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on Open Economy Macroeconomics |
| By: | Ahmed, Rashad |
| Abstract: | I investigate monetary policy transmission under the Trilemma across Advanced and Emerging Market Economies, paying particular attention on the extent of spillovers under intermediate exchange rate regimes (i.e. managed floats). The extent of monetary pass-through: 1) is broadly significant, but more incomplete in Emerging Markets than Advanced Economies, 2) occurs over both the short-run and longer-run, 3) varies within intermediate exchange rate regimes, 4) appears to be diversifiable under a basket peg, and 5) is non-linear in exchange rate flexibility. The latter three points suggest that near-corner exchange rate policies can carry starkly different implications from corner policies themselves: Countries can face almost the same monetary autonomy as under a float without resorting to a pure float. Countries under a fixed regime appear to gain disproportionate monetary independence by giving up relatively little exchange rate stability. The use of international reserves as an additional policy instrument appears to play a role in explaining these non-linearities, particularly in Emerging Markets. Such gains in monetary autonomy are allocated towards domestic objectives differently across Advanced Economies and Emerging Markets. Advanced Economies tend to put greater emphasis on output stabilization while Emerging Markets focus on inflation. Non-linear policy trade-offs under intermediate exchange rate regimes may help explain the continuous rejection of the Two Corners hypothesis, the scarcity of true pure floats, and the persistent dominance of middle-ground exchange rate policy. |
| Keywords: | Monetary policy, exchange rate regimes, international spillovers, policy trilemma |
| JEL: | F3 F31 |
| Date: | 2020–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:98852&r=all |
| By: | Ha, Jongrim (World Bank); Kose, M. Ayhan (International Monetary Fund); Otrok, Christopher (University of Virginia); Prasad, Eswar (Cornell University) |
| Abstract: | We develop a new dynamic factor model that allows us to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption, and investment) and financial variables (equity and house prices, and interest rates). We find that the global macro factor plays a major role in explaining G-7 business cycles, but there are also spillovers from equity and house price shocks onto macroeconomic aggregates. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find little evidence of spillovers from macroeconomic cycles to financial cycles. |
| Keywords: | global business cycles, global financial cycles, common shocks, international spillovers, dynamic factor models |
| JEL: | E32 F4 C32 C1 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp13000&r=all |
| By: | Calderon,Cesar; Chuhan-Pole,Punam; Kubota,Megumi |
| Abstract: | This paper discusses recent trends and investigates the drivers of capital flows across regions in the world, with emphasis on Sub-Saharan Africa. The post-global financial crisis behavior of capital flows into Sub-Saharan Africa is unique and differs from that of global capital flows. The structure of financial flows into Sub-Saharan Africa has shifted toward new sources, such as international bond issuances and debt inflows from non?Paris Club governments. The main message is that the behavior of capital flows into Sub-Saharan Africa differs from that of capital flows into global, industrial, and non?Sub-Saharan African developing countries. The regression analysis reveals that gross flows into Sub-Saharan African are predominantly influenced by external factors, such as foreign growth and uncertainty in global markets and policies. Capital flow behavior for Sub-Saharan African countries is different from that of industrial countries due to different economic structures, which render different transmission processes. The main findings suggest that pull and push factors are the driving forces of capital inflows for industrial countries and non?Sub-Saharan African developing countries?especially better economic performance, sound fiscal outcomes, a greater degree of financial openness, and stronger institutions. The impact of these drivers has become stronger in the 2000s. Macroeconomic policy can play an important role in attracting capital inflows. For instance, fiscal discipline promotes greater other investment inflows, and less flexible exchange rate arrangements (more exchange rate stability) foster portfolio investment inflows. |
| Date: | 2019–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:8777&r=all |
| By: | Jongrim Ha (World Bank); M. Ayhan Kose (World Bank, Brookings Institution, and CEPR); Christopher Otrok (University of Missouri and Federal Reserve Bank of St Louis); Eswar S. Prasad (Cornell University, Brookings Institution, and NBER) |
| Abstract: | We develop a new dynamic factor model that allows us to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption, and investment) and financial variables (equity and house prices, and interest rates). We find that the global macro factor plays a major role in explaining G-7 business cycles, but there are also spillovers from equity and house price shocks onto macroeconomic aggregates. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find little evidence of spillovers from macroeconomic cycles to financial cycles. |
| Keywords: | Global business cycles; global financial cycles; common shocks; international spillovers; dynamic factor models. |
| JEL: | E32 F4 C32 C1 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:2004&r=all |
| By: | Fernandez Lafuerza,Luis Gonzalo; Serven,Luis |
| Abstract: | This paper assesses the international comovement of gross capital flows in a setting simultaneously encompassing aggregate inflows and outflows. It uses as empirical framework a multilevel latent factor model, implemented on flow data for a large sample of countries over more than three decades. On average, common shocks account for over 40 percent of the variance of both inflows and outflows, although with major differences between advanced countries and the rest. Among the former, global and group shocks dominate capital flows, and the same shocks drive gross inflows and outflows. Among the latter countries, idiosyncratic shocks tend to play the leading role, and gross inflows exhibit less commonality with outflows. The latent factors configure an international financial cycle that closely tracks the trends in a handful of global"push"variables. Recursive estimation of the factor model reveals a rising trend in the exposure of countries'flows to the international cycle?especially for advanced economies?up to the global financial crisis. Exposure to the cycle is robustly related to countries'external financial openness and the (lack of) flexibility of their exchange rate regime. |
| Keywords: | Investment and Investment Climate,Commodity Risk Management,International Trade and Trade Rules,Macroeconomic Management,Financial Regulation&Supervision |
| Date: | 2019–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:8787&r=all |
| By: | Tamas Csabafi (Department of Economics, University of Missouri-St. Louis); Max Gillman (Department of Economics, University of Missouri-St. Louis); Ruthira Naraidoo (Department of Economics, University of Pretoria) |
| Abstract: | A technical appendix for “International Business Cycle and Financial Intermediation.” The paper extends a standard two-country international real business cycle model to include financial intermediation by banks of loans and government bonds. Taking in household deposits from home and abroad, the loans are produced by the bank in a Cobb-Douglas production approach such that a bank productivity shock can explain financial data moments. The paper contributes an explanation, for both the US relative to the Euro-area, and the US relative to China, of cross-country correlations of loan rates, deposit rates, and the loan premia. It provides a sense in which financial retrenchment resulted in the US following the 2008 bank crisis, and how the Euro-area and China reacted. The paper contributes evidence of how the Euro-area has been more Önancially integrated with the US, and China less financially integrated, with the Euro-area becoming more financially integrated after the 2008 crisis, and China becoming less so integrated. |
| Keywords: | international real business cycles, financial intermediation, credit spread, bank productivity, 2008 crisis. |
| JEL: | E13 E32 E44 F41 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:msl:workng:1017&r=all |
| By: | Abate,Girum Dagnachew; Serven,Luis |
| Abstract: | Growth fluctuations exhibit substantial synchronization across countries, which has been viewed as reflecting a global business cycle driven by shocks with worldwide reach, or spillovers resulting from local real and/or financial linkages between countries. This paper brings these two perspectives together by analyzing international growth fluctuations in a setting that allows for both global shocks and spatial dependence. Using annual data for 117 countries over 1970-2016, the paper finds that the cross-country dependence of aggregate growth is the combined result of global shocks summarized by a latent common factor and spatial effects accruing through the growth of nearby countries -- with proximity measured by bilateral trade linkages or geographic distance. The latent global factor shows a strong positive correlation with worldwide TFP growth. Countries'exposure to global shocks rises with their openness to trade and the degree of commodity specialization of their economies. Despite its simplicity, the empirical model fits the data well, especially for advanced countries. Ignoring the cross-country dependence of growth, by omitting spatial effects or common shocks (or both) from the analysis, leads to a marked deterioration of the empirical model's in-sample explanatory power and out-of-sample forecasting performance. |
| Date: | 2019–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:8786&r=all |
| By: | Renee Fry-McKibbin; Rodrigo da Silva Souza |
| Abstract: | This paper examines the effects of commodity demand and supply shocks as well as international liquidity shocks on the small open economy of Brazil using an SVAR model. The paper highlights the importance of modeling both types of shocks in the commodity sector. Including only commodity prices overstates the effect of commodity price shocks on the output of Brazil. Commodity demand shocks are much larger than commodity supply shocks in the long run. Including commodity demand and international liquidity also reduces the impact of commodity price shocks on the interest rate made available to Brazil in international capital markets. The interest rate channel is considered a source of business cycles for emerging market economies in the literature. |
| Keywords: | Commodity demand shocks, commodity supply shocks, emerging market interest rates, liquidity, Brazil, SVAR |
| JEL: | C51 E32 F43 F62 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2020-18&r=all |
| By: | Balduzzi, Pierluigi (Boston College); Brancati, Emanuele (Sapienza University of Rome); Brianti, Marco (Boston College); Schiantarelli, Fabio (Boston College) |
| Abstract: | We study the effects on financial markets and real economic activity of changes in risk related to political events and policy announcements in Italy during the 2013-2019 period that saw the rise to power of populist parties. We focus on events that have implications for budgetary policy, debt sustainability and for Euro membership. We use changes in the Credit Default Swaps (CDS) spread on governments bonds around those dates as an instrument for shocks to policy and institutional risk – political risk for short – in the context of Local Projections - IV. We show that shocks associated with the rise of populist forces or their policies have adverse and sizable effects on financial markets. These negative effects were moderated by European institutions and domestic constitutional constraints. In addition, Italian political developments generate international spillover effects on the spreads of some other euro-zone countries. Finally, political risk shocks have a negative impact on the real economy, although the accommodating stance of monetary policy helped in cushioning their effect. |
| Keywords: | populism, political risk, policy uncertainty, sovereign debt, fiscal policy, CDS spread |
| JEL: | E44 G10 H62 H63 |
| Date: | 2020–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp12929&r=all |
| By: | Ha,Jongrim; Stocker,Marc; Yilmazkuday,Hakan |
| Abstract: | The degree to which domestic prices adjust to exchange rate movements is key to understanding inflation dynamics, and hence to guiding monetary policy. However, the exchange rate pass-through to inflation varies considerably across countries and over time. By estimating structural factor-augmented vector-autoregressive models for 47 countries, this paper brings to light two fundamental factors accounting for these variations: the nature of the shock triggering currency movements and country-specific characteristics. The empirical results in this paper are three-fold. First, an empirical investigation demonstrates that different domestic and global shocks can be associated with widely different pass-through ratios. Second, country characteristics matter, including policy frameworks that govern monetary policy responses, as well as other structural features that affect an economy's sensitivity to currency fluctuations. Pass-through ratios tend to be lower in countries that combine flexible exchange rate regimes and credible inflation targets. Finally, the empirical results suggest that central bank independence can greatly facilitate the task of stabilizing inflation following large currency movements and allows fuller use of the exchange rate as a buffer against external shocks. |
| Keywords: | Inflation,Macroeconomic Management,Financial Structures,International Trade and Trade Rules,Trade and Services |
| Date: | 2019–03–13 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:8780&r=all |
| By: | Martin Hodula; Simona Malovana; Jan Frait |
| Abstract: | We focus on the link between the macroeconomic conditions faced by households, the confidence of households as investors and consumers, and households' demand for credit. On a sample of 21 OECD countries, we provide empirical evidence that links households' macroeconomic conditions to the evolution of credit. Specifically, we find that: (i) the well-known procyclicality of credit is reinforced in periods of favorable macroeconomic conditions; (ii) the relationship in question grows stronger when good macro conditions are met with optimistic consumer confidence; (iii) household credit is sticky on the way down, while it goes hand in hand with the improving economy during an economic upturn. |
| Keywords: | Credit, households, macroeconomic conditions, panel data |
| JEL: | F12 F41 F43 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2019/11&r=all |
| By: | Martin Hodula; Simona Malovana; Jan Frait |
| Abstract: | We construct a novel index of households' macroeconomic conditions for 22 high-income European countries between 2002 Q1 and 2018 Q4. The resulting index is in line with the broad features of the countries' business cycles and captures households' economic well-being. We discuss the complementary character of the proposed index in relation to widely employed survey-based consumer confidence indicators. We show that households' expectations are tightly linked to current macroeconomic conditions. This finding echoes the literature linking consumer attitudes and economic development. In a single-country case study, we provide empirical evidence that links the proposed index to new credit extended to households. The evidence suggests that households need a longer period of good macroeconomic conditions to decide to take on a mortgage than they do in the case of a consumer loan. |
| Keywords: | Composite index, factor analysis, households' confidence, loan growth |
| JEL: | F12 F41 F43 |
| Date: | 2019–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2019/10&r=all |
| By: | Marina Glushenkova; Marios Zachariadis |
| Abstract: | Not that different. Based on a unique dataset of semi-annual microeconomic price levels of goods and services across and within countries for 1990:1-2018:2, we show that time-series volatility and cross-sectional dispersion of law-of-one-price deviations is similar for pairs of cities within the same country and within the European Monetary Union. Our empirical analysis reveals that inflation and nominal exchange rate volatility/dispersion across locations have a positive impact on the volatility/dispersion across locations of law-of-one-price deviations across the globe. Furthermore, dispersion of law-of-one-price deviations across goods falls when the relative inflation rate between these locations rises, suggesting that the degree of price adjustment in individual product markets within a country has an international component shaped by international trade and arbitrage considerations. According to this measure of price integration, economies within the monetary union are half-way to the level of integration characterizing national economies. Moreover, monetary union membership reduces the volatility of law-of-one-price deviations, taking member countries more than half-way towards the volatility levels characterizing national economies. |
| Keywords: | Law-of-one-price, border effect, economic integration |
| JEL: | F4 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:ucy:cypeua:01-2020&r=all |
| By: | Todd M. Hazelkorn; Tobias J. Moskowitz; Kaushik Vasudevan |
| Abstract: | Deviations from the law of one price between futures and spot prices, known as bases, reflect the difference between interest rates implied in futures prices and benchmark borrowing rates. These differences are driven by intermediaries’ cost of capital and the amount of leverage demand for an asset. Focusing on leverage demand, we find that bases negatively predict futures and spot market returns with the same sign in both global equities and currencies. This evidence is consistent with bases capturing uninformed leverage demand. We investigate the source of this demand in both markets using dealer and institutional positions data, securities lending fees, and foreign capital flows and find that the return predictability represents compensation to intermediaries for meeting liquidity and hedging demand. Our results have broader implications for understanding the interest rates embedded in derivatives prices. |
| JEL: | F3 F31 F65 G1 G13 G15 G2 G23 |
| Date: | 2020–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26773&r=all |
| By: | Huidrom,Raju; Kose,Ayhan; Lim,Jamus Jerome; Ohnsorge,Franziska Lieselotte |
| Abstract: | The fiscal position can affect fiscal multipliers through two channels. Through the Ricardian channel, households reduce consumption in anticipation of future fiscal adjustments when fiscal stimulus is implemented from a weak fiscal position. Through the interest rate channel, fiscal stimulus from a weak fiscal position heightens investors'concerns about sovereign credit risk, raises economy-wide borrowing cost, and reduces private domestic demand. The paper documents empirically the relevance of these two channels using an Interactive Panel Vector Auto Regression model. It finds that fiscal multipliers tend to be smaller when fiscal positions are weak than strong. |
| Keywords: | Public Finance Decentralization and Poverty Reduction,Macro-Fiscal Policy,Public Sector Economics,Economic Adjustment and Lending,Macroeconomics and Economic Growth,Economic Policy, Institutions and Governance,Fiscal&Monetary Policy,Macroeconomic Management,Financial Crisis Management&Restructuring |
| Date: | 2019–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:8784&r=all |