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on Open Economy Macroeconomics |
| By: | Saadon, Yossi; Sussman, Nathan |
| Abstract: | The increasing globalization of trade in goods and services and the deepening of financial markets have reduced frictions that may impede the operation of the PPP and UIP relationships in the short run. In this paper, we estimate the short term relative PPP and UIP relationships. Using data from Israel, which has a deep market for inflation expectations for 12 months, we show that relative PPP and UIP cannot be rejected. Deviations from equilibrium last less than a year. Data from Israel's capital account of the balance of payments shows that the deviations are not destabilizing. Our findings suggest that greater globalization and financial deepening contribute to the effectiveness of monetary policy. |
| Keywords: | Balance sheet effects; Exchange Rates; Inflation expectations; monetary policy; purchasing power parity; uncovered interest rate parity |
| JEL: | E52 F3 F31 F41 G15 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13235&r=opm |
| By: | Eller, Markus (Oesterreichische Nationalbank (Austrian Central Bank)); Huber, Florian (University of Salzburg); Schuberth, Helene (Oesterreichische Nationalbank (Austrian Central Bank)) |
| Abstract: | We propose a dynamic factor model with time-varying parameters and stochastic volatility to analyze the relationship between global factors and country-specific capital flow dynamics. Studying a global sample of 43 countries from 1994 until 2015, we show that global co-movement of macroeconomic, financial and capital flow variables can explain a major share of country-specific capital flow volatility and that the impact of these variables has become even more important since the 2008–2009 global financial crisis. Our results indicate that country-specific changes in capital flows are strongly affected by fluctuations in global financial cycles and - to some extent - by global real business cycles. There is some evidence that countries with higher foreign exchange reserves, flexible exchange rates, lower public indebtedness or more developed domestic stock markets may better shield themselves from the global financial cycle. |
| Keywords: | Volatility of capital flows; dynamic factor model; stochastic volatility; global co-movement; global real business cycle; global financial cycle |
| JEL: | C38 F32 F41 F42 F44 |
| Date: | 2018–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:ris:sbgwpe:2018_002&r=opm |
| By: | Cian Allen |
| Abstract: | This paper revisits the period of substantial widening of external imbalances in advanced economies in the run-up to the global financial crisis and their adjustment since then. We take a granular look at these imbalances through the lens of their domestic counterpart: the net financial balance of the household sector, the government, non-financial corporations, and financial corporations. Our findings challenge the often-claimed view that the household sector lies behind most of the dynamics of the current account. In fact, we show that it is the non-financial corporation and the government sectors that account for the bulk of: (i) the co-movement with the standard set of fundamental covariates of the current account; (ii) the external adjustment and expenditure reduction in the aftermath of the global financial crisis; and (iii) the diverging dynamics during large and persistent current account imbalances. These results emphasize that analyzing domestic sectoral balances can lead to a better empirical and theoretical understanding of global imbalances. |
| JEL: | F31 F32 E21 |
| Date: | 2018–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2018:pal913&r=opm |
| By: | Dominik Thaler (Banco de España) |
| Abstract: | Why do governments borrow internationally, so much as to risk default? Why do they remain out of fi nancial markets for a while after default? This paper develops a quantitative model of sovereign default with endogenous default costs to propose a novel and unifi ed answer to these questions. In the model, the government has an incentive to borrow internationally due to a difference between the world interest rate and the domestic return on capital, which arises from a friction in the domestic banking sector. Since banks are exposed to sovereign debt, sovereign default causes losses for them, which translate into a fi nancial crisis. When deciding upon repayment, the government trades off these costs against the advantage of not repaying international investors. After default, it only reaccesses international capital markets once banks have recovered, because only then are they able to effi ciently allocate the marginal unit of investment again. Exclusion hence arises endogenously. The model is able to generate signifi cant levels of domestic and foreign debt, realistic spreads, quantitatively plausible drops of lending and output in default episodes, and periods of postdefault international fi nancial market exclusion of a realistic duration. |
| Keywords: | sovereign default, banking crisis, endogenous cost of default, international capital market exclusion. |
| JEL: | F34 E62 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1824&r=opm |
| By: | Belke, Ansgar; Domnick, Clemens |
| Abstract: | This paper examines the linkages between the trade of goods and financial assets. Do both flows behave as complements (implying a positive correlation) or as substitutes (negative correlation)? Although a classic topic in international macroeconomics, the empirical evidence has remained relatively scarce so far, in particular for the Euro area where trade and financial imbalance played a prominent role in the build-up of the European sovereign debt crisis. Consequentially, we use a novel dataset, providing estimates for financial flows and its four main categories for 42 countries and covering the period from 2002-2012, to test the so-called trade-finance nexus. Since theoretical models stress that both flows might be influencing each other simultaneously, we introduce a novel time-varying instrumental variable based on capital control restrictions to estimate a causal effect. The results of the gravity regressions support theories that underline the complementarity between exports and capital flows. When testing the trade-finance nexus for different types of capital flows, the estimated coefficient is most pronounced for foreign direct investment, in line with theories stressing informational frictions. Robustness checks in the form of different estimation methods, alternative proxies for capital flows and sample splits confirm the positive relationship. Interestingly, the trade-finance nexus does not differ among countries belonging to the EMU, the European Union or among core and peripheral Euro area countries. |
| Keywords: | Capital flows,economic integration,Heckscher-Ohlin paradigm,interaction between trade integration and capital mobility,trade |
| JEL: | F14 F15 F21 F41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:glodps:269&r=opm |
| By: | Pablo D'Erasmo (Federal Reserve Bank of Philadelphia); Enrique G. Mendoza (Department of Economics, University of Pennsylvania) |
| Abstract: | Infrequent but turbulent overt sovereign defaults on domestic creditors are a "forgotten history" in Macroeconomics. We propose a heterogeneous-agents model in which the government chooses optimal debt and default on domestic and foreign creditors by balancing distributional incentives v. the social value of debt for self-insurance, liquidity, and risk-sharing. A rich feedback mechanism links debt issuance, the distribution of debt holdings, the default decision, and risk premia. Calibrated to Eurozone data, the model is consistent with key long-run and debt-crisis statistics. Defaults are rare (1.2 percent frequency), and preceded by surging debt and spreads. Debt sells at the risk-free price most of the time, but the government's lack of commitment reduces sustainable debt sharply. |
| Keywords: | public debt, sovereign default, debt crisis, European crisis |
| JEL: | E6 E44 F34 H63 |
| Date: | 2018–09–14 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:18-018&r=opm |
| By: | Belke, Ansgar; Domnick, Clemens |
| Abstract: | This paper examines the linkages between the trade of goods and financial assets. Do both flows behave as complements (implying a positive correlation) or as substitutes (negative correlation)? Although a classic topic in international macroeconomics, the empirical evidence has remained relatively scarce so far, in particular for the Euro area where trade and financial imbalance played a prominent role in the build-up of the European sovereign debt crisis. Consequentially, we use a novel dataset, providing estimates for financial flows and its four main categories for 42 countries and covering the period from 2002-2012, to test the so-called trade-finance nexus. Since theoretical models stress that both flows might be influencing each other simultaneously, we introduce a novel time-varying instrumental variable based on capital control restrictions to estimate a causal effect. The results of the gravity regressions support theories that underline the complementarity between exports and capital flows. When testing the trade-finance nexus for different types of capital flows, the estimated coefficient is most pronounced for foreign direct investment, in line with theories stressing informational frictions. Robustness checks in the form of different estimation methods, alternative proxies for capital flows and sample splits confirm the positive relationship. Interestingly, the trade-finance nexus does not differ among countries belonging to the EMU, the European Union or among core and peripheral Euro area countries. |
| Keywords: | capital flows,economic integration,Heckscher-Ohlin paradigm,interaction between trade integration and capital mobility,trade |
| JEL: | F14 F15 F21 F41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:776&r=opm |
| By: | Hoffmann, Mathias; Maslov, Egor; Sørensen, Bent E; Stewen, Iryna |
| Abstract: | The interplay of equity market and banking integration is of first-order importance for risk sharing in the EMU. While EMU created an integrated interbank market, "direct'' banking integration (in terms of direct cross-border bank-to-real sector flows or cross-border banking-consolidation) and equity market integration remained limited. We find that direct banking integration is associated with more risk sharing, while interbank integration is not. Further, interbank integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model, we discuss implications for banking union. Our results show that real banking integration and capital market union are complements and robust risk sharing in the EMU requires both. |
| Keywords: | Banking Union; Capital Union |
| JEL: | F15 F36 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13254&r=opm |
| By: | Husnu C. Dalgic |
| Abstract: | Households in emerging markets hold significant amounts of dollar deposits while firms have significant amounts of dollar debt. Motivated by the perceived dangers, policymakers often develop regulations to limit dollarization. In this paper, I draw attention to an important benefit of dollarization, which should be taken into account when crafting regulations. I argue that dollarization repre- sents an insurance arrangement in which the entrepreneurs that own firms pro- vide income insurance to households. Emerging market exchange rates tend to depreciate in a recession so that dollar deposits in effect provide households with income insurance. With their preference for holding deposits denominated in dol- lars, households effectively starve local financial markets of local currency, which raises local interest rates. By raising local currency interest rates, they cause entrepreneurs to borrow in dollars. Consistent with my argument, countries in which the exchange depreciates in a recession have a higher level of deposit and credit dollarization. In those countries, I verify that the premium of the local interest rate over the dollar interest rate is higher. This premium is the price paid by households for insurance. |
| Keywords: | Emerging Markets. Financial Dollarization. Corporate Dollar Debt. |
| JEL: | E32 E43 E44 F32 F41 F43 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_051_2018&r=opm |
| By: | Lin, S.; Han, H. |
| Abstract: | Using panel data of 31 provinces during 1997-2014 in China, this paper fills the void of examining the determinants of capital flows across regions within China specific attention is given to the role of government size in capital flows across Shanhai Pass. Based on the fixed-effect model, the impactors of classical capital flows are tested. While government size is the main hinder impeding capital flows, capital return, institutional quality, human capital is conducive to capital inflow. However, when the components of the aggregate government expenditures is divided into two parts of productive expenditures on physical infrastructure and on education, it is proved that productive expenditures on physical infrastructure negatively correlate with capital inflows. In particular, there is strong impact of Lucas paradox that is the negative correlation of TFP and GDP growth with capital inflows; more importantly, lagged saving rate has a significantly positive impact on capital inflows namely the Feldstein-Horioka puzzle indicates the severe capital market segmentation. Overall, the main findings are that oversized government, especially government expenditures on physical infrastructure are major impediments to china s capital inflows among regions. Therefore, it is urgent to let market play a fundamental role in resource allocation, especially capital allocation. Acknowledgement : This research was supported by the Major Program of the National Social Science Foundation of China (Grant No.14 ZDA070) and by the Fundamental Research Funds for the Central Universities 2017. |
| Keywords: | Agricultural and Food Policy |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:iaae18:277515&r=opm |
| By: | Gardberg, Malin (Research Institute of Industrial Economics (IFN)) |
| Abstract: | Many currencies, especially those of countries with negative net foreign assets, tend to depreciate during times of financial turbulence. Using a panel of 26 currencies over the period 1/1997 – 6/2016, I show that the composition of net foreign assets matter for the exchange rate sensitivity to changes in global financial market risk tolerance, where debt financing increases it and equity financing reduces it. Thus, currencies of countries with large negative net external portfolio debt are more vulnerable to changes in financial market uncertainty than currencies with the equivalent net external equity. Ownership matters too, private net foreign debt liabilities heighten the exchange rate sensitivity much more than public. The relationship between banking sector risk intolerance, net external asset positions and exchange rates has, moreover, become stronger since the credit crisis. |
| Keywords: | Exchange rates; Excess currency returns; Net foreign assets; External imbalances; Net foreign portfolio debt; Financial market risk tolerance; Panel data |
| JEL: | C23 F31 F32 G15 G20 |
| Date: | 2018–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:1246&r=opm |
| By: | Corsetti, Giancarlo; Crowley, Meredith A; Han, Lu |
| Abstract: | In this paper, we provide novel micro evidence from UK customs transactions which supports the view that the currency in which exports and imports are invoiced is a good proxy for the currency in which firms set prices. First, we document that pricing to market, in the form of destination-specific markup adjustment, is substantial only for export shipments which are invoiced in the destination market's currency. Conversely, we find no destination-specific markup adjustments by firms that invoice a shipment in either their own currency or a vehicle currency. Second, we document that while the aggregate shares of invoicing currencies for the UK's exports and imports are stable over time, firms often change their invoicing currency; this practice is more pronounced for firms that use multiple invoicing currencies, are multi-product, and serve several destinations. |
| Keywords: | currency choice; firm pricing; invoicing currency; Markups |
| JEL: | F12 F14 F31 F41 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13282&r=opm |
| By: | Chernov, Mikhail; Creal, Drew |
| Abstract: | The depreciation rate is often computed as the ratio of foreign and domestic pricing kernels. Using bond prices to estimate these kernels leads to currency puzzles: inability of models to match violations of the uncovered interest parity and volatility of exchange rates. One cannot use information in bonds alone because exchange rates are not spanned by bonds. This view of the puzzles is distinct from market incompleteness. Incorporating exchange rates into estimation of yield curve models helps with resolving the puzzles. It also allows to connect the differences between international yield curves to characteristics of exchange rates. |
| Keywords: | affine models; bond valuation; Exchange Rates; market incompleteness |
| JEL: | F31 G12 G15 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13252&r=opm |
| By: | Mariam Camarero (Jaume I University. Department of Economics, Av. de Vicent Sos Baynat s/n, E-12071 Castellón, Spain); Juan Sapena (Catholic University of Valencia, Faculty of Economics and Business. 34 Calle Corona, Valencia, Spain); Cecilio Tamarit (University of Valencia, INTECO Joint Research Unit. Department of Applied Economics II. PO Box 22.006 - E-46071 Valencia, Spain) |
| Abstract: | The aim of this paper is to reexamine the Feldstein-Horioka puzzle in a dynamic framework. We estimate a time-varying saving-investment relationship for a group of 17 countries panel, paying special attention to Eurozone members but including some relevant OECD countries as well for the period 1970-2016. The main advantage of our empirical approach is that it captures the dynamics of the FH coe_cient, highly consistent with increased _nancial integration. Global risk and country size are relevant elements to unpuzzle the savings-investment correlation. The inclusion of time-varying estimates reveal certain heterogeneity among EMU countries on the way and the circumstances under which their domestic investment would be constrained by savings retention. |
| Keywords: | Feldstein-Horioka puzzle, panel unit root tests, multiple structural breaks, Kalman Filter, Time varying parameters |
| JEL: | C23 F32 F36 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:eec:wpaper:1813&r=opm |
| By: | Flavia Corneli (Bank of Italy) |
| Abstract: | I propose a theoretical model of a debt contract between a sovereign and its international lenders that determines the optimal debt maturity structure and related costs. It is shaped by two financial frictions: limited liability (the country cannot guarantee that it will not dilute its obligations or default on them) and market incompleteness (only non-contingent assets can be issued). I find that, in equilibrium, debt dilution constrains the amount of long-term debt issuance. I then focus on two aspects that are currently widely debated in both academic and policy fora: the possibility of sovereign debt restructuring with private creditors and international official lending in the event of exclusion from the international capital markets. The possibility of restructuring after default stimulates long-term debt issuance. However, in equilibrium, the proposed crisis management tools are unable to loosen the constraint on long-term debt issuance. Consistently with the empirical literature, I find that even when these policy options for crisis resolution are available, the country tends to issue mainly short-term debt. |
| Keywords: | sovereign debt, optimal maturity, strategic default, crisis management, lender of last resort |
| JEL: | E43 F33 G15 H63 |
| Date: | 2018–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1196_18&r=opm |
| By: | Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania); Lee Ohanian (Department of Economics, Stanford University) |
| Abstract: | This paper draws lessons from post-World War II Western European economic performance for the current U.S. economy. We document that much of Western Europe grew very quickly from the end of World War II up to the mid-1970s, reflecting policies that incentivized technology adoption and investment in physical and human capital. But since then, European policies have changed considerably, with higher tax rates and increased regulatory barriers that have reduced competition and new business formation. We discuss how the U.S. has shown signs of becoming like Europe over the last decade, and argue why policy reforms are key to restoring U.S. growth. |
| Keywords: | Productivity growth, Europe’s economic performance, economic policy |
| JEL: | E02 E30 E60 |
| Date: | 2018–09–07 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:18-024&r=opm |