nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒04‒16
nine papers chosen by
Martin Berka
University of Auckland

  1. Exchange rate misalignment, capital flows, and optimal monetary policy trade-offs By Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
  2. One money, many markets: a factor model approach to monetary policy in the Euro Area with high-frequency identification By Corsetti, Giancarlo; Duarte, Joao B.; Mann, Samuel
  3. Markets and markups: a new empirical framework and evidence on exporters from China By Corsetti, Giancarlo; Crowley, Meredith; Han, Lu; Song, Huasheng
  4. The international transmission of monetary policy By Buch, Claudia M.; Bussiere, Matthieu; Goldberg, Linda S.; Hills, Robert
  5. The Feldstein-Horioka puzzle and the global financial crisis: Evidence from South Africa using asymmetric cointegation analysis By Andrew Phiri
  6. Fiscal Spillovers; The Importance of Macroeconomic and Policy Conditions in Transmission By Patrick Blagrave; Giang Ho; Ksenia Koloskova; Esteban Vesperoni
  7. Monetary Policy Transmission in the Eastern Caribbean Currency Union By Alla Myrvoda; Julien Reynaud
  8. On real interest rates, tariff policy, exchange rates and the ZLB By Sweder van Wijnbergen
  9. Sovereign risk and asset market dynamics in the euro area By Erica Perego

  1. By: Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain
    Abstract: What determines the optimal monetary trade-o§ between internal objectives (inflation, and output gap) and external objectives (competitiveness and trade imbalances) when inefficient capital flows cause exchange rate misalignment and distort current account positions? We characterize this trade-o§ analytically, using the workhorse model of modern monetary theory in open economies under incomplete markets–where inefficient capital flows and exchange rate misalignments can arise independently of nominal distortions. We derive a quadratic approximation of the utility-based global policy loss function under fairly general assumptions on preferences and openness, and solve for the optimal targeting rules under cooperation. We show that, in economies with a low degree of exchange rate pass-through, the optimal response to inefficient capital inflows associated with real appreciation is contractionary, above and beyond the natural rate: the optimal policy curbs excessive demand at the cost of exacerbating currency overvaluation. In contrast, a high degree of pass-through, and/or low trade elasticities, warrants expansionary policies that lean against exchange rate appreciation and competitive losses, at the cost of inefficient inflation.
    Keywords: currency misalignments; trade imbalances; asset markets and risk sharing; optimal targeting rules; international policy cooperation; exchange rate pass-through
    JEL: E44 E52 E61 F41 F42
    Date: 2018–03
  2. By: Corsetti, Giancarlo; Duarte, Joao B.; Mann, Samuel
    Abstract: We reconsider the effects of common monetary policy shocks across countries in the euro area, using a data-rich factor model and identifying shocks with high-frequency surprises around policy announcements. We show that the degree of heterogeneity in the response to shocks, while being low in financial variables and output, is significant in consumption, consumer prices and macro variables related to the labour and housing markets. Mirroring country-specific institutional and market differences, we find that home ownership rates are significantly correlated with the strength of the housing channel in monetary policy transmission. We document a high dispersion in the response to shocks of house prices and rents and show that, similar to responses in the US, these variables tend to move in different directions.
    Keywords: monetary policy; high-frequency identification; monetary union; labour market; housing market
    JEL: E21 E44 E52
    Date: 2018–02
  3. By: Corsetti, Giancarlo; Crowley, Meredith; Han, Lu; Song, Huasheng
    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; trade elasticity; China
    JEL: F31 F41
    Date: 2018–02
  4. By: Buch, Claudia M. (Deutsche Bundesbank); Bussiere, Matthieu (Banque de France); Goldberg, Linda S. (Federal Reserve Bank of New York); Hills, Robert (Bank of England)
    Abstract: This paper presents the novel results from an internationally coordinated project by the International Banking Research Network (IBRN) on the cross-border transmission of conventional and unconventional monetary policy through banks. Teams from seventeen countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the United States, the euro area, Japan, and the United Kingdom. Two other studies use international data with different degrees of granularity. International spillovers into lending to the private sector do occur, especially for U.S. policies, and bank-specific heterogeneity influences the magnitudes of transmission. The effects are supportive of the international bank lending channel and the portfolio channel of monetary policy transmission. They also show that the frictions that banks face matter; in particular, foreign currency funding and hedging considerations can be a key source of heterogeneity. The forms of bank balance sheet heterogeneity that differentiate spillovers across banks are not uniform across countries. International spillovers into lending can be large for some banks, even while the average international spillovers of policies into nonbank lending generally are not large.
    Keywords: monetary policy; international spillovers; cross-border transmission; global bank; global financial cycle
    JEL: E52 F3 F4 G15 G21
    Date: 2018–03–01
  5. By: Andrew Phiri (Department of Economics, Nelson Mandela University)
    Abstract: In this study we examine the effects of the 2007-2008 global financial crisis on the Feldstein-Horioka coefficient for South Africa using momentum threshold cointegration and error correction techniques applied to quarterly national savings-investment time series collected between 2000:Q1 and 2017:Q1. Our empirical strategy consists of segregating the data into three samples; one corresponding to the full sample (1960:Q1 – 2016:Q4), another corresponding to the pre-crisis period (1960:Q1-2008:Q3) and the last corresponding to the post-crisis period (2008:Q4-2016:Q4). Our empirical results validate asymmetric cointegration effects for both the full and the pre-crisis periods while only accepting a linear cointegration relation for the post-crisis period. The saving-retention coefficient estimates produced are 0.59 (significant), 0.64 (significant), and 0.22 (insignificant) for the full, pre-crisis and post-crisis periods, respectively. These results imply that international capital mobility has increased in the post-crisis period and this may be primarily due to the effects of a redirection of private capital flows by investors to safe haven assets. Therefore policy plans of further relaxing of capital controls is inadvisable considering that capital is already highly mobile.
    Keywords: Investment, Savings, Feldstein-Horioka puzzle, Threshold cointegration, Threshold error correction model, Sub-Saharan Africa, South Africa.
    JEL: C22 C52 F21 F41
    Date: 2017–05
  6. By: Patrick Blagrave; Giang Ho; Ksenia Koloskova; Esteban Vesperoni
    Abstract: Are fiscal spillovers today as large as they were during the global financial crisis? How do they depend on economic and policy conditions? This note informs the debate on the cross-border impact of fiscal policy on economic activity, shedding light on the magnitude and the factors affecting transmission, such as the fiscal instruments used, cyclical positions, monetary policy conditions, and exchange rate regimes. The note assesses spillovers from five major advanced economies (France, Germany, Japan, United Kingdom, United States) on 55 advanced and emerging market economies that represent 85 percent of global output, looking at government-spending and tax revenue shocks during expansion and consolidation episodes. It finds that fiscal spillovers are economically significant in the presence of slack and/or accommodative monetary policy—and considerably smaller otherwise, which suggests that spillovers are large when domestic multipliers are also large. It also finds that spillovers from government-spending shocks are larger and more persistent than those from tax shocks and that transmission may be stronger among countries with fixed exchange rates. The evidence suggests that although spillovers from fiscal policies in the current environment may not be as large as they were during the crisis, they may still be important under certain economic circumstances.
    Keywords: Spillovers;Fiscal policy;External shocks;Global financial crisis, 2008-2009;Monetary policy;Exchange rate regimes;Emerging markets;Government spending;Tax revenue;Economic expansion;Fiscal consolidation;Spillovers, fiscal policy, transmission, economic impact, cross-border impact
    Date: 2017–10–18
  7. By: Alla Myrvoda; Julien Reynaud
    Abstract: This paper empirically investigates international and domestic monetary policy transmission mechanisms in the Eastern Caribbean Currency Union (ECCU). We assess interest rate pass-through of both the U.S. policy rate and the ECCU minimum saving deposit rate (MSR) into domestic interest rates through the interest rate channel. While economic theory suggests that the international pass-through should be high in small open economies with fixed exchange rates and open capital accounts, our findings, based on regression analysis, point to a low long-run pass-through coefficient of the U.S. interest rate. The domestic transmission channel, however, is found to operate through changes in the MSR. The results hold for different interest rates (deposit and lending) and are supported by survey-based findings.
    Date: 2018–03–29
  8. By: Sweder van Wijnbergen (UvA, CEPR)
    Abstract: What could be the drivers of low real rates? What are the implications of the Zero Lower Bound for economic policy? To discuss these questions we introduce a full general equilibrium model of the world economy with a simple (2 period) intertemporal structure. The model is simple enough to allow for full analytical solution yet sufficiently complex to allow us to address the impact of anticipated future productivity slow down, aging, structural reform and fiscal policy on real interest rates if markets clear and on aggregate economic activity if they do not because of the ZLB. We extend both the equilibrium model and the ZLB variant to a more-goods-per-period set up with complete specialization to address (real) exchange rate policy and the macroeconomic impact of trade tariffs.
    Keywords: equilibrium real interest rates; aging; productivity change; the ZLB; real exchange rates; import tariffs
    JEL: E62 F13 F40 F41 H30
    Date: 2018–03–30
  9. By: Erica Perego (University of Evry-Val d’Essonne)
    Abstract: This paper studies the behaviour of euro area asset market comovements during the period 2010- 2014, through the lens of a DSGE model. The economy is a two-country world consisting of a core and a periphery and featuring an international banking sector, home bias in bond holdings, and default. The periphery is buffeted by a sovereign risk shock, whose process is estimated from the data. The model successfully accounts for the divergence in core-periphery correlations between stock and bond returns. Simulation results indicate that the sovereign risk shock explains 50% of the increase in sovereign and loan-deposit spreads and 7% of the decrease in global output during the sovereign debt crisis.
    Keywords: Currency union, international financial markets, sovereign risk, general equilibrium
    JEL: F41 F44 G15
    Date: 2018

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