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on Open Economy Macroeconomics |
| By: | Jesse Schreger (Harvard Business School); Brent Neiman (University of Chicago); Matteo Maggiori (Harvard University) |
| Abstract: | We examine global capital flows using unique disaggregated data. We document a number new stylized facts on the nature of global capital flows and how they interact with economic activity. We discuss how these findings can inform the theoretical literature on capital flows in international finance. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:502&r=opm |
| By: | Javier Cravino (University of Michigan) |
| Abstract: | Aggregate price levels are positively related to income per capita across countries. We propose a mechanism to rationalize this observation that relies on sectorial differences in intermediate input intensities. As aggregate productivity and income grow, so does the cost of labor relative to intermediate inputs, which in turn increases the relative price of non-tradables if tradable sectors use intermediate inputs more intensively. In contrast to the Balassa-Samuelson hypothesis, this mechanism does not rely on sectorial differences in the level of productivity, and hence can be easily quantified using input-output data. We show that differences in intermediate input shares across sectors can account for about half the elasticiy of the aggregate price level with respect to GDP per capita. The mechanism also has stark implications for industry-level real exchange rates that are strongly supported by the data. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:552&r=opm |
| By: | Evangelos V. Dioikitopoulos (King's College London, UK); Stephen J. Turnovsky (University of Washington, USA); Roland Wendner (University of Graz, Austria) |
| Abstract: | This paper advances the hypothesis that the intensity of status preferences depends negatively on the average wealth of society (endogenous dynamic status effect), in accordance with empirical evidence. Our behavioral driven theory is able to replicate the contradictory historical facts of an increasing saving rate along with declining returns on capital over time. As an implication of our hypothesis, we are able to provide a theoretical foundation for the observed dynamics on comparative development of income inequality across different countries. In particular, our theory implies that, as an economy develops, the saving rate increases during transition altering the speed of convergence relative to the standard neoclassical growth model. The initially lower and then increasing saving rate during the process of development benefits the wealthy households relative to poor ones, as the rate of interest on capital declines at a lower rate. Therefore, the endogenous dynamic status effect contributes to a rise in wealth inequality. Along the same lines, we analyze the behavior of inequality in response to changes in wealth (income) induced by productivity shocks. Under a positive productivity shock, in economies with a strong enough endogenous dynamic status effect, inequality increases - a fact that we experience in many countries around the globe. |
| Keywords: | Status preferences; Saving rate; Growth; Inequality |
| JEL: | D11 D31 O11 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:grz:wpaper:2017-08&r=opm |
| By: | Davis, J. Scott (Federal Reserve Bank of Dallas); Van Wincoop, Eric (University of Virgina) |
| Abstract: | The correlation between capital inflows and outflows has increased substantially over time in a sample of 128 advanced and developing countries. We provide evidence that this is a result of an increase in financial globalization (stock of external assets and liabilities). This dominates the effect of an increase in trade globalization (exports plus imports), which reduces the correlation between capital inflows and outflows. In the context of a two-country model with 14 shocks we show that the theoretical impact of financial and trade globalization on the correlation between capital inflows and outflows is consistent with the data. |
| JEL: | F3 F4 |
| Date: | 2017–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:323&r=opm |
| By: | Pierre De Leo (Boston College); Vito Cormun (Boston College) |
| Abstract: | Recursive vector autoregression (VAR) analysis suggests that the nominal exchange rate tends to depreciate after a contractionary monetary policy shock in most developing countries, a puzzle for virtually all open-economy macroeconomic models. Using a structural VAR approach, we document that when the U.S. economic outlook worsens developing countries' exchange rates signicantly depreciate and their policy-controlled interest rates increase. We show that commonly used recursive VAR schemes inevitably confound these correlations for the monetary policy innovation. In our econometric framework, we identify the spillover effects of future U.S. business cycles as the innovations that best explain future movements in the Federal Funds rate over an horizon of two years. When the monetary policy shock is then cleansed of these variations, the exchange rate response puzzle disappears. We conclude by showing that a standard small open economy model with news about future fundamentals in a large economy is consistent with all the empirical findings of this paper. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:576&r=opm |
| By: | Ryan Greenaway-McGrevy; Donggyu Sul; Nelson Mark; Jyh-Lin Wu |
| Abstract: | Using recently developed model selection procedures, we determine that exchange rate returns are driven by a two-factor model. We identify them as a dollar factor and a euro factor. Exchange rates are thus driven by global, US, and Euro-zone stochastic discount factors. The identified factors can also be given a risk-based interpretation. Identification motivates multilateral models for bilateral exchange rates. Out-of-sample forecast accuracy of empirically identified multilateral models dominate the random walk and a bilateral purchasing power parity fundamentals prediction model. 24-month ahead forecast accuracy of the multilateral model dominates those of a principal components forecasting model. |
| JEL: | F31 F37 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:23726&r=opm |
| By: | Arturo J. Galindo (Inter-American Development Bank); Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva and CEPR) |
| Abstract: | The paper shows that international government borrowing from multilateral development banks is countercyclical while international government borrowing form private sector lenders is procyclical. The countercyclicality of official lending is mostly driven by the behavior of the World Bank (borrowing from regional development banks tends to be acyclical). The paper also shows that official sector lending to Latin America and East Asia is more countercyclical than official lending to other regions. Private sector lending is instead procyclical in all developing regions. While the cyclicality of official lending does not depend on domestic or international conditions, private lending becomes particularly procyclical in periods of limited global capital flows. By focusing on both borrowers and lenders’ heterogeneity the paper shows that the cyclical properties of international government debt are mostly driven by credit supply shocks. Demand factors appear to be less important drivers of procyclical international government borrowing. The paper’s focus on supply and demand factors is different from the traditional push and pull classification, as push and pull factors could affect both the demand and the supply of international government debt. |
| Keywords: | International Government Debt; Capital Flows, Fiscal Policy; International Financial Institutions |
| JEL: | E62 F34 F32 |
| Date: | 2017–08 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp17-2017&r=opm |