The role of foreign and domestic factors in the evolution of the Brazilian EMBI spread and debt dynamics.

This paper examines the relative importance of global and domestic factors as a source of macroeconomic fluctuations in Brazil from 1995 to 2004. US and Brazilian credit spreads are encompassed in a near-VAR model, including the main debt-related domestic variables. The US corporate bond spread is used as a measure of international risk aversion. The relative importance of global factors to the volatility of Brazilian domestic series is singled out by means of a partial identification strategy, whereby foreign variables are treated as block exogenous. The estimates reveal that foreign investors’ appetite for risk is an important determinant of the volatility of the macroeconomic Brazilian series and affects the monetary policy transmission channel, as recently suggested by Olivier Blanchard.External factors, Credit spreads, External debt, Fiscal dominance.

The Future of the Sino-American Co-Dependency

The crisis of 2008 has shown the unsustainability of the global imbalances centered on the USChina symbiotic relationship that characterized the previous decade. This has revived the so-called growth-rebalancing debate. In particular, the new emerging consensus calls for a re-orientation of the US economy away from consumption and toward exports, and for policy shifts that can help China to reduce its dependence on external demand and inefficiently high rates of capital accumulation. In this essay, we discuss the economic and political feasibility of the proposed patterns of re-adjustment by focusing on the short- and long-term trade-offs faced by the policymakers. We argue that the rebalancing will be gradual and partial because of the costs associated with a radical shift in the growth strategies of both countries. We also believe that this scenario will be consistent with a world economy expanding at lower rates than in the past decade.Growth strategies; Global imbalances; Sino-American co-dependency; Growth Rebalancing

Trade-imbalances networks and exchange rate adjustments: The paradox of a new Plaza

Global imbalances are not new as much as the effort to address them. In the mid 1980s the phenomenon led the most industrialised countries to orchestrate a devaluation of the US dollar so as to reduce the US trade deficit. Some economists have called for a similar "New Plaza" agreement to tackle the present situation. The feasibility of such a plan has not been thoroughly assessed so far. In this paper we apply complex network analysis to characterise the properties of the web of international bilateral trade imbalances. We study its evolution over time and the position of key players within it. We find that the complexity of the network has increased in several dimensions, and this casts doubts on the usefulness of a coordinated solution among industrialised countries only. In addition, we propose new effective exchange rate measures based on bilateral trade imbalances, and study their dynamics in the 1980s and in the 2000s. By distinguishing exchange rate movements against debtor and creditor countries we show that, so far, they have not been consistent with the simultaneous reduction in all trade bilateral imbalances. A paradox therefore emerges: the growing difficulty to orchestrate a plan involving a large number of partners is matched by the inability of so far uncoordinated exchange rate adjustments to close global imbalances.Plaza agreement, exchange rates, global imbalances, network analysis

Household’s Preferences and Monetary Policy Inertia

The estimation of monetary policy rules suggests that the interest rates set by central banks move with a certain inertia. Although a number of hypotheses have been suggested to explain this phenomenon, its ultimate origin is unclear, thus delineating this issue as a modern "puzzle" in monetary economics. We show that household's preferences can play an important role in determining optimal interest rate inertia. Importantly, this can occur even when the central bank has negligible preferences for smoothing the interest rate.Optimal monetary policy; interest rate smoothing; household's preferences

Seeking Mutual Understanding. A Discourse Theoretical Analysis of the WTO Dispute Settlement System.

The Dispute Settlement System (DSS) of the World Trade Organisation (WTO) is a mechanism to settle international trade controversies by means of adversarial procedures. In this paper we aim to address the following question: why is the DSS adversarial in kind and articulated through such sophisticated procedures? We shall combine studies in the fields of politics, law and economics through philosophical analysis to look for a systemic answer to this question in the inherent qualities of the procedures through which the DSS is articulated. Specifically, we shall resort to Jürgen Habermas’s discourse theory, as a hermeneutic device to disentangle the different kinds of “action orientations” DS procedures may have (compromise, consensus and understanding). We shall identify the reasons of the specific characterisation given to the DSS in the purposeful connections between its procedural features, the general aims pursued by the WTO and the disputes emerging within it.WTO, dispute settlement, discourse theory, trade controversies, mutual understanding

The evolution of the Sino-American Co-dependency: modelling a regime switch in a growth setting

This work presents a two-country two-stage growth model capturing the special relationship that has emerged in recent years between the US and China (the so-called BWII regime described by Dooley et al., 2003). The Chinese authorities maintain a competitive (i.e., undervalued) exchange rate in order to sustain the high-productive exporting sectors, foster growth and absorb the large amount of rural workers into the industrial sector. Thus, China runs current account surpluses against the US and accumulates US assets in the form of foreign reserves. The US policy-makers are supposedly more concerned with keeping high the consumption possibilities of the population and exploit the Chinese willingness to finance the US external deficits. We consider three scenarios for the future state of the Sino-American co-dependency. All the scenarios share phase 1, resembling what has actually occurred in recent years, but differ in accordance with what fiscal policy the Chinese authorities adopt, and whether and when China fully liberalizes its capital account and floats the currency (thus starting phase 2). Scenario A is quite optimistic because the Chinese fiscal policy is effective in partially substituting the mercantilist policy undertaken in phase 1 as a fundamental source of demand for tradables and as an engine of growth. Scenario B emphasizes the risks for China of abandoning too early the peg of the exchange rate. Finally, Scenario C shows that a Chinese continuation of the current export-led growth strategy can be economically feasible and lead to the mobilization of the Chinese manpower into the advanced sectors of the economy.Bretton Woods II, growth, global imbalances, regime switch

The China-US co-dependency and the elusive costs of growth rebalancing

The global crisis burst in 2007 has revived the growth-rebalancing debate and backed the position of those advocating a fast reduction of the global imbalances centered on the symbiotic US-China relationship. In this work, we develop a two-country two-stage growth model reproducing the main features of the Sino-American co-dependency and we analyze alternative (medium- and long-term) scenarios for its evolution. We show that altering the Chinese exchange rate policy and down-sizing the US external deficits with a view to moving the production of tradables toward the US may imply some relevant costs. If exchange rate and fiscal policies are not properly tuned in both countries, the rebalancing process may lead to the emergence of structural unemployment in the US (due to the greater labor intensity of growth recorded in the nontradable sector than in the tradable sector) and to a slow-down in the process whereby the Chinese labor force is gradually absorbed in the modern sectors of the economyGrowth-rebalancing, global imbalances, structural unemployment

Chinese reserves accumulation and US monetary policy: Will China go on buying US financial assets?

It has been argued that China may stop financing the US external deficit, appreciate the currency, increase consumption and move its economy away from tradables and towards nontradables. Our two-country model shows that paradoxically this policy option is unattractive if the US authorities keep monetary policy sufficiently loose, thus reducing the real value of the US liabilities held by China. As long as the American and Chinese authorities pursue complementary objectives, the current China-US arrangement continues. In addition, an untimely appreciation of China’s real exchange rate may have negative consequences on employment in the US and in China.China-US co-dependency; global imbalances; reserve accumulation; external debt

Taking Keller seriously: trade and distance in international R&D spillovers

In a much cited paper, Wolfgang Keller (Are international R&D spillovers trade-related? Analyzing spillovers among randomly matched trade partners, European Economic Review, 48, 1469-1481, 1998) claims that international R&D spillovers are global and trade-unrelated. In following works, Keller revisits his position and maintains that spillovers are localized because the tacit nature of knowledge favors the direct interaction among agents. Whether the international R&D spillovers are global and trade-related still remains a debated issue in the empirical literature. By adopting two empirical specifications that nest Keller’s models, we i) reject the hypothesis that international R&D spillovers are global and ii) show that these latter depend on both geographical distance and international trade.International R&D spillovers, International technology diffusion,Localized knowledge spillovers, Total Factor Productivity

International R&D spillovers, absorptive capacity and relative backwardness: a panel smooth transition regression model

We investigate how the country’s absorptive capacity and relative backwardness affect the impact of international R&D spillovers on domestic Total Factor Productivity (TFP). To account for nonlinearities, we adopt a Panel Smooth Transition Regression (PSTR) approach, where the country’s elasticity of TFP to foreign R&D stock is allowed to change smoothly across various identified extreme values, and this change is related to observable transition variables: human capital (capturing the country’s absorptive capacity) and relative backwardness. The results suggest that absorptive capacity is positively associated with international R&D spillovers. In addition, and in contrast with previous results, relative backwardness has a negative and significant impact on them.Absorptive capacity, International R&D spillovers, Nonlinear panel, Smooth Transition Regression, Total Factor Productivity