|
on Open Economy Macroeconomics |
| By: | Bryan Hardy; Felipe Saffie; Ina Simonovska |
| Abstract: | Large firms borrow in foreign currency and are net providers of trade credit to firms in their supply chains. We model the transmission of exchange rate risk via firm balance sheets along the supply chain. Trade credit loosens borrowing constraints and allows for higher production. Furthermore, firms are more likely to pass-through exchange rate shocks to their balance sheets onto their partners the more they are financially constrained. We validate these predictions using a quarterly firm panel for 19 emerging markets. Trade credit constitutes an important transmission mechanism of exchange rate shocks, but firms tend to protect their trading partners. |
| Keywords: | trade credit, financial constraints, supply chains, exchange rate volatility, imperfect pass through |
| JEL: | E32 G21 G32 F31 F34 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1216 |
| By: | Dalgic, Husnu; Ozhan, Galip Kemal |
| JEL: | F31 F32 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302436 |
| By: | Tarek A. Hassan; Thomas M. Mertens; Jingye Wang |
| Abstract: | Standard asset pricing models reconcile high equity premia with smooth risk-free rates by inducing an inverse functional relationship between the mean and the variance of the stochastic discount factor. This highly successful resolution to closed-economy asset pricing puzzles is fundamentally problematic when applied to open economies: It requires that differences in currency returns arise almost exclusively from predictable appreciations, not from interest rate differentials. In the data, by contrast, exchange rates are largely unpredictable, and currency returns arise from persistent interest rate differentials. We show currency risk premia arising in canonical long-run risk and habit preferences cannot match this fact. We argue this tension between canonical asset pricing and international macroeconomic models is a key reason researchers have struggled to reconcile the observed behavior of exchange rates, interest rates, and capital flows across countries. The lack of such a unifying model is a major impediment to understanding the effect of risk premia on international markets. |
| Keywords: | currency premium; asset pricing; macroeconomic models; exchange rates; interest rates; international capital flows |
| Date: | 2024–10–18 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedfwp:99017 |
| By: | Pellegrino, Bruno; Spolaore, Enrico; Wacziarg, Romain |
| Abstract: | Observed international investment positions and cross-country heterogeneity in rates of return to capital are hard to reconcile with frictionless capital markets. In this paper, we develop a theory of international capital allocation: a multi-country dynamic spatial general equilibrium model in which the entire network of cross-border investment is endogenously determined. Our model features cross-country heterogeneity in fundamental risk, a demand system for international assets, and frictions that cause segmentation in international capital markets. We measure frictions affecting international investment and apply our model to data from nearly 100 countries, using a new dataset of international capital taxes and cultural, geographic and linguistic distances between countries (geopoliticaldistance.org). Our model performs well in reproducing the composition of international portfolios, the cross-section of home bias and rates of return to capital, and other key features of international capital markets. Finally, we carry out counterfactual exercises: we show that barriers to international investment reduce world output by almost 7% and account for nearly half of the observed cross-country differences in capital stock per employee. |
| Keywords: | Capital Allocation, Cultural Distance, Geography, Information Frictions, International Finance, International Investment, Misallocation, Open Economy, Rational Inattention |
| JEL: | E22 E44 F2 F3 F4 G15 O4 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cbscwp:303525 |
| By: | Tomas Sestorad (Institute of Economic Studies of the Faculty of Social Sciences, Charles University & The Czech National Bank, Monetary Department, Prague, Czech Republic); Natalie Dvorakova (Institute of Economic Studies of the Faculty of Social Sciences, Charles University; Prague, Czech Republic) |
| Abstract: | This paper examines the drivers of the post-pandemic surge in inflation in four small open economies: Czechia, Hungary, Poland, and Slovakia. For this purpose, a Bayesian structural vector autoregressive model with sign-zero restrictions and block exogeneity is employed. The results show that both foreign demand and foreign supply shocks have contributed significantly to inflation in the post-2020 period across countries, alongside notable contributions from domestic factors explaining differences among economies. Specifically, supply-side shocks are identified as the primary domestic factor across all countries, whereas domestic demand shocks were much less influential. Exchange rate shocks were pronounced in Hungary only, while monetary policy shocks have had a minimal impact on inflation since 2022 in all the countries considered. Additionally, we provide decompositions of core inflation, highlighting the predominance of domestic factors. |
| Keywords: | Bayesian VAR, extraordinary events, inflation, sign-zero restrictions, small open economies |
| JEL: | C32 E31 E32 E52 F41 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:fau:wpaper:wp2024_36 |
| By: | Rodolfo G. Campos (BANCO DE ESPAÑA); Ana-Simona Manu (EUROPEAN CENTRAL BANK); Luis Molina (BANCO DE ESPAÑA); Marta Suárez-Varela (BANCO DE ESPAÑA) |
| Abstract: | This paper analyzes the financial spillovers of shocks originating in China to emerging markets. Using a high-frequency identification strategy based on sign and narrative restrictions, we find that equity markets react strongly and persistently to Chinese macroeconomic shocks, while monetary policy shocks have limited or no spillovers. The impact is particularly strong in Latin American equity markets, with the likely channel being the effect of shocks in China on international commodity prices. These effects extend to various financial variables, such as sovereign and corporate spreads and exchange rates, suggesting that macroeconomic shocks in China may have implications for economic cycles and financial stability in emerging markets. |
| Keywords: | China, emerging markets, financial spillovers |
| JEL: | F31 F37 F62 F65 G15 N26 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:bde:wpaper:2435 |
| By: | Gabriel Chodorow-Reich (Harvard and NBER); Matthew Smith (US Treasury Department); Owen Zidar (Princeton and NBER); Eric Zwick (Chicago Booth and NBER) |
| 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: | E23 F21 F23 H00 H25 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:pri:cepsud:328 |