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We study the role that changes in credit and fiscal positions play in explaining current account fluctuations. Empirically, the current account declines when credit increases, and when the fiscal balance declines. We use a two-country model with financial frictions and fiscal policy to study these facts. We estimate the model using annual data for the U.S. and “a rest of the world” aggregate that includes main advanced economies. We find that about 30 percent of U.S. current account balance fluctuations are due to domestic credit shocks, while fiscal shocks explain about 14 percent. We evaluate simple macroprudential policy rules and show that they help reduce global imbalances. By taming the financial cycle, macroprudential rules that react to domestic credit conditions or to domestic house prices would have led to a smaller and less volatile U.S. current account deficit. We also show that a countercylical fiscal policy rule that stabilizes output growth reduces the level and volatility of the U.S. current account deficit.

Macroeconomics --- Economics: General --- International Economics --- Model Evaluation and Selection --- Quantitative Policy Modeling --- Open Economy Macroeconomics --- Economic & financial crises & disasters --- Economics of specific sectors --- Financial crises --- Economic sectors --- Currency crises --- Informal sector --- Economics

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We study gains from introducing a common numerical fiscal rule in a “Union” of model economies facing sovereign default risk. We show that among economies in the Union, there is significant disagreement about the common debt limit the Union should implement: the limit preferred by some economies can generate welfare losses in other economies. In contrast, a common sovereign spread limit results in higher welfare across economies in the Union.

Macroeconomics --- Economics: General --- Financial Risk Management --- International Lending and Debt Problems --- Open Economy Macroeconomics --- Fiscal Policy --- Debt --- Debt Management --- Sovereign Debt --- Price Level --- Inflation --- Deflation --- Economic & financial crises & disasters --- Economics of specific sectors --- Finance --- Fiscal rules --- Fiscal policy --- Debt limits --- Asset and liability management --- Asset prices --- Prices --- Currency crises --- Informal sector --- Economics

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We consider how fear of model misspecification on the part of the planner and/or the households affects welfare gains from optimal macroprudential taxes in an economy with occasionally binding collateral constraints as in Bianchi (2011). On the one hand, there exist welfare gains from internalizing how borrowing decisions in good times affect the value of collateral during a crisis. On the other hand, interventions by a robust planner that has in mind a model far from the true underlying distribution of shocks, can result in negligible welfare gains, or even losses. This is because a policy that is robust to misspecification, as in Hansen and Sargent (2011), is optimal under a "worst-case' scenario but not under alternative distributions of the state. A robust planner introduces taxes that are 5 percentage points higher but does not achieve a significant increase in welfare gains compared to a non-robust planner when the true underlying model is not the worst-case. If households also make choices that are robust to model misspecification, the gains are significantly reduced and a highly-robust planner "underborrows" and induces welfare losses. If, however, the worst-case scenario is indeed realized, then welfare gains are the largest possible.

Macroeconomics --- Economics: General --- International Economics --- Externalities --- Business Fluctuations --- Cycles --- Financial Markets and the Macroeconomy --- Fiscal Policy --- Current Account Adjustment --- Short-term Capital Movements --- Open Economy Macroeconomics --- Financial Crises --- Efficiency --- Optimal Taxation --- Economic & financial crises & disasters --- Economics of specific sectors --- Financial crises --- Economic sectors --- Currency crises --- Informal sector --- Economics

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We develop a microfounded New Keynesian model to analyze monetary policy and financial stability issues in open economies with financial fragilities and weakly anchored inflation expectations. We show that foreign exchange intervention (FXI) and capital flow management tools (CFMs) can improve monetary policy tradeoffs under some conditions, including by reducing the need for procyclical tightening in response to capital outflow pressures. Moreover, they can be used in a preemptive way to reduce the risk of a “sudden stop” through curbing a buildup in leverage. While these tools can materially improve welfare, mainly by dampening inefficient fluctuations in risk premia, our analysis also highlights potential limitations, including the possibility that their deployment may forestall needed adjustment in the external balance. Finally, our results also emphasize the power of FXIs to provide domestic stimulus in a liquidity trap.

Macroeconomics --- Economics: General --- Exports and Imports --- Foreign Exchange --- Inflation --- Finance: General --- Quantitative Policy Modeling --- Monetary Policy --- Central Banks and Their Policies --- Open Economy Macroeconomics --- International Investment --- Long-term Capital Movements --- Price Level --- Deflation --- International Financial Markets --- Economic & financial crises & disasters --- Economics of specific sectors --- International economics --- Currency --- Foreign exchange --- Finance --- Sudden stops --- Balance of payments --- Prices --- Currency markets --- Financial markets --- Exchange rates --- Exchange rate devaluation --- Currency crises --- Informal sector --- Economics --- Capital movements --- Foreign exchange market

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This paper provides the first assessment of the contribution of idiosyncratic shocks to aggregate fluctuations in an emerging market using confidential data on the universe of Chilean firms. We find that idiosyncratic shocks account for more than 40 percent of the volatility of aggregate sales. Although quite large, this contribution is smaller than documented in previous studies based on advanced economies, despite a higher degree of market concentration in Chile.We show that this finding is explained by larger firms being less volatile and by weaker propagation effects across Chilean firms.

Macroeconomics --- Economics: General --- Finance: General --- Industries: Manufacturing --- Exports and Imports --- Business Fluctuations --- Cycles --- Open Economy Macroeconomics --- General Financial Markets: General (includes Measurement and Data) --- Industry Studies: Manufacturing: General --- Trade: General --- Economic & financial crises & disasters --- Economics of specific sectors --- Finance --- Manufacturing industries --- International economics --- Emerging and frontier financial markets --- Financial markets --- Manufacturing --- Economic sectors --- Exports --- International trade --- Currency crises --- Informal sector --- Economics --- Financial services industry --- Chile