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on Open Economy Macroeconomics |
| By: | Javier Bianchi; Saki Bigio; Charles Engel |
| Abstract: | We develop a theory of exchange rate fluctuations arising from financial institutions’ demand for dollar liquid assets. Financial flows are unpredictable and may leave banks “scrambling for dollars.” Because of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield on the dollar. We show that an increase in the dollar funding risk leads to a rise in the convenience yield and an appreciation of the dollar, as banks scramble for dollars. We present empirical evidence on the relationship between exchange rate fluctuations for the G10 currencies and the quantity of dollar liquidity, which is consistent with the theory. |
| Keywords: | Exchange rates; Liquidity premia; Monetary policy |
| JEL: | E44 F31 F41 G20 |
| Date: | 2021–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:93468&r= |
| By: | Javier Bianchi; Guido Lorenzoni |
| Abstract: | We provide a simple framework to study the prudential use of capital controls and currency reserves that have been explored in the recent literature. We cover the role of both pecuniary externalities and aggregate demand externalities. The model features a central policy dilemma for emerging economies facing large capital outflows: the choice between increasing the policy rate to stabilize the exchange rate and decreasing the policy rate to stabilize employment. Ex ante capital controls and reserve accumulation can help mitigate this dilemma. We use our framework to survey the recent literature and provide an overview of recent empirical findings on the use of these policies. |
| Keywords: | Capital controls; Foreign exchange interventions; Monetary policy; Macroprudential policies |
| JEL: | F32 F33 F41 F42 G18 |
| Date: | 2021–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:93469&r= |
| By: | Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Eric van Wincoop (University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)); Eric R. Young (University of Virginia) |
| Abstract: | We introduce a portfolio friction in a two-country DSGE model where investors face a constant probability to make new portfolio decisions. The friction leads to a more gradual portfolio adjustment to shocks and a weaker portfolio response to changes in expected excess returns. We apply the model to monthly data for the US and rest of the world for equity portfolios. We show that the model is consistent with a broad set of evidence related to portfolios, equity prices and excess returns for an intermediate level of the friction. The evidence includes portfolio inertia, limited sensitivity to expected excess returns, a significant impact of financial shocks, excess return predictability, and asset price momentum and reversal. |
| Keywords: | portfolio frictions, infrequent portfolio decisions, international portfolio allocation, excess return predictability, financial shocks. |
| JEL: | F30 F41 G11 G12 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2210&r= |
| By: | Joao Luiz Ayres; Constantino Hevia; Juan Pablo Nicolini |
| Abstract: | We show that explicitly modeling primary commodities in an otherwise totally standard incomplete markets open economy model can go a long way in explaining the Mussa puzzle and the Backus-Smith puzzle, two of the main puzzles in the international economics literature. |
| Keywords: | Primary commodity prices; Mussa puzzle; Backus-Smith puzzle |
| JEL: | F31 F41 |
| Date: | 2021–09–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:93462&r= |
| By: | António Afonso; José Carlos Coelho |
| Abstract: | Using two measures of the fiscal position, the cyclically adjusted primary budget balance (CAPB) and the total budget balance, we assess the Twin Deficit Hypothesis for the Euro Area in the period 1995-2020. Furthermore, we estimate time-varying coefficients of the current account balance responses to changes in the CAPB and in the government balance and we identify the determinants of these responses. The CAPB and the government balance, in addition to being determinants of the current account balance, are also determinants of the time-varying responses of the current account balance. The levels of government balance, current account balance and public debt, as a percentage of GDP, and the temporal period (before and after 2010) also influence these responses. |
| Keywords: | CAPB; government balance; current account balance; time-varying coefficients; Eurozone; panel data. |
| JEL: | F32 F41 H62 C33 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp02112022&r= |
| By: | Joao Luiz Ayres; Constantino Hevia; Juan Pablo Nicolini |
| Keywords: | Primary commodity prices; Mussa puzzle; Backus-Smith puzzle |
| JEL: | F31 F41 |
| Date: | 2021–09–24 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:93463&r= |