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on Open Economy Macroeconomics |
| By: | Fernando Broner; Daragh Clancy; Alberto Martín; Aitor Erce |
| Abstract: | This paper explores a natural connection between fiscal multipliers and foreign holdings of public debt. Although fiscal expansions can raise domestic economic activity through various channels, they can also have crowding-out effects if the resources used to acquire public debt reduce domestic consumption and investment. Thus, these crowding-out effects are likely to be weaker when public debt is purchased by foreigners. We test this hypothesis on (i) post-war US data and (ii) data for a panel of 17 advanced economies from the 1980’s to the present. To do so, we assemble a novel database of public debt holdings by domestic and foreign creditors for a large set of advanced economies. We combine this data with standard measures of fiscal policy shocks and show that, indeed, the size of fiscal multipliers is increasing in the share of public debt held by foreigners. In particular, the fiscal multiplier is smaller than one when the foreign share is low, such as in the U.S. in the 1950’s and 1960’s and Japan today, and larger than one when the foreign share is high, such as in the U.S. and Ireland today. |
| Keywords: | sovereign debt, fiscal multiplier, foreign holdings of public debt |
| JEL: | F32 F34 F36 F41 F43 F44 G15 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1040&r=opm |
| By: | Gourinchas, Pierre-Olivier; Philippon, Thomas; Vayanos, Dimitri |
| Abstract: | We provide an empirical and theoretical analysis of the Greek crisis of 2010. We first benchmark the crisis against all episodes of sudden stops, sovereign debt crises, and lending booms / busts in emerging and advanced economies since 1980. The decline in Greece’s output, especially investment, is deeper and more persistent than in almost any crisis on record over that period. We then propose a stylized macrofinance model to understand what happened. We find that a severe macroeconomic adjustment was inevitable given the size of the fiscal imbalance; yet, a sizable share of the crisis was also the consequence of the sudden stop that started in late 2009. Our model suggests that the size of the initial macro / financial imbalances can account for much of the depth of the crisis. When we simulate an emerging-market sudden stop with initial debt levels (government, private, and external) of an advanced economy, we obtain a Greek crisis. Finally, in recent years, the lack of recovery appears driven by elevated levels of nonperforming loans and strong price rigidities in product markets. |
| JEL: | N0 F3 G3 |
| Date: | 2017–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:82433&r=opm |
| By: | Cimadomo, Jacopo; Furtuna, Oana; Giuliodori, Massimo |
| Abstract: | This paper investigates the contribution of private and public channels for consumption risk sharing in the EMU over the period 1999-2015. In particular, we explore the role of financial integration versus international financial assistance for private consumption smoothing in this set of countries. In addition, we present a time-varying test which allows estimating how risk sharing has evolved since the start of the EMU, and in particular during the recent crisis. Our results suggest that, whereas in the early years of the EMU only about 40% of country-specific output shocks were smoothed, in the aftermath of the euro zone’s sovereign debt crisis about 65% of these shocks were absorbed, therefore reducing consumption growth differentials across countries. This progressive improvement of the shock-absorption capacity is due to a higher financial integration, but also to the activation of the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) channelling official loans to distressed euro zone economies. We also show that cross-border holdings of equities and debt seem to be more effective than cross-border bank loans in isolating households from country-specific shocks, therefore contributing to consumption smoothing. JEL Classification: C23, E62, G11, G15 |
| Keywords: | financial integration, international financial assistance, risk sharing, time-variation |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182148&r=opm |
| By: | Dohwa, Kohjiro |
| Abstract: | In this paper, we construct a two-country model with the three factors of asymmetry in price-setting behavior between home and foreign intermediate goods firms, vertical production and trade, and endogenous entry of home and foreign final goods firms. We mainly examine the effect of asymmetric price-setting behavior on the welfare effects of monetary and productivity shocks, taking into account firm entry and exit. We show that when the ratio of home and/or foreign intermediate goods firms that set their export prices in the local currency rises, a home monetary shock has a beggar-thy-neighbor effect. In scenarios other than one where the ratios of both countries' intermediate goods firms that set their export prices in the local currency are unity, we show that the two types of home productivity shocks cause foreign welfare to deteriorate. When the ratios of both countries' intermediate goods firms that set their export prices in the local currency are unity, we show that the two types of home productivity shocks have a different effect on foreign welfare. |
| Keywords: | Local currency pricing, Vertical production and trade, Firm entry, Monetary shock, Productivity shocks |
| JEL: | F41 F42 |
| Date: | 2018–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:86351&r=opm |
| By: | Fornaro, Luca; Romei, Federica |
| 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: | aggregate demand externalities; Capital Flows; current account policies; fiscal policies; international cooperation; Liquidity traps; macroprudential policies; zero lower bound |
| JEL: | E32 E44 E52 F41 F42 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12894&r=opm |
| By: | Helena Chulià (Riskcenter- IREA and Department of Econometrics, University of Barcelona, Av. Diagonal, 690, 08034. Barcelona, Spain); Jorge M. Uribe (Department of Economics, Universidad del Valle and Riskcenter- IREA, University of Barcelona) |
| Abstract: | Recent literature has shown that international financial integration facilitates cross-country consumption risk sharing. We extend this line of research and demonstrate that the decomposition of financial integration into good and bad plays an important role. We also propose new measures of countries’ capital market integration, based on good and bad volatility shocks, as well as country specific indices of consumption risk sharing. We document a decoupling of individual consumption growth from global risk sharing after episodes of negative cross-spillovers, and a recoupling after positive spillovers. Our results support current views in the literature that advocate for an asymmetric treatment of good and bad volatility shocks, in order to assess the macroeconomic dynamics that follow risk episodes. They also challenge previous views in the literature that present capital market integration (without differentiating between positive and negative shocks) as a prerequisite for higher international consumption risk sharing. Overall, they cast doubts on the actual scope for consumption risk sharing across global financial markets. |
| Keywords: | Consumption risk sharing; Capital market integration; Good and bad volatility; cross-spillovers. JEL classification:F21; F36; E21; E44 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:201809&r=opm |
| By: | Dirk Niepelt |
| Abstract: | Rejecting a common assumption in the sovereign debt literature, we document that creditor losses ("haircuts") during sovereign restructuring episodes are asymmetric across debt instruments. We code a comprehensive dataset on instrument-specific haircuts for 28 debt restructurings with private creditors in 1999-2015 and find that haircuts on shorter-term debt are larger than those on debt of longer maturity. In a standard asset pricing model, we show that increasing short-run default risk in the run-up to a restructuring episode can explain the stylized fact. The data confirms the predicted relation between perceived default risk, bond prices, and haircuts by maturity. |
| JEL: | F34 F41 H63 |
| Date: | 2017–09 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp1703&r=opm |
| By: | Tunc, Cengiz; Solakoglu, Mehmet Nihat; Hazar, Adalet; Babuscu, Senol |
| Abstract: | Using World Bank’s Exporter Dynamics Database, we investigate the role of external exchange rate volatility on export in addition to the effect of bilateral exchange rate volatility. The results show that while the bilateral exchange rate volatility has depressing effect on export, external exchange rate volatility generates trade-promoting effect. However, the magnitude of the effect depends on the trade intensity between countries and the economic development of the destination country. We further find strong asymmetric effect that both the trade-depressing effect of the bilateral volatility and trade-promoting effect of the external volatility are larger for exchange rate depreciations and for larger swings in the volatilities. |
| Keywords: | Exchange rate volatility, International trade, Third-country effect |
| JEL: | F13 F31 F41 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:86401&r=opm |
| By: | Chernov, Mikhail; Creal, Drew |
| Abstract: | Exposures of expected future depreciation rates to the current interest rate differential violate the UIP hypothesis in a distinctive pattern that is a non-monotonic function of horizon. Conversely, forward, risk-adjusted expected depreciation rates are monotonic. We explain the two patterns by incorporating the weak form of PPP into a no-arbitrage joint model of the depreciation rate, inflation differential, domestic and foreign yield curves. Short-term departures from PPP generate the first pattern. The risk premiums for these departures generate the second pattern. |
| Keywords: | affine term structure model; cointegration; multiple horizons; purchasing power parity; uncovered interest parity |
| JEL: | F31 F47 G12 G15 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:12893&r=opm |
| By: | Renzo Alvarez (Department of Economics, Florida International University); Amin Shoja (Department of Economics, Florida International University); Syed Uddin (Department of Economics, Florida International University); Hakan Yilmazkuday (Department of Economics, Florida International University) |
| Abstract: | This paper estimates the exchange rate pass-through (ERPT) by using good-level daily data on wholesale prices of imported agricultural products, where the identification is achieved by using daily data on the domestic inflation rate. The results of standard empirical analyses are in line with existing studies that employ lower frequencies of data by showing evidence for incomplete daily ERPT of about 5 percent. The key innovation is achieved when nonlinearities in ERPT are considered, where ERPT is doubled to about 10 percent when daily nominal exchange rate changes are above 0.55 percent, daily frequencies of price change are above 3.12 percent, and storage life of a product is above 10 weeks. Important policy implications follow. |
| Keywords: | Daily Agricultural Prices, Exchange Rate Pass-Through, Good-Level Analysis |
| JEL: | E31 F14 F31 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:1803&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: | E32, E44, E52, F41, F42 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1039&r=opm |
| By: | Tasso Adamopoulos; Diego Restuccia |
| Abstract: | Why is agricultural productivity so low in poor countries relative to the rest of the world? Is it due to geography or constrained economic choices? We assess the quantitative role of geography and land quality for agricultural productivity differences across countries using high-resolution micro-geography data and a spatial accounting framework. Our rich spatial data provide in each cell of land covering the entire globe actual yields of cultivated crops and potential yields for 18 crops, which measure the maximum attainable output for each crop given soil quality, climate conditions, terrain topography, and a level of cultivation inputs. While there is considerable heterogeneity in land quality across space, even within narrow geographic regions, we find that low agricultural productivity in poor countries is not due to poor land endowments. If countries produced current crops in each cell according to potential yields, the rich-poor agricultural yield gap would virtually disappear, from more than 200 percent to less than 5 percent. We also find evidence of additional productivity gains attainable through the spatial reallocation of production and changes in crop choices. |
| JEL: | O1 O11 O13 O14 O4 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:24532&r=opm |
| By: | Nauro F. Campos; Corrado Macchiarelli |
| Abstract: | This paper has three main objectives, namely to (a) propose a new framework that can support placing countries along a core-periphery continuum (beyond the more common binary treatment as either core or periphery), (b) to construct a continuous dynamic theory-based measure (the first, to the best of our knowledge) illustrating the use of this framework for a set of European countries using yearly data from 1960 to 2015, and (c) provide a first preliminary assessment, based on endogenous Optimal Currency Area (OCA) theory, of the main potential explanatory factors of the dynamics of this measure over time and across countries. Our main finding is that this new measure allows us to identify sets of countries on the basis of not only its level but also in terms of its dynamic behaviour. Using the Phillips-Sul procedure, we show the emergence a newer set of core countries (composed by Austria, Belgium, Germany, France, Italy and Netherlands), a mixed set of countries (namely Denmark, Sweden, Greece, Spain and the UK), and a set of deep-rooted periphery countries (Finland, Ireland, Norway, Portugal, and Switzerland). There are valuable lessons from the dynamics of this measure. It increases for core countries (which confirms endogenous OCA predictions), remains worrisomely constant for a periphery, and varies substantially for the intermediate set of countries. Spain (Sweden and Greece) becomes consistently more (less) core over time, Denmark’s remains constant and the UK moves in and out of the core over time. Our panel estimates on a specification suggested by endogenous OCA theory imply that euro membership and more flexible product market regulations (or trade openness) make countries more likely to be in the core. |
| Keywords: | Symmetry, Convergence, Euro, EMU, European Union, Core-Periphery, SVAR |
| JEL: | E3 F4 |
| Date: | 2018–03 |
| URL: | http://d.repec.org/n?u=RePEc:eiq:eileqs:131&r=opm |