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on Open Economy Macroeconomics |
| By: | Emile A. Marin; Sanjay R. Singh (Department of Economics, University of California Davis) |
| Abstract: | Classical contributions in international macroeconomics rely on goods-market mechanisms to reconcile the cyclicality of real exchange rates when financial markets are incomplete. However, cross-border trade in one domestic and one foreign-currency-denominated risk-free asset prohibits these mechanisms from breaking the pattern consistent with complete markets. In this paper, we characterize how goods markets drive exchange rate cyclicality, taking into account trade in risk-free and/or risky assets. We show that goods market mechanisms come back into play, even when there is cross-border trade in two risk-free assets, as long as we allow for empirically plausible heterogeneity in the stochastic discount factors of domestic marginal investors. |
| Keywords: | risk sharing, incomplete markets, exchange rates |
| JEL: | E32 F31 F44 G15 |
| Date: | 2023–12–03 |
| URL: | http://d.repec.org/n?u=RePEc:cda:wpaper:361&r=opm |
| By: | Julian di Giovanni; Ṣebnem Kalemli-Özcan; Alvaro Silva; Muhammed A. Yildirim |
| Abstract: | We estimate a multi-country, multi-sector New Keynesian model to quantify the drivers of domestic inflation during 2020–23 in several countries, including the United States. The model matches observed inflation together with sector-level prices and wages. We further measure the relative importance of different types of shocks on inflation across countries over time. The key mechanism, the international transmission of demand, supply and energy shocks through global linkages helps us to match the behavior of the USD/EUR exchange rate. The quantification exercise yields four key findings. First, negative supply shocks to factors of production, labor and intermediate inputs, initially sparked inflation in 2020-21. Global supply chains and complementarities in production played an amplification role in this initial phase. Second, positive aggregate demand shocks, due to stimulative policies, widened demand-supply imbalances, amplifying inflation further during 2021-22. Third, the reallocation of consumption between goods and service sectors, a relative sector-level demand shock, played a role in transmitting these imbalances across countries through the global trade and production network. Fourth, global energy shocks have differential impacts on the U.S. relative to other countries’ inflation rates. Further, complementarities between energy and other inputs to production play a particularly important role in the quantitative impact of these shocks on inflation. |
| Keywords: | inflation; international spillovers; global production network |
| JEL: | E2 E3 E6 F1 F4 |
| Date: | 2023–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97350&r=opm |
| By: | Maciej Stefański |
| Abstract: | This paper extends the Laubach-Williams (2003) framework, which is widely used to estimate the natural rate of interest, to make it more suitable for studying small open economies. The model is augmented with consumer inflation expectations, foreign output gap, the exchange rate, energy prices and a lending spread. It also uses survey data to improve the accuracy of output gap and potential growth estimates. This model is subsequently applied to CEE countries (Poland, Czechia and Hungary) and the euro area. The natural interest rate is found to be relatively volatile and pro-cyclical; it fell following the global financial crisis, but rebounded in recent years; however, while it remains lower than before the crisis, it is positive for all analysed economies. The model gives more precise and robust estimates than the standard Laubach-Williams framework, but ex-post revisions remain substantial. |
| Keywords: | natural interest rate, small open economy, CEE, Kalman filter |
| JEL: | E43 E52 C32 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2023093&r=opm |
| By: | Christian Bayer; Alexander Kriwoluzky; Gernot J. Müller; Fabian Seyrich |
| Abstract: | The distributional and disruptive effects of energy supply shocks are potentially large. We study the effectiveness of alternative fiscal responses in a two-country HANK model that we calibrate to the euro area. Energy subsidies can stabilize the domestic economy, but are fiscally costly and generate adverse spillovers to the rest of the monetary union: What the subsidizing country gains, the other countries lose. Transfers based on historical energy consumption in the form of a Hicks/Slutsky compensation are less effective domestically as subsidies but do not harm economic activity abroad. In addition, transfers increase welfare at Home while subsidies reduce welfare. |
| Keywords: | Energy crisis, Subsidies, Transfers, HANK2, monetary union, spillovers, heterogeneity, inequality, households |
| JEL: | D31 E64 F45 Q41 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2023_474&r=opm |
| By: | Harms, Philipp; Beck, Günter; Hussain, Muzammil; Ruszel, Mark |
| JEL: | E31 F31 F41 L81 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc23:277626&r=opm |
| By: | Jieun Lee |
| Abstract: | Using unique tick-by-tick data from an exchange, this paper examines the relationship between the US dollar and liquidity in the Korean government (Treasury) bond market. We find that a strong US dollar deteriorates the Treasury market's liquidity by increasing the bid-ask spread and the price impact and lowering market depth. The effects of fluctuations in the broad US dollar index on Treasury market liquidity become more pronounced when funding liquidity conditions are tighter, when banks' total capital ratio is lower with greater foreign currency risk, or when there is a larger sell-off of Korean Treasury bonds by foreign investors. The empirical evidence supports the financial channel of exchange rates affecting Treasury market liquidity. In particular, a strong dollar as a global risk factor is likely to limit the market intermediation capacity of emerging market dealers through the currency exposures of borrowers or dealers and thus tighten market conditions. |
| Keywords: | dollar, exchange rate, Treasury bond liquidity, funding liquidity, foreign investors |
| JEL: | E58 F34 G12 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1145&r=opm |
| By: | Hermann, Tim; Scholl, Almuth |
| JEL: | F34 H63 E62 F41 D72 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:vfsc23:277632&r=opm |
| By: | António Afonso; José Alves; Sofia Monteiro |
| Abstract: | We assess the impact of geopolitical risk and world uncertainty on the sovereign debt risk of 26 European Economies during the period 1984-2022, through the implementation of OLS-Fixed Effects regressions and the Generalized Method of Moments (GMM). We find that geopolitical tensions and global uncertainty in border countries contribute to the rise of European country’s sovereign risk as measured by 5- and 10-year Credit Default Swaps (CDS) and bond returns. Moreover, this interconnection is more pronounced during turbulent times such as the subprime crisis. Lastly, we found that geopolitical tensions in other country’ groups such as South America and Asia have a significant impact on the government risks of European countries. |
| Keywords: | FGeopolitical Risk; World Uncertainty; Political Tensions; Sovereign Risk; European Economy; GMM; Subprime crisis |
| JEL: | C23 E44 G32 H63 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp03002023&r=opm |