|
on Open Economy Macroeconomics |
| By: | Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Zhao, Zhiqi (Cardiff Business School) |
| Abstract: | This paper studies the economy of Hong Kong through the lens of a small open economy DSGE model with a currency board exchange rate commitment. It assumes flexible prices and a banking system that provides credit to entrepreneurial household-firms; the money supply is fully backed by reserves under the currency board. We estimate and evaluate the model by Indirect Inference over the sample period of 1994Q1-2018Q3; we find that it matches the data behaviour, as represented by a VAR. We examined the economy’s volatility using bootstrapping of the model innovations, under both the estimated currency board model and a standard alternative regime with floating exchange rate and a Taylor rule; we found that Hong Kong welfare is higher in the currency board, which substantially reduces output volatility. |
| Keywords: | Currency Board, Monetary Policy, Hong Kong, Indirect Inference |
| JEL: | E52 F41 G5 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2021/13&r= |
| By: | Shaghil Ahmed; Ozge Akinci; Albert Queraltó |
| Abstract: | We explore how the sources of shocks driving interest rates, country vulnerabilities, and central bank communications affect the spillovers of U.S. monetary policy changes to emerging market economies (EMEs). We utilize a two-country New Keynesian model with financial frictions and partly dollarized balance sheets, as well as poorly anchored inflation expectations reflecting imperfect monetary policy credibility in vulnerable EMEs. Contrary to other recent studies that also emphasize the sources of shocks, our approach allows the quantification of effects on real macroeconomic variables as well, in addition to financial spillovers. Moreover, we model the most relevant vulnerabilities structurally. We show that higher U.S. interest rates arising from stronger U.S. aggregate demand generate modestly positive spillovers to economic activity in EMEs with stronger fundamentals but can be adverse for vulnerable EMEs. In contrast, U.S. monetary tightening’s driven by a more-hawkish policy stance cause a substantial slowdown in activity in all EMEs. Our model also captures the challenging policy tradeoffs that EME central banks face, and we show that these tradeoffs can potentially be improved by clearer communications from them. |
| Keywords: | financial frictions; U.S. monetary policy spillovers; adaptive expectations |
| JEL: | E32 E44 F41 |
| Date: | 2021–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:92825&r= |
| By: | Etienne Lepers (OECD); Rogelio Mercado (Asian Development Bank) |
| Abstract: | This paper assembles a comprehensive sectoral capital flows dataset for 64 advanced and emerging economies from 2000-18. This includes direct, portfolio and other investments to and from five sectors: central banks (CB), general government (GG), banks (BKs), non-financial corporates (NFCs) and other financial corporates (OFCs) and a corresponding dataset on capital controls imposed on these sectors. The paper uses this data to examine the usefulness of a sectoral approach in assessing capital flow covariates, co-movements, and the effectiveness of capital controls. The findings show that: 1) private sectoral flows have varying sensitivities to global financial conditions and different cyclicality with respect to output growth. For instance, unlike other flows, NFCs respond to global commodity prices but not global risk aversion and, unlike banks, OFCs cut foreign investment in periods of domestic investment; 2) co-movements of resident and non-resident OFC sectoral flows add to the observed positive correlation between gross inflows and outflows; and, 3) the tightening of capital controls on NFCs and OFCs appear effective in reducing the volume of flows to these sectors. |
| Keywords: | capital controls, capital flows correlations, sectoral capital flows |
| JEL: | F21 F38 F41 G20 |
| Date: | 2021–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:oec:dafaaa:2021/04-en&r= |
| By: | Jongrim Ha (World Bank); M. Ayhan Kose (World Bank; Brookings Institution; CEPR; CAMA); Franziska Ohnsorge (World Bank; CEPR; CAMA) |
| Abstract: | This paper introduces a global database that contains inflation series: (i) for a wide range of inflation measures (headline, food, energy, and core consumer price inflation; producer price inflation; and gross domestic product deflator changes); (ii) at multiple frequencies (monthly, quarterly and annual) for an extended time period (1970-2021); and (iii) for a large number of (up to 196) countries. As it doubles the number of observations over the next-largest publicly available sources, our database constitutes a comprehensive, single source for inflation series. We illustrate the potential use of the database with three applications. First, we study the evolution of inflation since 1970 and document the broad-based disinflation around the world over the past half-century, with global consumer price inflation down from a peak of roughly 17 percent in 1974 to 2.5 percent in 2020. Second, we examine the behavior of inflation during global recessions. Global inflation fell sharply (on average by 0.9 percentage points) in the year to the trough of global recessions and continued to decline even as recoveries got underway. In 2020, inflation declined less, and more briefly, than in any of the previous four global recessions over the past 50 years. Third, we analyze the role of common factors in explaining movements in different measures of inflation. While, across all inflation measures, inflation synchronization has risen since the early 2000s, it has been much higher for inflation measures that involve a larger share of tradable goods. |
| Keywords: | Prices, global inflation, deflation, inflation synchronization, global factor. |
| JEL: | E30 E31 F42 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:2107&r= |
| By: | David Kohn; Fernando Leibovici; Michal Szkup |
| Abstract: | We study the role of financial development on the aggregate and welfare implications of reducing trade barriers on imports of physical capital and intermediate inputs. We document that financially underdeveloped economies feature a slower response of real GDP, consumption, and investment following trade liberalization episodes that improve access to imported production inputs. To quantify the role of financial development, we set up a quantitative general equilibrium model with heterogeneous firms subject to financial constraints and estimate it to match salient features from Colombian plantlevel data. We find that the adjustment to a decline of import tariffs on physical capital and intermediate inputs is significantly slower in financially underdeveloped economies in line with the empirical evidence. These effects reduce the welfare gains from trade liberalization and make them more unequal across agents. |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:553&r= |
| By: | King Yoong Lim; Chunping Liu; Shuonan Zhang |
| Abstract: | We develop a DSGE model with cash and digital currency to study the financial stability properties of two potential central banking policies in China. Specifically, a Loan Prime Rate (LPR)-setting policy function and central bank digital currency (CBDC) implementation are examined. Distinguish between a benchmark model and a "Post-CBDC world", we Bayesian-estimate the model. Post-CBDC implementation, we find macroeconomic variables to display greater procyclicality to real shocks. However, we also find a potential LPR-setting policy to exhibit an improved stabilization property in the post-CBDC world. We uncover an optimal design of LPR policy function, which targets more specifically housing and capital asset markets, as well as the growth in CBDC. This suggests a potential policy complementarity between these two seemingly unrelated central banking policies in the financial stability agenda of China going forward. |
| Keywords: | China, Digital Currency, Loan Prime Rate, Monetary Policy, Bayesian DSGE models. |
| JEL: | E4 E52 E58 C11 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbs:wpaper:2021/02&r= |
| By: | Léonore Raguideau-Hannotin |
| Abstract: | This paper investigates the monetary autonomy of Central Eastern and South Eastern European countries with the Euro area. These countries are European Union Member States that have not adopted yet the Euro single currency. Despite high degree of convergence as measured by Maastricht criteria, four of them do no plan to enter the Euro area soon. We therefore assess monetary autonomy of these countries over the long run through the use of a multivariate cointegration methodology with structural breaks (Johansen et al., 2000). This methodology allows us to capture the multidimensional aspects of monetary autonomy in the context of nominal convergence in the Economic and Monetary Union, by including both domestic and Euro area variables into the system (policy rates, infation rates, exchange rate). It also enables us to exploit all information contained in the macroeconomic series of these countries, for which broken economic history translates into non-stationary time series with breaks. Our empirical results suggest that modelling structural breaks changes the number and/or nature of cointegrating relations between our variables compared to the standard error correction model without breaks. With this modelling, we find monetary policy spillover from the Euro area to Bulgaria, the Czech Republic, Hungary and Romania. The inclusion of Euro area inflation to our baseline model enriches the cointegrating relations for the Czech Republic and Bulgaria. Poland is found to be the most monetary-independent country of ourstudy across the various models estimated. On the other hand, Romania's monetary interdependence with Euro area is better modelled without taking into account any structural break. |
| Keywords: | Central Eastern and South Eastern European countries, Economic and Monetary Union, European Union, nominal convergence, monetary autonomy, structural breaks, cointegration, integration, CESEE, EU, EMU |
| JEL: | F31 F36 F42 P33 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2021-20&r= |