Optimal Monetary Policy in an Open Emerging Market Economy
The majority of households across emerging market economies are excluded from the financial markets and cannot smooth consumption. I analyze the implications of this for optimal monetary policy and the corresponding choice of domestic versus external nominal anchor in a small open economy framework with nominal rigidities, aggregate uncertainty and financial exclusion. I find that, if set optimally, monetary policy smooths the consumption of financially excluded agents by stabilizing their income. Even though Consumer Price Index (CPI) inflation targeting approximates optimal monetary policy when financial inclusion is high, targeting the exchange rate is appropriate if financial inclusion is limited. Nominal exchange rate stability, upon shocks that create trade-offs for monetary policy, directly stabilizes the import component of financially excluded agents? consumption baskets, which smooths their consumption and reduces macroeconomic volatility. This study provides a counterpoint to Milton Friedman?s long-standing argument for a float.
AUTHORS: Iyer, Tara
Intellectual Property, Tariffs, and International Trade Dynamics
The emergence of global value chains not only leads to a magnification of trade in intermediate inputs but also to an extensive technology diffusion among the different production units involved in arms-length relationships. In this context, the lack of enforcement of intellectual property rights has recently become a highly controversial subject of debate in the context of the China-U.S. trade negotiations. This paper analyzes the strategic interaction of tariff policies and the enforcement of intellectual property rights within a quantitative general equilibrium framework. Results indicate that, in principle, tariffs could be an effective deterrent for weak protections for intellectual property. Moreover, weakening enforcement may be a strong deterrent for raising tariffs. These results combined indicate that there is scope for international cooperation on these fronts.
AUTHORS: Mandelman, Federico S.; Waddle, Andrea L.
Demographics and the Evolution of Global Imbalances
The age distribution evolves asymmetrically across countries, influencing relative saving rates and labor supply. Emerging economies experienced faster increases in working age shares than advanced economies did. Using a dynamic, multicountry model I quantify the effect of demographic changes on trade imbalances across 28 countries since 1970. Counterfactually holding demographics constant reduces net exports in emerging economies and boosts them in advanced economies. On average, a one percentage point increase in a country?s working age share, relative to the world, increases its ratio of net exports to GDP by one-third of a percentage point. These findings alleviate the allocation puzzle.
AUTHORS: Sposi, Michael J.
Current Account Dynamics under Information Rigidity and Imperfect Capital Mobility
The current account in developed countries is highly persistent and volatile in comparison to output growth. The standard intertemporal current account model with rational expectations (RE) fails to account for the observed current account dynamics together with persistent changes in consumption. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for persistent changes in consumption, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income and infrequently adjust their consumption. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility almost fully explains current account dynamics and the persistence of changes in consumption, if high degrees of information rigidity and imperfect capital mobility are taken into account.
AUTHORS: Shibata, Akihisa; Tsuruga, Takayuki; Shintani, Mototsugu
Benefits of foreign ownership: evidence from foreign direct investment in china
To examine the effect of foreign direct investment, this paper compares the post-acquisition performance changes of foreign- and domestic-acquired firms in China. Unlike previous studies, we investigate the purified effect of foreign ownership by using domestic-acquired firms as the control group. After controlling for the acquisition effect that also exists in domestic acquisitions, we find no evidence in the data that foreign ownership can bring productivity gains to target firms. In contrast, a strong and robust finding is that foreign ownership significantly improves target firms' financial conditions and exports relative to domestic-acquired firms. Foreign acquisition is also found to improve output, employment and wage for target firms. These findings highlight the financial channel through which FDI benefits income and economic growth of host countries.
AUTHORS: Wang, Jian; Wang, Xiao
The quantitative role of capital-goods imports in U.S. growth
Over the last 40 years, an increasing share of U.S. aggregate E&S investment expenditure has been allocated to capital-goods imports. While capital-goods imports were only 3.5 percent of E&S investment in 1967, by 2008 their share had risen tenfold to 36 percent. The goal of this paper is to measure the contribution of capital-goods imports to growth in U.S. output per hour using a simple growth accounting exercise. We find that capital-goods imports have contributed 20 to 30 percent to growth in U.S. output per hour between 1967 and 2008. More importantly, we find that capital-goods imports have been an increasing source of growth for the US economy: the average contribution of capital-goods imports to growth in U.S .output per hour has increased noticeably since 1967.
AUTHORS: Cavallo, Michele; Landry, Anthony E.
Bretton Woods and the Reconstruction of Europe
The Bretton Woods international financial system, which was in place from roughly 1949 to 1973, is the most significant modern policy experiment to attempt to simultaneously manage international payments, international capital flows, and international currency values. This paper uses an international macroeconomic accounting methodology to study the Bretton Woods system and finds that it: (1) significantly distorted both international and domestic capital markets and hence the accumulation and allocation of capital; (2) significantly slowed the reconstruction of Europe, albeit while limiting the indebtedness of European countries. Our results also provide support for the utility of the accounting methodology in that it finds a sharp change in the behavior of domestic and international capital market wedges that coincides with the breakdown of the system.
AUTHORS: Ohanian, Lee E.; Restrepo-Echavarria, Paulina; Van Patten, Diana; Wright, Mark L. J.
Multinational Firms' Entry and Productivity: Some Aggregate Implications of Firm-level Heterogeneity
Despite the microeconomic evidence supporting the superior idiosyncratic productivity of multinational firms (MFN) and their affiliates, cross-country studies fail to find robust evidence of a positive relationship between Foreign Direct Investment and growth. In order to study the aggregate implications of MNF entry and production, I develop a Dynamic Stochastic General Equilibrium model with firm heterogeneity where MNF sort according to their own productivity. Entry and production of MNF contribute to aggregate productivity growth at decreasing rates over time but potentially crowd out domestic producers due to increased product and factor market competition. I compare the aggregate benefit of productivity contributions with the cost of crowding out and argue that composition and crowding-out effects can help explain the conflicting evidence on the impact of Foreign Direct Investment on growth.
AUTHORS: Contessi, Silvio
What drives the German current account? and how does it affect other EU member states?
We estimate a three-country model using 1995-2013 data for Germany, the Rest of the Euro Area (REA) and the Rest of the World (ROW) to analyze the determinants of Germany?s current account surplus after the launch of the Euro. The most important factors driving the German surplus were positive shocks to the German saving rate and to ROW demand for German exports, as well as German labour market reforms and other positive German aggregate supply shocks. The convergence of REA interest rates to German rates due to the creation of the Euro only had a modest effect on the German current account and on German real activity. The key shocks that drove the rise in the German current account tended to worsen the REA trade balance, but had a weak effect on REA real activity. Our analysis suggests these driving factors are likely to be slowly eroded, leading to a very gradual reduction of the German current account surplus. An expansion in German government consumption and investment would raise German GDP and reduce the current account surplus, but the effects on the surplus are likely to be weak.
AUTHORS: Roeger, Werner; in Veld, Jan; Kollmann, Robert; Ratto, Marco; Vogel, Lukas
Multinational firms' entry and productivity: some aggregate implications of firm-level heterogeneity
Despite the microeconomic evidence supporting the superior idiosyncratic productivity of multinational firms (MNFs) and their affiliates, cross-country studies fail to find robust evidence of a positive relationship between foreign direct investment and growth. In order to study the aggregate implications of MNFs entry and production, I develop a dynamic general equilibrium model with firm heterogeneity where MNFs sort according to their own productivity. The entry and production of MNFs contribute to aggregate productivity growth at decreasing rates and affect domestic producers through general equilibrium effects in the labor market. I argue that the heterogeneous composition of the population of affiliates can help explain the conflicting evidence on the impact of foreign direct investment on growth.
AUTHORS: Contessi, Silvio