Working Papers
2017
March 15, 2017
Exchange Rates and Trade: A Disconnect?
Description: We examine the stability and strength of the relationship between exchange rates and trade over time using three alternative approaches, mitigating the endogeneity of the relation. We find that both exchange rate pass-through and the price elasticity of trade volumes are largely stable over time. Economic slack and financial conditions affect the relationship, but there is limited evidence that participation in global value chains has significantly changed the exchange rate–trade relationship over time.
March 13, 2017
Public Debt Sustainability Under Uncertainty: An Invariant Set Approach
Description: The paper offers an approach to assessing the sustainability of public debt taking into account the effect of fiscal policy on output, as well as uncertainty in the model parameters and system dynamics. Uncertainty is specified in general terms, and the analysis is based on the notion of invariant sets. Examples are provided to illustrate how the method can be applied in practice.
March 13, 2017
Direct and Spillover Effects of Unconventional Monetary and Exchange Rate Policies
Description: This paper explores the effects of unconventional monetary and exchange rate policies. We find that official foreign asset purchases have large effects on current accounts that diminish as capital mobility rises and spill over to financially integrated countries. There is an additional effect through the stock of central bank assets. Domestic asset purchases have an effect on current accounts only when capital mobility is low. We also find that rising US bond yields drive foreign yields, stock prices and depreciations, but less so on days of policy announcements. We develop a theoretical model that is broadly consistent with our results.
March 13, 2017
Aftershocks of Monetary Unification: Hysteresis with a Financial Twist
Description: Once upon a time, in the 1990s, it was widely agreed that neither Europe nor the United States was an optimum currency area, although moderating this concern was the finding that it was possible to distinguish a regional core and periphery (Bayoumi and Eichengreen, 1993). Revisiting these issues, we find that the United States is remains closer to an optimum currency area than the Euro Area. More intriguingly, the Euro Area shows striking changes in correlations and responses which we interpret as reflecting hysteresis with a financial twist, in which the financial system causes aggregate supply and demand shocks to reinforce each other. An implication is that the Euro Area needs vigorous, coordinated regulation of its banking and financial systems by a single supervisor—that monetary union without banking union will not work.
March 13, 2017
Labor Force Participation in Chile: Recent Trends, Drivers, and Prospects
Description: Gains in labor force participation rates in Chile have slowed in recent years. We examine their determinants using a cohort-model analysis. Allowing for both age- and cohort-specific effects in the context of a seemingly unrelated regression equations (SURE) approach, we find that age factors play an important role in determining participation decisions, especially for males. For females, we find that strong positive time trends dominate the downward pressure from demographics, although those trends have recently dissipated. In addition, we find that both cohort effects and the business cycle shape participation decisions. Using our cohort-based analysis, we construct projections of participation rates, which suggest population aging will put downward pressure on labor inputs, and thus potential output, in coming years. Further increases in female labor force participation—supported by policies— could more than offset the downward pressure from demographics.
March 13, 2017
Pension Reform Options in Chile: Some Tradeoffs
Description: In this paper, we study the macroeconomic impact of pension reform options in Chile, using a dynamic general equilibrium model. The main reform proposal considers raising contributions (employer side) and vehicle additional proceeds to individual accounts and to increase the support of solidarity pensions. We model increased contributions as a labor tax. We find the impact of this reform on GDP to be negative in the near to the medium run, with GDP declining by 0.5 percent by 2021, as a result of labor tax distortions which lead to a fall in labor supply, investment and to a loss in competitiveness. We also illustrate the main macroeconomics tradeoffs by analyzing alternative reforms, such as using revenues only to improve future pensions or a reform package funded by a mix of higher contributions and indirect taxes.
March 10, 2017
The Drivers of Capital Flows in Emerging Markets Post Global Financial Crisis
Description: Using a sample of 34 emerging markets and developing economies over the period 2009Q3-2015Q4, the paper employs a panel framework to study the determinants of capital flows, both net and gross, across a wide range of instruments. The baseline regressions are then extended to focus on high and low episodes – quarters with flows one standard deviation above/below mean. Overall, the results suggest that the capital flow slowdown witnessed in recent years is due to a combination of lower growth prospects of recipient countries and worse global risk sentiment. However, the determinants of flows can be considerably different across instruments and across the type of flows considered, net or gross. The sensitivity of certain types of flows, towards push and pull factors, increases during periods of high and low capital flows. Moreover, some variables may not necessarily be significant during normal times, but can be important drivers during such episodes, and vice versa. Indicators like the gap between the U.S. long- and short-term maturity bond yields – not significant during normal times – can be an important driver during high episodes.
March 10, 2017
Brazilian Market Portfolio
Description: In recent years, Brazil has achieved substantial progress in capital market development by building a diversified investor base and expanding the menu of available financial instruments. In this context, we evaluated the invested Brazilian market portfolio for a period spanning 2005–15. This is a portfolio of all assets proportionally weighted by their market capitalization, and it is divided in eight broad categories: government bonds, equities, bank funding bonds, corporate bonds, real-estate, agribusiness, private-equity, and credit bonds. While the paper focuses on stylized facts related to market size, composition weighting and changes over time, the estimated market portfolio contains important information for policy makers and market participants alike.
March 10, 2017
Spillovers from U.S. Monetary Policy Normalization on Brazil and Mexico’s Sovereign Bond Yields
Description: This paper examines the transmission of changes in the U.S. monetary policy to localcurrency sovereign bond yields of Brazil and Mexico. Using vector error-correction models, we find that the U.S. 10-year bond yield was a key driver of long-term yields in these countries, and that Brazilian yields were more sensitive to U.S. shocks than Mexican yields during 2010–13. Remarkably, the propagation of shocks from U.S. long-term yields was amplified by changes in the policy rate in Brazil, but not in Mexico. Our counterfactual analysis suggests that yields in both countries temporarily overshot the values predicted by the model in the aftermath of the Fed’s “tapering” announcement in May 2013. This study suggests that emerging markets will need to contend with potential spillovers from shifts in monetary policy expectations in the U.S., which often lead to higher government bond interest rates and bouts of volatility.
March 10, 2017
Evaluating Changes in the Transmission Mechanism of Government Spending Shocks
Description: We empirically revisit the crowding-in effect of government spending on private consumption based on rolling windows of U.S. data. Results show that in earlier samples government spending is increasingly crowding in private consumption; however, this relation is reverted in the latest periods. We propose a model embedding non-separable public and private consumption in the utility function and rule-of-thumb consumers to assess the sources of non-monotonic changes in the transmission of the shock. The iterative full information estimation of the model reveals that changes in the co-movement between private and public spending is primarily driven by the fluctuations in the elasticity of substitution between private and public consumption, the share of financially constrained consumers, and the elasticity of intertemporal substitution.