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on Open Economy Macroeconomics |
| By: | Xing Guo; Pablo Ottonello; Diego J. Perez |
| Abstract: | We study how monetary policy affects the asymmetric effects of globalization. To this end, we build an open-economy heterogeneous-agent New Keynesian model (HANK), in which households differ in their income, wealth, and real and financial integration with international markets. We use the model to reassess classic questions in international macroeconomics, but from a distributional perspective: What are the international spillovers of policies and shocks, how do alternative exchange-rate regimes compare, and what are the implications for monetary policy of the international price system. Our results indicate the presence of a trade-off between aggregate stabilization and inequality in consumption responses to external shocks. The asymmetric effects of globalization can be smaller for economies with higher international integration. |
| JEL: | E21 E52 F3 F32 F41 F6 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28213&r=all |
| By: | Corsetti, G.; Kuester, K.; Müller, G. J.; Schmidt, S. |
| Abstract: | The notion that flexible exchange rates insulate a country from foreign shocks is well grounded in theory, from the classics (Meade, 1951; Friedman 1953), to the more recent open economy literature (Obstfeld and Rogoff, 2000). We confront it with new evidence from Europe. Specifically, we study how shocks that originate in the euro area spill over to its neighboring countries. We exploit the variation of the exchange rate regime across time and countries to assess whether the regime alters the spillovers: it does not - flexible exchange rates fail to provide insulation against euro area shocks. This result is robust across a number of specifications and holds up once we control for global financial conditions. We show that the workhorse open-economy model can account for the lack of insulation under a float, assuming that central banks respond to headline consumer price inflation. However, it remains puzzling that policy makers are ready to forego stabilization of economic activity to the extent we found in the data. |
| Keywords: | External shock, International spillovers, Exchange rate, Insulation, Monetary Policy, Dominant currency pricing, Effective lower bound |
| JEL: | F41 F42 E31 |
| Date: | 2021–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2109&r=all |
| By: | André, Marine-Charlotte; Traficante, Guido |
| Abstract: | We examine forward guidance in a small open economy New Keynesian model. In a setup where forward guidance duration is known with certainty, we show that the elasticity of in ation with respect to the real exchange rate is a key variable in attenuating the forward guidance puzzle. Then we consider a credible forward guidance regime which is adopted stochastically, in normal times or under a liquidity trap. Compared to closed economy, forward guidance turns out to be more expansionary in open economy and the real exchange rate is a key variable driving this result. In particular, the response of output and inflation is amplifi�ed when aggregate supply is negatively related to the real exchange rate. |
| Keywords: | Monetary policy, small open economy, forward guidance. |
| JEL: | E31 E52 |
| Date: | 2020–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:104600&r=all |
| By: | Zhang, Qianxue (University of Warwick) |
| Abstract: | Global supply chains have become increasingly important in international trade over the past decade. Nevertheless, it remains di cult to quantify the role of supply-chain trade in transmitting and amplifying shocks, given the challenge of identifying and tracing the exogenous shocks across economies. This paper argues that the lockdown of Hubei province in China due to the Coronavirus (COVID-19) outbreak provides a natural experiment to study the importance of China's role in global value chains. Since the lockdown started during the Lunar New Year, Hubei's migrant workers who went home could not return to workplaces in other provinces, resulting in a massive labor supply shock. I feed the supply shock through a Ricardian model with intermediate goods and sectoral linkages to study trade and welfare e ects across several economies. While welfare in China is the most strongly a ected, the shock also has sizeable implications for the US and the UK. However, close neighbors such as South Korea and Japan gain from the shock. There are large variations regarding the sectoral contributions to the aggregate welfare changes. The model also performs well in predicting bilateral export changes. |
| Keywords: | COVID-19 ; Labor supply shock ; Global supply chains ; Sectoral linkages ; Productivity effect ; Welfare effect JEL Classification: F10 ; F11 ; F14 ; F17 ; F41 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:1323&r=all |
| By: | Georgiadis, Georgios; Gräb, Johannes; Khalil, Makram |
| Abstract: | This paper draws a causal link between the rise of global value chain participation (GVCP) and the decline of exchange rate pass-through (ERPT) to import prices over the last decades. We first illustrate in a structural two-country model how greater GVCP can reduce ERPT to import prices. In the model, the sensitivity of an economy's home-currency production costs to exchange rate changes rises as it exhibits greater GVCP by importing a larger share of its intermediate inputs. The increased sensitivity of the economy's home-currency production costs to exchange rate changes translates into a higher sensitivity of its home-currency export prices. The latter implies a reduction of the sensitivity of the economy's foreign-currency export prices - i.e. its trading partner's home-currency import prices - to exchange rate changes. Hence, an increase in the economy's GVCP implies a fall in its trading partner's ERPT to import prices. We then estimate instrumental variable regressions using adopted trade agreements as instruments for economies' GVCP in a cross-country panel dataset for the time period from 1995 to 2014. Consistent with the mechanism spelled out in the theoretical model, we find that ERPT to export prices has been higher in economies which exhibit greater GVCP, and that ERPT to import prices has been lower in economies whose trading partners exhibit greater GVCP. |
| Keywords: | global value chain participation,exchange rate pass-through |
| JEL: | F32 F41 F62 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:672020&r=all |
| By: | Giancarlo Corsetti (Cambridge University and CEPR); Keith Kuester (University of Bonn and CEPR); Gernot J. Müller (University of Tübingen and CEPR); Sebastian Schmidt (European Central Bank and CEPR) |
| Abstract: | The notion that flexible exchange rates insulate a country from foreign shocks is well grounded in theory, from the classics (Meade, 1951; Friedman 1953), to the more recent open economy literature (Obstfeld and Rogo, 2000). We confront it with new evidence from Europe. Specifically, we study how shocks that originate in the euro area spill over to its neighboring countries. We exploit the variation of the exchange rate regime across time and countries to assess whether the regime alters the spillovers: it does not-flexible exchange rates fail to provide insulation against euro area shocks. This result is robust across a number of specifications and holds up once we control for global financial conditions. We show that the workhorse open-economy model can account for the lack of insulation under a float, assuming that central banks respond to headline consumer price inflation. However, it remains puzzling that policy makers are ready to forego stabilization of economic activity to the extent we found in the data. |
| Keywords: | External shock, International spillovers, Exchange rate, Insulation, Monetary Policy, Dominant currency pricing, Effective lower bound |
| JEL: | F41 F42 E31 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:060&r=all |
| By: | Agustin Benetrix; Deepali Gautam; Luciana Juvenal; Martin Schmitz |
| Abstract: | This paper provides a dataset on the currency composition of the international investment position for a group of 50 countries for the period 1990-2017. It improves available data based on estimates by incorporating actual data reported by statistical authorities and refining estimation methods. The paper illustrates current and new uses of these data, with particular focus on the evolution of currency exposures of cross-border positions. |
| Keywords: | Currencies;Foreign currency exposure;Foreign exchange;Exchange rates;International investment position;WP,foreign currency,exchange rate,reserve asset,financial crisis |
| Date: | 2019–12–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/299&r=all |
| By: | Redding, Stephen; Antras, Pol; Rossi-Hansberg, Esteban |
| Abstract: | We develop a model of human interaction to analyze the relationship between globalization and pandemics. Our framework provides joint microfoundations for the gravity equation for international trade and the Susceptible-Infected-Recovered (SIR) model of disease dynamics. We show that there are cross-country epidemiological externalities, such that whether a global pandemic breaks out depends critically on the disease environment in the country with the highest rates of domestic infection. A deepening of global integration can either increase or decrease the range of parameters for which a pandemic occurs, and can generate multiple waves of infection when a single wave would otherwise occur in the closed economy. If agents do not internalize the threat of infection, larger deaths in a more unhealthy country raise its relative wage, thus generating a form of general equilibrium social distancing. Once agents internalize the threat of infection, the more unhealthy country typically experiences a reduction in its relative wage through individual-level social distancing. Incorporating these individual-level responses is central to generating large reductions in the ratio of trade to output and implies that the pandemic has substantial effects on aggregate welfare, through both deaths and reduced gains from trade. |
| Keywords: | globalization; pandemics; gravity equation; SIR model; Covid-19; coronavirus |
| JEL: | F23 F15 I00 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:108234&r=all |
| By: | Yang, Jiao (Fudan University); Kwon, Ohyun (Drexel University); Roh, Jae-Whak (Hansung University) |
| Abstract: | This paper provides novel empirical evidence on the role of international trade in shaping the currency composition of corporate debt. We address endogeneity concerns by proposing a novel method to construct an instrumental variable for firms’ export shares using both domestic and South Korea’s trading partners’ industry-level demand shocks. Cross-sectional patterns, long difference regression, and IV regression results are all consistent with our theoretical prediction that firms with higher export shares borrow larger shares of debt in foreign currency. We validate our theory further by showing that: (1) our results are robust to dropping firms that potentially use financial hedge against exchange rate risk; (2) the effects of export shares were less pronounced during a less flexible exchange rate regime; and (3) higher shares of imported intermediate inputs in firms’ total cost tend to lower their foreign currency debt shares. Together, these findings shed light on the discussion of exchange rate policy in emerging and developing countries where foreign currency debts are pervasive. |
| Keywords: | International Trade; Currency Composition; Debt Finance; External Demand Shocks; Exchange Rate; Global Supply Chain |
| JEL: | E44 F31 F34 F36 |
| Date: | 2021–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:drxlwp:2021_001&r=all |
| By: | Douglas L. Campbell (New Economic School); Aleksandr Chentsov (New Economic School) |
| Abstract: | As several European countries debate entering, or exiting, the euro, a key policy question is how much currency unions (CUs) affect trade. Despite the longstanding academic debate on the topic, even recent research has continued to find that CUs exert a large effect on trade. We find, by contrast, that the sizeable recent estimated impact of CUs on trade is driven by other major geopolitical events and is also sensitive to dynamic controls. Overall, we estimate that the impact of CUs on trade is typically indistinct from zero, depending on the specification and controls, but with fairly large standard errors. |
| Keywords: | Euro, Currency Union Effect, Gravity Estimation |
| JEL: | F15 F33 F54 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:abo:neswpt:w0281&r=all |
| By: | Vincent Bodart; François Courtoy; Erica Perego |
| Abstract: | With commodities becoming international financial securities, commodity prices are affected by the international financial cycle. With this evidence in mind, this paper reconsiders the macroeconomic adjustment of developing commodity-exporting countries to changes in world interest rates. We proceed by building a model of a small open economy that produces a non-tradable good and a storable tradable commodity. The difference with standard models of small open economies lies in the endogenous response of commodity prices which -due to commodity storage- adjust to variations in international interest rates. We find that the endogenous response of commodity prices amplifies the reaction of commodity exporting countries to international monetary shocks. This suggests that commodity exporting countries are more vulnerable to unfavourable international monetary disturbances than other small open economies. In particular, because of the existence of the commodity price channel, even those small open commodity-exporting economies that are disconnected from international financial markets can be affected by the international financial cycle. |
| Keywords: | Storable Commodity;International Financial Shock;Developing Economies |
| JEL: | E32 F41 G15 O11 Q02 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2021-01&r=all |
| By: | Camatte Hadrien; Faubert Violaine; Lalliard Antoine; Daudin Guillaume; Rifflart Christine |
| Abstract: | Following the 2008 financial crisis, inflation rates in advanced economies have been at odds with the prediction of a standard Phillips curve. This puzzle has triggered a debate on the global determinants of domestic prices. We contribute to this debate by investigating the impact of exchange rate shocks on consumer prices from 1995 to 2018. We focus on cost-push inflation through global value chains, using three sectoral world input-output datasets. Depending on countries, the absolute value of the elasticity of the household consumption expenditure (HCE hereafter) deflator to the exchange rate ranges from 0.05 to 0.35, confirming the importance of global value chains in channelling external shocks to domestic inflation. Using data from WIOD on a sample of 43 countries, we find that the mean output-weighted elasticity of the HCE deflator to the exchange rate increased in absolute value from 0.075 in 2000 to 0.094 in 2008. After peaking in 2008, it declined to 0.088 in 2014. World Input-Output tables (WIOT hereafter) are released with a lag of several years and the latest WIOT dates back to 2015. To fill this gap, we approximate the impact of an exchange rate shock on the HCE deflator from 2016 onwards using up-to-date GDP and trade data. Our extrapolations suggest that the decline in the elasticity of the HCE deflator continued until 2016, before reversing in 2017 and 2018. Our findings are robust to using three different datasets. |
| Keywords: | Inflation, global value chains, Phillips curve, input output tables, international trade, pass through |
| JEL: | D57 E31 F14 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:797&r=all |
| By: | Alex Pienkowski |
| Abstract: | This paper outlines a simple three-country macroeconomic model designed to focus on the transmission of external shocks to Portugal. Building on the framework developed by Berg et al (2006), this model differentiates between shocks originating from both inside and outside the euro area, as well as domestic shocks, each of which have different implications for Portugal. This framework is also used to consider the dynamics of the Portuguese economy over recent decades. The model, which is designed to guide forecasts and undertake simulations, can easily be modified for use in other small euro area countries. |
| Keywords: | Output gap;Exchange rates;Inflation;Real exchange rates;Real interest rates;WP,demand shock |
| Date: | 2019–12–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2019/281&r=all |
| By: | Rafael Dix-Carneiro; João Paulo Pessoa; Ricardo M. Reyes-Heroles; Sharon Traiberman |
| Abstract: | We study the role of global trade imbalances in shaping the adjustment dynamics in response to trade shocks. We build and estimate a general equilibrium, multi-country, multi-sector model of trade with two key ingredients: (a) Consumption-saving decisions in each country commanded by representative households, leading to endogenous trade imbalances; (b) labor market frictions across and within sectors, leading to unemployment dynamics and sluggish transitions to shocks. We use the estimated model to study the behavior of labor markets in response to globalization shocks, including shocks to technology, trade costs, and inter-temporal preferences (savings gluts). We find that modeling trade imbalances changes both qualitatively and quantitatively the short- and long-run implications of globalization shocks for labor reallocation and unemployment dynamics. In a series of empirical applications, we study the labor market effects of shocks accrued to the global economy, their implications for the gains from trade, and we revisit the “China Shock” through the lens of our model. We show that the US enjoys a 2.2% gain in response to globalization shocks. These gains would have been 73% larger in the absence of the global savings glut, but they would have been 40% smaller in a balanced-trade world. |
| JEL: | F1 F16 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28315&r=all |