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on Open Economy Macroeconomics |
| By: | Paolo Cavallino; Damiano Sandri |
| Abstract: | We provide a theory of the limits to monetary policy independence in open economies arising from the interaction between capital flows and domestic collateral constraints. The key feature is the existence of an "Expansionary Lower Bound" (ELB), defined as an interest rate threshold below which monetary easing becomes contractionary. The ELB can be positive, thus binding before the ZLB. Furthermore, the ELB is affected by global monetary and financial conditions, leading to novel international spillovers and crucial departures from Mundell's trilemma. We present two models in which the ELB may arise due to either carry-trade capital flows or currency mismatches. |
| Keywords: | monetary policy, collateral constraints, currency mismatches, carry trade, spillovers |
| JEL: | E5 F3 F42 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:770&r=all |
| By: | ITO Hiroyuki; Phuong TRAN |
| Abstract: | It has been increasingly argued that highly globalized financial markets have been playing a bigger role in determining domestic asset prices and long-term interest rates. Rey (2013) argues that global financial cycles essentially dictate the movements of domestic financial markets to such an extent that policy makers have to decide between either retaining monetary autonomy by imposing capital controls, or retaining free capital mobility but relinquishing monetary independence. In such a world, managing long-term interest rates through manipulating short-term interest rates can be difficult. In this paper, we empirically examine whether net capital inflows contribute to weakening the link between short-term and long-term interest rates. We find that economies open to cross-border capital flows or with more developed financial markets tend to have a greater negative relationship between net capital inflows and interest rate pass-through. We also examine whether macroprudential policies can affect the extent of interest rate pass-through and find that broad-based capital macroprudential tools are effective in retaining control of short- to long-term interest rate pass-through. |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:19012&r=all |
| By: | CHAFIK, Omar |
| Abstract: | Nominal interest rate is generally assumed to follow an UIP condition when the exchange rate is fixed, and the capital account is opened. Consequently, domestic interest rate is determined by foreign rates and the risk premium. This paper shows that for an oil exporting country like UAE, adjusting nominal interest rate only to foreign rate could be economically inconsistent. In fact, what really matters with exchange rate is expectations, and for an oil exporter country like UAE these expectations are significantly impacted by oil prices. By incorporating a market-expected exchange rate mechanism in a semi-structural New Keynesian Model, this paper highlights the importance of this mechanism and provides a consistent analytical framework. |
| Keywords: | Monetary policy, exchange rate, New Keynesian Model, UIP condition, Bayesian estimation |
| JEL: | C11 E3 E5 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92558&r=all |
| By: | Jongrim Ha (World Bank, Development Prospects Group); M. Ayhan Kose (World Bank, Development Prospects Group; Brookings Institution; CEPR, and CAMA); Franziska L. Ohnsorge (World Bank, Development Prospects Group; CAMA) |
| Abstract: | We study the extent of global inflation synchronization using a dynamic factor model in a large set of countries over a half century. Our methodology allows us to account for differences across groups of countries (advanced economies and emerging market and developing economies) and to analyze commonalities in inflation synchronization across a wide range of inflation measures. We report three major results. First, inflation movements have become increasingly synchronized internationally over time: a common global factor has accounted for about 22 percent of variation in national inflation rates since 2001. Second, inflation synchronization has also become more broad-based: while it was previously much more pronounced among advanced economies than among emerging market and developing economies, it has become substantial in both groups over the past two decades. In addition, inflation synchronization has become significant across all inflation measures since 2001, whereas it was previously prominent only for inflation measures that included mostly tradable goods. |
| Keywords: | Global inflation, synchronization, dynamic factor model, advanced economies, emerging markets, developing economies. |
| JEL: | E31 E32 F42 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1903&r=all |
| By: | Miyamoto, Wataru; Nguyen, Thuy Lan |
| Abstract: | We quantify the effects of changes in international input-output linkages on the nature of business cycles. We build a multi-sector multi-country international business cycle model that matches the input-output structure within and across countries. We find that, in our 23 countries sample with manufacturing and non-manufacturing sectors, changes in the international input-output linkages between 1970 and 2007 causes a 15% drop in output volatility in a median country, but the effects are heterogeneous across countries. Changing international linkages tend to stabilize output in most countries, while leading to a higher risk of a global recession. |
| Keywords: | International business cycles, trade linkages, volatilities, input-output |
| JEL: | E32 F31 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hitcei:2018-16&r=all |
| By: | Hartmut Egger; Simone Habermeyer |
| Abstract: | We develop a framework for studying how differences in the level and/or dispersion of per-capita income affect trade structure and welfare in a two-country model. Thereby, we embed nonhomothetic preferences into a home-market model with two sectors of production and one input factor. We associate the outside good with a necessity and the differentiated good with a luxury, and we assume that heterogeneity of income arises due to heterogeneity of households in their effective labor supply. We then show that in line with the home-market effect countries have a trade surplus in the good for which they have relatively higher domestic demand, making the country with a higher level and/or dispersion of per-capita income a net-exporter of luxuries. The structure of trade is irrelevant for welfare in the open economy if both sectors pay the same wage. If, however, the sector producing luxuries pays a wage premium due to rent sharing, there are feedback effects of trade on the level and dispersion of per-capita income, which can lead to losses from trade in the country net-exporting necessities. In an extension of our model, we show that our results remain intact when we allow for positive assortative matching of workers featuring high effective labor supply with jobs offering high wages in the sector of luxuries. In a second extension, we show that the assumption of nonhomothetic preferences seems less important when supply-side differences are the main motive for inter-industry trade. |
| Keywords: | nonhomothetic preferences, rent sharing, trade structure, welfare effects of trade |
| JEL: | F12 F16 D11 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7522&r=all |
| By: | Troug, Haytem |
| Abstract: | To show how fiscal policy affects the transmission mechanism of monetary policy, we extend a standard new Keynesian model for a small open economy to allow for the presence of non-separable government consumption in the utility function. We show how monetary policy should optimally respond to demand and supply shocks when the government sector is incorporated into the model. The introduction of government consumption affects the transmission of monetary policy. When government consumption has a crowding in effect on private consumption, it will dampen the transmission mechanism of monetary policy, and vice versa. Nevertheless, the degree of openness will minimise the effect of the introduction of government consumption in a non-separable form. Data for 35 OECD countries empirically support these findings, and the empirical results are robust to the zero lower bound period. The theoretical model also shows that, once we model the rest of the world economy, domestic government consumption and foreign government consumption will have opposing effects on private consumption, which contradicts with the existing literature. |
| Keywords: | New Keynesian models, Business Cycle, Monetary Policy, Open Economy Macroeconomics, Joint Analysis of Fiscal and Monetary Policy. |
| JEL: | E12 E32 E52 E63 F41 |
| Date: | 2019–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92511&r=all |
| By: | Bilir, Kamran; Chor, Davin; Manova, Kalina |
| Abstract: | This paper evaluates the influence of host-country financial conditions on the global operations of multinational firms. Using detailed U.S. data, we establish that financial development in a country is associated with relatively more entry by multinational affiliates, as well as with higher aggregate affiliate sales to the local market, back to the U.S. and to third destinations, with these effects being more pronounced in financially more vulnerable sectors. At the level of individual affiliates, by contrast, these forces are associated with relatively lower local sales and higher return and third-country sales. Yet at both aggregate and affiliate levels, the share of local sales in total sales is smaller, while the shares of U.S. and third-country sales are both bigger. These empirical regularities hold when using fixed effects to account for unobserved differences across country-years, sectors, and parent firms. We show theoretically that these patterns are consistent with host-country financial development affecting multinationals' incentives for horizontal, vertical and platform FDI through two channels: a financing effect that induces affiliate entry and expansion by improving their access to external finance, and a competition effect that reorients affiliate sales away from the local market due to increased entry by credit-constrained domestic firms. |
| Keywords: | credit constraints; FDI; Financial Development; Heterogeneous Firms; multinational activity |
| JEL: | F12 F23 F36 G20 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13557&r=all |
| By: | Ana Fostel (Dept. of Economics, George Washington University); John Geanakoplos (Cowles Foundation, Yale University); Gregory Phelan (Department of Economics, Williams College) |
| Abstract: | Cross-border financial flows arise when (otherwise identical) countries differ in their abilities to use assets as collateral to back financial contracts. Financially integrated countries have access to the same set of financial instruments, and yet there is no price convergence of assets with identical payoffs, due to a gap in collateral values. Home (financially advanced) runs a current account deficit. Financial flows amplify asset price volatility in both countries, and gross flows driven by collateral differences collapse following bad news about fundamentals. Our results can explain financial flows among rich, similarly-developed countries, and why these flows increase volatility. |
| Keywords: | Collateral, Capital flows, Asset prices, Current account, Securitized markets, Asset-backed securities |
| JEL: | D52 D53 E32 E44 F34 F36 G01 G11 G12 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2169&r=all |
| By: | Johannes Wiegand |
| Abstract: | In 1871-73, newly unified Germany adopted the gold standard, replacing the silver-based currencies that had been prevalent in most German states until then. The reform sparked a series of steps in other countries that ultimately ended global bimetallism, i.e., a near-universal fixed exchange rate system in which (mostly) France stabilized the exchange value between gold and silver currencies. As a result, silver currencies depreciated sharply, and severe deflation ensued in the gold block. Why did Germany switch to gold and set the train of destructive events in motion? Both a review of the contemporaneous debate and statistical evidence suggest that it acted preemptively: the Australian and Californian gold discoveries of around 1850 had greatly increased the global supply of gold. By the mid-1860s, gold threatened to crowd out silver money in France, which would have severed the link between gold and silver currencies. Without reform, Germany would thus have risked exclusion from the fixed exchange rate system that tied together the major industrial economies. Reform required French accommodation, however. Victory in the Franco-Prussian war of 1870/71 allowed Germany to force accommodation, but only until France settled the war indemnity and regained sovereignty in late 1873. In this situation, switching to gold was superior to adopting bimetallism, as it prevented France from derailing Germany’s reform ex-post. |
| Date: | 2019–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/32&r=all |
| By: | Cheung, Yin-Wong; He, Shi |
| Abstract: | We conduct a meta-regression analysis of 69 studies that generated 937 renminbi (RMB) misalignment estimates. The Bayesian Model Averaging (BMA) approach is adopted to allow for model selection and sampling uncertainties in assessing effects of study characteristics on these RMB misalignment estimates. Misalignment estimates are found to be influenced by the eight selected study characteristic types in our median probability model. The RMB misalignment estimate from models with various hypothetical combinations of study characteristics, however, is mostly insignificantly different from zero. It is also shown that the set of significant study characteristics is sensitive to the use of the least squares estimation method and the choice of benchmark study characteristics. |
| JEL: | C83 F31 F41 |
| Date: | 2019–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofitp:2019_003&r=all |