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on Open Economy Macroeconomics |
| By: | Caballero, Ricardo; Simsek, Alp |
| Abstract: | We develop a model of gross capital flows and analyze their role in global financial stability. In our model, consistent with the data, when a country experiences asset fire sales, foreign investments exit (fickleness) while domestic investments abroad return home (retrenchment). When countries have symmetric expected returns and financial development, the benefits of retrenchment dominate the costs of fickleness and gross flows increase fire-sale prices. Fickleness, however, creates a coordination problem since it encourages local policymakers to restrict capital inflows. When countries are asymmetric, capital flows are driven by additional mechanisms, reach-for-safety and reach-for-yield, that can destabilize the receiving country. |
| Keywords: | asset fire sales; capital controls; fickleness; Global liquidity; Gross capital flows; Policy Coordination; reach-for-safety; reach-for-yield; retrenchment; scarcity of safe assets |
| JEL: | E3 E4 F3 F4 G1 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13819&r=all |
| By: | Corsetti, Giancarlo; Crowley, Meredith A; Han, Lu; Song, Huasheng |
| Abstract: | Firms that dominate global trade export to multiple countries and frequently change their foreign destinations. We develop an estimator of the destination-specific markup elasticity to the exchange rate that controls for endogenous market selection. To proxy for firms' power in local markets, we introduce a new classification of products based on Chinese linguistics that distinguishes between highly and less differentiated goods. Using Chinese customs data, we show that controlling for selectivity unveils significant pricing-to-market for highly differentiated goods. Measured in the importer's currency, the prices of highly differentiated goods are more stable than those of less differentiated products. |
| Keywords: | China; differentiated goods; Exchange Rates; markup elasticity; pricing-to-market; product classification; Trade Elasticity |
| JEL: | F14 F31 F41 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13904&r=all |
| By: | Charles Engel (University of Wisconsin – Madison) |
| Abstract: | The “exorbitant privilege” of the U.S. – the ability of the U.S. to earn positive net income on its international portfolio even though it is a net debtor – may be linked to the “convenience yield” on U.S. government bonds. The convenience yield refers to the low pecuniary return on U.S. Treasuries associated with the non-pecuniary yield on those assets arising from their liquidity and safety. A simple model shows how the convenience yield can lead to current account deficits, an appreciated currency in real terms, and positive net factor income. Empirically, we find evidence associating the convenience yield with a strong dollar in real terms, and, in turn, evidence linking the real exchange rate to the U.S. current account. We calculate that this channel may account for approximately 40% of the U.S. current account deficit. We then discuss factors that might influence the convenience yield, and discuss possible drawbacks to the exorbitant privilege. |
| Date: | 2019–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:cth:wpaper:gru_2019_025&r=all |
| By: | Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Eric van Wincoop (University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)) |
| Abstract: | The objective of this paper is to show that the proposal by Froot and Thaler (1990) of delayed portfolio adjustment can account for a broad set of puzzles about the relationship between interest rates and exchange rates. The puzzles include: i) the delayed overshooting puzzle; ii) the forward discount puzzle (or Fama puzzle); iii) the predictability reversal puzzle; iv) the Engel puzzle (high interest rate currencies are stronger than implied by UIP); v) the forward guidance exchange rate puzzle; vi) the absence of a forward discount puzzle with long-term bonds. These results are derived analytically in a simple two-country model with portfolio adjustment costs. Quantitatively, this approach can match all targeted moments related to these puzzles. |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1935&r=all |
| By: | Hulya Saygili |
| Abstract: | We explore the role of invoicing currency and global production integration on exchange rate pass-through to import and export prices, using 3-digit product level data classified by end-use and 2-digit sector level data displaying varying integration to global value-added trade from an emerging country, Turkey. The results show that, overall, rates of exchange rate pass-through to export prices are higher than those to import prices. The rare of pass-through is significantly higher for local currency-priced goods. The pass-through to the US dollar and euro-priced goods depends on the type of products traded and value-added trade. For consumption and capital goods, pass-through rates are significant and relatively high when they are priced in the US dollars. For intermediate goods the pass-through to euro-priced goods are higher than those to the US dollar-priced goods. In addition, sectors displaying a low or high association with global value chains tend to have a higher exchange rate pass-through than those placing in the middle range and the rate is slightly higher for sectors having lower global linkage. |
| Keywords: | Exchange rate pass-through, Currency of invoicing, Imported input, Value-added trade |
| JEL: | F1 F3 F4 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:1917&r=all |
| By: | Huo, Zhen; Levchenko, Andrei A.; Pandalai-Nayar, Nitya |
| Abstract: | This paper uses sector-level data for 30 countries and up to 28 years to provide a quantitative account of the sources of international GDP comovement. We propose an accounting framework to decompose comovement into the components due to correlated shocks, and to the transmission of shocks across countries. We apply this decomposition in a multi-country multi-sector DSGE model. We provide an analytical solution to the global influence matrix that characterizes every country's general equilibrium GDP elasticities with respect to various shocks anywhere in the world. We then provide novel estimates of country-sector-level technology and non-technology shocks to assess their correlation and quantify their contribution to comovement. We find that TFP shocks are virtually uncorrelated across countries, whereas non-technology shocks are positively correlated. These positively correlated shocks account for two thirds of the observed GDP comovement, with international transmission through trade accounting for the remaining one third. However, trade opening does not necessarily increase GDP correlations relative to autarky, because the contribution of trade openness to comovement depends on whether sectors with more or less correlated shocks grow in influence as countries increase input linkages. Finally, while the dynamic model features rich intertemporal propagation of shocks, quantitatively these components contribute little to the overall GDP comovement as impact effects dominate. |
| Keywords: | input linkages; international comovement; non-technology shocks; TFP shocks |
| JEL: | F41 F44 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13796&r=all |
| By: | Al Raee, Mueid (UNU-MERIT); De Crombrugghe, Denis (SBE, Maastricht University); Ritzen, Jo (UNU-MERIT, Maastricht University) |
| Abstract: | This chapter examines the relationship between labour productivity, capital formation, and natural resource extraction in countries with natural resource reserves. We develop a theoretical two-sector model for a closed economy that maximises consumption over time, and examine how the control variables - natural resource extraction and the savings rate - determine fixed capital investment. We find that in a closed economy, the overall labour productivity is a positive function of capital investment per labour. That is in turn related to the externally given natural resource price, natural resource reserves and the resource extraction ratio. High natural resource prices and extraction rates provide opportunities to increase the overall investment in fixed capital and thus boost the labour productivity. We empirically test this model for oil as a natural resource. The data covers 36 years from 1980 to 2015 and includes 149 countries. 85 of these countries possessed commercially recoverable oil reserves in at least a part of the time period covered. We are able to exploit the panel and carry out the estimation using two-way fixed effects. We observe that oil price has an overall positive impact on labour productivity growth in the modern sector. The savings rate and schooling are positively correlated to labour productivity growth as well as fixed capital formation per capita. We find that the oil sector variables - oil reserves and oil extraction ratio - do not contribute to labour productivity growth directly, rather through increased capital formation per capita. |
| Keywords: | structural change, natural resource curse, GCC, theoretical modelling, empirical application, capital formation |
| JEL: | E21 E24 O13 O47 Q32 |
| Date: | 2019–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:unm:unumer:2019023&r=all |
| By: | Schlegl, Matthias; Trebesch, Christoph; Wright, Mark L. J. |
| Abstract: | Sovereign governments owe debt to many foreign creditors and can choose which creditors to favor when making payments. This paper documents the de facto seniority structure of sovereign debt using new data on defaults (missed payments or arrears) and creditor losses in debt restructuring (haircuts). We overturn conventional wisdom by showing that official bilateral (government-to-government) debt is junior, or at least not senior, to private sovereign debt such as bank loans and bonds. Private creditors are typically paid first and lose less than bilateral official creditors. We confirm that multilateral institutions like the IMF and World Bank are senior creditors. |
| Keywords: | Sovereign default,Arrears,Insolvency,Priority,IMF,Official Debt,Sovereign bonds,International Financial Architecture,Pecking Order |
| JEL: | F3 F4 F5 G1 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:2129&r=all |
| By: | posada |
| Keywords: | Colombian Economic Growth; Cass-Koopmans-Ramsey Model; Small OpenEconomy; Technical Change; Interest Rate; Investment; Households Savings. |
| JEL: | E13 E21 E22 F41 F43 O11 O41 O54 |
| Date: | 2019–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:col:000122:017389&r=all |
| By: | Koray Alper (Government of the Republic of Turkey - Central Bank of the Republic of Turkey); Fatih Altunok (Central Bank of the Republic of Turkey); Tanju Çapacıoğlu (Central Bank of Turkey); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)) |
| Abstract: | We analyze the impact of quantitative easing by the Federal Reserve, European Central Bank and Bank of England on cross‐border credit flows. Relying on comprehensive loan‐level data, we find that Fed QE strongly boosts cross‐border credit granted to Turkish banks by banks located in the US, Euro Area and UK, while ECB and BoE QEs work only moderately through banks in the EA and UK, respectively. In general QE works at short maturities across bank locations and loan currencies, more strongly for weaker lenders and borrowers, and may have resulted in maturity mismatches in Turkish banks searching for yield. |
| Keywords: | bank lending channel; bank borrowing channel; monetary transmission; quantitative easing (QE); cross‐border bank loans, micro‐level data, capital requirements, financial de‐globalization |
| JEL: | E44 E52 F42 G15 G21 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp1938&r=all |
| By: | Gunes Kamber; Benjamin Wong |
| Abstract: | We develop an empirical model to study the influence of global factors in driving trend inflation and the inflation gap. We apply our model to 7 developed economies and 21 emerging market economies. Our results suggest that while global factors can have a sizeable influence on the inflation gap, they play only a marginal role in driving trend inflation. Much of the influence of global factors in the inflation gap may be reflecting commodity price shocks. Finally, we find that the effect of global factors to be greater in our sample of emerging market economies relative to the developed economies. There is some evidence which suggest propagation mechanisms, which may reflect institutional structures or policy choices, can explain the greater role for global factors in driving trend inflation in emerging market economies. |
| Keywords: | Trend inflation, foreign shocks, Beveridge-Nelson decomposition |
| JEL: | C32 E31 F41 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-62&r=all |
| By: | John D. Burger; Francis E. Warnock; Veronica Cacdac Warnock |
| Abstract: | We put forward the notion that capital flows—specifically, gross portfolio flows—fluctuate around some natural level. Our particular measure of the natural level of capital flows, denoted by KF*, is a theory-based time-varying supply-side factor, much like potential GDP is a theory based time varying supply side measure of economic activity. We construct KF* for 184 countries and, for the subset of countries that have quarterly time series data of capital flows, we show that KF* is a level to which flows converge in the medium term. That is, KF* appears to help identify the underlying persistent component in gross portfolio inflows by differentiating between longer-term structural flows and short-term cyclical noise. Overall, we conclude that there is a natural level of capital flows that is well approximated by our measure of KF*. |
| JEL: | F3 F4 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26184&r=all |