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on Open Economy Macroeconomics |
| By: | Ha, Jongrim; Kose, Ayhan; Ohnsorge, Franziska |
| 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: | Advanced economies; developing economies; Dynamic factor model; emerging markets; Global inflation; Synchronization |
| JEL: | E31 E32 F42 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13600&r=all |
| By: | Hidehiko Matsumoto (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: hidehiko.matsumoto@boj.or.jp)) |
| Abstract: | This paper develops a quantitative small-open-economy model to assess the optimal pace of foreign reserve accumulation by emerging and developing countries. In the model, reserve accumulation depreciates the real exchange rate and attracts foreign direct investment (FDI) inflows, which promotes productivity growth through endogenous firm dynamics. The economy is also subject to sudden stops in the form of an occasionally binding constraint on foreign borrowing, and accumulated reserves are used to prevent severe economic downturns. The model shows that two factors are the key determinants of the optimal pace of reserve accumulation: the elasticity of the foreign borrowing spread with respect to foreign debt, and the entry cost for FDI entry. The model suggests that these two factors can explain a substantial amount of the cross-country variation in the observed pace of reserve accumulation. |
| Keywords: | Foreign Reserve Accumulation, Foreign Direct Investment, Sudden Stops, Endogenous Growth, Real Exchange Rate, Gross Capital Flows |
| JEL: | F23 F31 F32 F41 F43 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:19-e-04&r=all |
| By: | Hyeongwoo Kim; Ying Lin; Henry Thompson |
| Abstract: | A group of researchers has asserted that the rate of exchange rate pass-through (ERPT) to domestic prices has declined substantially over the last few decades. We revisit this claim of a downward trend in ERPT to the Consumer Price Index (CPI) in a vector autoregressive (VAR) model for US macroeconomic data under the current floating exchange rate regime. Our VAR approach nests the conventional single equation method, revealing very weak evidence of ERPT during the pre-1990 era, but statistically significant evidence of ERPT during the post-1990 era, sharply contrasting with previous findings. After statistically confirming a structural break in ERPT to total CPI via Hansen's (2001) test procedure, we seek the source of the structural break with disaggregated level CPIs, pinning down a key role of energy prices in the break. The dependency of US energy consumption on imports increased since the 1990s until the recent recession. This change magnifies effects of the exchange rate shocks on domestic energy prices, resulting in greater responses of the total CPI via this energy price channel. |
| Keywords: | Exchange Rate Pass Through; Disaggregated CPI; Structural Break; Oil Price Shock |
| JEL: | E31 F31 F41 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2019-01&r=all |
| By: | Carlo Galli (Centre for Macroeconomics (CFM); University College London (UCL)) |
| Abstract: | This paper studies the circular relationship between sovereign credit risk, government fiscal and debt policy, and output. I consider a sovereign default model with fiscal policy and private capital accumulation. I show that, when fiscal policy responds to borrowing conditions in the sovereign debt market, multiple equilibria exist where the expectations of lenders are self-fulfilling. In the bad equilibrium, pessimistic beliefs make sovereign debt costly. The government substitutes borrowing with taxation, which depresses private investment and future output, increases default probabilities and verifies lenders’ beliefs. This result is reminiscent of the European debt crisis of 2010-12: while recessionary, fiscal austerity may be the government best response to excessive borrowing costs during a confidence crisis. |
| Keywords: | Self-fulfilling debt crises, Soverign default, Multiple equilibria, Fiscal austerity |
| JEL: | E44 E62 F34 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:1904&r=all |
| By: | Bruni, Franco; Lopez, Claude |
| Abstract: | In a time of global crisis, international policy coordination is quite natural. Yet, in normal times such coordination becomes a challenge. This is an issue especially when it comes to monetary and macroprudential policy of globally influential countries. This is especially relevant now with the trend of monetary normalisation in many of these countries. In this brief, we propose four necessary steps to help addressing these challenges: (i) Monetary policy should take into account its spillovers on financial stability, (ii) Systemic central banks need to account for the global impact of their policy, (iii) Multilateral consultations may provide a useful platform to assess these impacts, (iv) The analysis that helps designing monetary and macroprudential policy should include global aggregates to capture the global economic and financial context. |
| Keywords: | Financial system resilience, |
| JEL: | E5 E6 F4 F5 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:92880&r=all |
| By: | Boris Hofmann; Ilhyock Shim; Hyun Song Shin |
| Abstract: | In emerging market economies, currency appreciation goes hand in hand with compressed sovereign bond spreads, even for local currency sovereign bonds. This yield compression comes from a reduction in the credit risk premium. Crucially, the relevant exchange rate involved in yield compression is the bilateral US dollar exchange rate, not the trade-weighted exchange rate. Our findings highlight endogenous co-movement of bond risk premia and exchange rates through the portfolio choice of global investors who evaluate returns in dollar terms. |
| Keywords: | bond spread, capital flow, credit risk, emerging market, exchange rate |
| JEL: | G12 G15 G23 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:775&r=all |
| By: | Demir, Ishak |
| Abstract: | We estimate a structural dynamic factor model on large panel quarterly data to analyse the spillovers of U.S. monetary policy to the advanced economies and emerging and frontier market economies. The estimated model suggests that monetary contraction in U.S. leads to a significant decrease in real GDP with typical inverted hump-shape almost for all countries. It reduces permanently aggregate price level, increases interest rate and leads appreciation of U.S. dollar. However, contagion of U.S. monetary policy to the individual countries shows heterogeneity. For instance, its impact is larger in developing countries. We also find that global financial crisis has amplified the impact of U.S monetary policy on the rest of world in particular on developing countries. Lastly, the empirical results suggest that the cross-country heterogeneity in responses may be consequence of difference in country-specific characteristics such as exchange rate regimes, currency of price settings of firms, central bank independence and geographical distance from Unites States. |
| Keywords: | cross-country heterogeneity,country-specific characteristic,international monetary spillovers,structural factor model,monetary policy |
| JEL: | C38 E43 E52 E58 F42 G12 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:193968&r=all |
| By: | Hettig, Thomas; Müller, Gernot; Wolf, Martin |
| Abstract: | We run local projections to estimate the effect of US monetary policy shocks on the dollar. We find that monetary contractions appreciate the dollar and establish two results. First, the spot exchange rate undershoots: the appreciation is smaller on impact than in the longer run. Second, forward exchange rates also appreciate on impact, but their response is flat across tenors. Next, we develop and estimate a New Keynesian model with information frictions. In the model, investors do not observe the natural rate of interest directly. As a result, they learn only over time whether an interest rate surprise represents a monetary contraction. The model accurately predicts the joint dynamics of spot and forward exchange rates following a monetary contraction. |
| Keywords: | Forward Exchange Rate; Forward premium puzzle; information effect; Information Frictions; monetary policy; Spot Exchange Rate; UIP puzzle |
| JEL: | E43 F31 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13597&r=all |