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Working Paper
Why are business cycles alike across exchange-rate regimes?
Since the adoption of flexible exchange rates in the early 1970s, real exchange rates have been much more volatile than they were under Bretton Woods. However, the literature showed that the volatilities of most other macroeconomic variables have not been affected by the change in exchange-rate regime. This poses a puzzle for standard international business cycle models. In this paper, the authors study this puzzle by developing a two-country, two-sector model with nominal rigidities featuring deviations from the law of one price because a fraction of firms set prices in buyers' currencies. ...
Working Paper
Exchange Rate Misalignment and External Imbalances: What is the Optimal Monetary Policy Response?
How should monetary policy respond to capital inflows that appreciate the currency, widen the current account deficit and cause domestic overheating? Using the workhorse open-macro monetary model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, solve for the optimal targeting rules under cooperation and characterize the constrained-optimal allocation. The answer is sharp: the optimal monetary stance is contractionary if the exchange rate pass-through (ERPT) on import prices is incomplete, expansionary if ERPT is complete–implying ...
Working Paper
Productivity and the dollar
This paper investigates the role of shocks to U.S. productivity and demand in driving the real value of the dollar, and the dynamics of the U.S. trade balance. Using sign restrictions based on robust predictions by standard theory, we identify shocks that increase domestic labor productivity and output in manufacturing (our measure of U.S. tradables), relative to an aggregate of other industrial countries including the rest of the G7, while driving down (up in the case of demand) the relative price of tradables (in accord to Harrod-Balassa-Samuelson effects). Consistent with previous results ...
Working Paper
The international dimension of productivity and demand shocks in the U.S. economy
Identifying productivity and real demand shocks in the US with sign restrictions based on standard theory, we provide evidence on real and financial channels of their international propagation. Productivity gains in US manufacturing have substantial macroeconomic effects, raising US consumption, investment and the terms of trade, relative to the rest of the world, while lowering US net exports. Significant international financial adjustment occurs via a rise in the global value of the US stock market, portfolio shifts in US foreign assets and liabilities, and especially real dollar ...
Working Paper
Does a Big Bazooka Matter? Central Bank Balance-Sheet Policies and Exchange Rates
We estimate the effects of quantitative easing (QE) measures by the ECB and the Federal Reserve on the US dollar-euro exchange rate at frequencies and horizons relevant for policymakers. To do so, we derive a theoretically-consistent local projection regression equation from the standard asset pricing formulation of exchange rate determination. We then proxy unobserved QE shocks by future changes in the relative size of central banks? balance sheets, which we instrument with QE announcements in two-stage least squares regressions in order to account for their endogeneity. We find that QE ...
Working Paper
Optimal monetary policy in open economies
Research in the international dimensions of optimal monetary policy has long been inspired by a set of fascinating questions, shaping the policy debate in at least two eras of progressive cross-border integration of goods, factors, and assets markets in the years after World War I and from Bretton Woods to today. Namely, should monetary policy respond to international variables such as exchange rates, global business cycle conditions, or global imbalances beyond their in uence on the domestic output gap and inflation? Do exchange rate movements have desirable stabilization and allocative ...
Working Paper
Macroeconomics of international price discrimination
This paper builds a baseline two-country model of real and monetary transmission under optimal international price discrimination. Distributing traded goods to consumers requires nontradables; because of distributive trade, the price elasticity of export demand depends on the exchange rate. Profit-maximizing monopolistic firms drive a wedge between wholesale and retail prices across countries. This entails possibly large deviations from the law of one price and incomplete pass-through on import prices. Yet, consistent with expenditure-switching effects, a nominal depreciation generally ...
Working Paper
On exchange rate regimes, exchange rate fluctuations, and fundamentals
The authors develop a two-country, two-sector general equilibrium business cycle model with nominal rigidities featuring deviations from the law of one price. The paper shows that a model with these features can quantitatively account for the empirical fact that of the statistical properties of most macroeconomic variables, only the volatility of the real and nominal exchange rates has dramatically changed after the fall of the Bretton Woods system. In particular, the authors replicate some explicit nonstructural tests proposed in the literature with simulated data from their artificial ...
Working Paper
International risk-sharing and the transmission of productivity shocks
A central puzzle in international finance is that real exchange rates are volatile and, in stark contradiction to efficient risk-sharing, negatively correlated with cross-country consumption ratios. This paper shows that a standard international business cycle model with incomplete asset markets augmented with distribution services can account quantitatively for these properties of real exchange rates. Distribution services, intensive in local inputs, drive a wedge between producer and consumer prices, thus lowering the impact of terms-of-trade changes on optimal agents' decisions. This ...