513 research outputs found
PRICE LEVEL DETERMINATION IN A HETEROGENEOUS MONETARY UNION
A monetary union requires that a common central bank be shared among multiple nations, where governments and households may well be heterogeneous across national borders. A dynamic stochastic general equilibrium model of a two-country monetary union provides a natural setting in which to examine the implications of agent heterogeneity in government fiscal policies can be accommodated within a monetary union. Second, household heterogeneity gives monetary policy a reallocative dimension which affects price-level determination. For example, dissimilar preferences for holding money tend to enhance the potency of a monetary contraction to lower inflation. Fiscal federalism may reverse this effect.
Asset price booms and current account deficits
Before the global financial crisis of 2007–2009, the United States and several other countries posted large current account deficits. Many of these countries also experienced asset price booms. Evidence suggests the two developments were linked. Rising asset values in the United States permitted households to borrow more easily to boost consumption, while the net sale of debt securities abroad financed current account deficits. The fall in some asset prices since the crisis can make it easier to reduce current account imbalances.Balance of payments ; Asset pricing
How Well Can the New Open Economy Macroeconomics Explain the Exchange Rate and Current Account?
This paper advances the new open economy macroeconomic (NOEM) literature in an empirical direction, estimating and testing a two-country model. Fit to U.S and G-7 data, the model performs moderately well for the exchange rate and current account. Results offer guidance for future theoretical work. Parameter estimates lend support to some common assumptions in the theoretical literature, such as local currency pricing and risk sharing. Estimates are found for key parameters commonly calibrated in the theoretical literature, such as the elasticity of substitution between home and foreign composite goods, and the response of a country risk premium to the net foreign asset position. Results also indicate that deviations from interest rate parity are not closely related to monetary policy shocks, as recently hypothesized. Further, results suggest that inserting explicit interest rate parity shocks into a NOEM model may be more helpful in explaining movements in the current account than the exchange rate.
Towards a theory of firm entry and stabilization policy
This paper studies the role of stabilization policy in a model where firm entry responds to shocks and uncertainty. We evaluate stabilization policy in the context of a simple analytically solvable sticky price model, where firms have to prepay a fixed cost of entry. The presence of endogenous entry can alter the dynamic response to shocks, leading to greater persistence in the effects of monetary and real shocks. Entry affects welfare, depending on the love of variety in consumption and investment, as well as its implications for market competitiveness. In this context, monetary policy has an additional role in regulating the optimal number of entrants, as well as the optimal level of production at each firm. We find that the same monetary policy rule optimal for regulating the scale of production in familiar sticky price models without entry, also generates the amount of (endogenous) entry corresponding to a flex-price equilibrium.productivity, monetary policy, market dynamics
Understanding International Portfolio Diversification and Turnover Rates
This paper argues that fixed trading costs in international asset markets help explain equity home bias. This contrasts with explanations prevalent in international macroeconomics, which tend to be based on trading frictions instead in international goods markets, such as nontraded goods or transportation costs. While the stylized fact of high trading turnover in foreign holdings has been interpreted as evidence against international asset trading costs, we show that this argument only applies to costs that are proportional to trade, and not to fixed costs of entering the foreign market. After documenting that the home bias and turnover stylized facts remain valid in recent data, the paper constructs a very simple portfolio allocation model with various configurations of trading costs and with heterogeneous types of traders. A configuration with per unit costs heterogeneous among agents and a homogeneous fixed cost is found to replicate the pair of stylized facts. Intuitively, the lower trading costs that characterize larger and more efficient traders have two implications: firstly, these traders find it more profitable to enter foreign markets; secondly, their lower trading costs encourage a higher rate of trading turnover. Since holdings of international equities are disproportionately dominated by this class of larger and more efficient traders, average trading turnover is higher among international holdings.
Does Exchange Rate Risk Matter for Welfare?
second order solution, exchange rates
staggered price setting and endogenous persistence
This paper generates persistent effects of a monetary disturbance in the context of staggered price-setters. Previous research has been restricted by the CES functional form to price-setting rules that are constant markups over marginal costs. The present paper considers a translog form for preferences and an input-output structure for production in the context of a dynamic general equilibrium model of monopolistically competitive staggered price-setters. We derive a price-setting rule that is a function of milrginal cost and also competitors'' prices. This rule better captures the interaction of price-setters envisioned in Tajlor (1980) and Blanchard (1983) in their early work on staggered contracts. The model is able to generate reasonable persistence, and also confirms the conjecture of Taylor and Blanchard that increasing the number of contracting groups increases the degree of persistence.
Endogenous Tradability andMacroeconomic Implications
This paper advocates a new way of thinking about goods trade in an open economy macro
model. It develops a simple method for analyzing trade costs that are heterogeneous among a
continuum of goods, and it explores how these costs determine the endogenous decision by a
seller of whether to trade a good internationally. This way of thinking offers new insights
into international market integration and the behavior of international relative prices. As one
example, it provides a natural explanation for a prominent and controversial puzzle in
international macroeconomics regarding the surprisingly low degree of volatility in the
relative price of nontraded goods. Because tradedness is an endogenous decision, the good on
the margin forms a link holding together the prices of traded and nontraded goods. The paper
goes on to find that endogenizing trade has implications for other basic macroeconomic
issues.endogenizing trade, open economy macroeconomics
Tradability, Productivity, and Understanding International Economic Integration
This paper develops a two-country macro model with endogenous tradability to study features of
international economic integration. Recent episodes of integration in Europe and North America
suggest some surprising observations: while quantities of trade have increased significantly,
especially along the extensive margin of goods previously not traded, price dispersion has not
decreased and may even have increased. These observations challenge the usual understanding of
integration in the literature. We propose a way of reconciling these price and quantity
observations in a macroeconomic model where the decision of heterogeneous firms to trade
internationally is endogenous. Trade is shaped both by the nature of heterogeneity -- trade costs
versus productivity -- and by the nature of trade policies -- cuts in fixed costs versus cuts in per
unit costs like tariffs. For example, in contrast to tariff cuts, trade policies that work mainly by
lowering various fixed costs of trade may have large effects on entry decisions at the extensive
margin without having direct effects on price-setting decisions. Whether this entry raises or
lowers price dispersion depends on the type of heterogeneity that distinguishes the new entrants
from incumbent traders.tariff cuts, trade policies,
Measuring Monetary Policy Interdependence
This paper measures the degree of monetary policy interdependence between major industrialized
countries from a new perspective. The analysis uses a special data set on central bank issued policy
rate targets for 14 OECD countries. Methodologically, our approach is novel in that we separately
examine monetary interdependence due to (1) the coincidence in time of when policy actions are
executed from (2) the nature and magnitude of the policy adjustments made. The first of these
elements requires that the timing of events be modeled with a dynamic discrete duration design. The
discrete nature of the policy rate adjustment process that characterizes the second element is captured
with an ordered response model. The results indicate there is significant policy interdependence
among these 14 countries during the 1980-1998 sample period. This is especially true for a number
of European countries which appeared to respond to German policy during our sample period. A
number of other countries appeared to respond to U.S. policy, though this number is smaller than
that suggested in preceding studies. Moreover, the policy harmonization we find appears to work
through channels other than formal coordination agreements.policy, interdependance
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