Topics in International Economics

Paper Session

Saturday, Jan. 7, 2017 8:00 AM – 10:00 AM

Hyatt Regency Chicago, Michigan 3
Hosted By: American Economic Association
  • Chair: Saeed Qadir, Claremont Graduate University

Sovereign Debt Restructuring and Growth

Lorenzo Forni
,
International Monetary Fund
Geremia Palomba
,
International Monetary Fund
Joana Pereira
,
International Monetary Fund
Christine Richmond
,
International Monetary Fund

Abstract

This paper studies the effect of sovereign debt restructurings on growth and the causal linkages between the two using data for the period 1970-2010. We find that there are bad and good (or not so bad) debt restructurings for growth. While growth generally declines in the aftermath of a sovereign debt restructuring, agreements that allow countries to exit a default spell (final restructurings) can lead to improvements in growth as they reduce countries’ debt (in NPV terms). Debt relief has the largest growth impact for countries that exit restructurings with relatively low debt levels.

World Business Cycles With Volatility Shocks and Recursive Preferences

Robert Kollmann
,
ECARES, Free University of Brussels, and CEPR

Abstract

Output and employment are highly positively correlated across the major industrialized economies. Standard macro models have great difficulties explaining this fact. This paper develops a dynamic stochastic general equilibrium (DSGE) model of a two-country world with exogenous shocks to the volatility of total factor productivity (TFP), recursive preferences (Epstein-Zin-Weil), integrated global financial markets, and sticky prices and wages. A rise in TFP volatility depresses aggregate demand, due to a precautionary saving motive. Firms and workers in both countries charge higher price and wage markups in response to a country-specific positive shock to TFP volatility, as that shock triggers a worldwide rise in uncertainty about future goods and labor demand, and about future marginal costs. Thus, a positive volatility shock in one country depresses domestic and foreign output. Recursive utility, with a preference for early resolution of uncertainty, magnifies the effect of volatility shocks on stochastic discount factors, which strengthens the effects of uncertainty shocks on worldwide aggregate demand and markups. The structure here generates cross-country correlations of real activity and of asset returns that are markedly higher, and hence closer to the data, than the cross-country correlations predicted by conventional DSGE models. In the framework here, TFP volatility shocks account for a non-negligible share of the fluctuations of output, consumption, investment, net exports and the real exchange rate.

International Dollar Flows

Ayelen Banegas
,
Federal Reserve Board
Ruth Judson
,
Federal Reserve Board
Charles Sims
,
Federal Reserve Bank of New York
Viktors Stebunovs
,
Federal Reserve Board

Abstract

Using confidential Federal Reserve data, we study the factors driving U.S.
banknote flows between the United States and other countries. These flows are a significant
component of capital flows in emerging market economies, where physical U.S. currency
functions as a safe asset and precautionary demand for U.S. banknotes is a form of flight to
quality. Prior to the global financial crisis, country-specific factors, including local economic
uncertainty, largely explain the volume and heterogeneity of the flows. Since the crisis, global
factors, particularly, global economic uncertainty, explain the flows markedly well. Further,
precautionary demand for U.S. banknotes is not episodic.

Gold and Trade: An Empirical Simulation Approach

Rui Esteves
,
University of Oxford
Florian Ploeckl
,
University of Adelaide

Abstract

The network externalities between international trade and the choice of exchange
rate regimes have been invoked to explain the rise of the classical
gold standard. In particular, gravity regressions have consistently shown
large trade gains for countries on the same monetary regime (especially
gold). However, causality probably runs in both directions, since more
open economies would have a greater incentive to adopt stable exchange
rate regimes, especially if they traded more with other countries already on
gold. This raises an endogeneity issue for which conventionalThe network externalities between trade and the choice of exchange rate regimes have been invoked to explain the rise of the classical gold standard. Gravity regressions have consistently shown large trade gains for countries on the same monetary regime (especially gold). However, causality probably runs in both directions, since more open economies have a greater incentive to adopt stable exchange rate regimes, especially if they traded more with other countries already on gold. This raises an endogeneity issue for which conventional identification methods are not suitable. This paper uses a novel methodology developed for the study of social networks–dynamic network analysis–to model the co-evolution of trade and monetary regimes. We study the relation between the choice of exchange rate regimes (paper, silver, gold) and the signing of trade treaties by a large sample of countries between 1850 and 1913. The results suggest that the network externalities from trade were indeed strong and influenced the choice of monetary regimes. Countries more linked through trade treaties tended to adopt the gold standard sooner, a result consistent with the ‘scramble for gold’ which led most countries to adopt the gold standard by the eve of World War I. However, the direct trade gains from common monetary standards seem small, i.e. countries who had adopted the gold standard earlier were not more likely to become more connected

Global Sourcing and Domestic Production Networks

Heiwai Tang
,
Johns Hopkins University
Taiji Furusawa
,
Hitotsubashi University
Tomohiko Inui
,
Research Institute of Economy, Trade and Industry
Keiko Ito
,
Senshu University

Abstract

This paper studies the impact of firms' global sourcing on a country's domestic production network. We develop a variant of the global sourcing model by Antràs, Fort, and Tintelnot (2016) to consider input industries that differ in relationship-specificity to buyers' production and endogenous communication costs as part of the trade costs between buyers and sellers located in different regions. The model predicts that firms are less likely to outsource relationship-specific inputs, especially from distant suppliers, due to high communication costs. Upon offshoring triggered by supply shocks, a firm experiences a reduction in the marginal cost of production and starts adding domestic suppliers from the more relationship-specific input industries, which tend to be less productive and located closer by, and dropping those from the more generic input industries, which tend to be more productive and located farther away. Using production network data for 4.5 million buyer-seller links in Japan and a firm-level instrument for offshoring, we find evidence supporting the theoretical predictions. The consequential decline in the average distance between the newly offshoring firms and their domestic suppliers suggests that offshoring can be a source of industry agglomeration.
JEL Classifications
  • F3 - International Finance