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on Open Economy Macroeconomics |
| By: | Silvia Albrizio (Banco de España); Sangyup Choi (Yonsei University); Davide Furceri (IMF); Chansik Yoon (Princeton University) |
| Abstract: | How does domestic monetary policy in systemic countries spillover to the rest of the world? This paper examines the transmission channel of domestic monetary policy in the cross-border context. We use exogenous shocks to monetary policy in systemically important economies, including the U.S., and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross-border bank lending. We find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross-border bank lending. The effect is weakened during periods of high uncertainty. In contrast, the effect is found to not vary according to the degree of borrower country riskiness, further weakening support for the international portfolio rebalancing channel. |
| Keywords: | monetary policy spillovers, international bank lending channel, cross-border banking flows, global financial cycles, local projections |
| JEL: | E52 F21 F32 F42 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1938&r=all |
| By: | Hoces de la Guardia, Fernando; Grant, Sean (Indiana University); Miguel, Edward |
| Abstract: | The evidence-based policy movement promotes the use of empirical evidence to inform policy decision-making. While this movement has gained traction over the last two decades, concerns about the credibility of empirical research have been identified in scientific disciplines that use research methods and practices that are commonplace in policy analysis. As a solution, we argue that policy analysis should adopt the transparent, open, and reproducible research practices increasingly espoused in related disciplines. We first discuss the importance of evidence-based policy in an era of increasing disagreement about facts, analysis, and expertise. We review recent credibility crises of empirical research, and their relevance to the credibility of evidence-based policy. We then make the case for “open” policy analysis (OPA) and how to achieve it, focusing on examples of recent policy analyses that have incorporated open research practices such as transparent reporting, open data, and code sharing. We conclude with recommendations on how key stakeholders in evidence-based policy can make OPA the norm and thus safeguard trust in using empirical evidence to inform important policy decisions. |
| Date: | 2018–03–26 |
| URL: | http://d.repec.org/n?u=RePEc:osf:metaar:jnyqh&r=all |
| By: | Adrian, Tobias (International Monetary Fund); Boyarchenko, Nina (Federal Reserve Bank of New York); Giannone, Domenico (Amazon.com, Inc.) |
| Abstract: | We estimate the evolution of the conditional joint distribution of economic and financial conditions in the United States, documenting a novel empirical fact: while the joint distribution is approximately Gaussian during normal periods, sharp tightenings of financial conditions lead to the emergence of additional modes—that is, multiple economic equilibria. Although the U.S. economy has historically reverted quickly to a “good” equilibrium after a tightening of financial conditions, we conjecture that poor policy choices under these circumstances could also open a pathway to a “bad” equilibrium for a prolonged period. We argue that such multimodality arises naturally in a macro-financial intermediary model with occasionally binding intermediary constraints. |
| Keywords: | density impulse response; multimodality; nonparametric density estimator |
| JEL: | C14 E17 E37 G01 |
| Date: | 2019–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:903&r=all |
| By: | Dilts Stedman, Karlye (Federal Reserve Bank of Kansas City) |
| Abstract: | This paper examines international spillovers from unconventional monetary policy between the United States, the euro area, the United Kingdom and Japan, and assesses the influence of asynchronous policy normalization on the slope of the yield curve. Using high frequency futures data to identify monetary policy surprises and controlling for contemporaneous news, I find that spillovers increase during periods of unconventional monetary policy and strengthen during asynchronous policy normalization. Local projections suggest persistent spillovers from the Federal Reserve, whereas other spillovers fade quickly. Through the lens of a shadow rate term structure model, I find that such spillovers elicit revisions, domestically and internationally, to both the expected path of short-term interest rates and required risk compensation, with the latter gaining importance at the effective lower bound of interest rates. |
| Keywords: | Monetary Policy; Spillovers |
| JEL: | E5 F42 G15 |
| Date: | 2019–10–31 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp19-09&r=all |
| By: | Pragyan Deb; Albe Gjonbalaj; Swarnali A Hannan |
| Abstract: | China’s current account surplus has declined significantly from its peak in 2008 and the external position in 2018 was in line with medium-term fundamentals and desirable policies. While cyclical factors and expansionary credit and fiscal policies contributed, the trend decline has been largely structural, driven by economic rebalancing from investment to consumption, appreciation of the real effective exchange rate (REER) towards equilibrium, increase in outbound tourism, and moderation in goods surplus reflecting market saturation and China’s faster growth compared with trading partners. Policies should focus on continued rebalancing and opening up to ensure excessive surpluses do not return, and to prepare the economy and the financial system to handle more volatile capital flows. From a global perspective, the decline in China’s surplus has lowered global imbalances, but with different impact across countries. The analysis is based on data as of July 2019. |
| Date: | 2019–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/244&r=all |
| By: | Alice Albonico; Ludovic Calés; Roberta Cardani; Olga Croitorov; Fabio Di Dio; Filippo Ferroni; Massimo Giovannini; Stefan Hohberger; Beatrice Pataracchia; Filippo Pericoli; Philipp Pfeiffer; Rafal Raciborski; Marco Ratto; Werner Roeger; Lukas Vogel |
| Abstract: | This paper introduces the Global Multi-country (GM) model, an estimated multi-country Dynamic Stochastic General Equilibrium (DSGE) model of the world economy. We present the model in 3-region configurations for Euro area (EA) countries that include an individual EA Member State, the rest of the EA (REA), and the rest of the world (RoW). We provide and compare estimates of this model structure for the four largest EA countries (Germany, France, Italy, and Spain). The novelty of the paper is the estimation of ex-ante identical country models on the basis of a unified information set, which allows for clean crosscountry comparison of parameter estimates and drivers of economic dynamics. The paper also provides an overview of applications of the GM model such as the structural interpretation of business cycle dynamics, the contribution to the European Commission’s economic forecast, the scenario analysis and policy counterfactuals. |
| JEL: | C51 E32 F41 F45 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:102&r=all |
| By: | Claire Giordano (Banca d’Italia) |
| Abstract: | This paper explores the robustness of Behavioural Equilibrium Exchange Rate (BEER) models – employed to estimate real effective exchange rate (REER) deviations from “equilibrium” values consistent with macroeconomic fundamentals – to the frequency (annual vs. quarterly) of the underlying data. Indeed, data frequency influences both the length of the sample period (which is typically shorter in a quarterly model) and the set of relevant fundamentals to be included in the specification, and can affect the plausibility of some of the BEER modelling assumptions, which are especially restrictive at the quarterly frequency. The paper compares REER misalignment estimates stemming from a carefully specified annual model, estimated since 1980 for 55 countries, and a comparable quarterly model, estimated since 1999, which is a variant of that currently in use at the Bank of Italy (Giordano, 2018). In the overlapping period the annualised quarterly-model misalignments are quite similar to those based on the annual model. Moreover, the in-sample power of quarterly REER misalignments in explaining subsequent, actual REER developments is found to be higher than that of the annual estimates, signalling their greater usefulness in assessing a country’s external economic outlook. This paper therefore confirms the robustness of the quarterly BEER model currently employed at the Bank of Italy; moreover, it suggests that the “optimal” frequency of a BEER model depends on the use (research vs. monitoring and policy-making) one makes of the resulting measures. |
| Keywords: | real effective exchange rate, equilibrium exchange rate, BEER model, data frequency |
| JEL: | C54 F00 F31 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_522_19&r=all |
| By: | Silvia Albrizio; Sangyup Choi; Davide Furceri; Chansik Yoon |
| Abstract: | How does domestic monetary policy in systemic countries spillover to the rest of the world? This paper examines the transmission channel of domestic monetary policy in the cross-border context. We use exogenous shocks to monetary policy in systemically important economies, including the U.S., and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross-border bank lending. We find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross-border bank lending. The effect is weakened during periods of high uncertainty. In contrast, the effect is found to not vary according to the degree of borrower country riskiness, further weakening support for the international portfolio rebalancing channel. |
| Date: | 2019–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/234&r=all |
| By: | Luca Fornaro |
| Abstract: | Since the creation of the euro, capital flows among member countries have been large and volatile. Motivated by this fact, I provide a theory connecting the exchange rate regime to financial integration. The key feature of the model is that monetary policy affects the value of collateral that creditors seize in case of default. Under flexible exchange rates, national governments can expropriate foreign investors by depreciating the exchange rate. Anticipating this, investors impose tight limits on international borrowing. In a monetary union this source of exchange rate risk is absent, because national governments do not control monetary policy. Forming a monetary union thus increases financial integration by boosting borrowing capacity toward foreign investors. This process, however, does not necessarily lead to higher welfare. The reason is that a high degree of financial integration can generate multiple equilibria, with bad equilibria characterized by inefficient capital flights. Capital controls or fiscal transfers can eliminate bad equilibria, but their implementation requires international cooperation. |
| Keywords: | Monetary union, international financial integration, exchange rates, optimal currency area, capital flights, euro area. |
| JEL: | E44 E52 F33 F34 F36 F41 F45 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1677&r=all |
| By: | Yossi Yakhin (Bank of Israel) |
| Abstract: | Breaking the uncovered interest rate parity (UIP) condition is essential to accounting for the empirical behavior of exchange rates and is a prerequisite for theoretical analysis of sterilized foreign exchange interventions. Gabaix and Maggiori (2015) account for some of the long-standing empirical exchange rate puzzles by introducing financial intermediaries that are willing to absorb international saving imbalances for a premium, thereby deviating from the UIP. In another important contribution, Fanelli and Straub (2019) lay down the principles for foreign exchange interventions. In their model, regulatory exposure limits and participation cost in the international financial markets drive a wedge in the UIP. This paper demonstrates that, to a first-order approximation, a simple reduced-form portfolio adjustment cost friction, as in Schmitt-Grohé and Uribe (2003), generates identical deviations from the UIP as the micro-founded models mentioned above. Therefore, to the extent that one is only concerned with first-order dynamics and second moments, there is no gain from adopting the rich microstructure of either models - the simple ad-hoc adjustment cost is just as good. |
| Keywords: | UIP, Financial Frictions, Open Economy Macroeconomics |
| JEL: | E58 F31 F41 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:boi:wpaper:2019.15&r=all |
| By: | António Afonso; Florence Huart; João Tovar Jalles; Piotr Stanek |
| Abstract: | We assessthe sustainability of external imbalances for EUcountriesusing panel stationarity tests of Current Account(CA) balance-to-GDP ratiosand panel cointegration of exports and imports of goods and services, for the period 1970Q1-2015Q4. We find that: i) the country panel isnon-stationary; ii) cross-sectional dependence plays an important role; iii) there is non-stationarity of the CA, imports, and exportswith cross-sectional panel dependenceand multiple structural breaks; iv) however, there is a stable long-run relationship between exports and imports in the panel.Hence, trade imbalances can be less unsustainable but this is not sufficient to make current account imbalances sustainable. |
| Keywords: | current account, exports, imports, unit roots, cointegration |
| JEL: | C23 F32 F41 |
| Date: | 2019–11 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp0992019&r=all |
| By: | Alessandro Turrini; Stefan Zeugner |
| Abstract: | Applied analysis aimed at assessing which value of the NIIP is appropriate for a given country is relatively scarce, and the few existing papers on the topic estimate one-size-fits-all NIIP benchmarks (e.g., Catão and Milesi-Ferretti, 2014). This paper estimates country-specific NIIP benchmarks on a sample of 65 advanced and emerging economies according to two different criteria: consistency with economic fundamentals (NIIP norms, obtained as cumulated current account norms) and prudence against the risk of external crises (NIIP prudential thresholds, obtained as the threshold of the NIIP variable interacted with relative income per capita that maximises signal power in predicting external crises). The median for the country-specific NIIP norms is around -17% of GDP, while the median for prudential threshold is about -44%. The two benchmarks are negatively correlated across countries, highlighting a tension between factors underpinning the scope for external borrowing and debt tolerance. Gaps between actual and NIIP benchmarks are highly persistent, but help predicting subsequent medium-term NIIP changes better than the NIIP level, thus confirming the usefulness of country-specific reference values. The adjustment of the NIIP in response to NIIP gaps is asymmetric, with a significant adjustment limited to negative gaps, with the exception of countries with a positive net position in foreign currency. |
| JEL: | F32 F41 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:097&r=all |
| By: | Xuan Wang |
| Abstract: | Since the Eurozone Crisis of 2010-12, a key debate on the viability of a currency union has focused on the role of a fiscal union in adjusting for country heterogeneity. However, a fully-fledged fiscal union may not be politically feasible. This paper develops a two-country international finance model to examine the benefits of the bankruptcy code of a capital markets union - in the absence of a fiscal union - as an alternative financial mechanism to improve the welfare of a currency union. When domestic credit risks are present, I show that a lenient union-wide bankruptcy code that allows for default in the cross-border capital markets union leads to a Pareto improvement within the currency union. However, if the union-wide bankruptcy code is too lenient, default may cause the collapse of the capital markets union and impede cross-border risk sharing. Moreover, the absence of floating nominal exchange rates removes a mechanism to neutralise domestic credit risks; I show that softening the union-wide bankruptcy code can recoup the lost benefits of floating nominal exchange rates. The model provides the economic and welfare implications of bankruptcy within a capital markets union in the Eurozone. |
| JEL: | E64 F55 |
| Date: | 2019–11–07 |
| URL: | http://d.repec.org/n?u=RePEc:jmp:jm2019:pwa938&r=all |
| By: | Andrea De Polis (Warwick Business School, University of Warwick); Mario Pietrunti (Bank of Italy) |
| Abstract: | In this paper we estimate an open economy New-Keynesian model to investigate the impact of unconventional monetary policies on the exchange rate, focusing on those adopted since the Global Financial Crisis in the euro area and in the United States. To this end we replace effective, short-term, interest rates with shadow rates, which provide a measure of the monetary stance when the former reach their effective lower bound. We find that since 2009 unconventional monetary policies significantly affected the dynamics of the euro-dollar exchange rate both in nominal and real terms: while the stimulus provided by the Fed prevailed between 2011 and 2014, contributing to the weakening of the dollar, in most recent years the depreciation of the euro mainly reflected the measures adopted by the ECB. |
| Keywords: | exchange rates, shadow rates, unconventional policies |
| JEL: | C11 E52 F31 F41 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1231_19&r=all |