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on Open Economy Macroeconomics |
| By: | Michail Litainas (School of Economics, University of Sheffield, Sheffield S1 4DT, UK); Peter McAdam (European Central Bank); Alberto Montagnoli (School of Economics, University of Sheffield, Sheffield S1 4DT, UK); Konstantinos Mouratidis (School of Economics, University of Sheffield, Sheffield S1 4DT, UK) |
| Abstract: | Despite extensive research on fiscal policy effects in recent times, comprehensive studies on the international transmission of structural fiscal shocks remains limited and inconclusive. We address these shortcomings in three key ways. First, we confront the perfect foresight problem associated to anticipated fiscal shocks by incorporating a proxy for fiscal policy news into a detailed multi-country model. This is the first study to use such a proxy to empirically determine the cross-border transmission of US fiscal shocks in such a detailed setting. Second, we use a Bayesian multi-country VAR, which, unlike existing two-country model studies, fully accounts for higher-order spillover effects. Third, with this setup, our empirical results reassess the interpretation of fiscal multipliers from New-Keynesian closed-economy models. Key findings include: i) international spillovers mainly operate through trade channels (expenditure switching and boosting); ii) the transmission mechanism hinges on the recipient country’s underlying ‘growth model; and iii) higher-order spillover effects markedly amplify direct spillover effects; and iv) the exchange rate puzzle is rather an artifact of an omitted variable problem and of the policy regime. |
| Keywords: | Fiscal Foresight, Exchange Rate Puzzle, Openness, Bayesian Multi-Country VAR, Spillovers |
| JEL: | F15 F32 F41 H68 H62 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:shf:wpaper:2024009 |
| By: | Ariel Burstein; Sarah Lein; Jonathan Vogel; Sarah Marit Lein; Jonathan E. Vogel |
| Abstract: | Consumers access foreign goods by purchasing them domestically or shopping abroad. We present new facts on cross-border shopping by Swiss households showing, for example, that prices of identical products are lower in neighboring countries, cross-border shopping shares fall with distance to the border, and price gaps and cross-border shopping shares rose following the 2015 Swiss Franc appreciation. We use a simple model of cross-border shopping to quantify how variation across space in cross-border shopping results in heterogeneous changes in cost-of-living in response to changes in international prices such as the 2015 Swiss Franc Appreciation and the 2020 Covid-19-related closing of the border. |
| Keywords: | cross-border shopping, cost of living, household heterogeneity |
| JEL: | E31 F10 F41 F60 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11373 |
| By: | Guglielmo Maria Caporale; Faek Menla-Ali |
| Abstract: | This paper analyses the short- and long-term effects of geopolitical uncertainty on cross-border portfolio flows between the US and 41 developed and emerging economies over the period January 1992-November 2022. We find that geopolitical uncertainty decreases equity inflows from other countries into the US in both the short- and long-term, with this flight home effect generally peaking after 6 months. We investigate the underlying mechanisms and show that the erosion of net financial worth, the evaporation of liquidity and rising risk premia are the key channels through which geopolitical uncertainty affects these inflows, supporting theoretical capital flow models with portfolio choice that feature information and related frictions. By contrast, the responses of other types of flows to geopolitical uncertainty are generally weak and are only found when accounting for the role of some cross-sectional heterogeneity and its time variation. |
| Keywords: | cross-border portfolio flows, equity and bond inflows and outflows, geopolitical risk, push and pull factors, local projections, risk premia |
| JEL: | F32 F36 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11337 |
| By: | Matías Moretti; Lorenzo Pandolfi; Mr. German Villegas Bauer; Mr. Sergio L. Schmukler; Tomás Williams |
| Abstract: | We present evidence of inelastic demand for risky sovereign bonds and explore its implications for optimal government debt policies. Using monthly changes in the composition of a major international bond index, we identify flow shocks unrelated to fundamentals that shift the available bond supply. From these shocks, we estimate an inverse demand elasticity of -0.30 and show that it increases with countries’ default risk. We formulate a sovereign debt model with endogenous default and inelastic investors, calibrated to our empirical estimates. By penalizing additional borrowing, an inelastic demand acts as a disciplining device that reduces default risk and bond spreads. |
| Keywords: | inelastic financial markets; institutional investors; international capital markets; sovereign debt |
| Date: | 2024–11–01 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/227 |
| By: | Otaviano Canuto |
| Abstract: | Recent initiatives and policy moves by China and other countries to extend the reach of use of the renminbi in the international monetary system, while the U.S. dollar share in global reserves has slightly shrunk in relative terms, have sparked frequent discussions about a hypothetical “de-dollarization” of the global economy. We approach here what that would mean in terms of global currency functions as means of payment and store of value. While we point out a relative decline of the U.S. dollar weight in those functions more recently, we also highlight gravitational factors that tend to uphold its position. Therefore, the “exorbitant privilege” that the U.S. dollar has provided to its issuer is likely to remain. |
| Date: | 2023–04 |
| URL: | https://d.repec.org/n?u=RePEc:ocp:pbecon:pb_21_23 |
| By: | António Afonso; José Alves; Lucas Menescal; Sofia Monteiro |
| Abstract: | We examine the effects of World Uncertainty and Geopolitical Risk on Trade flows for 31 European economies between 1995 and 2023. To do so, we resort to Panel estimation techniques, including OLS and Poisson Pseudo Maximum Likelihood (PPML). Our findings reveal that European nations primarily respond to global uncertainty by concentrating their exports and imports among top trading partners particularly their top 5 highest trading partners. This result is more pronounced when uncertainty is driven by low-income countries. Moreover, there is a stronger relationship between imports and global uncertainty compared to exports. Our study underscores the importance of European economies strategically adapting their export and import approaches in response to these challenges. |
| Keywords: | geopolitical risk, world uncertainty, trade flows, international trade, European economies |
| JEL: | C23 E44 F14 F41 F62 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11401 |
| By: | Giulio Cifarelli; Paolo Paesani |
| Abstract: | The French franc variability of the 1920-1926 time interval is often attributed to irrational speculation. A common view is that French investors, disregarding fundamentals, were prone to export their funds in response to adverse financial/political news, destabilizing in this way the exchange rate. Our analysis, based on a new dataset, qualifies these results. The estimates of a Markov-switching Heterogeneous Agents Model strongly support the hypothesis that informed speculators relied on the relative purchasing power parity paradigm and drove the short run exchange rate dynamics, bandwagon effects being but short lived. In line with previous analyses the impact of additional explanatory variables, real and financial, turns out to be rather limited. |
| Keywords: | Gold Standard, HAM French Franc pricing, Markov Switching |
| JEL: | C32 F31 F33 G15 N24 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:frz:wpaper:wp2024_24.rdf |
| By: | Florian Huber; Karin Klieber; Massimiliano Marcellino; Luca Onorante; Michael Pfarrhofer |
| Abstract: | This paper analyzes nonlinearities in the international transmission of financial shocks originating in the US. To do so, we develop a flexible nonlinear multi-country model. Our framework is capable of producing asymmetries in the responses to financial shocks for shock size and sign, and over time. We show that international reactions to US-based financial shocks are asymmetric along these dimensions. Particularly, we find that adverse shocks trigger stronger declines in output, inflation, and stock markets than benign shocks. Further, we investigate time variation in the estimated dynamic effects and characterize the responsiveness of three major central banks to financial shocks. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.16214 |
| By: | Silvana Tenreyro; Ludovica Ambrosino; Jenny Chan |
| Abstract: | How does trade fragmentation affect inflationary pressures? What is the response of monetary policy needed to sustain inflation at target? To answer these questions, we develop a heterogeneous agent, open-economy model featuring imperfect international risk-sharing. The model captures both the demand and supply side effects of fragmentation. It illustrates how the impact of fragmentation on inflationary pressures and the appropriate policy response depends not only on the direct effect of higher import prices on supply but, crucially, on how aggregate demand adjusts in response to lower real incomes and productivity stemming from fragmentation. |
| Keywords: | monetary policy, trade fragmentation, open economies, inflation, heterogeneity, globalisation |
| JEL: | F12 F15 F41 F62 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1225 |
| By: | Bhavesh Garg (Indian Institute of Technology Ropar, India) |
| Abstract: | This paper employs a two-economy model, which incorporates New Keynesian features, to examine the impact of a coronavirus disease (COVID-19) induced supply shock on economic recovery in large net oil-importing Asian countries. It examines whether and to what extent monetary and fiscal policies are effective in mitigating such supply shock risks. Our calibrations and estimations reveal that a COVID-19 induced supply shock negatively impacted both the global and domestic economies alike and delayed their economic recovery. Specifically, shocks to total factor productivity and world output negatively affected domestic macroeconomic variables such as domestic output, inflation rate, interest rate, and government expenditure, amongst others. We show that monetary and fiscal policies efficiently mitigate the adverse effects arising from the supply shock. |
| Keywords: | COVID-19, supply shock, two-economy model, NK-DSGE, monetary policy, fiscal policy |
| JEL: | C63 D58 E47 E52 E62 |
| Date: | 2023–12–22 |
| URL: | https://d.repec.org/n?u=RePEc:era:wpaper:dp-2023-20 |
| By: | Luca Macedoni; Ariel Weinberger |
| Abstract: | This paper investigates the positive international spillover effects of non-discriminatory product regulations, such as quality standards. We incorporate regulations into a multi-country general equilibrium framework with firm heterogeneity and variable markups. We model regulations as a fixed cost that any firm selling to an economy must pay, consistent with stylized facts that we present. We demonstrate that in the presence of variable markups, the fixed cost generates a positive spillover on the rest of the world as it induces entry of high-quality firms, and it improves the terms of trade of the non-imposing countries. We argue that the benefits of such regulations are not fully realized under non-cooperative policy settings, leading to a call for international cooperation in setting regulations. We estimate our model to quantify the effects of regulations on consumers’ welfare, the extent of the positive externalities across countries, the relative importance of the entry of high-quality firms and of the terms of trade effect of regulations, and the value of cooperation. |
| Keywords: | allocative efficiency, international spillover, quality standards, variable markups, trade policy |
| JEL: | F12 F13 L11 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11287 |
| By: | Andres Blanco; Pablo Ottonello; Tereza Ranošová |
| Abstract: | We empirically characterize episodes of large inflation surges that have been observed worldwide in the last three decades. We document four facts. (1) Inflation surges tend to be persistent, with the duration of disinflation exceeding that of the initial inflation increase. (2) Surges are initially unexpected but followed by a gradual catch-up of average short-term expectations with realized inflation. (3) Long-term inflation expectations tend to exhibit increases that persist throughout disinflation. (4) Policy responses are characterized by hikes in nominal interest rates but no tightening of real rates or fiscal balances. In sum, episodes of large and persistent inflation tend to occur with government responses that depart from the prescriptions of textbook policy rules, and that instead exhibit a "fear of tightening." |
| Keywords: | inflation surges; inflation expectation; fiscal and monetary policy |
| JEL: | E31 E40 F40 |
| Date: | 2024–09–23 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedawp:99038 |