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on Open Economy Macroeconomics |
| By: | Sotirios Kokas; Dmitri Vinogradov; Marios Zachariadis |
| Abstract: | By adjusting lending, banks can smooth the macroeconomic impact of deposit fluctuations. This may however lead to extended periods of disproportionately high lending relative to deposit intake, resulting in the accumulation of risk in the banking system. Using bank-level data for 8,477 banks in 129 countries for the 24-year period from 1992 to 2015, we examine how individual banks’ market power and other characteristics may contribute to smoothing or amplification of shocks and to the accumulation of risk. We find that the higher their market power the lower is the growth rate of lending relative to deposits. As a result, in periods of falling deposits, higher market power for the average bank would be associated with a greater fall in lending resulting in amplification of adverse effects as deposits fall during relatively bad times. Strikingly, at very high levels of market power there is a threshold past which the effect of market power on the growth rate of lending relative to deposits turns positive so that “superpower” banks contribute to smoothing of adverse effects when deposits are falling. In periods of rising deposits, however, such banks lead to amplification and accumulation of risk in the economy |
| Keywords: | smoothing, amplification, risk accumulation, market power, competition, crisis. |
| JEL: | E44 E51 F3 F4 G21 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2018-03&r=opm |
| By: | Taddei, Filippo |
| Abstract: | The connection between the financial crisis and global imbalances is controversial. This paper argues that this relationship is likely to be connected to the existence of heterogenous financial frictions in different domestic credit markets. By developing a general equilibrium model where adverse selection and limited pledgeability coexist, this work highlights why adverse selection may play a pivotal role in determining the different (often opposing) welfare effects of international capital flows on originating and destination countries. This perspective also advances an analytical framework that is flexible enough to analyze the global effects on investment allocation of the ”Saving Glut”, of the policies facilitating financial integration and macro-prudential policy. JEL Classification: D53, E2, F3 |
| Keywords: | asymmetric information, international capital flows, limited pledgeability, macro-prudential policy, welfare |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20182167&r=opm |
| By: | Simon Gilchrist; Raphael Schoenle; Jae W. Sim; Egon Zakrajsek |
| Abstract: | We analyze the economic consequences of forming a monetary union among countries with varying degrees of financial distortions, which interact with the firms' pricing decisions because of customer-market considerations. In response to a financial shock, firms in financially weak countries (the periphery) maintain{{p}}cashflows by raising markups--in both domestic and export markets--while firms in financially strong countries (the core) reduce markups, undercutting their financially constrained competitors to gain market share. When the two regions are experiencing different shocks, common monetary policy results in a substantially higher macroeconomic volatility in the periphery, compared with a flexible exchange rate regime; this translates into a welfare loss for the union as a whole, with the loss borne entirely by the periphery. By helping firms from the core internalize the pecuniary externality engendered by the interaction of financial frictions and customer markets, a unilateral fiscal devaluation by the periphery can improve the union's overall welfare. |
| Keywords: | Eurozone ; Financial crisis ; Fiscal devaluation ; Inflation dynamics ; Markups ; Monetary union |
| JEL: | E31 E32 F44 |
| Date: | 2018–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2018-43&r=opm |
| By: | Chamon, Marcos; Schumacher, Julian; Trebesch, Christoph |
| Abstract: | Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-à-vis domestic bonds. This paper studies the effect of this jurisdiction choice on bond prices. We test whether foreign-law bonds trade at a premium compared to domestic-law bonds. We use the euro area 2006-2013 as a unique testing ground, controlling for currency risk, liquidity risk, and term structure. Foreign-law bonds indeed carry significantly lower yields in distress periods, and this effect rises as the risk of a sovereign default increases. These results indicate that, in times of crisis, governments can borrow at lower rates under foreign law. |
| Keywords: | Sovereign Debt; Creditor Rights; Seniority; Law and Finance |
| JEL: | F34 G12 K22 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13020&r=opm |
| By: | António Afonso; João Jalles |
| Abstract: | In this paper, we decompose the current account (CA) balance in 19 Euro area countries into cyclical and non-cyclical components. For the period 1999:Q1 to 2015:Q4, we compute income elasticities of imports and of exports via an alternative novel and improved approach by running time-varying coefficient models country-by-country. Then, in a panel set-up (and controlling for country-invariant characteristics), we uncover that terms of trade have a positive effect on both the cyclical and non-cyclical components of the CA, while the Global Financial Crisis, compensation of employees and the employment level have a negative effect on the cyclical component. Moreover, the crisis had a greater impact on the cyclical component of the CA due to movements in the real effective exchange rate. In addition, we find a negative effect of the crisis on the cyclical component of the CA for countries that received financial assistance from the European Union, notably Ireland, Portugal, Spain and Latvia. |
| Keywords: | current account cyclicality; financial markets; time-varying coefficients |
| JEL: | C23 F32 G01 |
| Date: | 2018–06 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp0422018&r=opm |
| By: | Alejandro Torres García; Laura Wberth Escobar |
| Abstract: | Emerging market economies(EMEs), particularly the commodity exporterones,are ex- posed to world’s dynamics through different channels. In this paper,we consider the role of (exogenous) commodity prices shocks in explaining business cycles in EMEs,by proposing a financial transmission mechanism: the balance sheet effect. Our hypothesis is that a nega- tive commodity price shock increases the firm’s external debt and the cost of the new debt. In consequence,the aggregate investment decreases amplifying the output contraction.To test it,we estimate a series of VAR models using quarterly data on corporate external debt, nominal exchange rate, EMBI+ spreads, the local currency value of external debt to nomi- nal GDP ratio and real GDP,covering the period 2000-2017. We do this for Latin America and then, we focus on five particular economies: Brazil, Chile, Colombia, Mexico and Peru. We find that balance sheets do matter and they exacerbate the output’s contraction when the commodity price shock is negative. We also find that, turning the financial channel off, the real GDP cumulative response in Latin America is smaller than in the unrestricted model. Finally, we find no evidence on the existence of the balance sheet effect for Chile. |
| Keywords: | Emerging EconomiesCommodity PricesInternational Business Cycles Balance Sheet Effect Nominal Exchange Rate |
| Date: | 2018–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:col:000122:016362&r=opm |
| By: | Akihisa Shibata; Mototsugu Shintani; Takayuki Tsuruga |
| Abstract: | The current account in developed countries is highly persistent and volatile in comparison to output growth. The standard intertemporal current account model with rational expectations (RE) fails to account for the observed current account dynamics together with persistent changes in consumption. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for persistent changes in consumption, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income and infrequently adjust their consumption. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility almost fully explains current account dynamics and the persistence of changes in consumption, if high degrees of information rigidity and imperfect capital mobility are taken into account. |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:dpr:wpaper:1036&r=opm |
| By: | Mauro Bambi (University of York); Sara Eugeni (Durham University Business School) |
| Abstract: | OThe empirical evidence on nominal exchange rate dynamics shows a long-run relationship of this variable with the fundamentals of the economy, although such relationship disappears at shorter horizons ("exchange rate disconnect" puzzle). This apparently contrasting behaviour of the nominal exchange rate can be explained in an overlapping-generations model where the two currencies are not perfect substitutes. In this framework, we show that the nominal exchange rate is pinned down by the fundamentals of the economy at the monetary steady state. However, uctuations of the nominal exchange rate around its long-run value, which are not driven by shocks to fundamentals, can emerge. Firstly, we prove the existence of endogenous (deterministic) business cycles in the nominal exchange rate. Secondly, we construct stationary sunspot equilibria where random uctuations of the nominal exchange rate arise as a result of self-ful lling beliefs. |
| Date: | 2018–05 |
| URL: | http://d.repec.org/n?u=RePEc:dur:durham:2018_05&r=opm |
| By: | Musti, Babagana Mala (Kingston University London); Siddiki, Jalal Uddin (Kingston University London) |
| Abstract: | This paper examines the level and speed of exchange rate pass-through (ERPT) to consumer prices in Nigeria using a partial equilibrium microeconomic mark-up model with quarterly time series data from 1986 to 2013 applying the vector error correction model (VECM) incorporating structural breaks in exchange rates. It assesses the level of long-run ERPT, the speed of adjustments to the long-run equilibrium and the level of short-run ERPT. The results show high and statistically significant ERPT in the long-run in Nigeria. However, the short-run results show slow and insignificant adjustments of prices to its long-run equilibrium trend. The impulse response analyses also support the cointegration results showing the near zero response of consumer prices to exchange rate shocks. The variance decomposition results demonstrate the contribution of external shocks whereby the exchange rate shocks made some modest contribution to the domestic prices. The strong policy implication of these empirical results is that exchange rate stability plays a crucial role in controlling domestic consumer price inflation in Nigeria and comprable economies. |
| Keywords: | Exchange rate pass-through; Consumer prices; Nigeria. |
| JEL: | F30 F40 |
| Date: | 2018–07–05 |
| URL: | http://d.repec.org/n?u=RePEc:ris:kngedp:2018_005&r=opm |
| By: | James Staveley-O'Carroll (Babson College); Olena Staveley-O'Carroll (College of the Holy Cross) |
| Abstract: | We present a solution to the Backus-Smith puzzle that, instead of relying on extreme parameter values or complex modeling assumptions, simply switches the framework from in?nitely lived agents to overlapping generations. Young agents face non-diversi?able wage risk that leads to a low degree of risk sharing within each country. Subsequently, international price movements are not sufficient to achieve the high consumption-real exchange rate correlation produced in standard infinitely lived agent DSGE models. |
| Keywords: | Backus-Smith, international portfolio choice, overlapping generations, risk sharing |
| JEL: | D52 F21 F41 G11 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:hcx:wpaper:1806&r=opm |