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on Open Economy Macroeconomics |
| By: | Kevin x.d. Huang (Vanderbilt University); Qinglai Meng (Oregon State University); Jianpo Xue (Renmin University of China) |
| Abstract: | In a closed economy setting a cash-in-advance monetary economy under money growth targeting is prone to self-fulfilling expectations and beliefs-driven fluctuations. This paper shows that such extrinsic instability is less of a problem in a small open economy integrated in the world goods and financial markets. This is because endogenous terms-of-trade movements associated with global goods trade and cross-border capital flows and endogenous international asset price adjustments associated with global financial transaction serve as an endogenous stabilizer to reduce the likelihood of sunspot equilibria. We find that for empirically reasonable parametrization of the small open economy sunspot beliefs are unlikely to become self-fulfilled. |
| Keywords: | self-fulfilling expectations; indeterminacy; saddle-path stability; money growth targeting; small open economy |
| JEL: | E3 F4 |
| Date: | 2018–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:vuecon-18-00005&r=opm |
| By: | Patrick A. Pintus (CNRS-InSHS and Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE); Yi Wen (Federal Reserve Bank of St. Louis & Tsinghua University); Xiaochuan Xing (Department of Economics, Yale University) |
| Abstract: | This paper stresses a new channel through which global financial linkages contribute to the co-movement in economic activity across countries. We show in a two-country setting with borrowing constraints that international credit markets are subject to self-fulfilling variations in the world real interest rate. Those expectation-driven changes in the borrowing cost in turn act as global shocks that induce strong cross-country co-movements in both financial and real variables (such as asset prices, GDP, consumption, investment and employment). When firms around the world benefit from unexpectedly low debt repayments, they borrow and invest more, which leads to excessive supply of collateral and of loanable funds at a low interest rate, thus fueling a boom in both home and foreign economies. As a consequence, business cycles are synchronized internationally. Such a stylized model thus offers one way to rationalize both the existence of a world business-cycle component, documented by recent empirical studies through dynamic factor analysis, and the factor’s intimate link to global financial markets. |
| Keywords: | world interest rate, international co-movement, self-fulfilling equilibria |
| JEL: | E21 E22 E32 E44 E63 |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:1814&r=opm |
| By: | Dramane Coulibaly; Blaise Gnimassoun; Valérie Mignon |
| Abstract: | Following the dynamics of globalization, international migration has increased dramatically since the 1990s. Given that these migrations may obscure the natural demographic structure of nations, they are likely to explain a significant part of global imbalances. This paper tackles this issue by investigating the role played by international migration in the dynamics of global imbalances. To this end, we rely on an overlapping generations model to derive the theoretical relationship between international migration and current account position. Through a series of robust estimates, we empirically investigate this relationship by relying on a panel of 157 developed and developing countries over the period 1990-2014. Our results point to substantial effects of international migration. Specifically, we show that an increase in migration improves national savings and the current account balance in the destination country, while it has opposite impacts in the origin country. These effects are particularly pronounced in developing economies, and attenuated by migrants' remittances. |
| Keywords: | International migration, current account, global imbalances, remittances |
| JEL: | F22 F32 O55 C33 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2018-24&r=opm |
| By: | Ohanian, Lee E. (Federal Reserve Bank of Minneapolis); Restrepo-Echavarria, Paulina (Federal Reserve Bank of St Louis); Wright, Mark L. J. (Federal Reserve Bank of Minneapolis) |
| Abstract: | After World War II, international capital flowed into slow-growing Latin America rather than fast-growing Asia. This is surprising as, everything else equal, fast growth should imply high capital returns. This paper develops a capital flow accounting framework to quantify the role of different factor market distortions in producing these patterns. Surprisingly, we find that distortions in labor markets — rather than domestic or international capital markets — account for the bulk of these flows. Labor market distortions that indirectly depress investment incentives by lowering equilibrium labor supply explain two-thirds of observed flows, while improvement in these distortions over time accounts for much of Asia’s rapid growth. |
| Keywords: | Capital flows; Labor markets; Domestic capital markets; International capital markets |
| JEL: | E21 F21 F41 J20 |
| Date: | 2018–05–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:563&r=opm |
| By: | Luisito BERTINELLI; Olivier CARDI; Romain RESTOUT |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:leo:wpaper:2585&r=opm |
| By: | Pereira, Luiz C. Bresser |
| Abstract: | This paper discusses the political economy involved in the required neutralization of the Dutch disease – a long-term overvaluation of a national currency originated in exports of commodities that generate Ricardian rents or benefit from commodity booms. The difficulty in dealing with this market failure is associated to two political problems: the natural resource curse, which is the generalized rent-seeking that often takes over a commodity-exporting country, and exchange rate populism, the practice of keeping the currency overvalued, to ensure the reelection of politicians. While the two political problems have cultural and institutional roots that make them resilient to change, this paper shows that there is a relatively simple policy that will effectively turn the currency competitive and the manufacturing industry, a possibility. |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:476&r=opm |
| By: | Signe Krogstrup (International Monetary Fund); Cédric Tille (The Graduate Institute of International and Development Studies); |
| Abstract: | The literature on drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries’ funding flows in different currencies. A portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediary’s pre-existing currency exposure. Analysis of data on European banks’ aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area. |
| Keywords: | Currency mismatch, capital flows, push factors, spillovers, cross-border transmission of shocks, European bank balance sheets |
| JEL: | F32 F34 F36 |
| Date: | 2018–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp09-2018&r=opm |
| By: | Martina Cecioni (Bank of Italy) |
| Abstract: | The paper provides empirical evidence on the effects of ECB conventional and unconventional monetary policy on the euro exchange rate, focusing on the period from January 2013 to September 2017. Innovations to conventional and unconventional monetary policies are identified through changes in, respectively, short- and long-term interest rates immediately after Governing Council meetings. Both types of measures contributed to the depreciation of the euro from mid-2014; surprises associated with conventional measures had a stronger and more persistent effect than those associated with unconventional ones. Time-varying estimates of the effects of conventional surprises since 1999 show that the responsiveness of exchange rates to monetary news increased markedly from 2013. State-dependence analysis finds that the exchange rate became more sensitive to monetary policy when the ECB adopted a policy of negative interest rates and when conventional and unconventional monetary surprises moved in the same direction. |
| Keywords: | unconventional monetary policy, exchange rates, European Central Bank |
| JEL: | E52 E58 F31 |
| Date: | 2018–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1172_18&r=opm |