nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒08‒13
four papers chosen by
Martin Berka
University of Auckland

  1. Fixed on Flexible: Rethinking Exchange Rate Regimes after the Great Recession By Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot
  2. Exchange Rate Choices with Inflexible Markets and Costly Price Adjustments By Tara Iyer
  3. Monetary Policy in the Capitals of Capital By Elena Gerko; Hélène Rey
  4. Central Bank Balance Sheet Policies and Spillovers to Emerging Markets By Manmohan Singh; Haobin Wang

  1. By: Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot
    Abstract: The zero lower bound problem during the Great Recession has exposed the limits of monetary autonomy, prompting a reevaluation of the relative benefits of currency pegs and monetary unions (see e.g. Cook and Devereux, 2016). We revisit this issue from the perspective of a small open economy. While a peg can be beneficial when the recession originates domestically, we show that a float dominates in the face of deflationary demand shocks abroad. When the rest of the world is in a liquidity trap, the domestic currency depreciates in nominal and real terms even in the absence of domestic monetary stimulus (if domestic rates are also at the zero lower bound) -- enhancing the country's competitiveness and insulating to some extent the domestic economy from foreign deflationary pressure.
    Keywords: Benign coincidence; Currency union; Exchange rate; Exchange rate peg; external shock; Fiscal Multiplier; great recession; zero lower bound
    JEL: E31 F41 F42
    Date: 2017–08
  2. By: Tara Iyer
    Abstract: This paper analyzes the appropriate choice of an exchange rate regime in agricultural commodity-exporting economies. In an open economy model that incorporates key structural characteristics of agricultural commodity exporters including dual labor markets, the benefits of exchange rate flexibility are shown to depend on the extent of labor and product market development. With developed markets, flexible exchange rates are preferred as they allow for greater relative price fluctuations, which amplify the transmission mechanism of labor reallocation upon commodity price volatility. When labor and product markets are not welldeveloped, however, international relative price adjustments exacerbate currency and factor misalignments. A nominal exchange rate peg, by mitigating relative wage and price fluctuations, increases welfare relative to a float. Given the current low level of labor and product market development across most agricultural commodity exporters, the study provides a counterpoint to conventional arguments in favor of flexible exchange rates and a rationale as to why exchange rate targeting is appropriate in agricultural economies.
    Date: 2017–07–10
  3. By: Elena Gerko; Hélène Rey
    Abstract: The importance of financial markets and international capital flows have increased greatly since the 1990s. How does this affect the effectiveness of monetary policy? We analyse the transmission of monetary policy in two important financial centres, the United States and the United Kingdom. Studying the responses of mortgage and corporate spreads we find evidence in favour of an important financial channel in both countries. Our identification strategy allows us to study movements in the policy rates and the effect of forward guidance, broadly defined. We also analyse international financial spillovers, which we find to be asymmetric.
    JEL: E4 E52 E58 F41 G15
    Date: 2017–08
  4. By: Manmohan Singh; Haobin Wang
    Abstract: We develop a theoretical model that shows that in the near future, the monetary policies of some key central banks in advanced economies (AEs) will have two dimensions—changes in short-term policy rates and balance sheet adjustments. This will affect emerging market economies (EMs), especially those with a pegged exchange rate, as these EMs primarily use a single monetary policy tool, i.e., the short-term policy rate. We show that changes in policy rates and balance sheet adjustments in AEs may differ in their respective financial spillovers to pegged EMs. Thus, it will be difficult for EMs to mitigate different types of spillovers with a single monetary policy tool. In that context, we use the model to show how EMs might use additional tools—capital controls and/or macro-prudential policy—to complement their monetary policy and financial stability toolkit. We also discuss how balance sheet adjustments that affect long-term interest rates may percolate to influence short-term interest rates via financial plumbing.
    Date: 2017–07–25

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