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on Open Economy Macroeconomics |
| By: | Davis, Scott (Federal Reserve Bank of Dallas); Zlate, Andrei (Federal Reserve Bank of Boston) |
| Abstract: | This paper measures the effect of monetary tightening in key advanced economies on net capital flows around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous response of domestic monetary policy depends on each economy's capital account openness and exchange rate regime. We use a method to compute counterfactual impulse responses for net capital outflows under the assumption that the domestic policy rate does not respond to foreign monetary tightening. Our results suggests that failing to account for the endogenous response of domestic monetary policy biases down the estimated elasticity of net capital flows to foreign interest rates by as much as one-third for countries with open capital accounts. |
| Keywords: | trilemma; structural VAR; counterfactual VAR; net capital inflows; exchange rates |
| JEL: | E5 F3 F4 |
| Date: | 2018–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbqu:rpa18-5&r=all |
| By: | Alok Johri; Shahed K. Khan; Cesar Sosa-Padilla |
| Abstract: | Fluctuations in sovereign bond yields display a large global component which is associated with a rise in uncertainty. We build a model of sovereign default in which shocks to the level and to the volatility of the world interest rate help to account for this phenomenon. We calibrate the model parameters to Argentine data and estimate a process for the world interest rate using US treasuries data. Time variation in the world interest rate interacts with default incentives and its effect on borrowing and sovereign spreads is state contingent. We find that shocks to the level and volatility of the world interest rate (i.e. uncertainty shocks) cause the model to predict an average sovereign spread that is 280 basis points larger and 200 basis points more volatile than a model with a constant world interest rate. The model also predicts that countries will prefer a longer maturity for their debt when facing a time-varying world interest rate. The welfare gains from eliminating uncertainty about the world interest rate amount up to a permanent increase in consumption of 1 percent. |
| Keywords: | Sovereign default, Interest rate spread, Political turnover, Left-wing, Right-wing, Cyclicality of fiscal policy. |
| JEL: | E32 E43 F34 F41 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2018-17&r=all |
| By: | Mardi Dungey; Denise R. Osborn |
| Abstract: | As China becomes more closely entwined with the US, positive shocks in the US translate into positive outcomes for China, but the extent of gain for the US during the convergence process is less clear. We develop an empirical framework of two interacting open economies in which Chinese GDP per capita moves towards convergence and cointegration with the US, resulting in a time-varying structural VAR model. As a result, the impulse responses of the two countries to shocks are sensitive to the timing of the shock. The changing effects of US shocks are evident in the analysis, which shows that over the convergence process both the US and China unambiguously benefit from the catch-up process. |
| Keywords: | China, SVAR, convergence, catch-up |
| JEL: | O11 O47 F41 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-07&r=all |
| By: | Miguel Portela; António Rua; Paulo Esteves |
| Abstract: | The existence of a link between exports and domestic demand challenges the standard theoretical assumption in international trade models and carries out important policy implications. Being a small open economy and one of the hardest hit economies during the latest economic and financial crisis, Portugal is a natural case study for assessing the role of this channel, in particular given the large export market share gains that mitigated the negative effects on economic activity. A key difference of our empirical approach vis-à-vis previous literature is that the estimated relationship between exports and domestic sales results directly from a monopolistic model of a firm selling to both domestic and external markets. Drawing on an appropriate estimation strategy, it is found a noteworthy negative relationship between domestic demand and firms’ exports covering the manufacturing sector over the period 2009–2016. This result holds for almost all industries although with a heterogeneous magnitude. Additionally, there is also evidence that this effect is stronger for larger firms. |
| JEL: | C33 D21 D22 F14 F41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w201826&r=all |
| By: | Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia |
| Abstract: | This paper studies the relationship between the business cycle and financial intermediation in the euro area. We establish stylized facts and study their stability during the global financial crisis and the European sovereign debt crisis. Long-term interest rates have been exceptionally high and long-term loans and deposits exceptionally low since the Lehman collapse. Instead, short-term interest rates and short-term loans and deposits did not show abnormal dynamics in the course of the financial and sovereign debt crisis. JEL Classification: E32, E51, E52, C32, C51 |
| Keywords: | euro area, loans, monetary policy, money, non-financial corporations |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192226&r=all |
| By: | Akcigit, Ufuk; Ates, Sina T.; Impullitti, Giammario |
| Abstract: | How do import tariffs and R&D subsidies help domestic firms compete globally? How do these policies affect aggregate growth and economic welfare? To answer these questions, we build a dynamic general equilibrium growth model where firm innovation endogenously determines the dynamics of technology, market leadership, and trade flows, in a world with two large open economies at different stages of development. Firms’ R&D decisions are driven by (i) the defensive innovation motive, (ii) the expansionary innovation motive, and (iii) technology spillovers. The theoretical investigation illustrates that, statically, globalization (defined as reduced trade barriers) has ambiguous effects on welfare, while, dynamically, intensified globalization boosts domestic innovation through induced international competition. Accounting for transitional dynamics, we use our model for policy evaluation and compute optimal policies over different time horizons. The model suggests that the introduction of the Research and Experimentation Tax Credit in 1981 proves to be an effective policy response to foreign competition, generating substantial welfare gains in the long run. A counterfactual exercise shows that increasing tariffs as an alternative policy response improves domestic welfare only when the policymaker cares about the very short run, and only when introduced unilaterally. Tariffs generate large welfare losses in the medium and long run, or when there is retaliation by the foreign economy. Protectionist measures generate large dynamic losses by distorting the impact of openness on innovation incentives and productivity growth. Finally, our model predicts that a more globalized world entails less government intervention, thanks to innovation-stimulating effects of intensified international competition. |
| Keywords: | economic growth; short- and long run gains from globalization; foreign technological catching-up; innovation policy; trade policy; competition |
| JEL: | F13 F43 O40 |
| Date: | 2018–12 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:91712&r=all |
| By: | Marco E. Terrones (Universidad del Pací fico) |
| Abstract: | There is an important debate about how economies with different exchange rate regimes performed during the Great Recession and its ensuing recovery. While economic theory suggests that economies with fixed exchange rates are more affected and recover more slowly from global shocks than economies with non-fixed exchange rates, the empirical evidence on the most recent global recession has been mixed. This paper examines the exchange rate and economic growth nexus and assesses how this relationship is affected by the four global recessions and recoveries the world economy has experienced post-Bretton Woods. While there is no robust long-term relationship between exchange rate regimes and growth, there is evidence that fixers recover from global recessions at a weaker pace than non-fixers. |
| Keywords: | Cycles, international cycles, global recessions and recoveries, exchange rates, economic growth of open economies |
| JEL: | E32 F31 F41 F43 F44 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:139&r=all |
| By: | Chen, Kaiji (Emory University); Zha, Tao (Federal Reserve Bank of Atlanta) |
| Abstract: | The Chinese economy has undergone three major phases: the 1978–97 period marked as the SOE-led economy, the 1998–2015 phase as the investment-driven economy, and the new normal economy since 2016. All three economies have been shaped by the government financial policies, defined as a set of credit policy, monetary policy, and regulatory policy. We analyze the macroeconomic effects of these financial policies throughout the three phases and provide the stylized facts to substantiate our analysis. The stylized facts differ qualitatively across different phases or economies. We argue that the impacts of China's financial policies work through transmission channels different from those in developed economies and that a regime switch from one economy to another was driven mainly by regime changes in financial policies. |
| Keywords: | marketized tools; regime change; growth; investment; capital intensity; local governments; regulations; shadow banking; debts; real estate; preferential credits; industrialization; SOEs; POEs; heavy and light sectors; monetary stimulus; trends and cycles |
| JEL: | E5 G1 G28 O2 |
| Date: | 2018–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2018-12&r=all |