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Marriott Marquis, La Costa
Recent Advances in International Macro
Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)
- Chair: Loukas Karabarbounis, University of Minnesota
Exchange Rates and Uncovered Interest Differentials: The Role of Permanent Monetary Shocks
AbstractWe estimate an empirical model of exchange rates with transitory and permanent monetary shocks. Using monthly post-Bretton-Woods data from the United States, the United Kingdom, and Japan, we report four main findings: First, there is no exchange rate overshooting in response to either temporary or permanent monetary shocks. Second, a transitory increase in the nominal interest rate causes appreciation, whereas a permanent increase causes persistent depreciation. Third, transitory increases in the interest rate cause short-run deviations from uncovered interest-rate parity in favor of domestic assets, whereas permanent increases cause deviations against domestic assets. Fourth, permanent monetary shocks explain the majority of short-run movements in nominal exchange rates.
Sovereign Default Risk and Firm Heterogeneity
AbstractThis paper measures the output costs of sovereign risk by combining a sovereign debt model with firm- and bank-level data. In our framework, an increase in sovereign risk lowers the price of government debt and has an adverse impact on banks’ balance sheets, disrupting their ability to finance firms. Importantly, firms are not equally affected by these developments: those that have greater financing needs and borrow from banks that are more exposed to government debt cut their production the most in a debt crisis. We measure the extent of this heterogeneity using Italian data and parameterize the model to match these cross-sectional facts. In counterfactual analysis, we find that heightened sovereign risk was responsible for one-third of the observed output decline during the 2011-2012 crisis in Italy.
The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis
AbstractDespite a formal ‘no-bailout clause’, we estimate significant transfers from the European Union to Cyprus, Greece, Ireland, Portugal, and Spain, ranging from roughly 0% (Ireland) to 43% (Greece) of output during the recent sovereign debt crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Because of collateral damage to the union in case of default, these bailouts are ex-post efficient. Our model embeds a ‘Southern view’ of the crisis (assistance was insufficient) and a ‘Northern view’ (assistance weakens fiscal discipline). Ex-post, bailouts do not improve the welfare of the recipient country, since creditor countries get the entire surplus from avoiding default. Ex-ante, bailouts generate risk shifting with an incentive to over-borrow by fiscally fragile countries. While a stronger no-bailout commitment reduces risk-shifting, we find that it may not be ex-ante optimal from the perspective of the creditor country, if there is a risk of immediate insolvency. Hence, the model provides some justification for the often decried policy of ‘kicking the can down the road’.
- F4 - Macroeconomic Aspects of International Trade and Finance
- F3 - International Finance