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on Open Economy Macroeconomics |
| By: | Corsetti, G.; Maeng, S. H. |
| Abstract: | Uncertainty about a government willingness to repay its outstanding liabilities upon auctioning new debt creates vulnerability to belief-driven hikes in borrowing costs. We show that optimizing policymakers will eliminate such vulnerability by accumulating reserves up to ensuring post-auction debt repayment in all (off-equilibrium) circumstances. The model helps explaining why governments hold significant amounts of reserves and appear reluctant to use them to smooth fundamental shocks. Quantitatively, the model explains reserve holdings up to 3% of GDP if debt is short term, 2.4% with long-term debt—as long bond maturities mitigate vulnerability to belief-driven crises. |
| Keywords: | Debt Sustainability, Discretionary Fiscal Policy, Expectations, Foreign Reserves, Self-Fulfilling Crises, Sovereign Default |
| JEL: | E43 E62 F34 H50 H63 |
| Date: | 2023–11–08 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camjip:2319&r=opm |
| By: | Jonathan Eaton (Pennsylvania State University); Samuel Kortum (Yale University) |
| Abstract: | Interpreting individual heterogeneity in terms of probability theory has proved powerful in connecting behaviour at the individual and aggregate levels. Returning to Ricardo's focus on comparative efficiency as a basis for international trade, much recent quantitative equilibrium modeling of the global economy builds on particular probabilistic assumptions about technology. We review these assumptions and how they deliver a unified framework underlying a wide range of static and dynamic equilibrium models. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2385&r=opm |
| By: | Bippus, B.; Lloyd, S.; Ostry, D. |
| Abstract: | Using data on the external assets and liabilities of global banks based in the UK, the world’s largest centre for international banking, we identify exogenous cross-border banking flows by constructing novel Granular Instrumental Variables. In line with the predictions of a new granular international banking model, we show empirically that cross-border flows have a significant causal impact on exchange rates. A 1% increase in UK-based global banks’ net external US dollar-debt position appreciates the dollar by 2% against sterling. While we estimate that the supply of dollars from abroad is price-elastic, our results suggest that UK-resident global banks’ demand for dollars is price-inelastic. Furthermore, we show that the causal effect of banking flows on exchange rates is state dependent, with effects twice as large when banks’ capital ratios are one standard deviation below average. Our findings showcase the importance of banks’ risk-bearing capacity for exchangerate dynamics and, therefore, for insulating their domestic economies from global financial shocks. |
| Keywords: | Capital flows, Exchange Rates, Granular instrumental variables, International banking |
| JEL: | E00 F00 F30 |
| Date: | 2023–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camjip:2314&r=opm |
| By: | Mengting Zhang; Andreas Steiner; Jakob de Haan; Haizhen Yang |
| Abstract: | We analyse how reversals of several types of capital flows impact currency crises in emerging market and developing economies. Estimates of logit models show that reversals of (equity and debt) portfolio flows significantly increase the likelihood of currency crises in emerging market economies. In developing economies, reversals of portfolio debt flows and banking flows have a significant positive impact on currency crises. Finally, our results suggest that countries with mature financial systems and fixed exchange rate regimes are less likely to experience a currency crisis after a capital flow shock. The mediating role of capital account liberalization varies by country type. |
| Keywords: | capital flow reversals, currency crises, event study approach, logit models, domestic financial factors |
| JEL: | E44 E51 F34 F41 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11008&r=opm |
| By: | Daniel Marcel te Kaat; Chang Ma; Alessandro Rebucci |
| Abstract: | In this paper, we show that cross-border portfolio flows around the peak of the European Crisis induced households to rebalance their portfolios toward housing. Estimating difference-in-differences regressions around Draghi's “Whatever It Take” speech in July 2012 with household data from the ECB's Household Finance and Consumption Survey, we find that portfolio inflows induce households with larger ex-ante bond and equity shares to rebalance more strongly toward housing. The effect is not driven by higher pre-treatment access to credit or higher credit growth during the treatment period and is stronger for wealthier and less risk-averse households. |
| JEL: | F3 G5 R0 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32210&r=opm |
| By: | Victoria Ivashina; Ṣebnem Kalemli-Özcan; Luc Laeven; Karsten Müller |
| Abstract: | Using a new dataset on sectoral credit exposures covering financial and non-financial sectors in 115 economies over the period 1940–2014, we document the following evidence that corporate debt plays a key role in explaining boom-bust cycles, financial crises, and slow macroeconomic recoveries: (i) corporate debt accounts for two thirds of the aggregate credit expansion before crises and three quarters of total nonperforming loans during the bust; (ii) expansions in corporate debt predict crises similarly to household debt; (iii) a measure of imbalance in credit growth flowing disproportionately to some sectors, such as construction and non-bank financial intermediation, is associated with crises; and (iv) the recovery from financial crises is slower after a boom in corporate debt, especially when backed by procyclical collateral values, due to higher nonperforming loans. |
| JEL: | E30 F34 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32225&r=opm |
| By: | Luis E. Rojas (UAB, MOVE and Barcelona School Of Economics); Dominik Thaler (European Central Bank) |
| Abstract: | The feedback loop between sovereign and financial sector insolvency has been identified as a key driver of the European debt crisis and has motivated an array of policy proposals. We revisit this “doom loop” focusing on governments’ incentives to default. To this end, we present a simple 3-period model with strategic sovereign default, where debt is held by domestic banks and foreign investors. The government maximizes domestic welfare, and thus the temptation to default increases with externally-held debt. Importantly, the costs of default arise endogenously from the damage that default causes to domestic banks’ balance sheets. Domestically-held debt thus serves as a commitment device for the government. We show that two prominent policy prescriptions – lower exposure of banks to domestic sovereign debt or a commitment not to bailout banks – can backfire, since default incentives depend not only on the quantity of debt, but also on who holds it. Conversely, allowing banks to buy additional sovereign debt in times of sovereign distress can avert the doom loop. In an extension we show that in the context of a monetary union (such as the euro area) similar unintended negative consequences may arise from the pooling of debt (such as European safe bonds (ESBies)). A central bank backstop (such as the ECB’s Transmission Protection Instrument) can successfully disable the loop if precisely calibrated. |
| Keywords: | sovereign default, bailout, doom loop, self-fulfilling crises, transmission protection instrument, ESBies |
| JEL: | E44 E6 F34 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2409&r=opm |
| By: | Cavallaro, Eleonora (University of Rome, Sapienza, Department of Economics and Law); Villani, Ilaria (Banking Supervision, European Central Bank) |
| Abstract: | This paper proposes an index to benchmark EU financial systems against their potential to enhance resilient growth and international risk sharing. It finds that the risk sharing mechanism is more effective in more stable financial environments, whereas a larger fraction of shocks remains unsmoothed in the lower financial clusters, especially in the aftermath of the global financial crisis, when the credit channel is significantly downsized. |
| Keywords: | financial structure, financial heterogeneity, growth, volatility, risk sharing |
| JEL: | F15 F36 O16 E44 G1 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bda:wpsmep:wp2024/21&r=opm |
| By: | Sushant Acharya; Paolo Pesenti |
| Abstract: | We study international monetary policy spillovers and spillbacks in a tractable two-country Heterogeneous Agent New Keynesian model. Relative to Representative Agent (RANK) models, our framework introduces a precautionary-savings channel, as households in both countries face uninsurable income risk, and a real-income channel, as households have heterogeneous marginal propensities to consume (MPC). While both channels amplify the size of spillovers/spillbacks, only precautionary savings can change their sign relative to RANK. Spillovers are likely to be larger in economies with higher fractions of high MPC households and more countercyclical income risk. Quantitatively, both channels amplify spillovers by 30-60 percent relative to RANK. |
| Keywords: | monetary policy spillovers; incomplete markets; precautionary savings; real-income channel |
| JEL: | E50 F41 F42 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97955&r=opm |
| By: | Ostry, D. A. |
| Abstract: | I build a model in which speculators unwind carry trades and hedgers fly to relatively liquid U.S. Treasuries during global financial disasters. The net effect of these flows produces an amplified U.S. dollar appreciation against high-yield currencies in disasters and a dampened depreciation, or even an appreciation, against low-yield ones. I verify this prediction by examining deviations from uncovered interest parity (UIP) within a novel quantile-regression framework. In the tail quantiles, I show that interest differentials predict high-yield currencies to suffer depreciations ten times as large as suggested by UIP, while spikes in Treasury liquidity premia meaningfully appreciate the dollar regardless of the U.S. relative interest rate. A complementary analysis of speculators’ and hedgers’ currency futures positions substantiates my model’s mechanism and highlights that hedging agents imbue the U.S. dollar with its unique safe-haven status. |
| Keywords: | Disaster Risk, Exchange Rates, Liquidity Yields, Quantile regression, U.S. Safety |
| JEL: | C22 F31 G15 |
| Date: | 2023–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camjip:2311&r=opm |
| By: | Meyer, Timothy Andreas |
| Abstract: | U.S. equity outperformance and sustained dollar appreciation have led to large valuation gains for the rest of the world on the U.S. external position. The author constructs their global distribution, carefully accounting for the role of tax havens. Valuation gains are concentrated and large in developed countries, while developing countries have been mostly bypassed. To assess the welfare implications of these capital gains, the author adopts a sufficient statistics approach. In contrast to the large wealth changes, most countries so far did not benefit much in welfare terms. This is because they did not rebalance their portfolios and realize their gains, while they were further hurt by rising import prices from the strong dollar. |
| Keywords: | Foreign Assets, Global Imbalances, Valuation Effects |
| JEL: | F21 F32 F40 G15 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:287755&r=opm |
| By: | Claudia M. Buch; Linda S. Goldberg |
| Abstract: | Global liquidity flows are largely channeled through banks and nonbank financial institutions. The common drivers of global liquidity flows include monetary policy in advanced economies and risk conditions. At the same time, the sensitivities of liquidity flows to changes in these drivers differ across institutions and have been evolving over time. Microprudential regulation of banks plays a role, influencing leverage and capitalization, changing sensitivities to shocks, and also driving risk migration from banks to nonbank financial institutions. Risk sensitivities and flightiness of global liquidity are now strongest in more leveraged nonbank financial institutions, raising challenges in stress episodes. Current policy initiatives target linkages across different types of financial institutions and associated risks. Meanwhile, significant gaps remain. This paper concludes by discussing policy options for addressing systemic risk in banks and nonbanks. |
| Keywords: | international banks; nonbank financial institutions; global liquidity; regulation; prudential policy |
| JEL: | F3 G21 G23 G28 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97968&r=opm |
| By: | R, Pazhanisamy |
| Abstract: | The purpose of this paper is to explore the impact of BRICS unions’ currency on the Dollar and its performances on international trade among the nations. The compound reviews of literature on the classical, neo classical and modern theories of trade reveals the non existence of research works on the multinational union currencies and its impact on the validity of the dollar and the economic gain of the nations and its influence over the trade activities for which this attempt is made. Due to lack of availability of the numerical data on the new currency and its impact over the economics through trade the graphical approach is used with the logical realistic assumptions and justified how the value of currencies of BRICS nations in international market would certainly be appreciate. It also portrays that how simultaneously the dominant dollar depreciate its value through the market forces of demand and supply changes in the global scale |
| Keywords: | BRICS currency, Alternative to Dollar, Gain from trade, Value of currency in the international market, Foreign Exchange Exploitation, Solutions to US sanction |
| JEL: | E44 E51 E58 F23 F3 F33 F36 F38 F52 F55 G15 G21 P51 |
| Date: | 2024–01–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120538&r=opm |
| By: | Ariel Dvoskin (BCRA/CONICET); Germán Feldman (BCRA); Gabriel Montes-Rojas (BCRA/UBA/IIEP-CONICET) |
| Abstract: | This paper studies, both theoretically and empirically, tradable (T) and non-tradable (N) profit rates dynamics in a small, price-taker peripheral economy under foreign exchange controls and parallel exchange rates (ER). Using a state-space econometric representation of the Argentine economy for the period April 2016- April 2023, we found evidence to support three main hypotheses derived from the theoretical models. First, an official exchange rate depreciation increases tradable goods profit rates, but has no effect on non-tradeable goods profitability. Second, the rise of the financial exchange rate increases sector N’s profit rate but has no effect on T’s. Moreover, this effect depends on the magnitude of the ER gap in a positive, but non-linear way. Third and finally, over sufficient time, both profit rates tend to influence each other, through the action of competition. This means that, eventually, and increase (depreciation) in the official exchange rate exerts its influence on sector N’s profit rate; while, if sufficiently persistent and big enough, a rise in the financial ER ends up affecting sector T’s profit rate too. |
| Keywords: | Argentina, Inflation, Exchange rate, Foreign exchange controls, Sectorial profit rates, Small open economy |
| JEL: | E31 E11 F41 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:315&r=opm |
| By: | Yasumasa Morito (University of Wisconsin); Kenichi Ueda (University of Tokyo) |
| Abstract: | Using the bilateral international investment data across countries for 2009-2018, we find that the returns on international investments are lower for rich countries than for poor countries, seemingly consistent with the Lucas Paradox. However, when we look at the excess returns on international investments relative to domestic investments, rich countries are investing more wisely than poor countries. A puzzle arises: Why do poor countries invest mostly in rich countries where relative returns are negative? We investigate the effects of institutional qualities of investor countries, in addition to recipient countries’ characteristics, which the literature has been focusing on. We find that investor countries’ institutional qualities do matter for participating in a wider set of investment destinations, but that they do not affect return sensitivity in allocating funds across participating markets. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:cfi:fseres:cf581&r=opm |
| By: | Biagio Bossone |
| Abstract: | This article shows that in highly internationally financially integrated ("globalized") economies, policymakers' ability to implement effective expansionary macroeconomic policies, referred to in the article as "Keynesian policy space, " is influenced by the portfolio decisions of a specific group of investors known as "Global investors." This conclusion arises from a two-country, open-economy model in which Global investors allocate capital internationally based primarily on their perception of the policy credibility of the countries where they invest their managed wealth. In countries that Global investors deem highly credible, expansionary macroeconomic policies prove effective in terms of stimulating output and resource employment. Conversely, in countries perceived as having weak credibility, the portfolio decisions of these investors may undermine the effectiveness of such policies. Consequently, the anticipated real effects of these policies may dissipate into domestic currency depreciation and higher inflation. Following the derivation and evaluation of this conclusion, the article explores various options for countries to establish and maintain Keynesian policy space. |
| Keywords: | credibility; exchange rate; financial integration; global investor; inflation; intertemporal budget constraint; macro-policies |
| JEL: | E31 E40 E50 E62 F31 G15 H30 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2405&r=opm |