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Report
How valuable is exchange rate flexibility? Optimal monetary policy under sectoral shocks
The paper explores the optimal monetary policy reaction to productivity shocks in an open economy. Whereas earlier studies assume that countries specialize in producing particular goods, I enrich the analysis by allowing for incomplete specialization. I confirm the finding of Obstfeld and Rogoff (2000)--who build on Friedman (1953)--that a flexible exchange rate is highly valuable in delivering the optimal response to country- specific shocks. Its value is, however, much smaller when shocks are sector-specific, because exchange rate fluctuations then lead to misallocations between different ...
Report
Borrowing without debt? Understanding the U.S. international investment position
Sustained large U.S. current account deficits have led some economists and policymakers to worry that future current account adjustment could occur through a sudden and disruptive depreciation of the dollar and a sharp drop in U.S. consumption. Two factors that, to date, have cast doubt on such concerns are the stability of U.S. net external liabilities and the minimal net income payments made by the United States on these liabilities. We show that the stability of the external position reflects sizable capital gains stemming from strong foreign equity markets and a weaker dollar - conditions ...
Working Paper
Could capital gains smooth a current account rebalancing?
A narrowing of the U.S. current account deficit through exchange rate movements is likely to entail a substantial depreciation of the dollar, as stressed in the widely cited contribution by Obstfeld and Rogoff (2005). We assess how the adjustment is affected by the high degree of international financial integration in the world economy. A growing body of research stresses the increasing leverage in international financial positions, with industrialized economies holding substantial and growing financial claims on each other. Exchange rate movements then leads to valuations effects as the ...
Working Paper
A bargaining theory of trade invoicing and pricing
We develop a theoretical model of international trade pricing in which individual exporters and importers bargain over the transaction price and exposure to exchange rate fluctuations. We find that the choice of price and invoicing currency reflects the full market structure, including the extent of fragmentation and the degree of heterogeneity across importers and across exporters. Our study shows that a party has a higher effective bargaining weight when it is large or more risk tolerant. A higher effective bargaining weight of importers relative to exporters in turn translates into lower ...
Journal Article
To what extent does productivity drive the dollar?
The continuing strength of the dollar has fueled interest in the relationship between productivity and exchange rates. An analysis of the link between the dollar's movements and productivity developments in the United States, Japan, and the euro area suggests that productivity can account for much of the change in the external value of the dollar over the past three decades.
Journal Article
Curbing unemployment in Europe: are there lessons from Ireland and the Netherlands?
Since the mid-1980s, unemployment rates in Ireland and the Netherlands have plummeted, while the average rate for the European Union has maintained its longtime high level. Ambitious labor market reforms_including wage moderation and the tightening of unemployment benefits_have helped to bring the Irish and Dutch rates down. Other European countries would benefit from adopting similar reforms, but they are unlikely to see the same dramatic improvement in their unemployment numbers.
Report
On the distributional effects of exchange rate fluctuations
The paper studies the differential impact of exchange rate fluctuations on households in a country. I extend earlier research by relaxing the assumption of complete international sectoral specialization. My setup allows for the presence of several different sectors in a given country, each producing a different type of good. Combined with incomplete asset markets, the sectoral dimension leads to a heterogeneous impact of exchange rate fluctuation within each country. In particular, although a depreciation of a country's currency has an adverse 'beggar-thyself' effect for the country as a ...
Report
A bargaining theory of trade invoicing and pricing
We develop a theoretical model of international trade pricing in which individual exporters and importers bargain over the transaction price and exposure to exchange rate fluctuations. We find that the choice of price and invoicing currency reflects the full market structure, including the extent of fragmentation and the degree of heterogeneity across importers and across exporters. Our study shows that a party has a higher effective bargaining weight when it is large or more risk tolerant. A higher effective bargaining weight of importers relative to exporters in turn translates into lower ...
Report
The internationalization of the dollar and trade balance adjustment
The pattern of international trade adjustment is affected by the continuing international role of the dollar and related evidence on exchange rate pass-through to prices. This paper argues that a depreciation of the dollar would have asymmetric effects on flows between the United States and its trading partners. With low exchange rate pass-through to U.S. import prices and high exchange rate pass-through to the local prices of countries consuming U.S. exports, the effect of dollar depreciation on real trade flows is dominated by an adjustment in U.S. export quantities, which increase as U.S. ...
Report
Micro, macro, and strategic forces in international trade invoicing
We extend a standard New Keynesian model both to incorporate heterogeneity in spending opportunities along with two sources of (potentially time-varying) credit spreads and to allow a role for the central bank's balance sheet in determining equilibrium. We use the model to investigate the implications of imperfect financial intermediation for familiar monetary policy prescriptions and to consider additional dimensions of central bank policy--variations in the size and composition of the central bank's balance sheet as well as payment of interest on reserves--alongside the traditional question ...