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on Open Economy Macroeconomics |
| By: | Christoph Gortz (Department of Economics, University of Birmingham); Konstantinos Theodoridis (Business School, Cardiff University); Christoph Thoenissen (Department of Economics, University of Sheffield) |
| Abstract: | We estimate a novel empirical (state-space) model to study the effects of international and domes- tic technology trend shocks on the UK economy. We jointly identify anticipated and unanticipated domestic and international technological innovations arising from changes in total factor productivity (TFP) and investment specific technology (IST). The long-run restrictions used to jointly identify the structural trends in the data are informed by a standard two-country structural model. Our results point to large and persistent swings in productivity. International non-stationary TFP and IST shocks explain about 30% and 24% of the variance of UK GDP, respectively. UK-specific TFP and IST shocks are somewhat less important, but still a relevant factor. Notably, it is the anticipated components of these international and domestic productivity shocks, rather than their unanticipated counterparts, which account for the bulk of the volatility in the data. We dissect the historical role of different shocks as drivers of UK labor productivity growth. We find that a decline in the contribution of international IST shocks, combined with weak domestic TFP growth, can explain the widely documented slowdown in UK labor productivity after the financial crisis. A standard two-country model implies widely-used restrictions on the relative price of investment which we find to be inconsistent with our empirical evidence that relies on a minimum of structure. We show that a two-sector version of this model with adjustment cost in investment and costly sectoral labor reallocation can capture the empirical dynamics. |
| Keywords: | International Transmission of Productivity Shocks, Total Factor Productivity, Investment Specific Technology, Small Open Economy Dynamics, News Shocks, State Space Model |
| JEL: | E32 E3 F41 F44 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2023015&r=opm |
| By: | Simon Gilchrist; Raphael Schoenle; Jae Sim; Egon Zakrajsek |
| Abstract: | During the 2010–12 eurozone crisis, deviations of price and wage dynamics from those implied by canonical Phillips curves were systematically related to differences in financial strains across countries. Most notably, markups in financially "weak" (periphery) countries rose, while those in financially "strong" (core) countries declined. In a monetary union model, where financial frictions interact with the firms' pricing decisions because of customer-market considerations, firms in the periphery maintain cashflows in response to an adverse financial shock by raising markups in both domestic and export markets, while firms in the core reduce markups, undercutting their financially constrained competitors to gain market share. In this framework, a unilateral fiscal-devaluation-style policy by the periphery stabilizes the local economy by improving the condition of firm balance sheets and by boosting household demand-it does not, however, reverse the real exchange rate appreciation in the periphery. |
| Keywords: | eurozone, financial crisis, monetary union, customer markets, inflation dynamics, markups, fiscal devaluation |
| JEL: | E31 E32 F44 F45 |
| Date: | 2023–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1107&r=opm |
| By: | Sai Ma; Tim Schmidt-Eisenlohr |
| Abstract: | This paper provides evidence that the U.S. dollar affects countries’ exports through the financial channel of the exchange rate (Bruno and Shin (2015)). Using global data on trade between countries whose currency is not the U.S. dollar, it documents a positive relationship between the dollar and import prices. Importantly, this effect is stronger when the dollar share of the exporter’s foreign borrowing is larger. Results strengthen substantially when instrumenting the dollar by U.S. domestic housing activity. Then, a dollar appreciation increases import prices and decreases import quantities, with effects being proportional to the source country’s foreign dollar borrowing share. |
| Keywords: | dollar, dominant currency, financial channel, international trade |
| JEL: | F14 F31 G15 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10495&r=opm |
| By: | Karol Szafranek (Narodowy Bank Polski); Grzegorz Szafrański (Narodowy Bank Polski); Agnieszka Leszczyńska-Paczesna (Narodowy Bank Polski) |
| Abstract: | Following recent exceptional events in the world economy inflation increased remarkably across most countries, reinvigorating the prevalent discussion on the sources of consumer price dynamics. We analyse this issue for the small open economy of Poland by means of the Bayesian structural VAR. The model describes the evolution of eight key macroeconomic variables and is identified with a set of zero and sign restrictions. This framework, applicable also to other small open economies, provides sound economic interpretation of three domestic and five external shocks, of which two are country-specific and the remaining three are purely global. In a robust manner we show that country-specific energy price and global supply shocks mostly determine the recent inflation surge in Poland. We illustrate that inflation response to these two shocks has become markedly more persistent after the outbreak of the Covid-19 pandemic. We also demonstrate that the choice of an inadequate energy prices proxy may result in the understated importance of the energy price shock, whereas accounting for recent geopolitical threats and other exogenous events does not alter our baseline findings. For policy makers, we show that counterfactual inflation net of external shocks is far lower, but has recently increased as well. |
| Keywords: | Inflation decomposition, Bayesian SVAR model, energy prices, supply disruptions, domestic and external shocks. |
| JEL: | C11 C32 C51 E31 Q43 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:357&r=opm |
| By: | Michael S. Michael; Panos Hatzipanayotou; Nikos Tsakiris |
| Abstract: | We develop a model of two small open asymmetric economies with two tradable and one non-tradable goods, capital mobility and consumption generated cross border pollution. We show that the Nash equilibrium calls for a consumption tax and capital tax (subsidy) when the consumption of the tradable (non-tradable) good pollutes. In this model, the consumption tax causes pollution leakages between the two countries which is partly offset by the capital tax or subsidy. Thus, the existence of non-tradable goods and international capital mobility induce the small countries to act strategically. In the absence of capital taxes, consumption taxes are lower to their rates when capital taxes are also present since are used strategically to mitigate the pollution leakage. |
| Keywords: | Pollution Leakage; Non-tradable Goods; Capital Mobility; Capital and Consumption Taxes; Consumption-generated Cross-border Pollution |
| JEL: | F15 F18 F20 H20 H21 |
| Date: | 2023–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:ucy:cypeua:02-2023&r=opm |
| By: | Daniel Monteiro |
| Abstract: | We develop a dynamic stochastic general equilibrium model of a monetary union and employ it to study in an integrated manner different macrofinancial disturbances and related policy options. The model is calibrated to the euro area, comprises two regions subject to real, nominal and financial rigidities, and features microfounded regional banking sectors and portfolio selection mechanisms allowing for empirically-consistent properties. Among the questions to which we devote our analysis are the transmission of conventional and unconventional monetary policy, the effects of private- and government-sector default risk, the implications of different macroprudential policies, the endogenous emergence of country risk premia in a context of crossborder financial flows, and the stabilising properties of joint sovereign debt issuance. |
| JEL: | E32 E44 E52 F36 F45 G28 H63 |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:euf:dispap:188&r=opm |
| By: | George A. Alessandria; Oscar I. Avila-Montealegre |
| Abstract: | We study empirically and theoretically the dynamic effects of the unilateral reduction in import tariffs undertaken by Colombia from 1989-1993, with a particular emphasis on the transition and including any anticipation effects. We develop an asymmetric two-country, multi-sector heterogeneous firm model with a dynamic exporting decision, input-output linkages, capital accumulation, and trade in financial assets. The model is calibrated to match Colombian exporter dynamics, sectoral trade openness, tariffs, imbalances, and input-output linkages in the late 1980s. We introduce an anticipated phased out reform into the model and relate the predicted path of sectoral and aggregate activity to the data. Our multi-sector dynamic exporting model predicts much larger gains from these reforms than models that abstract from exporter dynamics, sectoral heterogeneity, trade in financial assets, or capital accumulation. It also captures the key macroeconomic features in terms of a temporary expansion in growth featuring a large, but short-lived investment boom financed by international borrowing, more so when the reforms are expected to be short-lived. |
| JEL: | F15 F4 |
| Date: | 2023–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31378&r=opm |