88 research outputs found
Monetary Policy and Unemployment in Open Economies
After an expansionary monetary policy shock employment increases and unemployment falls. In standard New Keynesian models the fall in aggregate unemployment does not affect employed workers at all. However, Luchinger, Meier and Stutzer (2010) found that the risk of unemployment negatively affects utility of employed workers: An increases in aggregate unemployment decreases workers' subjective well-being, which can be explained by an increased risk of becoming unemployed. I take account of this effect in an otherwise standard New Keynesian open economy model with unemployment as in Gali (2010) and find two important results with respect to expansionary monetary policy shocks: First, the usual wealth effect in New Keynesian models of a declining labor force, which is at odds with the data as high-lighted by Christiano, Trabandt and Walentin (2010), is shut down. Second, the welfare effects of such shocks improve considerably, modifying the standard results of the open economy literature that set off with Obstfeld and Rogoff's (1995) redux model.Open economy macroeconomics, monetary policy, unemployment
Global rebalancing in a three-country model
This paper extends the model of Engler et al. (2007) on the adjustment of the US current account to a three-country world economy. This allows an analysis of the differential impact of a reversal of the US current account on Europe and Asia. In particular, the outcomes under different exchange rate policies are analysed. The main finding is that large factor re-allocations from non-tradables to tradables will be necessary in the US. The direction of factor re-allocation in Asia depends on whether the Bretton-Woods-II regime of unilaterally fixed or manipulated exchange rates in Asia is continued. If this is the case, the tradables sector and the current account surplus will continue to grow even when the US deficit closes. The flip side of this result is that Europe will face a huge real appreciation and an enormous current account deficit. With floating exchange rates worldwide, the impact on Europe will be limited while Asia´s tradables sector will shrink. --Global imbalances,US current account deficit,dollar adjustment,sectoral adjustment
Opposition to capital market opening
We employ a neoclassical growth model to assess the impact of financial liberalization in a developing country on capital owners` and workers` consumption and welfare. We find in a baseline calibration for an average non-OECD country that capitalists suffer a 42 percent reduction in permanent consumption because capital inflows reduce their return to capital while workers gain 8 percent of permanent consumption because capital inflows increase wages. These huge gross impacts contrast with the small positive net effect found in a neoclassical represent agent model by Gourinchas and Jeanne (2006). We further show that the result for capitalists is insensitive to enhanced productivity catch-up processes induced by capital inflows. Our findings can help explain why poorer countries tend to be less financially open as capitalists` losses are largest for countries with the lowest capital stocks, inducing strong opposition to capital market opening. --Capital flows,international financial integration,growth,neoclassical model,heterogenous agents
Monetary policy and unemployment in open economies
After an expansionary monetary policy shock employment increases and
unemployment falls. In standard New Keynesian models the fall in aggregate
unemployment does not affect employed workers at all. However, Lüchinger,
Meier and Stutzer (2010) found that the risk of unemployment negatively
affects utility of employed workers: An increases in aggregate unemployment
decreases workers' subjective well-being, which can be explained by an
increased risk of becoming unemployed. I take account of this effect in an
otherwise standard New Keynesian open economy model with unemployment as in
Galí (2010) and nd two important results with respect to expansionary
monetary policy shocks: First, the usual wealth effect in New Keynesian models
of a declining labor force, which is at odds with the data as highlighted by
Christiano, Trabandt and Walentin (2010), is shut down. Second, the welfare
effects of such shocks improve considerably, modifying the standard results of
the open economy literature that set off with Obstfeld and Rogoff's (1995)
redux model
Global rebalancing in a three-country model
This paper extends the model of Engler et al. (2007) on the adjustment of the
US current account to a three-country world economy. This allows an analysis
of the differential impact of a reversal of the US current account on Europe
and Asia. In particular, the outcomes under different exchange rate policies
are analysed. The main finding is that large factor re-allocations from non-
tradables to tradables will be necessary in the US. The direction of factor
re-allocation in Asia depends on whether the "Bretton-Woods-II" regime of
unilaterally fixed or manipulated exchange rates in Asia is continued. If this
is the case, the tradables sector and the current account surplus will
continue to grow even when the US deficit closes. The flip side of this result
is that Europe will face a huge real appreciation and an enormous current
account deficit. With floating exchange rates worldwide, the impact on Europe
will be limited while Asia´s tradables sector will shrin
External imbalances and the US current account: how supply-side changes affect an exchange rate adjustment
The influential work of Obstfeld and Rogoff argues that a closing-up of the US current account deficit involves a large exchange rate adjustment. However, the Obstfeld-Rogoff model works exclusively via demand-side channels and abstracts from possible supply-side changes. We extend the framework to allow for endogenous supply-side changes and show that this fundamentally alters the mechanism of the adjustment process. Allowing for such an extension attenuates quite significantly the implied exchange rate adjustment. The paper also provides some empirical evidence of variations in the supply-side structure and correlations with the exchange rate and the current account. The policy implications are that measures to foster a supply-side reaction would facilitate the external adjustment by alleviating an exclusive reliance on demand and exchange rate changes, with the latter being potentially destabilising for the global financial system. JEL Classification: E2, F32, F41dollar adjustment, global imbalances, sectoral adjustment, US current account deficit
Opposition to Capital Market opening
We employ a neoclassical growth model to assess the impact of financial
liberalization in a developing country on capital owners` and workers`
consumption and welfare. We find in a baseline calibration for an average non-
OECD country that capitalists suffer a 42 percent reduction in permanent
consumption because capital inflows reduce their return to capital while
workers gain 8 percent of permanent con- sumption because capital inflows
increase wages. These huge gross impacts contrast with the small positive net
effect found in a neoclas- sical represent agent model by Gourinchas and
Jeanne (2006). We further show that the result for capitalists is insensitive
to enhanced productivity catch-up processes induced by capital inflows. Our
find- ings can help explain why poorer countries tend to be less financially
open as capitalists` losses are largest for countries with the lowest capital
stocks, inducing strong opposition to capital market opening
The Macroeconomic Effects of Progressive Taxes and Welfare
We analyze the positive and normative effects of a progressive tax on wages in
a nonlinear New Keynesian DSGE model in the presence of demand and technology
shocks. The non-linearity allows us to disentangle the effects of the
progressive tax on the volatility and the level of macroeconomic variables,
for both intertemporally optimizing (“Ricardian") and non-Ricardian (“rule-of-
thumb") households. We find that the interaction of the two household types is
of crucial importance. When only Ricardian households are considered,
progressive taxes increase welfare (compared to at taxes) in the presence of
technology shocks. Aggregate welfare falls, however, when rule-of-thumb
households are added to the analysis. The progressive tax increases the
welfare of the latter household by lowering its consumption volatility, but
this is overcompensated for by the destabilization of Ricardian household
consumption. Under demand shocks, progressive taxes reduce the welfare of both
household types, with the welfare of rule-of-thumb households falling despite
a decline in their consumption volatility. The reason is a lower average
consumption level which is related to the changed curvature of the marginal
cost function
Sovereign risk, interbank freezes, and aggregate fluctuations
This paper studies the bank-sovereign link in a dynamic stochastic general
equilibrium set-up with strategic default on public debt. Heterogeneous banks
give rise to an interbank market where government bonds are used as
collateral. A default penalty arises from a breakdown of interbank
intermediation that induces a credit crunch. Government borrowing under
limited commitment is costly ex ante as bank funding conditions tighten when
the quality of collateral drops. This lowers the penalty from an interbank
freeze and feeds back into default risk. The arising amplification mechanism
propagates aggregate shocks to the macroeconomy. The model is calibrated using
Spanish data and is capable of reproducing key business cycle statistics
alongside stylized facts during the European sovereign debt crisis
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