|
on Open Economy Macroeconomics |
| By: | Holger Breinlich; Elsa Leromain; Dennis Novy; Thomas Sampson |
| Abstract: | This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0:29. We estimate the Brexit vote increased consumer prices by 2:9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions. |
| Keywords: | Brexit, exchange rate pass-through, import costs, inflation |
| JEL: | E31 F15 F31 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8001&r=all |
| By: | Bussière, Matthieu (Banque de France); Hills, Robert (Bank of England); Lloyd, Simon (Bank of England); Meunier, Baptiste (Banque de France); Pedrono, Justine (Autorité de Contrôle Prudentiel et de Régulation (ACPR), Banque de France); Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England) |
| Abstract: | By combining analysis of two unique confidential datasets, we examine how euro-area (EA) monetary policy and recipient-country prudential policy interact to influence the cross-border lending of French banks from France and the UK. We find that monetary spillovers via cross-border lending can be partially offset by prudential measures in receiving countries. We then explore heterogeneities in that interaction, specifically the difference made by bank size and location of the affiliate (French headquarters vs. affiliates based in the UK, an international financial centre). Focusing on lending from France, we find that the response of GSIBs’ lending to EA monetary policy is less sensitive to recipient-country prudential policy than non-GSIBs’. In contrast, the response of lending to EA monetary policy from French-owned GSIB affiliates in the UK is sensitive to recipient-country prudential policy. We also find evidence that French GSIBs channel funds towards the UK in response to EA monetary policy, in a manner that is dampened by the global prudential policy setting. Together, these findings suggest the existence of a ‘London Bridge’: conditional on EA monetary policy, French GSIBs adjust their funds in the UK in response to global prudential policies and, from there, lend to third countries, responding to local prudential policies. French GSIBs’ cross-border lending from their headquarters to EA monetary policy responds differently to foreign prudential policies than their lending from international financial centres. Finally, we find evidence of a similar pattern for all EA-owned bank affiliates in the UK, suggesting a broader relevance of the London Bridge. |
| Keywords: | Cross-border bank lending; monetary policy; prudential policy; policy interactions; spillovers; financial centre. |
| JEL: | E52 F34 F36 F42 G18 G21 |
| Date: | 2020–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0850&r=all |
| By: | Chen, Been-Lon; Hu, Yunfang; Mino, Kazuo |
| Abstract: | This paper examines the stability of a small open economy under alternative income taxation rules. Using a one-sector real business cycle model with external increasing returns, we show that if the income taxation is progressive, the small open economy will not generate equilibrium indeterminacy, but it exhibits a diverging behavior if the degree of external increasing returns is sufficiently large. In this case, a progressive tax schedule on the factor income may recover saddle-point stability. We also reveal that if the taxation on the interest income from financial assets is regressive, then the small open economy may exhibit equilibrium indeterminacy. In this situation, progressive taxation is also useful for eliminating sunspot-driven fluctuations. |
| Keywords: | Income taxation rule, Equilibrium indeterminacy, Built-in stabilizer, small open economy |
| JEL: | E62 O41 |
| Date: | 2019–11–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98098&r=all |
| By: | Carlos Alberto Takashi Haraguchi; Jose Angelo Divino |
| Abstract: | This paper investigates how a combination of monetary and macroprudential policies might affect the dynamics of a small open economy with financial frictions under alternative exogenous shocks. The proposed DSGE model incorporates macroprudential policy rules to the financial sector of an open economy. Exogenous shocks in productivity, domestic and foreign monetary policies are used to identify the roles of the macroprudential and monetary policies in stabilizing the economy. A welfare analysis compares the performance of alternative rules for reserve requirements. The model is calibrated for the Brazilian economy and results indicate the exchange rate plays a central role in the transmission of foreign shocks, but not of domestic shocks. Considering the volatility of the variables and convergence to steady state, the interest rate rule should target domestic inflation and not respond directly to the exchange rate. The reserve requirement rule, in its turn, should react countercyclically to the credit-gap and not have a fixed component. There is complementarity between monetary and macroprudential policies to stabilize the small open economy. |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:514&r=all |
| By: | Mariarosaria Comunale; Francesco Paolo Mongelli |
| Abstract: | During the past thirty years, euro area countries have undergone significant changes and experienced diverse shocks. We aim to investigate which variables have consistently supported growth in this tumultuous period. The paper unfolds in three parts. First, we assemble a set of 35 real, financial, monetary and institutional variables for all euro area countries covering the period between 1990Q1 and 2016Q4. Second, using the Weighted-Average Least Squares (WALS) method, as well as other techniques, we gather clues about which variables to select. Third, we quantify the impact of various determinants of growth in the short and long runs. Our main finding is the positive and robust role of institutional reforms on long-term growth for all countries in the sample. An improvement in competitiveness matters for growth in the overall euro area in the long run as well as a decline in sovereign and systemic stress. The debt over GDP negatively influences growth for the periphery, but only in the short run. Property and equity prices have a significant impact only in the short run, whereas the loans to NFCs positively affect the core euro area. An increase in global GDP also supports growth. |
| Keywords: | Euro area, GDP growth, monetary policy, fiscal policy, institutional integration, financial crisis, systemic stress, and synchronization |
| JEL: | C23 E40 F33 F43 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2020-05&r=all |
| By: | Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio |
| Abstract: | We study what makes government bonds a safe asset. Building on a sample of monthly changes in government bond yields in 40 advanced and emerging countries, we analyse the sensitivity of yields to country specific fundamentals interacted with changes in global risk (VIX). We find that inertia (whether the bond behaved as a safe asset in the past) and good institutions foster a safe asset status, while the size of the debt market is also significant, reflecting the special role of the US. Within advanced and emerging markets, drivers are heterogeneous, with external sustainability in particular being relevant for the latter countries after the global financial crisis. Finally, the safe asset status does not appear to depend on whether the change in global risk is driven by financial shocks rather than by US monetary policy. JEL Classification: E42, E52, F31, F36, F41 |
| Keywords: | fundamentals, global risk, monetary policy, safe assets |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202355&r=all |
| By: | Mijakovic, Andrej; Rubaszek, Michał; Zorzi, Michele Ca’; Cap, Adam |
| Abstract: | In this paper we evaluate the predictive power of the three most popular equilibrium exchange rate concepts: Purchasing Power Parity (PPP), Behavioral Equilibrium Exchange Rate (BEER) and the Macroeconomic Balance (MB) approach. We show that there is a clear trade-off between storytelling and forecast accuracy. The PPP model offers little economic insights, but has good predictive power. The BEER framework, which links exchange rates to fundamentals, does not deliver forecasts of better quality than PPP. The MB approach has the most appealing economic interpretation, but performs poorly in forecasting terms. Sensitivity analysis confirms that changing the composition of fundamentals in the BEER model or modifying key underlying assumptions in the MB model does not generally enhance their predictive power. JEL Classification: C33, F31, F37, F41 |
| Keywords: | equilibrium exchange rate models, forecasting, mean reversion, panel data |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20202358&r=all |
| By: | Nikolov, Plamen; Pasimeni, Paolo |
| Abstract: | The debate about the use of fiscal instruments for macroeconomic stabilization has regained prominence in the aftermath of the Great Recession, and the experience of a monetary union equipped with fiscal shock absorbers, such as the United States, has often been a reference. This paper enhances our knowledge about the degree of macroeconomic stabilization achieved in the United States through the federal budget, providing a detailed breakdown of the different channels. In particular, we investigate the relative importance and stabilization impact of the federal system of unemployment benefits and of its extension as a response to the Great Recession. The analysis shows that in the United States, corporate income taxes collected at the federal level are the single-most efficient instrument for providing stabilization, given that even with a smaller size than other instruments they can provide important effects, mainly against common shocks. On the other hand, Social Security benefits and personal income taxes have a greater role in stabilizing asymmetric shocks. A federal system of unemployment insurance, then, can play an important stabilization role, in particular when enhanced by a discretionary program of extended benefits in the event of a large shock, like the Great Recession. |
| Keywords: | Monetary Union,Macroeconomic Stabilization,Fiscal Policy,Monetary Policy |
| JEL: | E63 F36 F41 F45 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofecr:62019&r=all |