Advances in Open Economy Macroeconomics
Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM
Hyatt Regency Chicago, Burnham
- Chair: Matteo Maggiori, Harvard University
Dominant Currency Paradigm
AbstractMost trade is invoiced in very few currencies. Despite this, the Mundell-Fleming
benchmark and its variants focus on pricing in the producer's currency or in local currency.
We model instead a `dominant currency paradigm' for small open economies
characterized by three features: pricing in a dominant currency; pricing complementarities,
and imported input use in production. Under this paradigm: (a) terms of
trade are stable; (b) dominant currency exchange rate pass-through into export and
import prices is high regardless of destination or origin of goods; (c) exchange rate
pass-through of non-dominant currencies is small; (d) expenditure switching occurs
mostly via imports and export expansions following depreciations are weak. Using
merged firm level and customs data from Columbia we document strong support for
the dominant currency paradigm and reject the alternatives of producer currency and
local currency pricing.
Lending of Last Resort in an Open Economy
AbstractThe paper analyzes a small open economy with flexible exchange rates in which the financial sector is possibly subject to confidence crises. A feedback between the health of the financial sector and the exchange rate amplifies the effects of the crisis. The paper shows that even if the domestic banking sector is initially financed mostly with deposits in domestic currency, a two-phase crisis can take place in which first consumers fly from domestic currency deposits, pushing the banks to dollarize their liabilities, and next the country is subject to a bank run cum currency crisis. We use this framework to analyze operations of lending of last resort. The possibility of capital flights in an open economy raises the amount of resources necessary to backstop a confidence crisis. Precautionary reserve accumulation by the fiscal authority facilitates effective lending of last resort, and it can lead to a less dollarized financial sector and
to a more stable exchange rate.
Real Interest Rates, Imbalances and the Curse of Regional Safe Asset Providers at the Zero Lower Bound
AbstractThe current environment is characterized by low real rates and by policy rates close to or at their lower bound in all major financial areas. We analyze these unusual economic conditions from a historical perspective and draw some implications for external imbalances, safe asset demand and the process of external adjustment. First, we decompose the fluctuations in the world consumption wealth ratio over long period of times and show that they anticipate movements of the real rate of interest. Second, our estimates suggest that the world real rate of interest is likely to remain low or negative for an extended period of time. In this context, we argue that there is a renewed Triffin dilemma where safe asset providers face a trade-off in terms of external exposure and real appreciation of their currency. This tradeoff is particularly acute for smaller economies. This is the `curse of the regional safe asset provider.' We discuss how this `curse' is playing out for two prominent regional safe asset providers: core EMU and Switzerland.
University of California-Berkeley
University of Chicago
- E0 - General