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on Open Economy Macroeconomics |
| By: | Michael D. Bordo (Rutgers University); Pierre Siklos (Wilfred Laurier University) |
| Abstract: | In this paper we revisit the Canadian experience with floating exchange rates since 1950. Canada was a pioneer in successfully adopting a floating exchange rate during the Bretton Woods pegged exchange rate regime. Since then, most advanced countries have followed the Canadian example. A key finding of our paper based on historical narrative and econometric analysis is that economic performance under floating depended on its monetary policy performance as Milton Friedman originally argued in his seminal 1953 article making the case for floating exchange rates. Canadian monetary policy achieved low and stable inflation once it adopted inflation targeting as a nominal anchor. Also, Canada’s floating exchange rate provided it with a modicum of insulation from external shocks, especially commodity price shocks that influenced both the level and volatility of the real exchange rate over the past three decades. The Canadian experience with floating (along with that of other small open economies such as Australia, New Zealand and Sweden) combined with inflation targeting became a global model for sound monetary policy. |
| Keywords: | floating exchange rates, commodity price shocks, insulation, sound monetary policy, Canada |
| JEL: | E32 E52 F31 F32 N10 |
| Date: | 2024–12 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:320&r=opm |
| By: | Benny Kleinman (University of Chicago); Ernest Liu (Princeton University and NBER); Stephen J. Redding (Princeton University, NBER and CEPR); Motohiro Yogo (Princeton University and NBER) |
| Abstract: | We generalize the closed-economy neoclassical growth model (CNGM) to allow for costly goods trade and capital flows with imperfect substitutability between countries. We develop a tractable, multi-country, quantitative model that matches key features of the observed data (e.g., gravity equations for trade and capital holdings) and is well suited for analyzing counterfactual policies that affect both goods and capital market integration (e.g., U.S.-China decoupling). We show that goods and capital market integration interact in non-trivial ways to shape impulse responses to counterfactual changes in productivity and goods and capital market frictions and the speed of convergence to steady-state. |
| Keywords: | Economic Growth, International Trade, Capital Flow |
| JEL: | F10 F21 F60 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:pri:cepsud:318&r=opm |
| By: | Elizabeth Steiner |
| Abstract: | This paper estimates the impact of exchange rate fluctuations on markups. Firm-level markups are estimated for a comprehensive panel of Swiss manufacturing firms for the period 2012-2017 using a production-function approach. The pass-through of the exchange rate is then estimated using an event-study design exploiting the large, sudden and persistent appreciation of the Swiss franc against the euro in January 2015. The results show that following an appreciation, Swiss manufacturing firms adjust their markup very heterogeneously. Large firms, especially those that invoice in foreign currency or are highly profitable, substantially decrease their markup. Owing to their sheer size, large firms shape the aggregate response. In contrast, the average firm does not respond significantly. This suggests that smaller firms, which are in the majority, are either unable or unwilling to absorb exchange rate movements by adjusting their markup. |
| Keywords: | Markup, Exchange rate, Pass-through, Firm-level data |
| JEL: | D22 D24 F12 F14 F41 F23 L11 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2024-02&r=opm |
| By: | Mariano Kulish (University of Sydney); Nadine Yamout (American University of Beirut) |
| Abstract: | We study the fiscal policy response to a slowdown in trend growth using an estimated open economy stochastic growth model. For equilibria to exist, fiscal policy must respond to the slowdown ensuring that the government budget constraint holds in the low growth regime. The slowdown reduces welfare but sets off a significant endogenous response of the private sector that increases capital accumulation and operates as an automatic stabilizer. If fiscal policy keeps the provision of public goods per capita constant, the slowdown gives rise to a pleasant fiscal arithmetic which requires either tax cuts or a higher target debt-to-GDP ratio for the government budget constraint to hold in the long run. We discuss the implications of different fiscal responses involving increasing per capita public spending and varying speeds of adjustment. |
| Keywords: | Open economy, trend growth, fiscal policy, real business cycles, estimation, structural breaks |
| JEL: | E30 F43 H30 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:308&r=opm |
| By: | Gabriel Chodorow-Reich; Matthew Smith; Owen M. Zidar; Eric Zwick |
| Abstract: | We evaluate the 2017 Tax Cuts and Jobs Act. Combining reduced-form estimates from tax data with a global investment model, we estimate responses, identify parameters, and conduct counterfactuals. Domestic investment of firms with the mean tax change increases 20% versus a no-change baseline. Due to novel foreign incentives, foreign capital of U.S. multinationals rises substantially. These incentives also boost domestic investment, indicating complementarity between domestic and foreign capital. In the model, the long-run effect on domestic capital in general equilibrium is 7% and the tax revenue feedback from growth offsets only 2p.p. of the direct cost of 41% of pre-TCJA corporate revenue. |
| JEL: | E22 F21 F23 H0 H25 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32180&r=opm |
| By: | Barry Eichengreen (NCAER and University of California, Berkeley) |
| Abstract: | Globalization is not over, but it is being reconfigured by events. Internationally, there are economic and political tensions between the United States and China. Both countries have responded with import tariffs, export controls, and foreign investment restrictions that have led to a decline in the relative importance of bilateral trade and the collapse of bilateral foreign direct investment. The paper concludes that globalization remains deeply entrenched despite the Global Financial Crisis, COVID, Russia’s invasion of Ukraine, and U.S.-China tensions. At the same time, the landscape of globalization has been changing in response to these events and specifically in response to U.S.-China rivalry. |
| Keywords: | Globalisation;Economic Growth |
| Date: | 2024–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:nca:ncaerw:161&r=opm |