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on Open Economy Macroeconomics |
| By: | Maurice Obstfeld; Alan M. Taylor |
| Abstract: | In our book, Global Capital Markets: Integration, Crisis, and Growth, we traced out the evolution of the international monetary system using the framework of the “international monetary trilemma”: countries can enjoy at most two from the set {exchange-rate stability, open capital markets, and domestic monetary autonomy}. The events of the past decade or more highlight the further complications for this framework posed by financial stability issues. Here we update and qualify our prior analysis, drawing on recent experience and research. Under the classical gold standard, scant attention was paid to macro management, either to stabilize output and employment or to ensure financial stability. The interwar years highlighted the changing demands for modern central bank interventions in the economy. Financial instability, followed by WWII, left a world with sharply constricted financial markets and little private cross-border capital mobility. Due to this historical accident, the Bretton Woods system agreed in 1944 focused not at all on financial stability, and focused on issues like adjustment, exchange rate misalignment, and international liquidity (defined in terms of official, not private, capital-account transactions). Post 1970s floating rates permitted, but did not require, liberalization of the capital account. But the political equilibrium had shifted in favor of financial interests, signaled by the push toward European integration and the later reform process in emerging markets starting in the 1990s. This development, however, opened the door once again to domestic financial crises and their international transmission. Countries now become more susceptible to a new species of “capital account crises,” fueled by bank and bond lending, and its sudden withdrawal. These developments, in fact, made evident a different, “financial trilemma”: countries can pick at most two from {financial stability, open capital markets, and autonomy over domestic financial policy}. We distill the main lessons as to the interactions between the monetary and financial trilemmas, and policies that could best address the resulting weaknesses. |
| JEL: | B1 E44 E50 E60 F30 F40 F62 F65 G01 N10 N20 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23440&r=opm |
| By: | Adina Ardelean; Miguel Leon-Ledesma; Laura Puzzello |
| Abstract: | We develop an empirical framework that allows us to account for producer-country, industry, and demand shocks as drivers of volatility at the industry level in open economies. Our methodology separately accounts for demand shocks originating in the home and foreign markets. Using a panel of manufacturing and trade data, our findings suggest that, independent of the level of aggregation, output volatility is driven primarily by shocks originating in the destination markets for an industry's sales (demand shocks) including home markets. Further, we show that industries more open to trade are more volatile because intra-industry imports increase the uncertainty of 1) domestic demand, and 2) production through greater exposure to foreign shocks. |
| Keywords: | Output Volatility; Demand Shocks; Trade; Industry-level Data |
| JEL: | F15 F44 F61 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1709&r=opm |
| By: | Drygalla, Andrej |
| Abstract: | Russian monetary policy has been challenged by large and continuous private capital outflows and a sharp drop in oil prices during 2014, with both ongoings having put a significant depreciation pressure on the ruble and having led the central bank to eventually give up its exchange rate management strategy. Against this background, this paper estimates a small open economy model for Russia, featuring an oil price sector and extended by a specification of the foreign exchange market to correctly account for systematic central bank interventions. We find that shocks to the oil price and private capital flows substantially affect domestic variables such as inflation, output and the exchange rate. Simulations of the model for the estimated actual strategy and five alternative regimes suggest that the vulnerability of the Russian economy to external shocks can substantially be lowered by adopting some form of an inflation targeting strategy. Foreign exchange intervention-based policy strategies to target the nominal exchange rate or the ruble price of oil, on the other hand, prove inferior to the policy in place. |
| Keywords: | monetary policy,exchange rate interventions,oil price,capital flows |
| JEL: | E52 F31 F41 G15 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:iwhdps:142017&r=opm |
| By: | Olumuyiwa Adedeji; Richard K. Abrams |
| Abstract: | With the global economy beginning to emerge from the financial crisis, capital is flowing back to emerging market countries (EMEs). These flows, and capital mobility more generally, allow countries with limited savings to attract financing for productive investment projects, foster the diversification of investment risk, promote intertemporal trade, and contribute to the development of financial markets. In this sense, the benefits from a free flow of capital across borders are similar to the benefits from free trade (see Reaping the Benefits of Financial Globalization, IMF Occasional Paper 264, 2008), and imposing restrictions on capital mobility means foregoing, at least in part, these benefits, owing to the distortions and resource misallocation that controls give rise to (see Edwards and Ostry, 1992, for an example of how capital controls interact with other distortions in the economy) |
| Date: | 2016–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfspn:05/016&r=opm |
| By: | Antonia Lopez-Villavicencio; Valérie Mignon |
| Abstract: | This paper assesses the impact of globalization on exchange rate pass-through (ERPT) into import prices in three core eurozone countries. To this end, we consider various indicators of globalization and rely on both aggregated (i.e., country level) and disaggregated (i.e., good level) data. Using quarterly data since 1992, we do not find compelling evidence that global factors cause a structural change in the degree of exchange rate pass-through. Indeed, increased trade openness or lower trade tariffs push up ERPT in some sectors, though results are quite sparse. However, regionalization, defined as a higher proportion of intra-EU imports' share in total imports, reduces the pass-through in a more generalized way. Most importantly, we show that ERPT incompleteness generally observed in the literature is in appearance only and not at play when intra-EU trade is controlled for. Overall, our findings show that ERPT is complete and significant in numerous sectors, meaning that exchange rate changes still exert important pressure on domestic prices. |
| Keywords: | Exchange rate pass-through;Import prices;Globalization;Eurozone |
| JEL: | E31 F31 F4 C22 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2017-08&r=opm |
| By: | Joshua Aizenman; Yothin Jinjarak; Gemma Estrada; Shu Tian |
| Abstract: | The pronounced and persistent impact of the global financial crisis of 2008 motivates our empirical analysis of the role of institutions and macroeconomic fundamentals on countries’ adjustment to shocks. Our empirical analysis shows that the associations of growth level, growth volatility, shocks, institutions, and macroeconomic fundamentals have changed in important ways after the crisis. GDP growth across countries has become more dependent on external factors, including global growth, global oil prices, and global financial volatility. After accounting for the effects global shocks, we find that several factors facilitate adjustment to shocks in middle income countries. Education attainment, share of manufacturing output in GDP, and exchange rate stability increase the level of economic growth, while exchange rate flexibility, education attainment, and lack of political polarization reduce the volatility of economic growth. Countries cope with shocks better in the short to medium term by using appropriate policy tools and having good long-term fundamentals. |
| JEL: | E02 F43 |
| Date: | 2017–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23467&r=opm |
| By: | Coricelli, Fabrizio; Ravasan, Farshad R |
| Abstract: | In the process of economic development, the share of manufacturing in total employment first increases and then declines after incomes per capita have passed a given threshold. Advanced economies are all beyond that threshold and thus experience a secular decline in the share of manufacturing. Baumol explained such a process of deindustrialization as resulting from faster productivity growth in manufacturing relative to services. More recently, trade with emerging economies, especially with China, is often identified as the main determinant of deindustrialization in advanced economies. Disentangling the trade channel from the traditional productivity channel is a complicated task. In this paper, we develop a simple model of structural change in an open economy to derive empirical implications, which we analyze for a sample of OECD countries. The model is based on trade between advanced and emerging economies. In a closed economy framework, faster productivity in manufacturing induces a fall in the share of manufacturing in total employment but not in total value added. By contrast, in open economies, what matters is not only the relative growth of productivity in manufacturing versus domestic services, but also relative productivity growth of domestic versus foreign manufacturing. When productivity growth of domestic manufacturing is faster than that of services but slower than that of foreign manufacturing, the share of manufacturing in advanced economies may fall, both in terms of value added and of employment. We call this phenomenon "twin deindustrialization." We exploit the comparison between estimates for the employment and value added shares to identify the relevance of the trade channel relative to the pure productivity channel. We find significant and quantitatively relevant effects of trade on structural change in advanced economies. Furthermore, we show that the strength of the trade effect depends on the nature of technological progress occurring in emerging economies. |
| Keywords: | deindustrialization; open economies; structural change |
| JEL: | E21 E22 F31 F41 O40 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12069&r=opm |
| By: | Dennis Bonam; Gavin Goy |
| Abstract: | Under monetary union, economic dynamics may diverge across countries due to regional inflation differentials and a pro-cyclical real interest rate channel, yet stability is generally ensured through endogenous adjustment of the real exchange rate. The speed of adjustment depends, inter alia, on the way agents form expectations. We propose a model in which agents' expectations are largely based on domestic variables, and less so on foreign variables. We show that such home bias in expectations strengthens the real interest rate channel and causes country-specific shocks to generate larger and more prolonged macroeconomic imbalances. |
| Keywords: | monetary union; macroeconomic imbalances; home biased expectations; E-stability |
| JEL: | E03 F44 F45 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:556&r=opm |