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on Open Economy Macroeconomics |
| By: | Javier Cravino; Samuel E. Haltenhof |
| Abstract: | Aggregate price levels are positively related to GDP per capita across countries. We propose a mechanism that rationalizes this observation through sectorial differences in intermediate input shares. As aggregate productivity and income grow, so do wages relative to intermediate input prices, which increases the relative price of non-tradables if tradable sectors use intermediate inputs more intensively. We show that sectorial differences in intermediate input shares can account for two thirds of the observed elasticity of the aggregate price level with respect to GDP per capita. The mechanism has stark implications for industry-level real exchange rates that are strongly supported by the data. |
| JEL: | F31 F41 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23705&r=opm |
| By: | Camila Casas; Federico Díez; Gita Gopinath; Pierre-Olivier Gourinchas |
| Abstract: | A country's exchange rate is at the center of economic and political debates on currency wars and trade competitiveness. The real consequences of exchange rate fluctuations depend critically on how firms set prices in international markets. Recent empirical evidence has challenged the dominant 'producer currency' pricing and 'local currency' pricing paradigms in the literature. In this paper we propose a new paradigm, consistent with the empirical evidence and characterized by three features: pricing in dollars, strategic complementarity in pricing and imported inputs in production. We call this the 'dollar pricing' paradigm and contrast its theoretical predictions with prior approaches in a general equilibrium New Keynesian model. We then employ novel data for Colombia to evaluate the implications of exchange rate fluctuations associated with commodity price shocks and show that the findings strongly support the dollar pricing paradigm. |
| Keywords: | dominant currency, terms of trade, pass-through, monetary policy |
| JEL: | F1 F2 F3 F4 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:653&r=opm |
| By: | Thomas Drechsel; Silvana Tenreyro |
| Abstract: | Emerging economies, particularly those dependent on commodity exports, are prone to highly disruptive economic cycles. This paper proposes a small open economy model for a net commodity exporter to quantitatively study the triggers of these cycles. The economy consists of two sectors, one of which produces commodities with prices subject to exogenous international fluctuations. These fluctuations affect both the competitiveness of the economy and its borrowing terms, as higher commodity prices are associated with lower spreads between the country's borrowing rate and world interest rates. Both effects jointly result in strongly positive effects of commodity price increases on GDP, consumption and investment, and a negative effect on the total trade balance. Furthermore, they generate excess volatility of consumption over output and a large volatility of investment. The model structure nests various candidate sources of shocks proposed in previous work on emerging economy business cycles. Estimating the model on Argentine data, we find that the contribution of commodity price shocks to fluctuations in post-1950 output growth is in the order of 38%. In addition, commodity prices account for around 42% and 61% of the variation in consumption and investment growth, respectively. We find transitory productivity shocks to be an important driver of output fluctuations, exceeding the contribution of shocks to the trend, which is smaller, although not negligible. |
| JEL: | E13 E32 F41 F43 O11 O16 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23716&r=opm |
| By: | Abbassi, Puriya (Deutsche Bundesbank); Brauning, Falk (Federal Reserve Bank of Boston); Fecht, Falko (Frankfurt School of Finance & Management); Peydro, Jose Luis (Universitat Pompeu Fabra) |
| Abstract: | We analyze how financial crises affect international financial integration, exploiting euro area proprietary interbank data, crisis and monetary policy shocks, and variation in loan terms to the same borrower on the same day by domestic versus foreign lenders. Crisis shocks reduce the supply of crossborder liquidity, with stronger volume effects than pricing effects, thereby impairing international financial integration. On the extensive margin, there is flight to home — but this is independent 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 reintegration. |
| Keywords: | financial integration; financial crises; cross-border lending; monetary policy; euro area sovereign crisis; liquidity |
| JEL: | E58 F30 G01 G21 G28 |
| Date: | 2017–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:17-6&r=opm |
| By: | Loren Brandt (University of Toronto); Jessica Leight (Williams College); Diego Restuccia (University of Toronto); Tasso Adamopoulos (York University) |
| 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. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:404&r=opm |
| By: | Tille, Cédric |
| Abstract: | Over the last decade, the economic linkages between Switzerland and the rest of the world have been transformed. First, merchanting and the chemical industry account for an increasing share of international trade, with chemicals exports expanding robustly in recent years despite the European crisis and the strong Swiss franc. Second, the nature of international financial integration has changed. While private investors drove Switzerland's financial flows and net foreign assets before the financial crisis, the foreign reserves accumulation by the Swiss National Bank has been playing a major role since. Third, asset prices and foreign exchange movements led to substantial capital losses in foreign assets which fully absorbed the surplus on the current account. Finally, the crisis has weakened the role of foreign trade as an engine of growth and narrowed it across sectors. |
| Keywords: | Switzerland,current account,globalization,external investment position |
| JEL: | F1 F4 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:2088&r=opm |
| By: | Giancarlo Corsetti (University of Cambridge; Centre for Macroeconomics (CFM); Centre for Economic Policy Research); Eleonora Mavroeidi (Bank of England); Gregory Thwaites (Bank of England; Centre for Macroeconomics (CFM)); Martin Wolf (University of Bonn) |
| Abstract: | We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment and at-target in ation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape can be beggar thy self, raising employment but actually lowering welfare. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities' ability to rescue the economy from stagnation. |
| Keywords: | Monetary policy, Zero lower bound, deflation, depreciation, Beggar-thy-neighbour, Capital controls |
| JEL: | F41 E62 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1722&r=opm |
| By: | Guangling Liu (University of Stellenbosch); Fernando Garcia-Barragan |
| Abstract: | This paper studies the effectiveness of capital controls with foreign currency denomination on business cycle fluctuations and the implications for welfare. To do this, we develop a general equilibrium model with financial frictions and banking, in which assets and liabilities are denominated in both domestic and foreign currencies. We propose a non-pecuniary, capital-control policy that limits the gap between foreign-currency denominated loans and deposits to the amount of foreign funds that bankers can borrow from the international credit market. We show that capital controls have a significant impact on the dynamics of assets and liabilities that are denominated in foreign currency. The non-pecuniary capital controls help to stabilize the financial sector, thereby reducing the negative spillovers to the real economy. A more restrictive capital-control policy significantly weakens the welfare effect of the foreign monetary policy and exchange rate shocks. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:415&r=opm |
| By: | Cécile Couharde; Anne-Laure Delatte; Carl Grekou; Valérie Mignon; Florian Morvillier |
| Abstract: | The aim of this paper is to present EQCHANGE, the new database developed by the CEPII on effective exchange rates. EQCHANGE includes two sub-databases containing data on (i) nominal and real effective exchange rates, and (ii) equilibrium real effective exchange rates and corresponding currency misalignments for advanced, emerging and developing countries. More specifically, the first sub-database delivers effective exchange rates for 187 countries that are computed under three different weighting schemes and two panels of trading partners (186 and top 30) over the 1973-2016 period. The second sub-database provides behavioral equilibrium exchange rate (BEER) estimates and corresponding currency misalignments for 182 economies over the 1973-2016 period. We describe the construction of the two datasets and illustrate some possible uses by presenting results concerning the evolution and main characteristics of currency misalignments in the world from 2015 to 2016. By providing publicly available indicators of equilibrium exchange rates, EQCHANGE aims to contribute to key debates in international macroeconomics. |
| Keywords: | Exchange Rates;Equilibrium Exchange Rates;Currency Misalignments |
| JEL: | F31 C23 C82 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2017-14&r=opm |
| By: | Gregor Bäurle; Matthias Gubler; Diego R. Känzig |
| Abstract: | We analyze how the transmission of international inflation spillovers depends on the nature of the underlying shocks that drive inflation abroad. We find evidence for substantial heterogeneity in the magnitude of spillovers to domestic inflation related to the fundamental source of international price fluctuations and the corresponding monetary policy reactions. Indeed, it turns out that the relative conduct of monetary policy varies depending on the source of these price fluctuations, and so does the role of the exchange rate as a shock absorber. We show this by looking at international inflation spillovers to Switzerland through the lenses of a Bayesian structural dynamic factor model relating a large set of disaggregated prices to key macroeconomic factors. Being a small open economy with an independent monetary policy, Switzerland is a particularly suitable subject for studying the role of monetary policy in the transmission of foreign shocks. However, our results more broadly indicate that inflation spillovers need to be analyzed in a framework allowing for different transmission channels. |
| Keywords: | international spillovers, inflation, monetary policy, Bayesian factor model, sign restrictions |
| JEL: | C11 C32 E31 E52 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2017-07&r=opm |
| By: | Thomas Drechsel (London School of Economics (LSE); Centre for Macroeconomics (CFM)); Silvana Tenreyro (London School of Economics (LSE); Centre for Macroeconomics (CFM); Centre for Economic Performance (CEP)) |
| Abstract: | Emerging economies, particularly those dependent on commodity exports, are prone to highly disruptive economic cycles. This paper proposes a small open economy model for a net commodity exporter to quantitatively study the triggers of these cycles. The economy consists of two sectors, one of which produces commodities with prices subject to exogenous international fluctuations. These fluctuations affect both the competitiveness of the economy and its borrowing terms, as higher commodity prices are associated with lower spreads between the country's borrowing rate and world interest rates. Both effects jointly result in strongly positive effects of commodity price increases on GDP, consumption and investment, and a negative effect on the total trade balance. Furthermore, they generate excess volatility of consumption over output and a large volatility of investment. The model structure nests various candidate sources of shocks proposed in previous work on emerging economy business cycles. Estimating the model on Argentine data, we find that the contribution of commodity price shocks to fluctuations in post-1950 output growth is in the order of 38%. In addition, commodity prices account for around 42% and 61% of the variation in consumption and investment growth, respectively. We find transitory productivity shocks to be an important driver of output fluctuations, exceeding the contribution of shocks to the trend, which is smaller, although not negligible. |
| Keywords: | Business cycles, Small open economy, Emerging markets, Commodity prices, Argentina's economy |
| JEL: | E13 E32 F43 O11 O16 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1723&r=opm |
| By: | Giancarlo Corsetti (University of Cambridge; Centre for Macroeconomics (CFM); Centre for Economic Policy Research); Keith Kuester (University of Bonn; Centre for Economic Policy Research); Gernot J. Müller (University of Tübingen; Centre for Economic Policy Research) |
| Abstract: | The zero lower bound problem during the Great Recession has exposed the limits of monetary autonomy, prompting a re-evaluation 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 oat 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: | External shock, Great Recession, Exchange rate, Zero lower bound, Exchange rate peg, Currency union, Fiscal Multiplier, Benign coincidence |
| JEL: | F41 F42 E31 |
| Date: | 2017–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1721&r=opm |