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on Open Economy Macroeconomics |
| By: | Joy, Mark (Bank of England); Lisack, Noemie (Bank of England); Lloyd, Simon (Bank of England); Reinhardt, Dennis (Bank of England); Sajedi, Rana (Bank of England); Whitaker, Simon (Bank of England) |
| Abstract: | There is substantial evidence that openness to trade raises economic growth and boosts living standards. But trade liberalisation has been asymmetric, focused on goods rather than services trade. The decline in goods trade barriers may have favoured countries specialising in goods, like China, Germany and Japan, allowing them to increase exports relative to imports, and contributing to their persistent current account surpluses. By contrast, countries like the United States and the United Kingdom, who specialise in the services sector where trade is more restricted, have been running persistent deficits. This pattern of persistent surpluses and deficits in these key countries has proven hard to explain in the International Monetary Fund’s External Balance Assessment methodology. This paper suggests that asymmetric trade liberalisation is one overlooked explanation. We demonstrate how realistic additions to textbook economic models allow trade policy to have persistent effects on current account imbalances. We also find empirical support for significant quantitative effects. These results suggest that liberalising services trade, levelling up to the liberalisation seen in goods trade, could reduce excess global imbalances by around 40%. Moreover it could contribute to higher and more inclusive global growth. |
| Keywords: | Comparative advantage; Current account; Global imbalances; Services trade policy; Trade liberalisation |
| JEL: | F13 F14 F15 F32 |
| Date: | 2018–01–24 |
| URL: | http://d.repec.org/n?u=RePEc:boe:finsta:0043&r=opm |
| By: | Goldberg, Linda S. (Federal Reserve Bank of New York); Krogstrup, Signe (International Monetary Fund) |
| Abstract: | This paper presents a new measure of capital flow pressures in the form of a recast exchange market pressure index. The measure captures pressures that materialize in actual international capital flows as well as pressures that result in exchange rate adjustments. The formulation is theory-based, relying on balance of payments equilibrium conditions and international asset portfolio considerations. Based on the modified exchange market pressure index, the paper also proposes a global risk response index, which reflects the country-specific sensitivity of capital flow pressures to measures of global risk aversion. For a large sample of countries over time, we demonstrate time variation in the effects of global risk on exchange market pressures, the evolving importance of the global factor across types of countries, and the changing risk-on or risk-off status of currencies. |
| Keywords: | exchange market pressure; risk aversion; safe haven; capital flows; exchange rate; foreign exchange reserves |
| JEL: | F32 G11 G20 |
| Date: | 2018–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:834&r=opm |
| By: | Campos, Nauro F.; Macchiarelli, Corrado |
| Abstract: | Bayoumi-Eichengreen (1993) establish a EMU core-periphery pattern using 1963-1988 data. We use same methodology, sample, window length (1989-2015), and a novel over-identifying restriction test to ask whether the EMU strengthened or weakened the core-periphery pattern. Our results suggest the latter. |
| Keywords: | business cycle synchronization; structural VAR; European Monetary Union; core-periphery |
| JEL: | E32 E63 F02 |
| Date: | 2016–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:68132&r=opm |
| By: | Jonathan J. Adams; Philip Barrett |
| Abstract: | Most countries hold large gross asset positions, lending in domestic currency and borrowing in foreign. Thus, their balance sheets are exposed to nominal exchange rates. We argue that when asset markets are incomplete, nominal exchange rate exposure allows countries to partially insure against shocks that move real exchange rates. We demonstrate that asset market incompleteness can simultaneously generate realistic gross asset positions and resolve the Backus-Smith puzzle: that relative consumptions and real exchange rates correlate negatively. We also show that local perturbation methods that use stabilizing endogenous discount factors are inaccurate when average and steady state interest rates differ. To address this, we develop a novel global solution method to accurately solve the model. |
| Date: | 2017–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:17/291&r=opm |
| By: | Luís A. V. Catão |
| Abstract: | High external deficits in Greece, Ireland, Portugal and Spain are widely regarded as culprits of the post-2008 financial crises in the eurozone. This paper examines the main drivers of those imbalances and discusses how the mix of macroeconomic adjustment and structural reforms implemented in the last few years has affected the evolution of those countries’ external positions. The analysis combines modern theories of the current account and of the real exchange rate with panel data regressions to shed light on the standing of those economies’ external “competitiveness” broadly defined. |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp0272018&r=opm |
| By: | Giancarlo Corsetti (Centre for Economic Policy Research (CEPR); Centre for Macroeconomics (CFM); University of Cambridge); Meredith Crowley (Centre for Economic Policy Research (CEPR); University of Cambridge); Lu Han (University of Cambridge); Huasheng Song (Zhejiang University) |
| Abstract: | We develop a new empirical framework to analyse destination-specific markup and quantity adjustments to bilateral exchange rates by exporters. The framework offers two methodological innovations. First, we develop an unbiased estimator of the markup elasticity that correctly isolates marginal costs in large unbalanced panels where the set of markets served by firms varies endogenously with currency movements. Second, we exploit Chinese linguistics to process characters recorded in Chinese custom forms to build a novel, general, product classification distinguishing high and low differentiation goods|which we can use to proxy for exporters' market power. Applying this framework to exporters from China over 2000-2014, we document substantial heterogeneity in destination-specific markup elasticities across product classes and firm types. Conditional on a price change, the average markup elasticity for highly differentiated consumption goods is 32%; markup adjustments explain three quarters of incomplete pass through into import prices for these goods. In contrast, the average for low-differentiation intermediates is only 5%, suggesting that pricing for these goods responds to global, rather than local, economic conditions. Markup elasticities are higher for both state-owned and foreign-invested enterprises than for private enterprises, which, on average, pursue aggressively competitive strategies throughout our sample. |
| Keywords: | Exchange rates, Pricing-to-market, Product classification, Differentiated goods, Market power, Markup elasticity, China |
| JEL: | F31 F41 |
| Date: | 2018–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1803&r=opm |