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on Open Economy Macroeconomics |
| By: | Saleem Bahaj (UCL); Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM)) |
| Abstract: | China’s current account transactions use an offshore international currency, the CNH, that co-exists as a parallel currency with the mainland domestic currency, the CNY. The CNH is freely used, but by restricting its exchange for CNY, the authorities can enforce capital controls. Sustaining these controls requires tight management of the money supply and liquidity to keep the exchange rate between the dual currencies pegged. After describing how the central bank implements this system, we find a rare instance of identified, exogenous, transitory increases in the supply of money and estimate by how much they depreciate the exchange rate. Theory and evidence show that elastically supplying money in response to demand shocks can maintain a currency peg. Liquidity policies complement these monetary interventions to deal with the pressure on the peg from financial innovation. Finally, deviations from the CNH/CNY peg act as a pressure valve to manage the exchange rate between the yuan and the US dollar. |
| Keywords: | Chinese monetary policy, Gresham’s law, Goodhart’s law, Money markets, RMB |
| JEL: | F31 F33 E51 G15 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:240&r=opm |
| By: | Sewon Hur (Federal Reserve Bank of Dallas); César Sosa-Padilla (University of Notre Dame and NBER); Zeynep Yom (Department of Economics, Villanova School of Business, Villanova University) |
| Abstract: | We study optimal bailout policies amidst banking and sovereign crises. Our model features sovereign borrowing with limited commitment, where domestic banks hold government debt and extend credit to the private sector. Bank capital shocks can trigger banking crises, prompting the government to consider extending guarantees over bank assets. This poses a trade-off: Larger bailouts relax financial frictions and increase output, but increase fiscal needs and default risk (creating a Ôdiabolic loopÕ). Optimal bailouts exhibit clear properties. The fraction of banking losses the bailouts cover is (i) decreasing in government debt; (ii) increasing in aggregate productivity; and (iii) increasing in the severity of banking crises. Even though bailouts mitigate the adverse effects of banking crises, the economy is ex ante better off without bailouts: Having access to bailouts lowers the cost of defaults, which in turn increases the default frequency, and reduces the levels of debt, output, and consumption. |
| Keywords: | Bailouts; Sovereign Defaults; Banking Crises; Conditional Transfers; Sovereign-bank diabolic loop |
| JEL: | E32 E62 F34 F41 G01 G15 G28 H63 H81 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:vil:papers:60&r=opm |
| By: | Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig; Jialu Sun |
| Abstract: | We introduce safe asset demand for dollar-denominated bonds into a tractable incomplete-market model of exchange rates. The convenience yield on dollar bonds enters as a stochastic wedge in the Euler equations for exchange rate determination. This wedge reduces the pass-through from marginal utility shocks to exchange rate movements, resolving the exchange rate volatility puzzle. The wedge also exposes the dollar's exchange rate to convenience yield shocks, giving rise to exchange rate disconnect from macro fundamentals and a quantitatively important driver of currency risk premium. This endogenous exposure identifies a novel safe-asset-demand channel by which the Fed's QE impacts the dollar and long-term U.S. Treasury bond yields. |
| JEL: | F30 G15 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32092&r=opm |
| By: | Jinzhao Chen (CleRMa - Clermont Recherche Management - ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA - Université Clermont Auvergne, ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand) |
| Abstract: | Moving away from a fixed exchange rate in 2005, China has gradually enlarged the band of fluctuations of Renminbi (RMB) and implemented various reforms on its central parity to have a more flexible exchange rate regime. This paper studies the nature of the exchange rate regime in China since the exchange regime reform of August 2015. Relying on the selfexciting threshold autoregressive (SETAR) model, it identifies endogenously the band of inaction beyond which the People's bank of China (China's central bank) starts to intervene in the foreign exchange market to restrict further fluctuations. Based on the comparison of the estimated threshold with the official band, this paper shows that the RMB/USD exchange rate followed an intermediate regime similar to the crawling band but with only one single threshold of intervention which is much lower than the upper boundary of the announced band. |
| Keywords: | Exchange rate regime, self-exciting threshold autoregressive model (SETAR), Renminbi (RMB), Central bank intervention |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04402467&r=opm |
| By: | Georgarakos, Dimitris; Popov, Alexander |
| Abstract: | Using microdata from a U.S. household survey, we document that immigrants who lived through a sovereign default episode are 6% less likely to hold debt relative to otherwise similar immigrants who reside in the same U.S. state and come from the same foreign country but who did not experience a default. Conditional on holding debt, consumers in the former group borrow less and service lower debt burdens. The negative effect on borrowing behavior of having experienced a sovereign default increases with family size and declines with education. These findings highlight the role of personal experience in shaping households’ financial decisions. JEL Classification: G11, G51, H63, D83 |
| Keywords: | experiences, household borrowing, immigrant, sovereign default |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20242893&r=opm |
| By: | Ortiz, Marco; Inca, Arthur; Solf, Fabrizio |
| Abstract: | Nominal GDP targeting (NGDP) rules have gained attention as a potential alternative to traditional models of monetary policy. In this paper, we extend the analysis of the welfare implications of NGDP rules within a New Keynesian model with nominal price and wage rigidities. Using a welfare function derived from the utility of consumers, we compare the NGDP target with a domestic inflation target, a CPI inflation target, and a Taylor rule in a small open economy scenario. Our simulations reveal that NGDP rules confer advantages on a central bank when the economy faces supply shocks, while their performance against demand shocks is comparable to that of a CPI target rule. These findings suggest that NGDP targeting could be a useful policy framework for central banks seeking to enhance their ability to stabilize the economy. |
| Keywords: | Nominal GDP targeting, optimal monetary policy, General equilibrium, open economy macroeconomics. |
| JEL: | E31 E32 E52 F41 |
| Date: | 2024–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119999&r=opm |
| By: | Helena Chuliá (Riskcenter- IREA and Department of Econometrics and Statistics, University of Barcelona.); Sabuhi Khalili (Department of Econometrics and Statistics, University of Barcelona.); Jorge M. Uribe (Faculty of Economics and Business Studies, Open University of Catalonia.) |
| Abstract: | SWe propose generative artificial intelligence to measure systemic risk in the global markets of sovereign debt and foreign exchange. Through a comparative analysis, we explore three novel models to the economics literature and integrate them with traditional factor models. These models are: Time Variational Autoencoders, Time Generative Adversarial Networks, and Transformer-based Time-series Generative Adversarial Networks. Our empirical results provide evidence in support of the Variational Autoencoder. Results here indicate that both the Credit Default Swaps and foreign exchange markets are susceptible to systemic risk, with a historically high probability of distress observed by the end of 2022, as measured by both the Joint Probability of Distress and the Expected Proportion of Markets in Distress. Our results provide insights for governments in both developed and developing countries, since the realistic counterfactual scenarios generated by the AI, yet to occur in global markets, underscore the potential worst-case scenarios that may unfold if systemic risk materializes. Considering such scenarios is crucial when designing macroprudential policies aimed at preserving financial stability and when measuring the effectiveness of the implemented policies. |
| Keywords: | Twin Ds, Sovereign Debt, Credit Risk, TimeGANs, Transformers, TimeVAEs, Autoencoders, Variational Inference. JEL classification: C45, C53, F31, F37. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:202402&r=opm |
| By: | Xiwen Bai (Tsinghua University); Jesús Fernández-Villaverde (University of Pennsylvania); Yiliang Li (University of International Business and Economics); Francesco Zanetti (University of Oxford) |
| Abstract: | We study the causal effects and policy implications of global supply chain disruptions. We construct a new index of supply chain disruptions from the mandatory automatic identification system data of container ships, developing a novel spatial clustering algorithm that determines real-time congestion from the position, speed, and heading of container ships in major ports around the globe. We develop a model with search frictions between producers and retailers that links spare productive capacity with congestion in the goods market and the responses of output and prices to supply chain shocks. The co-movements of output, prices, and spare capacity yield unique identifying restrictions for supply chain disturbances that allow us to study the causal effects of such disruptions. We document how supply chain shocks drove inflation during 2021 but that, in 2022, traditional demand and supply shocks also played an important role in explaining inflation. Finally, we show how monetary policy is more effective in taming inflation after a global supply chain shock than in regular circumstances. |
| Keywords: | supply chain disruptions, search-and-matching in the goods market, SVAR, state-dependence of monetary policy |
| JEL: | E32 E58 J64 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:cfm:wpaper:2405&r=opm |
| By: | Liutang Gong (Guanghua School of Management and LMEQF, Peking University; School of International Economics and Management, Beijing Technology And Business University); Chan Wang (School of Finance, Central University of Finance and Economics); Liyuan Wu (Institute of World Economics and Politics, Chinese Academy of Social Science); Heng-fu Zou (Economics and Management School, Wuhan University) |
| Abstract: | In the literature on optimal monetary policy in open economies, the presence of local-currency pricing provides a rationale for targeting CPI inflation rather than PPI inflation. In this paper, we reexamine this conclusion by incorporating international trade in intermediate inputs into Engel (2011). We find that the cooperative monetary policymaker should target the final-goods output gaps, the PPI inflation rates at both stages of production, the currency misalignments at both stages of production, and the vertical relative price gaps. Welfare analysis shows that the monetary policymaker should target the weighted average intermediate-goods PPI (WPPI) inflation rather than CPI inflation for most combinations of price stickiness at both stages of production. |
| Date: | 2023–03–31 |
| URL: | http://d.repec.org/n?u=RePEc:cuf:wpaper:617&r=opm |