Advances in International Economics
Sunday, Jan. 7, 2018 10:15 AM - 12:15 PM
- Chair: Matteo Maggiori, Harvard University
The Macroeconomic Impact of Microeconomic Shocks: Distorted Economy
AbstractWe provide a general non-parametric formula for aggregating microeconomic
shocks in general equilibrium economies with distortions such as taxes, markups,
frictions to resource reallocation, and nominal rigidities. We show that the macroe-
conomic impact of a shock can be boiled down into two components: its “pure”
technology effect; and its effect on allocative efficiency arising from the associated
reallocation of resources, which can be measured via changes in factor income shares.
We also derive a formula showing how these two components are determined by
structural microeconomic parameters such as elasticities of substitution, returns to
scale, factor mobility, and network linkages. Overall, our results generalize those
of Solow (1957) and Hulten (1978) to economies with distortions. To demonstrate
their empirical relevance, we pursue different applications, focusing on markup dis-
tortions. For example, we operationalize our non-parametric results and show that
improvements in allocative efficiency account for about 50% of measured TFP growth
eliminating markups would raise TFP by about 40%, increasing the economy-wide cost
of monopoly distortions by two orders of magnitude compared to the famous 0.1%
estimates of Harberger (1954).
Foreign Reserve Management
AbstractThis paper presents a theory of how a central bank should manage foreign reserves to achieve a monetary policy objective in an environment with limited interantional arbitrage. For a relatively open economy, a sufficient and necessary condition for an optimal policy is that foreign investors remain indifferent between holding risk-free bonds in local curency and any other domestic asset. For a relatively closed economy, on the other hand, a government should invest in foreign assets whose returns are positively correlated to states where the domestic currency appreciates. The covered interest parity deviation, rather than the uncovered, provides a lower bound to the arbitrage losses generated per unit of foreign capital inflow. In addition, it may be welfare-improving to restrict the ability of foreign capital to leverage in domestic markets.
Monetary Policy and the Predictability of Nominal Exchange Rates
AbstractThis paper documents two facts about the behavior of floating exchange rates in countries where monetary policy follows a Taylor-type rule. First, the current real exchange rate is highly negatively correlated with future changes in the nominal exchange rate at horizons greater than two years. This negative correlation is stronger the longer is the horizon. Second, for most countries, the real exchange rate is virtually uncorrelated with future inflation rates both in the short and in the long run. We develop a class of models that can account for these and other key observations about real and nominal exchange rates.
- A1 - General Economics