Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

A long-standing conjecture in macroeconomics is that recent declines in exchange rate pass-through are in part due to improved monetary policy performance. In a large sample of emerging and advanced economies, we find evidence of a strong link between exchange rate pass-through to consumer prices and the monetary policy regime’s performance in delivering price stability. Using input-output tables, we decompose exchange rate pass-through to consumer prices into a component that reflects the adjustment of imported goods at the border, and another that captures the response of all other prices. We find that price stability and central bank credibility have reduced the second component.

Foreign Exchange --- Inflation --- Macroeconomics --- Price Level --- Deflation --- Monetary Policy --- Open Economy Macroeconomics --- Currency --- Foreign exchange --- Exchange rate pass-through --- Consumer prices --- Import prices --- Nominal effective exchange rate --- Prices --- Imports --- United States

Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

This paper examines the policy challenges a country faces when it wants to both reduce inflation and maintain a sustainable external position. Mundell’s (1962) policy assignment framework suggests that these two goals may be mutually incompatible unless monetary and fiscal policies are properly coordinated. Unfortunately, if the fiscal authority is unwilling to cooperate—a case of fiscal intransigence—central banks that pursue a disinflation on a ‘go it alone’ basis will cause the country’s external position to further deteriorate. A dynamic analysis shows that if the central bank itself lacks credibility in its inflation goal, it must rely even more on cooperation from the fiscal authority than otherwise. Echoing Sargent and Wallace’s (1981) ‘unpleasant monetarist arithmetic,’ in these circumstances, a ‘go it alone’ policy may successfully stabilize prices and output, but only on a short-term basis.

Exports and Imports --- Foreign Exchange --- Inflation --- Macroeconomics --- Money and Monetary Policy --- Open Economy Macroeconomics --- Economic Growth of Open Economies --- Fiscal Policy --- Price Level --- Deflation --- International Lending and Debt Problems --- Monetary Policy --- Currency --- Foreign exchange --- International economics --- Monetary economics --- Fiscal consolidation --- Real exchange rates --- External debt --- Inflation targeting --- Fiscal policy --- Prices --- Monetary policy --- Debts, External --- South Africa

Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

We study the process of external adjustment to large terms-of-trade level shifts—identified with a Markov-switching approach—for a large set of countries during the period 1960–2015. We find that adjustment to these shocks is relatively fast. Current accounts experience, on average, a contemporaneous variation of only about ½ of the magnitude of the price shock—indicating a significant volume offset—and a full adjustment within 3–4 years. Dynamics are largely symmetric for terms-of-trade booms and busts, as well as for advanced and emerging market economies. External adjustment is driven primarily by offsetting shifts in domestic demand, as opposed to variations in output (also reflected in the response of import rather than export volumes), indicating a strong income channel at play. Exchange rate flexibility appears to have played an important buffering role during booms, but less so during busts; while international reserve holdings have been a key tool for smoothing the adjustment process.

Business cycles --- Business cycles. --- Economic cycles --- Economic fluctuations --- Cycles --- Econometric models. --- Exports and Imports --- Foreign Exchange --- Information Management --- Current Account Adjustment --- Short-term Capital Movements --- Open Economy Macroeconomics --- International Business Cycles --- Technological Change: Choices and Consequences --- Diffusion Processes --- Knowledge management --- International economics --- Currency --- Foreign exchange --- Technology transfer --- Current account --- Exchange rate arrangements --- Adjustment process --- Exchange rate flexibility --- Technology --- Balance of payments --- United States

Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

Across a sample of thirty four emerging countries, the evidence shows the frequent existence of a pro-cyclical fiscal impulse. However, the scope for countercyclical policy increases with the availability of international reserves as it enhances credibility and mitigates concerns about the effect of expansionary fiscal policy on the cost of borrowing and debt service. The paper also examines the effectiveness of the fiscal policy in emerging countries in the short- and long-run and its underlying conditions, which does not appear to be uniform. In some cases, contractionary fiscal policy could stimulate growth in the short-run, if fiscal tightness lowers the cost of borrowing and debt service, and mitigates concerns about debt sustainability. However, an increase in international reserves is evident to mitigate these concerns. On the other hand, high inflation increases concerns about the impact of fiscal spending on inflationary expectations and the cost of borrowing, countering the effectiveness of the fiscal stimulus on output growth in the short-run. Where the debt burden is high, fiscal expansion has a longlasting negative effect on real growth.

Banks and Banking --- Foreign Exchange --- Macroeconomics --- Public Finance --- Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General --- Fiscal Policy --- Business Fluctuations --- Cycles --- Open Economy Macroeconomics --- Macroeconomics: Production --- Monetary Policy --- Currency --- Foreign exchange --- Banking --- Fiscal stimulus --- Fiscal policy --- Production growth --- Exchange rate arrangements --- International reserves --- Production --- Central banks --- Economic theory --- Foreign exchange reserves --- Brazil --- Business cycles

Choose an application

• Reference Manager
• EndNote
• RefWorks (Direct export to RefWorks)

This paper studies optimal monetary policy in a two-sector small open economy model under segmented asset markets and sticky prices. We solve the Ramsey problem under full commitment, and characterize the optimal monetary policy in a calibrated version of the model. The findings of the paper are threefold. First, the Ramsey solution mimics the allocations under flexible prices. Second, under the optimal policy the volatility of non-tradable inflation is close to zero. Third, stabilizing nontradable inflation is optimal regardless of the financial structure of the small open economy. Even for a moderate degree of price stickiness, implementing a monetary policy that mitigates asset market segmentation is highly distortionary. This last result suggests that policymakers should resort to other policy instruments in order to correct financial imperfections.

Finance: General --- Inflation --- Macroeconomics --- Financial Markets and the Macroeconomy --- Monetary Policy --- Open Economy Macroeconomics --- Price Level --- Deflation --- General Financial Markets: General (includes Measurement and Data) --- Macroeconomics: Consumption --- Saving --- Wealth --- Finance --- Sticky prices --- Securities markets --- Consumption --- Asset prices --- Prices --- Financial markets --- National accounts --- Capital market --- Economics --- Chile --- Monetary policy --- Econometric models. --- Evaluation --- Mathematical models