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on Open Economy Macroeconomics |
| By: | Corsetti, Giancarlo; Dedola, Luca; Leduc, Sylvain |
| Abstract: | What determines the optimal monetary trade-off 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-off 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 co- operation. 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: | asset markets and risk sharing; Currency misalignments; exchange rate pass-through; international policy cooperation; optimal targeting rules; trade imbalances |
| JEL: | E44 E52 E61 F41 F42 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12850&r=opm |
| By: | Luca Fornaro; Federica Romei |
| Abstract: | This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy cannot stabilize the economy because it is frequently constrained by the zero lower bound. Now imagine that governments complement monetary policy with prudential financial and fiscal policies, because they perceive that limiting private and public borrowing during booms will help stabilize the economy by reducing the risk of financial crises and by creating space for fiscal interventions during busts. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. In a financially integrated world, in fact, prudential policies generate a rise in the global supply of savings, or equivalently a drop in global aggregate demand. In turn, weaker global aggregate demand depresses output in countries whose monetary policy is constrained by the zero lower bound. Due to this effect, the world might paradoxically experience a fall in output and welfare following the implementation of well-intended prudential policies. |
| Keywords: | Liquidity traps, zero lower bound, capital flows, fi scal policies, macroprudential policies, current account policies, aggregate demand externalities, international cooperation. |
| JEL: | E32 E44 E52 F41 F42 |
| Date: | 2016–12 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1609&r=opm |
| By: | van Wijnbergen, Sweder |
| 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: | aging; equilibrium real interest rates; import tariffs; productivity change; the ZLB; real exchange rates |
| JEL: | E62 F13 F40 F41 H30 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12837&r=opm |
| By: | Wen Yao; Xiaodong Zhu |
| Abstract: | The correlation between the cyclical components of aggregate employment and GDP is highly positive in the US, but close to zero in China. We argue that the difference in the size of the agricultural sector is the reason for the difference in employment-output correlation. We construct a simple two-sector growth model with productivity shocks and non-homothetic preferences and show that the model can simultaneously account for the long-run structural change and short-run employment fluctuations at sector level and in the aggregate for both economies. |
| Keywords: | Structural Change, Non-homothetic Preferences, Labor Reallocation, Aggregate Fluctuations |
| JEL: | E24 E32 O41 |
| Date: | 2018–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-600&r=opm |
| By: | Lozej, Matija; Onorante, Luca; Rannenberg, Ansgar |
| Abstract: | We examine, conditional on structural shocks, the macroeconomic performance of different countercyclical capital buffer (CCyB) rules in small open economy estimated medium scale DSGE. We find that rules based on the credit gap create a trade-off between the stabilization of fluctuations originating in the housing market and fluctuations caused by foreign demand shocks. The trade-off disappears if the regulator targets house prices instead. As a result, the optimal simple CCyB rule depends only on the house price but not the credit gap. Moreover, the optimal simple rule leads to significant welfare gains compared to the no CCyB case. JEL Classification: F41, G21, G28, E32, E44 |
| Keywords: | bank capital, boom-and-bust, countercyclical capital regulation, housing bubbles |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182144&r=opm |
| By: | Grasso, Adriana; Natoli, Filippo |
| Abstract: | We propose a consumption-based model that allows for an inverted term structure of real and nominal risk-free rates. In our framework the agent is subject to time-varying macroeconomic risk and interest rates at all maturities depend on her risk perception which shape saving propensities over time. In bad times, when risk is perceived to be higher in the short- than the long-term, the agent would prefer to hedge against low realizations of consumption in the near future by investing in long-term securities. This determines, in equilibrium, the inversion of the yield curve. Pricing time-varying consumption volatility risk is essential for obtaining the inversion of the real curve and allows to price the average level and slope of the nominal one. JEL Classification: G12 |
| Keywords: | habits, inverted yield curve, real rates, uncertainty, volatility risk |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182141&r=opm |
| By: | Stefano Bolatto; Marco Grazzi; Chiara Tomasi |
| Abstract: | This work investigates the di↵erential adjustments of the direct and intermediated export chan- nels in the aftermath of an exchange rate movement. We do this with the help of a relatively parsimonious model that, while replicating the main findings from the literature on export in- termediaries, also puts forth new testable predictions. Exporting through intermediaries entails lower fixed costs, but as a consequence of double marginalization, it also entails lower variable profits. If firms apply heterogeneous pricing-to-market, the joint outcome at the very micro level is a lower exchange rate pass-through for goods traded via intermediaries, whereas at a more aggregate level, there is an adjustment in the number of varieties reaching the foreign destination over the two export channels that varies with the level of country fixed costs. These conjectures are tested employing the Italian cross-border transaction level data; taken together they shed light on the determinants of the impact of intermediaries on aggregate trade flows. |
| Keywords: | firms heterogeneity, export intermediaries, heterogeneous markups, pricing to market, double marginalization, exchange rate pass-through, export mode selection |
| JEL: | F12 F14 D22 L22 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwprg:2018/02&r=opm |
| By: | Patrick Augustin; Mikhail Chernov; Dongho Song |
| Abstract: | Sovereign CDS quanto spreads – the difference between CDS premiums denominated in U.S. dollars and a foreign currency – tell us how financial markets view the interaction between a country's likelihood of default and associated currency devaluations (the twin Ds). A no-arbitrage model applied to the term structure of quanto spreads can isolate the interaction between the twin Ds and gauge the associated risk premiums. We study countries in the Eurozone because their quanto spreads pertain to the same exchange rate and monetary policy, allowing us to link cross-sectional variation in their term structures to cross-country differences in fiscal policies. The ratio of the risk-adjusted to the true default intensities is 2, on average. Conditional on the occurrence default, the true and risk-adjusted 1-week probabilities of devaluation are 4% and 75%, respectively. The risk premium for the euro devaluation in case of default exceeds the regular currency premium by up to 0.4% per week. |
| JEL: | C1 E43 E44 G12 G15 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24506&r=opm |
| By: | Augustin, Patrick; Chernov, Mikhail; Song, Dongho |
| Abstract: | Sovereign CDS quanto spreads - the difference between CDS premiums denominated in U.S. dollars and a foreign currency - tell us how financial markets view the interaction between a country's likelihood of default and associated currency devaluations (the twin Ds). A no- arbitrage model applied to the term structure of quanto spreads can isolate the interaction between the twin Ds and gauge the associated risk premiums. We study countries in the Eurozone because their quanto spreads pertain to the same exchange rate and monetary policy, allowing us to link cross-sectional variation in their term structures to cross-country differences in fiscal policies. The ratio of the risk-adjusted to the true default intensities is 2, on average. Conditional on the occurrence default, the true and risk-adjusted 1-week probabilities of devaluation are 4% and 75%, respectively. The risk premium for the euro devaluation in case of default exceeds the regular currency premium by up to 0.4% per week. |
| Keywords: | contagion; credit default swaps; credit risk; Exchange Rates; Sovereign debt |
| JEL: | C1 E43 E44 G12 G15 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12857&r=opm |
| By: | Jean-Christophe Poutineau (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR1 - Université de Rennes 1 - CNRS - Centre National de la Recherche Scientifique); Gauthier Vermandel (LEDa - Laboratoire d'Economie de Dauphine - Université Paris-Dauphine) |
| Abstract: | This paper provides a static two country new Keynesian model to teach two related questions in international macroeconomics: the international transmission of unilateral monetary policy decisions and the gains coming from the coordination monetary rules. We concentrate on “normal times” and use a thoroughly graphical approach to analyze the questions at hands. In this setting monetary policy is conducted using interest rates rules and economic integration between nations does not necessarily create the case for the coordination of monetary policy. In particular, we show that the conduct of optimal national monetary policies does not make any difference with the coordination of national policies, as this creates a situation where the international monetary system operates “Near an International Cooperative Equilibrium”. |
| Keywords: | monetary policy,New Keynesian macroeconomics,international macroeconomics,economic policy,optimal interest rate rules,A20,E10,E50,F41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-01745620&r=opm |
| By: | Alexander Monge-Naranjo; Juan M. Sánchez; Raül Santaeulàlia-Llopis |
| Abstract: | Is human capital allocated efficiently across countries? To answer this question, we need to differentiate misallocation from factor intensity differences. We use newly available estimates on natural resources shares from Monge-Naranjo et al. (2017) to correctly measure the factor shares of physical and human capital for a large number of countries and periods. We find that the global efficiency losses of the misallocation of human capital are around 60% of the world's output. Moreover, the misallocation of human capital seems to have worsened in the more recent years. Interestingly, we show that when physical and human capital can both be reallocated, physical capital would often ow from poor to rich countries, contrary to Lucas (1990)'s paradox. |
| Keywords: | natural rents, factor shares, misallocation, Migration, human capital |
| JEL: | O11 O16 O41 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1037&r=opm |