|
on Open Economy Macroeconomics |
| By: | Parrado, Eric; Heresi, Rodrigo |
| Abstract: | Singapore's unique monetary policy consists of a managed exchange rate framework that can be characterized as a Taylor-like reaction function with the nominal devaluation rate instead of the nominal interest rate as the main policy instrument. We build a small open economy New Keynesian model to estimate and characterize such a monetary rule from a welfare perspective. Welfare gains under an exchange rate rule (ERR) relative to the more standard interest rate-based Taylor rule (IRR) are unambiguously increasing in the degree of trade openness (defined as exports plus imports as a share of GDP). For Singapore, where trade openness is 280% of GDP, we estimate welfare gains of 1.48% of permanent consumption under an ERR. In a counterfactual thought experiment, we find that Chile, an established inflation-targeting economy using an IRR, would be better off under an ERR for any degree of openness above 100% (currently at 70%). |
| Keywords: | Monetary policy;Exchange rate management;Open economy macroeconomics |
| JEL: | E52 E58 F41 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:13346&r=opm |
| By: | Parrado, Eric |
| Abstract: | This paper introduces a novel monetary policy framework where the exchange rate becomes the central instrument. Using Singapore as a case study, it explores the Monetary Authority's adoption of the exchange rate as the primary tool since 1981, diverging from conventional approaches centered on interest rates or monetary aggregates. The estimated exchange rate reaction function aligns well with actual deviations, supporting the hypothesis that Singapore's forward-looking policy rule effectively responds to inflation and output volatility, especially during economic crises. This framework offers a promising alternative for countries with open economies and challenges in implementing traditional interest rate instruments. |
| Keywords: | exchange rate;Inflation;monetary policy rules;Singapore |
| JEL: | E31 E52 E58 F41 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:13347&r=opm |
| By: | Camila Gutierrez; Javier Turen; Alejandro Vicondoa |
| Abstract: | We study the international spillover effects of a macroeconomic surprise in China. Using high-frequency data, we show that the surprise component of the release of macro data in China brings a sizeable and significant effect on asset prices and global risk, across different economies. We document that the dynamic effect of Chinese Macro surprises is both significant and persistent for a broad range of financial variables worldwide. When assessing the relative importance of Chinese surprises relative to other known drivers of the Global Financial Cycle, we show that while the Monetary Policy in the US still accounts for most of the reaction, our measure is equally relevant to account for the reaction of commodities and the EMBI. |
| Keywords: | Spillovers, Global Financial Cycle, China, High-frequency |
| JEL: | E44 F21 F40 G15 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:577&r=opm |
| By: | Ayres, JoaÞo; Paluszynski, Radoslaw |
| Abstract: | This paper proposes a model of sovereign default that features interest rate multiplicity driven by rollover risk. Our core mechanism shows that the possibility of a rollover crisis by itself can lead to high interest rates, which in turn reinforces the rollover risk. By exploiting complementarity between the traditional notions of slow- and fast-moving crises, our model generates a rich simulated dynamics that features frequent defaults and a volatile bond spread even in the absence of shocks to fundamentals. In the presence of risky income, our mechanism amplifies the dynamics of debt and spreads relative to model benchmarks where equilibrium multiplicity relies on the underlying shocks to income. |
| Keywords: | sovereign default;self-fulfilling crises |
| JEL: | E44 F34 |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:13315&r=opm |
| By: | Martha Elena Delgado; Juan Herreño; Marc Hofstetter; Mathieu Pedemonte |
| Abstract: | We estimate the causal effects of a shift in the expected future exchange rate of a local currency against the US dollar on a representative sample of firms in an open economy. We survey a nationally representative sample of firms and provide the one-year-ahead nominal exchange rate forecast published by the local central bank to a random sub-sample of firm managers. The treatment is effective in shifting exchange rate and inflation expectations and perceptions. These effects are persistent and larger for non-exporting firms. Linking survey responses with administrative census data, we find that the treatment affects the dynamics of export and import quantities and prices at the firm level, with differential effects for exports to destination countries that use the US dollar as their currency. We instrument exchange rate expectations with the variation induced by the treatment and estimate a positive elasticity of a future expected depreciation in import expenditures. |
| Keywords: | expectations; exchange rate; firms |
| JEL: | E31 E71 F31 G41 |
| Date: | 2024–03–25 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:97957&r=opm |
| By: | Kazunobu Hayakawa (Institute of Developing Economies); Nuttawut LAKSANAPANYAKUL (Thailand Development Research Institute); Toshiyuki Matsuura (Keio Economic Observatory, Keio University); Taiyo Yoshimi (Faculty of Economics, Chuo University) |
| Abstract: | This study explores the evolution of invoicing currency choice, focusing on inertia in invoicing currency and the role of export experience. We theorize that inertia in the producer fs currency pricing (PCP) weakens with lower forex risk management costs, whereas inertia in foreign currency pricing is more pronounced under similar conditions. For the export experience, exporters tend to adopt PCP when they start exporting if the costs are significant. Empirical analysis using firm-level export data in Thailand from 2007 to 2014 supports these predictions. Specifically, we show that the inertia in PCP diminishes with access to forward exchange contracts or when the importer fs currency has a higher forex turnover than the Thai baht. We also show that the tendency to adopt PCP in first exports diminishes under these conditions. Our findings imply that exporters initially prefer invoicing in their own currency, but this preference decreases as export experience accumulates or if there are financial tools or favorable currency turnover conditions. |
| Keywords: | Invoicing currency, Export dynamics, Inertia, Learning effect, Customs data |
| JEL: | F14 F31 F39 |
| Date: | 2024–03–03 |
| URL: | http://d.repec.org/n?u=RePEc:keo:dpaper:2024-005&r=opm |
| By: | Alessandro Cantelmo (Bank of Italy); Nikos Fatouros (University of Birmingham); Giovanni Melina (International Monetary Fund); Chris Papageorgiou (International Monetary Fund) |
| Abstract: | With climate change increasing the frequency and intensity of natural disasters, how should central banks respond to these catastrophic events? Looking at IMF reports for 34 disaster-years, which occurred in 16 disaster-prone countries from 1999 to 2017, what emerges is a non-negligible heterogeneity in central banks' responses to climate-related disasters. Using a standard small-open-economy New-Keynesian model with disaster shocks, we show that, consistently with textbook theory, inflation targeting remains the welfare-optimal regime. The best strategy for monetary authorities is to resist the impulse to accommodate in the face of catastrophic natural disasters, and rather to continue to focus on price stability. |
| Keywords: | natural disasters, climate change, DSGE, monetary policy, exchange rate regimes |
| JEL: | E5 E52 E58 F41 Q54 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1443_24&r=opm |
| By: | Crowley, M. A.; Han, L.; Son, M. |
| Abstract: | Using administrative transactions data from the United Kingdom, we document a swift decline in sterling use among British exporters after the 2016 Brexit vote. Through a novel decomposition, we document most of this decline comes from two sources: (i) continuously-operating firms switching from sterling to dollars or local currencies and (ii) reductions in transactions for sterling-loyal firms. In contrast, new entrants into exporting primarily invoice in sterling before and after the Brexit vote. Our findings provide the first evidence on the quantitative relevance of new channels that contribute to changes in aggregate invoicing shares amidst political upheaval. |
| Keywords: | Invoicing Currency, Trade Transactions, Sterling, Brexit |
| JEL: | F14 F31 F41 |
| Date: | 2024–03–11 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:2413&r=opm |
| By: | Marta Gómez-Puig (Department of Economics & Riskcenter, Universitat de Barcelona, Spain.); Simón Sosvilla-Rivero (Complutense Institute for Economic Analysis, Universidad Complutense de Madrid, 28223 Madrid, Spain.) |
| Abstract: | Multiple interconnected channels link banks and governments: the sovereign-exposure channel (banks hold significant amounts of sovereign debt), the safety net channel (government guarantees protect banks), and the macroeconomic channel (bank and government health affect and is affected by economic activity). However, the sovereign-bank nexus in euro-area countries is particularly worrying since its member states issue debt in a currency they do not directly control and cannot ensure nominal repayment to bondholders. In this work, we summarise the main theoretical and empirical contributions that analyse this phenomenon and the legislative and institutional initiatives to reduce sovereign exposures in the banking sector. |
| Keywords: | Bank risk, Euro area, Interdependency, Sovereign risk, Sovereign-bank nexus. JEL classification: G21, G33, H63. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:ira:wpaper:202406&r=opm |
| By: | Ms. Gabriela Cugat; Andrea Manera |
| Abstract: | We construct a novel measure of technology adoption, the Embodied Technology Imports Indicator (ETI), available for 181 countries over the period 1970-2020. The ETI measures the technological intensity of imports of each country by leveraging patent data from PATSTAT and product-level trade data from COMTRADE. We use this index to assess the link between capital flows and the diffusion of new technologies across emerging economies and low-income countries. Through a local projection difference-in-differences approach, we establish that variations in statutory capital flow regulations increase technological intensity by 7-9 percentage points over 5 to 10 years. This increase is accompanied by a significant 28-33 pp rise in the volume of gross capital inflows, driven primarily by foreign direct investment (21 pp increase), and a 9 to 12 percentage points shift in the level of Real GDP per capita in PPP terms. |
| Keywords: | Technology measurement; Technology diffusion; Capital flows; Capital account openness. |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/044&r=opm |
| By: | Brenda Guevara (Pontificia Universidad Católica del Perú.); Gabriel Rodríguez (Departamento de Economía de la Pontificia Universidad Católica del Perú.); Lorena Yamuca Salvatierra (Pontificia Universidad Católica del Perú.) |
| Abstract: | We employ a family of mixture innovation, time-varying parameter VAR models with stochastic volatility (TVP-VAR-SV) to analyze the impact of external shocks on Peru’s GDP growth, inflation, and interest rate from 1998Q1 to 2019Q4. Our key findings are as follows: (i) the model best fitting the data features time-varying parameters and variances with a certain likelihood; (ii) impulse-response functions reveal that a 1% increase in the growth rate of Peru’s major trading partners (China and the U.S.) leads to a domestic GDP growth expansion of 0.65% and 0.21%, respectively; (iii) the forecast error variance decomposition shows that external shocks account for 65% of the long-term variability in output, 65% in inflation, and 67% in the interest rate; (iv) historical decomposition indicates that external shocks account for 50% of domestic GDP growth, particularly from 2002 onward. Lastly, we validate the results obtained in the primary specification through four robustness exercises. JEL Classification-JE: C32, C52, E31, F41. |
| Keywords: | External Shocks, Macroeconomic Fluctuations, Time-Varying Parameter Vector Autoregressive Models, Stochastic Volatility, Mixture in Innovations, Peru. |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pcp:pucwps:wp00529&r=opm |