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Working Paper
Bad Investments and Missed Opportunities? Capital Flows to Asia and Latin America, 1950-2007
Ohanian, Lee E.; Restrepo-Echavarria, Paulina; Wright, Mark L. J. (2013-11-25)
After World War II, international capital flowed into slow-growing Latin America rather than fast-growing Asia. This is surprising as, everything else equal, fast growth should imply high capital returns. This paper develops a capital flow accounting framework to quantify the role of different factor market distortions in producing these patterns. Surprisingly, we find that distortions in labor markets ? rather than domestic or international capital markets ? account for the bulk of these flows. Labor market distortions that indirectly depress investment incentives by lowering equilibrium ...
Working Papers , Paper 2014-38

Working Paper
Policy Rules and Large Crises in Emerging Markets
Espino, Emilio; Sanchez, Juan M.; Martin, Fernando M.; Kozlowski, Julian (2023-02-21)
Emerging countries have increasingly adopted rules to discipline government policy. The COVID-19 shock lead to widespread suspension and modification of these rules. We study rules and flexibility in a sovereign default model with domestic fiscal and monetary policies and long-term external debt. We find welfare gains from adopting monetary targets and debt limits during normal times. Though government policy cannot itself counteract fundamental shocks hitting the economy, the adoption of rules has a significant impact on policy, macroeconomic outcomes and welfare during large, unexpected ...
Working Papers , Paper 2022-018

Working Paper
Technology Choice and the Long- and Short-Run Armington Elasticity
Cooke, Dudley (2019-11-22)
This paper studies the international transmission of productivity shocks when the Armington elasticity is endogenized through firms' technology choice. With costly adjustment, technology choice allows for a low short-run elasticity and a high long-run elasticity. I provide analytical results which demonstrate how technology choice provides a solution to the Backus-Smith puzzle - the observed negative correlation between relative consumption and the real exchange rate. I then embed technology choice in a quantitative model of international trade with heterogeneous firms and endogenous producer ...
Globalization Institute Working Papers , Paper 373

Journal Article
International Trade Openness and Monetary Policy: Evidence from Cross-Country Data
Leibovici, Fernando (2019)
This article studies the extent to which open economies conduct monetary policy differently from economies that are relatively closed to international trade. I first estimate country-specific Taylor rules for 26 economies, following the approach of Clarida, Gal, and Gertler (1998 and 2000). Then, I examine the extent to which open economies assign systematically different weights to changes in economic outcomes, such as inflation and the output gap, than their closed economy counterparts do. I find that open economies respond less strongly to changes in expected inflation than relatively ...
Review , Volume 101 , Issue 2 , Pages 93-113

Working Paper
Exchange Rates and Endogenous Productivity
Saffie, Felipe; Goernemann, Nils; Guerron-Quintana, Pablo (2020-09-18)
Real exchange rates (RERs) display sizable uctuations not only over the business cycle, but also at lower frequencies, resulting in large and persistent swings over decades|facts that many business cycle models struggle to match. We propose an international macroeconomics model with endogenous productivity to rationalize these facts. In the model, endogenous growth amplifies stationary uctuations generating persistent productivity differences between countries that trigger low-frequency cycles in the RER. The estimated model effortlessly replicates the empirical spectrum, autocorrelation, and ...
International Finance Discussion Papers , Paper 1301

Working Paper
Navigating the Waves of Global Shipping: Drivers and Aggregate Implications
Dunn, Jason; Leibovici, Fernando (2023-02)
This paper studies the drivers of global shipping dynamics and their aggregate implications. We document novel evidence on the dynamics of global shipping supply, demand, and costs. Motivated by this evidence, we set up a dynamic model of international trade with a global shipping market where shipping firms and importers endogenously determine shipping supply and costs. We find the model successfully accounts for the dynamics of global shipping observed in the aftermath of COVID-19 as well as at business cycle frequencies. We find that accounting for global shipping is critical for the ...
Working Papers , Paper 2023-002

Working Paper
Hedging against the government: a solution to the home asset bias puzzle
Bhattarai, Saroj; Berriel, Tiago C. (2012)
This paper explains two puzzling facts: international nominal bonds and equity portfolios are biased domestically. In our two-country model, holding domestic government nominal debt provides a hedge against shocks to bond returns and the impact on taxes they induce. For this result, only two features are essential: some nominal risk and taxes falling only on domestic agents. A third feature explains why agents choose to hold primarily domestic equity: government spending falls on domestic goods. Then, an increase in government spending raises the returns on domestic equity, providing a hedge ...
Globalization Institute Working Papers , Paper 113

Working Paper
Optimal Bailouts in Banking and Sovereign Crises
Hur, Sewon; Sosa-Padilla, César; Yom, Zeynep (2021-01-29)
We study optimal bailout policies in the presence of banking and sovereign crises. First, we use European data to document that asset guarantees are the most prevalent way in which sovereigns intervene during banking crises. Then, we build a model of sovereign borrowing with limited commitment, where domestic banks hold government debt and also provide credit to the private sector. Shocks to bank capital can trigger banking crises, with government sometimes finding it optimal to extend guarantees over bank assets. This leads to a trade-off: Larger bailouts relax domestic financial frictions ...
Globalization Institute Working Papers , Paper 406

Report
The emerging market economies in times of taper-talk and actual tapering
Diez, Federico J. (2014-11-14)
The emerging market economies (EME) experienced financial distress during two recent periods, both linked to the prospect of the Federal Reserve starting to slow its asset purchases. This policy change was expected to reverse the capital flows directed to the EME. Despite this aggregate effect, a closer analysis shows that there were significant differences across the EME during the time when talk of the upcoming taper began and the period when the policy was implemented. The author makes use of the literature on currency crises to analyze the different cross-country responses and to identify ...
Current Policy Perspectives , Paper 14-6

Working Paper
Managing Macroeconomic Fluctuations with Flexible Exchange Rate Targeting
Mihov, Ilian; Heipertz, Jonas; Santacreu, Ana Maria (2022-01-16)
We show that a monetary policy rule that uses the exchange rate to stabilize the economy can outperform a Taylor rule in managing macroeconomics fluctuations and in achieving higher welfare. The differences between the rules are driven by: (i) the paths of the nominal exchange rate and the interest rate under each rule and (ii) external habits in consumption, which leads to deviations from uncovered interest parity. These differences are larger in economies, which are very open, which are more exposed to foreign shocks, or in which domestic and foreign goods are highly substitutable.
Working Papers , Paper 2017-028

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