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on Open Economy Macroeconomics |
| By: | Olivier J Blanchard (Peterson Institute for International Economics); Mitali Das (International Monetary Fund) |
| Abstract: | Debt sustainability is fundamentally a probabilistic concept: Debt is rarely sustainable with probability one. We propose an index of external debt sustainability that reflects this uncertainty. Namely we construct the index as the probability that, at the current exchange rate, net external debt is equal to or less than the present value of net exports. Constructing this index involves three steps: (1) deriving the distribution of the present value of net exports at the current exchange rate; (2) deriving the distribution of exchange rates associated with the condition that, for each realization, the present discounted value of net exports is at least equal to the value of current net debt; and (3) assessing where the current exchange rate stands in the distribution of exchange rates and thus the probability that debt is sustainable. Having shown how this can be done, we then compute the index for two countries, the United States and Chile. Our main conclusion is the large degree of uncertainty implied by the presence of large gross asset and liability positions, together with uncertainty about rates of return on these assets and liabilities. The size of the distribution of exchange rate adjustments implies that one should be careful in concluding that debt is or is not sustainable at the current exchange rate and that strong measures are potentially needed to reestablish sustainability. Exchange rates that appear overvalued in the baseline may still imply a reasonably high probability that debt is sustainable at the current exchange rate; symmetrically, exchange rates that appear undervalued in the baseline may still come with a reasonably low probability that debt is unsustainable at the current exchange rate. |
| Keywords: | Sustainability, External Debt, Capital Gains, Gross Assets, Gross |
| JEL: | F32 F34 |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp17-13&r=opm |
| By: | Mikkel Plagborg-Moller (Harvard University); Gita Gopinath (Harvard); Emine Boz (International Monetary Fund) |
| Abstract: | We document the outsize role played by the U.S. dollar in driving international trade prices and flows. Our analysis is the first to examine the consequences of the dollar's prominence as an invoicing currency using a globally representative panel data set. We establish three facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. 2) The cross-sectional heterogeneity in pass-through/elasticity across country pairs is related to the share of imports invoiced in dollars. 3) Bilateral terms of trade are essentially uncorrelated with bilateral exchange rates. Our results derive from fixed effects panel regressions as well as a Bayesian semiparametric hierarchical panel data model. Unlike standard panel regressions, the Bayesian approach allows us to quantify the cross-sectional heterogeneity of exchange rate pass-through/elasticities and the relation of this heterogeneity to dollar invoicing. Our results imply that the majority of international trade is best characterized by a dominant currency paradigm, as opposed to the traditional producer or local currency pricing paradigms. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1041&r=opm |
| By: | Riccardo Trezzi (Board of Governors - Federal Reserve); Luca Dedola (European Central Bank); Giancarlo Corsetti (University of Cambridge) |
| Abstract: | This paper carries out a systematic reconsideration of the evidence on price, wage and employment adjustment in response to the housing price cycle during the Great Recession across US jurisdictions -- i.e., US Metropolitan Statistical Areas (henceforth MSAs). It offers an insightful decomposition of relative price adjustment by sectors, and relates it to determinants in terms of relative sectoral wages (cost) and employment (slack) dynamics. Over the period 2008-2013, asymmetric housing price shocks were virtually uncorrelated with price and wage inflation across MSAs, while they significantly affected output, income and employment in services, the retail sector and construction. Decomposing the response of relative price inflation into that of goods and services (ex-rents) shows that the relative price of consumption goods fell with housing prices, while the relative price of services increased, with roughly identical elasticities basically offsetting the effect of each other movements. |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed017:1096&r=opm |
| By: | Liutang Gong (Guanghua School of Management and LMEQF, Peking University); Chan Wang (Guanghua School of Management and LMEQF, Peking University); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics; Institute for Advanced Study, Wuhan University; Institute for Advanced Study, Shenzhen University) |
| Abstract: | This paper examines optimal monetary policy in a two-country New Keynesian model with international trade in intermediate inputs. We derive the loss function of a cooperative monetary policymaker and ï¬ nd that the optimal monetary policy must target intermediategoods price inflation rates, ï¬ nal-goods price inflation rates, ï¬ nalgoods output gaps, and relative-price gaps. We use the welfare loss under the optimal monetary policy as a benchmark to evaluate the welfare implications of three Taylor-type monetary policy rules. A main ï¬ nding is that the degree of price stickiness at the stage of intermediate-goods production is a key factor to determine which policy rule should be followed. Speciï¬ cally, when the degree of price stickiness at the stage of intermediate-goods production is high, the policymaker should follow intermediate-goods PPI-based Taylor rule, whereas CPI-based Taylor rule should be followed when the degree of price stickiness at the stage of intermediate-goods production is intermediate or low. |
| Keywords: | Vertical production and trade, Optimal monetary policy, Inflation targeting, Welfare |
| JEL: | E5 F3 F4 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:604&r=opm |
| By: | Alberola, Enrique; Benigno, Gianluca |
| Abstract: | We study the response of a three-sector commodity-exporter small open economy to a commodity price boom. When the economy has access to international borrowing and lending, a temporary commodity price boom brings about the standard wealth effect that stimulates domand and has long-run implications on the sectoral allocation of labor. If dynamic productivity gains are concentrated in the traded goods sector, the commodity boom crowds out the traded sector and delays convergence to the world technology frontier. Financial openness by stimulating current demand, amplifies the crowding out effect and may even lead to a growth trap, in which no resources are allocated to the traded sector. From a normative point of view, our analysis suggests that capital account management policies could be welfare improving in those circumstances. |
| Keywords: | Commodity Resource Curse; Dutch-Disease; Financial Openness; Endogenous Growth |
| JEL: | F32 F36 F41 F43 O13 |
| Date: | 2017–05 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:74055&r=opm |
| By: | Davis, Scott (Federal Reserve Bank of Dallas); Zlate, Andrei (Federal Reserve Bank of Boston) |
| Abstract: | This paper measures the effect of monetary tightening in key advanced economies on net capital flows and exchange rates around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous responses of domestic monetary policy depends on each economy’s capital account openness and exchange rate regime. We develop a method to plot counter-factual impulse responses for net capital outflows under the assumption that domestic interest rates are held constant despite foreign monetary tightening. Our results suggests that failing to account for the endogenous response of domestic monetary policy biases down the estimated elasticity of net capital flows to foreign interest rates by as much as ¼ for floaters and ½ for peggers with open capital accounts. |
| JEL: | E5 F3 F4 |
| Date: | 2017–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:328&r=opm |
| By: | Mueller, Philippe; Tahbaz-Salehi, Alireza; Vedolin, Andrea |
| Abstract: | We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the United States, (ii) increase with uncertainty about monetary policy, and (iii) increase further when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies. |
| JEL: | F3 G3 |
| Date: | 2017–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:77256&r=opm |
| By: | Delle Chiaie, Simona; Ferrara, Laurent; Giannone, Domenico |
| Abstract: | In this paper we extract latent factors from a large cross-section of commodity prices, including fuel and non-fuel commodities. We decompose each commodity price series into a global (or common) component, block-specific components and a purely idiosyncratic shock. We find that the bulk of the fluctuations in commodity prices is well summarised by a single global factor. This global factor is closely related to fluctuations in global economic activity and its importance in explaining commodity price variations has increased since the 2000s, especially for oil prices. JEL Classification: C51, C53, Q02 |
| Keywords: | commodity prices, dynamic factor models, forecasting |
| Date: | 2017–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20172112&r=opm |
| By: | Rose Cunningham; Christian Friedrich; Kristina Hess; Min Jae Kim |
| Abstract: | In this paper, we analyze the presence of time variation in the pass-through from the nominal effective exchange rate to import prices for 24 advanced economies over the period 1995–2015. In line with earlier studies in the literature, we find substantial heterogeneity in the level of exchange rate pass-through across countries. But, in addition, we show that the dynamics of exchange rate pass-through also differ across countries. Potential explanations for this observation could be of a country-specific nature or could relate to differences in the composition or transmission of global shocks across countries. We then investigate the role of global demand shocks as potential determinants of exchange rate pass-through dynamics in seven advanced economies. We conduct this analysis by running a set of instrumental variable regressions to quantify the contemporaneous exchange rate pass-through that arises from different shocks. Out of the global demand shocks that we examine, we find that oil demand shocks, in particular, are associated with a relatively higher exchange rate pass-through to import prices, while US fiscal policy shocks appear to have the lowest impact. |
| Keywords: | Exchange rates, Inflation and prices, International topics, Transmission of monetary policy |
| JEL: | F31 F41 E31 |
| Date: | 2017 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:17-12&r=opm |
| By: | Liutang Gong (Guanghua School of Management and LMEQF, Peking University); Chan Wang (Guanghua School of Management and LMEQF, Peking University); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics; Institute for Advanced Study, Wuhan University; Institute for Advanced Study, Shenzhen University) |
| Abstract: | In this paper, we examine optimal exchange-rate flexibility in a model of local-currency pricing with vertical production and trade. Following a large body of empirical evidence, we assume that final-goods prices are sticky, but intermediategoods prices are flexible. We find that, unlike what is found in the literature, optimal nominal exchange rate is flexible under local-currency pricing. The key element in deriving our conclusion is the difference in expenditure shares between home and foreign households. The conclusion holds even if the degrees of home bias in production are identical between home and foreign final-goods producers, which contrasts with the findings in the literature. |
| Keywords: | Optimal monetary policy, Local-currency pricing, Vertical production and trade, Exchange-rate policy |
| JEL: | E5 F3 F4 |
| Date: | 2017–02 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:603&r=opm |