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on Open Economy Macroeconomics |
| By: | Corsetti, G.; Lipińska, A.; Lombardo, G. |
| Abstract: | We study how risk sharing affects the macroeconomic allocation, asset prices and welfare. Employing perturbation and global methods, we characterize a global (multi-country) equilibrium in terms of asymmetries in higher-order moments of non-Gaussian shocks and country size. Financial integration has consumption smoothing and wealth level effects. Wealth effects emerge through the revaluation of a country assets and terms of trade— benefiting safer and/or smaller economies. Riskier countries enjoy smoother consumption, but at the expense of lower relative wealth. Although riskier countries gain more, safety command a welfare and financial premium, with welfare differences being near-linear in relative asset prices. |
| Keywords: | Asymmetries in Risk, Tail Risk, Gains from Risk Sharing, Terms of Trade, Consumption Smoothing, Wealth Transfers |
| JEL: | F15 F41 G15 |
| Date: | 2024–08–08 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camjip:2422 |
| By: | Rudolfs Bems; Luciana Juvenal; Weifeng Larry Liu; Warwick J. McKibbin |
| Abstract: | This paper assesses the economic effects of climate policies on different regions and countries with a focus on external adjustment. The paper finds that various climate policies could have substantially different impacts on external balances over the next decade. A credible and globally coordinated carbon tax would decrease current account balances in greener advanced economies and increase current accounts in more fossil-fuel-dependent regions, reflecting a disproportionate decline in investment for the latter group. Green supply-side policies—green subsidy and infrastructure investment—would increase investment and saving but would have a more muted external sector impact because of the constrained pace of expansion for renewables or the symmetry of the infrastructure boost. Country characteristics, such as initial carbon intensity and net fossil fuel exports, ultimately determine the current account responses. For the global economy, a coordinated climate change mitigation policy package would shift capital towards advanced economies. Following an initial rise, the global interest rates would fall over time with increases in the carbon tax. These external sector effects, however, depend crucially on the degree of international policy coordination and credibility. |
| Keywords: | global climate policies, carbon taxes, net-zero emissions, current account balances, international capital flows, dynamic general equilibrium modelling, G-Cubed |
| JEL: | F41 F42 H23 Q54 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-50 |
| By: | Andres Escayola, Erik; McQuade, Peter; Schroeder, Christofer; Tirpák, Marcel |
| Abstract: | Monetary policy decisions by the Federal Reserve System in the US are widely recognised to have spillover effects on the rest of the world. In this paper, we focus on the asymmetric effects of US monetary policy shocks on macro-financial outcomes in emerging market economies (EMEs). We shed light on how domestic factors shape external monetary policy spillover effects using indicators on the macro-financial vulnerabilities and monetary policy stances of EMEs. We find that a surprise tightening of monetary policy in the US leads to an immediate tightening of financial conditions which leads to a decline in activity and prices in EMEs over one year. Importantly, these effects are amplified in periods of high vulnerabilities and attenuated when EMEs follow a prudent monetary policy stance. Our findings help explain the greater resilience of many EMEs to the Fed’s post-COVID-19 tightening cycle, and highlight the benefits of the broad improvements of monetary policy frameworks in these countries. JEL Classification: F42, E58, E52, C32 |
| Keywords: | emerging markets, monetary policy, spillovers |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242973 |
| By: | Philipp Engler; Gianluigi Ferrucci; Pawel Zabczyk; Tianxiao Zheng |
| Abstract: | We provide new evidence on the spillover effects of ECB monetary policy shocks to emerging European economies, using a combination of empirical methods and model-based simulations and focusing on spillovers from interest rate and balance sheet policies implemented by the ECB. We consider an event study set around the ECB policy announcement in June 2022 and also use local projections to estimate regional spillovers in a panel of 16 Emerging European countries spanning 1999 to 2022. Identifying ECB monetary policy shocks as the unexplained component of changes in the three-month Euribor futures rate, we find that ECB monetary policy tightening induces more than one-for-one changes in government bond yields in Emerging Europe, as well as sizable increases in sovereign spreads, domestic currency depreciations, and significantly lower output. Model simulations using a two-country DSGE calibrated to the euro area and its Eastern European neighbors reveal that a conventional tightening, achieved through interest rate increases, provides a more favorable inflation-output trade-off compared to balance sheet tightenings. The extent of spillovers from quantitative tightening depends on the speed of balance sheet reduction, and it is larger under a fixed exchange rate regime. |
| Keywords: | Monetary Policy; Quantitative Easing; International Spillovers |
| Date: | 2024–08–09 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/170 |
| By: | Brignone, Davide; Gambetti, Luca; Ricci, Martino |
| Abstract: | In this paper, we investigate the presence of non-linearities in the transmission of geopolitical risk (GPR) shocks. Our methodology involves incorporating a non-linear function of the identified shock into a VARX model and examining its impulse response functions and historical decomposition. We find that the primary transmission channel of such shocks is associated with heightened uncertainty, which significantly escalates only with substantially large GPR shocks (i.e., above 4 standard deviations). This increase in uncertainty prompts precautionary saving behaviors, exerting a strong impact on consumption and reducing activity. The response of inflation is more subdued, reflecting both diminished demand and heightened uncertainty, which influence prices in opposing directions. JEL Classification: C30, D80, E32, F44, H56 |
| Keywords: | economic activity, geopolitical risk, inflation, uncertainty, vector autoregressions |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20242972 |
| By: | Feld, Lars P.; Hassib, Joshua |
| Abstract: | Cohesion policy in the European Union (EU) has been widely accepted as a tool to advance the catch-up process, i.e., helping member countries with lower GDP per capita to grow faster economically in order to arrive at similarly high-income levels as member countries with higher GDP per capita. However, empirical studies provide contradicting evidence as to the success of structural funds in this regard. From a political economics perspective, EU structural funds and their instruments of cohesion policy, but also EU agricultural policy, are interpreted as providing for a compensation for poorer member countries' agreement on additional steps of European integration. In recent times, climate policy has entered the cohesion strategy of the EU as higher energy costs due to carbon pricing may require programs for transformation of the existing carbon intensive capital stock to a carbon-neutral capital stock. Structural funds should thus help countries in the transformation process to carbon neutrality such that they do not fall behind. An example is Next Generation EU (NGEU) that is aiming at member countries' transition to carbon neutrality. In this paper, the goals of EU cohesion policy are contrasted with the necessities of climate policy in order to fight climate change. Potential conflicts between the goals of cohesion policy and climate policy are highlighted. |
| Keywords: | Cohesion policy, Climate policy, Common market, Currency union, Multi-level governance, European Union |
| JEL: | F42 F55 Q58 R58 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:zewdip:300672 |
| By: | Ignacio Presno; Andrea Prestipino |
| Abstract: | The 2022 inflation surge has renewed interest in the drivers of inflation, with special attention on the role of oil and other commodity prices given the large increase in these prices post-pandemic. In this note, we use a DSGE model of the global economy to quantify the impact on U.S. inflation and output of the oil shocks that drove oil prices up by about $45 per barrel in the first half of 2022, around Russia's invasion of Ukraine. |
| Date: | 2024–08–02 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgfn:2024-08-02-3 |
| By: | Hoffmann, Clemens; Kastens, Lina; vPortugal-Perez, Alberto; von Cramon-Taubadel, Stephan |
| Abstract: | We look for evidence that countries increasingly insulate their domestic markets for staple grains from global markets when international prices increase. Previous studies have demonstrated that the transmission of international to domestic prices for these products is less than perfect, which reduces the ability of the global trading system to buffer shocks. However, past studies generally assume that relationships between international and domestic prices are constant, and hence that a country’s degree of insulation does not vary over time. To relax this assumption, we use a smooth-transition model, a modified version of the error correction model (ECM). We estimate elasticities of transmission from international to domestic wholesale and retail prices for a comprehensive set of countries for wheat, yellow and white maize, and rice. We find that price transmission from international to domestic prices weakens in many countries and on average when international prices peak, in other words that the insulation of domestic from international prices increases during high-price episodes (such as in 2007/08 and 2022). We also find that this increased insulation cannot be attributed exclusively to changes in border measures such as export restrictions or import tariffs. This suggests that countries are also using measures such as price controls or the release of stocks to insulate their domestic markets for staple grains. |
| Keywords: | Demand and Price Analysis, International Relations/Trade |
| Date: | 2024–08–07 |
| URL: | https://d.repec.org/n?u=RePEc:ags:cfcp15:344313 |
| By: | Vania Stavrakeva; Jenny Tang |
| Abstract: | In this paper, we study how the volatility of both realized and expected macroeconomic variables relates to the variation in exchange rate volatility through the prism of the Great Moderation hypothesis. We find significant heterogeneity in exchange rate trend volatility across currency pairs despite decreases in the volatility of expected future interest rate differentials and of realized yields themselves. We argue that time variation in the relationship between macroeconomic variables and exchange rates has prevented the Great Moderation in realized yield volatility from translating to a decrease in exchange rate volatility. Considering a Campbell‐Shiller‐type decomposition of exchange rate changes into forward‐looking components linked to inflation, policy rate, and currency risk premia expectations, we find that the Great Moderation in volatility of expected yield differentials cannot explain the patterns in exchange rate volatility we observe. The main drivers of these patterns were trends in the volatility of the currency risk premium component and in the covariance between the components capturing the strength of the Fama puzzle and the expected responsiveness of monetary policy to inflation. |
| Keywords: | exchange rates; international finance; volatility trends; risk premia; Fama puzzle |
| JEL: | E44 F31 G15 |
| Date: | 2024–02–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:98625 |
| By: | Mr. Ales Bulir; Mr. Jan Vlcek |
| Abstract: | Was the recent decline in real interest rates driven by a diminishing natural real interest rate, or have we observed a long sequence of shocks that have pushed market rates below the equilibrium level? In this paper we show on a sample of 12 open economies that once we account for equilibrium real exchange rate appreciation/depreciation, the natural real interest rate in the 2000s and 2010s is no longer found to be declining to near or below zero. The explicit inclusion of equilibrium real exchange rate appreciation in the identification of the natural rate is the main deviation from the Laubach-Williams approach. On top of that, we use a full-blown semi-structural model with a monetary policy rule and expectations. Bayesian estimation is used to obtain parameter values for individual countries. |
| Keywords: | r-star; zero lower bound; equilibrium real appreciation; Penn effect |
| Date: | 2024–07–26 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/161 |
| By: | Diego Solórzano; Lenin Arango-Castillo |
| Abstract: | Using daily retail prices gathered through web scraping in Mexico, we analyze if price changes can be characterized by time-dependent features, like the duration of the price spell, and/or by variables associated with the state of the economy. Through the lens of a duration model, we find evidence of both time- and state-dependency behavior. Favoring time-dependency, on the one hand, estimates indicate that price spells exhibit greater risk of ending every seven days relative to other days in between. Advocating for state-dependency, the probability of price changes seems to be affected by variations in the USD/MXN exchange rate, variations in real point of sales expenditures and the COVID-19 pandemic. Finally, leveraging data gathered via direct visits to brick-and-mortar stores, we also find time-dependency and state-dependency in the duration of price spells. |
| Keywords: | Web scraped retail prices;Duration models;Nominal rigidities;COVID-19 |
| JEL: | E31 C41 L16 C55 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bdm:wpaper:2024-10 |