Foreign Shocks Research Articles

Foreign Trade, Home Linkages and the Spatial Transmission of Economic Fluctuations in Italy

During the recent global recession both the export-oriented northern Italian regions and those in the far less open South experienced a sharp decline in economic activity. One of the possible explanations is the existence of strong domestic linkages propagating foreign demand shocks from North to South. To assess the scope of the spatial transmission of global and local disturbances across Italian regions, in this paper we specify and estimate a bivariate structural spatial VAR model featuring GDP and foreign exports as endogenous variables. A standard gravity equation approach is implemented to model unobserved domestic regional trade flows, while regional sales on foreign markets are related to global trade fluctuations and local shocks to competitiveness, broken down into a national and an idiosyncratic component. In line with expectations, strong domestic linkages are uncovered on the basis of model estimation results. The latter show that even less export-oriented Italian regions, although broadly unaffected on impact, may eventually experience a sharp output decline following a fall in global trade of the size observed in the recent recession.

Spillovers to Low-Income Countries: Importance of Systemic Emerging Markets

This paper documents the expanding economic linkages between low-income countries (LICs) and a narrow group of Emerging Market that have become major players in regional and global trade and financial flows. VAR models show that these linkages have increased the share of growth volatility that can be attributed to foreign shocks in LICs. Dynamic panel models further analyze the impact of LIC trade orientation and production structure on the sensitivity to foreign shocks. The empirical results demonstrate that the elasticity of growth to trading partners' growth is high for LICs in Asia, Latin America and the Caribbean, and Europe and Central Asia. However, for commodity-exporting LICs in Sub-Saharan Africa and the Middle East, terms of trade shocks and demand from the emerging market leaders are the main channels of transmission of foreign shocks.

Export Dynamics and Sales at Home

How do firms' sales interact across markets? Are foreign and domestic sales complements or substitutes? Using a large French firm-level database that combines balance-sheet and product-destination-specific export information over the period 1995-2001, we study the interconnections between exports and domestic sales. We identify exogenous shocks that affect the firms' demand on foreign markets to instrument yearly variations in exports. We use alternatively as instruments product-destination specific imports or tariffs changes, and large foreign shocks such as financial crises or civil wars. Our results show that exogenous variations in foreign sales are positively associated with domestic sales, even after controlling for changes in domestic demand. A 10% exogenous increase in exports generates a 1.5 to 3% increase in domestic sales in the short-term. This result is robust to various estimation techniques, instruments, controls, and sub-samples. It is also supported by the natural experiment of the Asian crisis in the late 1990's. We discuss various channels that may explain this complementarity.

The International Role of the Dollar: Does It Matter if This Changes?

There is often speculation that the international roles of currencies may be changing. This paper presents the current status of these roles. The U.S. dollar continues to be the dominant currency across various uses. Yet, such a role may change over time. If this occurs, there could be consequences for seignorage returns, U.S. funding costs, the dollar’s value, U.S. insulation from foreign shocks, and U.S. global influence. The paper concludes with a discussion of recent research on related themes and questions for future study.

Alternative Monetary Policy Rules in a Small Open Economy with Financial Frictions: The Case of Korea

This paper first shows an empirical result of VAR that Korean economy has experienced a severe economic contraction to an exogenous country spread shock. To analyze the effect of alternative monetary policy on the economy, the paper sets up a multi-sector small open economy new Keynesian (NK hereafter) model with financial frictions due to asymmetric information between firms and financial intermediaries along the line of Bernanke et al. (1999). It shows that the small economy with financial frictions is more vulnerable to the exogenous shocks such as the foreign exchange rate shock under the fixed exchange rate regime than under the flexible exchange regime. It also shows that the interest rate rule that responds to financial market conditions is better than any other interest rate rules only if it does not react to the exchange rate fluctuations. Moreover, an interest rate rule that responds to the exchange rate fluctuations, i.e. the monetary policy under the managed floating exchange rate regime is inferior to the monetary policy rules that do not respond to the exchange rate fluctuations. Finally, it shows that the monetary authority needs to stabilize a narrow price index such as domestic price index rather than a general price index such as consumer price index under the financial friction circumstances.

Gustav von Schmoller-Vorlesung, 5. Konferenz für Sozial- und Wirtschaftsdaten: Die Internationalisierung deutscher Banken und Unternehmen aus Perspektive der Mikrodaten

Economic performance in Germany is largely determined by external developments. Exports of German firms contribute a significant share to total production, German banks hold a large share of foreign assets, and many German firms hold foreign affiliates abroad. This international exposure brings costs and benefits. The German economy benefits from access to international markets for its firms and from having access to diversified international investment portfolios. But there are also potential costs in terms of an exposure to foreign shocks – as the recent crisis has forcefully shown –, and many fear that German jobs are “exported” abroad through foreign direct investment (FDI). Recent literature has shown that analyzing the patterns of internationalization requires an analysis of the sorting and selection of firms into foreign markets. This paper reviews the literature on firm- and bank-level globalization in Germany. It is shown that size effects matter significantly for both, banks and firms – only the largest and most productive firms and banks are active abroad. In addition, financial constraints serve as a barrier to entry into foreign markets. There is little evidence for negative employment effects of FDI, while the beneficial effects of foreign banking activities in terms of improvements in the risk-return-trade off are less clear cut. Zusammenfassung In Deutschland wird die wirtschaftliche Leistung zu einem großen Anteil durch Entwicklungen im Ausland mitbestimmt. Exporte deutscher Unternehmen tragen zu einem erheblichen Anteil zu der Gesamtproduktion bei, deutsche Banken halten einen nicht unerheblichen Teil ihrer Forderungen im Ausland und viele deutsche Unternehmen betreiben Tochterfirmen im Ausland. Die deutsche Wirtschaft profitiert vom Zugang ihrer Unternehmen zu weltweiten Absatzmärkten und zu diversifizierten internationalen Anlageportfolios. Jedoch entstehen auch potenzielle Kosten, da durch die internationale Verflechtung die deutsche Wirtschaft von Schocks aus dem Ausland betroffen ist, wie die jüngste Wirtschaftskrise verdeutlicht hat. Zudem besteht die Furcht, dass deutsche Arbeitsplätze ins Ausland exportiert werden. Dieser Beitrag fasst die Literatur über die Effekte der Globalisierung auf Unternehmens- und Bankenebene in Deutschland zusammen. Es wird deutlich, dass Größeneffekte sowohl für Banken als auch für Unternehmen von Bedeutung sind, denn nur die größten und produktivsten Unternehmen und Banken sind im Ausland aktiv. Zudem wirken finanzielle Beschränkungen wie Zugangsbarrieren zu ausländischen Märkten. Darüber hinaus gibt es keine generellen Hinweise auf negative Beschäftigungseffekte durch ausländische Direktinvestitionen, während die vorteilhaften Effekte der Auslandsaktivitäten von Banken hinsichtlich einer Verbesserung des Trade-off zwischen Risiko und Ertrag weniger deutlich sind. JEL Classifications: F1, F2, F3

The International Crisis and Latin America: Growth Effects and Development Strategies

Latin America has been strongly affected by the international crisis and recession since late 2008. In comparison to historical experience, how has Latin America coped with the global crisis, which has been the role of different transmission mechanisms, and how have the region’s structural and policy conditions affected its sensitivity to foreign shocks? Moreover, what policies can protect the region better from world crises and shocks, and to which extent should it rely on a strategy of close trade and financial integration into a world economy punctuated by shocks and crises? This paper addresses the latter questions in three steps. First, by assessing empirically the sensitivity of growth in the region’s seven major economies during 1990-2009 to large number of structural and cyclical factors, based on high-frequency panel-data estimations. Second, by using the latter results to decompose the amplitude of GDP reductions in both recessions according to the individual and combined contribution of the different growth factors. Third, to derive the main implications of the results for the choice of macroeconomic regimes and development strategies.

Targeting Rules for an Open Economy

This study extends the formal analysis of inflation targeting monetary policy using the standard New Keynesian framework to a small open economy by adding inflation and output persistence as well as a direct exchange rate channel to domestic inflation. We find that output variability is lower under CPI inflation targeting than under domestic inflation targeting. However, CPI inflation results in higher variability of the real exchange rate than domestic inflation targeting. Output and the nominal interest rate are less volatile under flexible inflation targeting than under almost-strict inflation targeting. We also find that almost-strict domestic inflation targeting cannot completely insulate domestic inflation from foreign shocks due to a direct exchange rate channel. The model is calibrated to Canadian data.

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Dynamic Impact Of Financial Structure On The Volatility Of The Real Exchange Rate

This study investigates the role of financial structure on the volatility of real effective exchange rates in Korea. (1). Historical developments of size, activity and efficiency of financial structure, including banking and nonblank financial institutions, are investigated for the last three decades in Korea. (2). Using the concept of bank-based and market-based financial structure, it is shown that there exists a stable long-run relationships between the financial structure of an economy and the volatility of real effective exchange rates. (3). Development of market-based system can successfully isolate foreign shocks and reduce the volatility of the real effective exchange rates while increased bank-based system destabilize the volatility of the real exchange. This can be explained by the strong requirement of information disclosure in the stock market induce risk-sharing activities of investors. (4). Policy implication is that transfer of risk from banking sector to stock market or non-bank financial institutions could stabilize the volatility of asset prices.

Why Has the Business Cycle in China Become More Stable in the Twenty‐first Century?

本文的目的在于回答两个问题：第一，21世纪中国经济周期平稳化的原因何在？ 第二，21世纪中国经济波动的来源何在？利用统计分析和构造的多方程结构宏观经济 模型，我们发现第一个问题的答案几乎完全在于国内因素，包括国内需求冲击的稳定 和信贷市场中的自稳定机制；就第二个问题而言，21世纪中国经济波动的最大来源在 于国外需求冲击和国内需求冲击——前者对GDP的波动影响较大，而后者则更多地影 响CPI。本文的另一个发现是，传统的盯住货币供应量的货币政策对稳定GDP和CPI几 乎没有效果。本文的政策建议之一是，在全球危机的背景下，稳定总需求的国内经济 刺激政策依然很重要。本文的另一个建议是，为了摆脱全球化的负面影响，我们需要 更加依靠城市化而非工业化，并在国内调整各个区域的经济角色。 关键词: 经济周期 全球化 稳定 The purpose of this paper is to answer two questions: first, what are the causes of the stability of the Chinese business cycle in the twenty‐first century? Second, what are the sources of volatility for the Chinese economy in the twenty‐first century? Using statistical analysis and constructing a multi‐equation structural macro‐economic model, we find the answer to the first question depends almost totally on domestic factors, including the stability of domestic demand shock and the automatic stabilization mechanism existing in the credit market. As to the second question, the greatest sources of volatility are foreign and domestic demand shocks, with the former having a greater effect on the volatility of GDP while the latter has a greater effect on the CPI. Another finding is that traditional monetary policy targeting money supply has little effect on the stability of GDP and CPI. One policy suggestion is that a domestic stimulus policy to stabilize aggregate demand is still vital against the background of the global crisis; another is that to get rid of negative impact of globalization upon our economy, we need to rely more on urbanization rather than industrialization and need to re‐adjust the economic roles of different regions within China.

National and international market integration in the 19th century: Evidence from comovement

This paper analyzes relative wheat price fluctuations to investigate market integration among 72 European and US cities. Applying a Dynamic Factor Model, which has seldom been used in market integration analysis, prices are decomposed into international, national and local components. Thus, national and international market integration are identified by a statistical restriction, and results for each single market are obtained. The first result is that globalization has accelerated faster in the first than in the second half of the 19th century, putting the post-1850 transport revolution into perspective. The USA integrated only later into the European market, discounting the role of the “grain invasion” for trade history. I also show that the European nations that turned protectionist after 1880 reduced the impact of foreign shocks, while free traders fully integrated into the international economy.

Growth Spillover Dynamics from Crisis to Recovery

Can positive growth shocks from the faster-growing countries in Europe spill over to the slower growing countries, providing useful tailwinds to their recovery process? This study investigates the potential relevance of growth spillovers in the context of the crisis and the recovery process. Based on a VAR framework, our analysis suggests that the U.S. and Japan remain the key source of growth spillovers in this recovery, with France also playing an important role for the European crisis countries. Notwithstanding the current export-led cyclical upswing, Germany generates relatively small outward spillovers compared to other systemic countries, but likely plays a key role in transmitting and amplifying external growth shocks to the rest of Europe given its more direct exposure to foreign shocks compared to other European countries. Positive spillovers from Spain were important prior to the 2008 - 09 crisis, however Spain is generating negative spillovers in this recovery due to a depressed domestic demand. Negative spillovers from the European crisis countries appear limited, consistent with their modest size.

Growth Spillover Dynamics from Crisis to Recovery

Can positive growth shocks from the faster-growing countries in Europe spill over to the slower growing countries, providing useful tailwinds to their recovery process? This study investigates the potential relevance of growth spillovers in the context of the crisis and the recovery process. Based on a VAR framework, our analysis suggests that the U.S. and Japan remain the key source of growth spillovers in this recovery, with France also playing an important role for the European crisis countries. Notwithstanding the current export-led cyclical upswing, Germany generates relatively small outward spillovers compared to other systemic countries, but likely plays a key role in transmitting and amplifying external growth shocks to the rest of Europe given its more direct exposure to foreign shocks compared to other European countries. Positive spillovers from Spain were important prior to the 2008 - 09 crisis, however Spain is generating negative spillovers in this recovery due to a depressed domestic demand. Negative spillovers from the European crisis countries appear limited, consistent with their modest size.

Real-time conditional forecasts with Bayesian VARs: An application to New Zealand

Abstract We develop a Bayesian VAR (BVAR) to produce conditional forecasts for the New Zealand economy. In a real-time out-of-sample forecasting exercise, we find that the BVAR outperforms a selection of other time series models, and it yields forecasts of similar accuracy to the forecasts produced internally at the Reserve Bank of New Zealand. Examining shock decompositions, we also highlight the importance of foreign shocks for the New Zealand economy. Our results suggest that the BVAR is a useful tool for policy making in real time.

FINANCIAL FRICTIONS AND THE CHOICE OF EXCHANGE RATE REGIMES

This article provides a quantitative assessment of the role of financial frictions in the choice of exchange rate regimes. I use a two‐country model with sticky prices to compare different exchange rate arrangements. I simulate the model without and with borrowing constraints on investment, under monetary policy and technology shocks. I find that the stabilization properties of floating exchange rate regimes in face of foreign shocks are enhanced relative to fixed exchange rate in presence of credit frictions. In presence of symmetric and correlated shock, fixed exchange rates regimes can perform better than floating. This analysis can have important policy implications for accession countries joining the European Exchange Rate Mechanism II system and with high degrees of credit frictions. (JEL E3, E42, E44, E52, F41)

The saving–investment correlation and origins of productivity shocks

This paper shows how savings and investment can be positively correlated despite capital being perfectly mobile across countries. The saving–investment (SI) correlation depends on the origin and the volatility of macroeconomic (productivity) shocks, the persistence of these shocks and country-size. Simulating a two-country Real Business Cycle (RBC) model we show that as the variance of common shocks increases (relative to country-specific shocks), as the persistence of these shocks decreases and as country-size increases, the SI correlation increases. Using annual data from 1960 to 2002, productivity changes in 11 OECD countries are decomposed into common and country-specific shocks (from which foreign shocks are also constructed). The empirical findings show that the 11 countries share a statistically significant common component in productivity changes and common shocks generally account for at least half of the variations in the countries’ productivity changes. We then use the estimated variances of the shocks, in addition to each country's size, in the RBC model to compute the predicted SI correlation for each country, under the assumption that capital is perfectly mobile. The predicted SI correlation is then compared to the actual correlation to assess the relative degree of capital mobility in the 11 countries. The findings indicate that Norway, the Netherlands and the US have the highest degree of capital mobility whereas in Canada, Sweden, Belgium and Japan capital mobility has been the lowest.

TAIWAN'S EXCHANGE RATE AND MACROECONOMIC POLICIES OVER THE BUSINESS CYCLE

This paper investigates exchange rate and monetary policies over the business cycle in Taiwan. We first characterize the business cycle dynamics in Taiwan and identify foreign shocks as the main cause of any fluctuations. We then briefly review the exchange rate system and policy operating in Taiwan since the early 1980s. Finally, we investigate the current recession, and discuss how the Taiwanese government is dealing with the economic slowdown.

The Varying Effect of Foreign Shocks in Central and Eastern Europe

This paper investigates the impact of international shocks – interest rate, commodity price and industrial production shocks – on key macroeconomic variables in ten Central and Eastern European (CEE) countries by using near-VAR models and monthly data from the early 1990s to 2009. In contrast to previous work, the empirical analysis takes explicit account of the possibility of (multiple) structural breaks in the underlying time series. We establish strong evidence of structural breaks, particularly along the years 2007 and 2008, suggesting the very relevant impact of the recent global crisis on CEE economies. Moreover, our results suggest that the way how countries react to world commodity price shocks is related to the underlying economic structure and the credibility of the monetary policy. We also find that some countries like Slovakia and Slovenia – already euro area members – react stronger to foreign industrial production shocks than other countries and that the responses to such shocks are strongly correlated for selected CEE countries. Nevertheless, our results also shed light on substantial differences in responses to foreign interest rate shocks that originate from the US or the euro area.

Does better information about foreign shocks improve monetary policy?

This paper examines whether better information about foreign shocks leads to welfare-improving monetary policy using a stylised two-country New Keynesian general equilibrium model. We demonstrate that when terms of trade externality exist and national central banks have the incentives to shift terms of trade in their own favour, the equilibrium under imperfect information may be welfare superior relative to an equilibrium with perfect information. In addition, the welfare gains or losses from information sharing between central banks are found to be small for empirically plausible range of parameters for risk aversion and elasticity of labour supply.