economics); |
| Abstract: | This paper asks two questions. First, when countries open up, what are the incentives of firm owners to invest in the productivity of their firms? And why do they wait until the country opens up to do so? To explore these questions, I set up a simple model in which firm owners choose the optimal mix of profits and leisure. The key insight is that openness drives a wedge between "productive" and "unproductive" firm owners, driving up the price of leisure, and therefore the incentives to innovate. The model is modified to consider one further insight: when countries open up, the real price of a consumption basket goes down because consumers enjoy more variety, which again changes the relative price of leisure. I illustrate the model implications with a survey of small firm owners in Mexico. |
| Keywords: | Import competition, productivity, firm-owner incentives |
| JEL: | F10 F14 F63 |
| Date: | 2017–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:1706&r=opm |
| By: | Katarina Juselius (Department of Economics, University of Copenhagen) |
| Abstract: | A theory-consistent CVAR scenario describes a set of testable regularities capturing basic assumptions of the theoretical model. Using this concept, the paper considers a standard model for exchange rate determination and shows that all assumptions about the model?s shock structure and steady-state behavior can be formulated as testable hypotheses on common stochastic trends and cointegration. While the scenario was rejected on essentially all counts, the results were informative about the cause of the empirical failure. It was the stationarity assumptions that were too restrictive to explain the long persistent swings in the real exchange rate and the interest rate differential. |
| Keywords: | Theory-Consistent CVAR, Expectations, International Puzzles, Long Swings, Persistence, Imperfect Knowledge |
| JEL: | F31 F41 G15 G17 |
| Date: | 2017–04–10 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:1708&r=opm |
| By: | Puriya Abbassi; Falk Brauning; Falko Fecht; José-Luis Peydró |
| Abstract: | We analyze how financial crises affect international financial integration, exploiting euro-area proprietary interbank data, crisis and monetary shocks, and loan terms to the same borrower-day by domestic versus foreign lenders. Crisis shocks reduce the supply of cross-border liquidity, with stronger volume than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home—but independently of quality. On the intensive margin, however, GIPS-headquartered debtor banks suffer in the Lehman crisis, but effects are stronger in the sovereign-debt crisis, especially for riskier banks. Nonstandard monetary policy improves interbank liquidity, but without fostering strong cross-border financial re-integration. |
| Keywords: | financial integration, financial crises, cross-border lending, monetary policy, euro area sovereign crisis, liquidity |
| JEL: | E58 F30 G01 G21 G28 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:965&r=opm |
| By: | Wensheng Kang; Ronald A. Ratti; Joaquin Vespignani |
| Abstract: | This paper investigates the time-varying dynamics of global stock volatility, commodity prices, and domestic output and consumer prices. The main empirical findings of this papers are: (i) stock volatility and commodity price shocks impact each other and the economy in a gradual and endogenous adjustment process; (ii) the impact of a commodity price shock on global stock volatility is far greater during the global financial crisis than at other times; (iii) the effects of global stock volatility on the US output are amplified by the endogenous commodity price responses; (iv) in the long run, shocks to commodity prices (stock market volatility) account for 11.9% (6.6%) and 25.1% (11.6%) of the variation in US output and consumer prices; (v) the effects of global stock volatility shocks on the economy are heterogeneous across nations and relatively larger in the developed countries. |
| Keywords: | Global commodity prices, Global stock volatility, Output, Heterogeneity |
| JEL: | D80 E44 E66 F62 G10 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2017-36&r=opm |