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The paper develops a simple model of sovereign debt where default both through direct repudiation and through inflation are possible and give rise to (endogenous) constraints on the currency composition and the level of public debt. This set up allows to show that procyclicality of fiscal policy in EMEs can arise as a by-product of the "original sin" and both can be explained by the presence of weak monetary institutions which cannot commit to price stability. The paper suggests that, as monetary institutions in EMEs strengthen, the "original sin" would fade away and the cyclical properties of fiscal policy would improve.
Fiscal policy --- Business cycles --- Financial crises --- Econometric models. --- Crashes, Financial --- Crises, Financial --- Financial crashes --- Financial panics --- Panics (Finance) --- Stock exchange crashes --- Stock market panics --- Tax policy --- Taxation --- Government policy --- Crises --- Economic policy --- Finance, Public --- Macroeconomics --- Money and Monetary Policy --- Public Finance --- National Government Expenditures and Related Policies: General --- Debt --- Debt Management --- Sovereign Debt --- Fiscal Policy --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- Macroeconomics: Consumption --- Saving --- Wealth --- Public finance & taxation --- Monetary economics --- Expenditure --- Public debt --- Currencies --- Private consumption --- Expenditures, Public --- Debts, Public --- Money --- Consumption --- Economics
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Productivity growth--the key driver of living standards--fell sharply following the global financial crisis and has remained sluggish since, adding to a slowdown already in train before. Building on new research, this note finds that the productivity slowdown reflects both crisis legacies and structural headwinds. In advanced economies, the global financial crisis has led to "productivity hysteresis"--persistent productivity losses from a seemingly temporary shock. Behind this are balance sheet vulnerabilities, protracted weak demand and elevated uncertainty, which jointly triggered an adverse feedback loop of weak investment, weak productivity and bleak income prospects. Structural headwinds--already blowing before the crisis--include a waning ICT boom and slowing technology diffusion, partly reflecting an aging workforce, slowing global trade and weaker human capital accumulation. Reviving productivity growth requires addressing remaining crisis legacies in the short run while pressing ahead with structural reforms to tackle longer-term headwinds.
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Shocks stemming from Brazil - the large neighbor in South America - have historically been a source of concern for policy-makers in other countries of the region. This paper studies the importance of Brazil’s influence on its neighboring economies, documenting trade linkages over the last two decades and quantifying spillover effects in a Vector Auto Regression setting. While trade linkages with Brazil are significant for the Southern Cone countries (Argentina, Bolivia, Chile, Paraguay, and Uruguay), they are very weak for others. Consistent with this evidence, econometric results show that, while the Southern Cone economies (especially Mercosur’s members) are vulnerable to output shocks from Brazil, the rest of South America is not. Spillovers can take two different forms: the transmission of Brazil-specific shocks and the amplification of global shocks—through their impact on Brazil’s output. Finally, we also find suggestive evidence that depreciations of Brazil’s currency may not have significant impact on output of its key trading partners.
Finance --- Business & Economics --- Investment & Speculation --- Investments, Foreign --- Brazil --- Foreign economic relations. --- Exports and Imports --- Foreign Exchange --- Investments: General --- Macroeconomics --- Externalities --- Trade: General --- Investment --- Capital --- Intangible Capital --- Capacity --- International economics --- Currency --- Foreign exchange --- Spillovers --- Exports --- Depreciation --- Real exchange rates --- Real effective exchange rates --- Financial sector policy and analysis --- International trade --- National accounts --- International finance --- Saving and investment
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Commodity-exporting countries have significantly benefited from the commodity price boom of recent years. At the current juncture, however, uncertain global economic prospects have raised questions about their vulnerability to a sharp fall in commodity prices and the policies that can shield it from such a shock. To address these questions, this paper takes a long term (4 decade) view at emerging markets' commodity dependence, the history of commodity price busts and the role of policies in mitigating or amplifying their economic impact. The paper highlights the stark difference in trends between Latin America - one of the most vulnerable regions given its high, and rising, commodity dependence - and emerging Asia - which has evolved from being a net exporter to a net importer of commodities in the last 40 years. We find evidence, however, that while commodity dependence is an important ingredient, a country's ultimate degree of vulnerability to commodity price shocks is to a great extent determined by the flexibility and quality of its policy framework. Policies in the run-up of sharp terms-of-trade drops - especially when those are preceded by booms - play a particularly important role. Limited exchange rate flexibility, a weak external position, and loose fiscal policy tend to amplify the negative effects of these shocks on domestic output. Financial dollarization also appears to act as a shock "amplifier.".
Prices --- Terms of trade --- Competition, International --- Commercial products --- Commodity prices --- Justum pretium --- Price theory --- Consumption (Economics) --- Cost --- Costs, Industrial --- Money --- Cost and standard of living --- Supply and demand --- Value --- Wages --- Willingness to pay --- Investments: Commodities --- Exports and Imports --- Foreign Exchange --- Macroeconomics --- Business Fluctuations --- Cycles --- Studies of Particular Policy Episodes --- Trade: General --- Macroeconomic Aspects of International Trade and Finance: General --- Agricultural and Natural Resource Economics --- Environmental and Ecological Economics: General --- Commodity Markets --- Empirical Studies of Trade --- International economics --- Investment & securities --- Currency --- Foreign exchange --- Commodities --- Exports --- Exchange rate flexibility --- International trade --- Economic policy --- nternational cooperation --- United States
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We study the history of terms-of-trade booms (during 1970–2012), with a focus on Latin America, through the prisms of a simple metric that quantifies the associated income windfall. We also document saving patterns during these episodes and propose a measure of how much of the income windfall was saved. We find that Latin America‘s terms-of-trade shocks of the last decade have not differed much in magnitude from those observed during the 1970s, but that the associated windfall have been substantially larger. While aggregate saving increased more than in past episodes, the share of the windfall saved (the marginal saving rate) seems to be lower, suggesting that greater aggregate saving reflects mainly the sheer size of the windfall rather than a greater 'effort' to save it. Finally, we find evidence that, while savings during the boom help to increase post-boom income, the composition of such savings matters. Specifically, in past episodes, savings allocated to foreign asset accumulation appear to have contributed more to post-boom income than those devoted to domestic investment.
International trade --- Terms of trade. --- Competition, International --- Prices --- Econometric models. --- Exports and Imports --- Macroeconomics --- Macroeconomics: Consumption --- Saving --- Wealth --- Trade: Other --- Open Economy Macroeconomics --- Personal Income, Wealth, and Their Distributions --- International Investment --- Long-term Capital Movements --- Current Account Adjustment --- Short-term Capital Movements --- Empirical Studies of Trade --- International economics --- Personal income --- Domestic savings --- Foreign assets --- Current account balance --- Terms of trade --- National accounts --- External position --- Balance of payments --- Income --- Saving and investment --- Investments, Foreign --- Economic policy --- nternational cooperation --- Bolivia
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The presence of foreign banks in emerging markets has increased markedly over the last two decades, raising questions about their potentially stabilizing or destabilizing role during times of financial distress. Most studies on this subject have focused on banks’ asset side (i.e., their lending behavior). This paper focuses on their liability side, studying the behavior of depositors vis-à-vis foreign banks. We rely on data from the banking crises in Argentina and Uruguay over the period 1994-2002 to conduct the study. The paper focuses on three questions; (i) are foreign banks perceived as a safe haven during bank runs?; (ii) does their legal structure (branch versus subsidiary) matter?; (iii) do perceptions depend on the nature of the crisis? Contrary to the commonly held view that foreign banks play a stabilizing role during domestic banking crises, we do not find robust evidence in this regard. Only in one (large) bank run episode, out of five studied, there is evidence of safe haven perceptions towards foreign branches.
Banks and banking, Foreign --- Financial crises --- Bank deposits --- Banks and banking --- Foreign banks and banking --- Offshore banking (Finance) --- Demand deposits --- Deposits, Bank --- Money supply --- Banks and Banking --- International Investment --- Long-term Capital Movements --- International Financial Markets --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Financing Policy --- Financial Risk and Risk Management --- Capital and Ownership Structure --- Value of Firms --- Goodwill --- Banking --- Financial services law & regulation --- Foreign banks --- Commercial banks --- Exchange rate risk --- Financial institutions --- Financial regulation and supervision --- State-owned banks --- Financial services --- Financial risk management --- Argentina
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Large fiscal financing needs, both in advanced and emerging market economies, have often been met by borrowing heavily from domestic banks. As public debt approached sustainability limits in a number of countries, however, high bank exposure to sovereign risk created a fragile inter-dependence between fiscal and bank solvency. This paper presents a simple model of twin (sovereign and banking) crisis that stresses how this interdependence creates conditions conducive to a self-fulfilling crisis.
Business & Economics --- Economic Theory --- Financial crises. --- Banks and banking. --- Agricultural banks --- Banking --- Banking industry --- Commercial banks --- Depository institutions --- Crashes, Financial --- Crises, Financial --- Financial crashes --- Financial panics --- Panics (Finance) --- Stock exchange crashes --- Stock market panics --- Finance --- Financial institutions --- Money --- Crises --- Banks and banking --- Bank loans --- Financial crises --- Risk --- Debts, Public --- Econometric models --- E-books --- Debts, Government --- Government debts --- National debts --- Public debt --- Public debts --- Sovereign debt --- Debt --- Bonds --- Deficit financing --- Economics --- Uncertainty --- Probabilities --- Profit --- Risk-return relationships --- Bank credit --- Loans --- Banks and Banking --- Financial Risk Management --- Money and Monetary Policy --- Public Finance --- Industries: Financial Services --- Financial Markets and the Macroeconomy --- Money Supply --- Credit --- Money Multipliers --- Comparative or Joint Analysis of Fiscal and Monetary Policy --- Stabilization --- Treasury Policy --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Financial Crises --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Debt Management --- Sovereign Debt --- Economic & financial crises & disasters --- Monetary economics --- Public finance & taxation --- Nonbank financial institutions --- Domestic debt --- Financial services industry --- Argentina
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With the rapid growth of countries' foreign asset and liability positions over the last two decades, financial returns on those positions ('NFA returns') have become material drivers of current accounts and net stock positions. This paper documents the relative importance of NFA return versus trade channels in driving NFA dynamics, for a sample of 52 economies over 1990-2015. While persistent trade imbalances have been a strong force leading to diverging NFA positions, NFA returns have played an important stabilizing role, mitigating NFA divergence. The stabilizing role of NFA returns primarily reflects the response of asset prices, rather than yield differentials or exchange rates. There is also evidence of heterogeneity in the speed of NFA adjustment, with emerging market economies adjusting more rapidly than advanced economies, and reserve-currency countries adjusting more slowly than others. The paper also documents the role of NFA returns as insurance against domestic and global income shocks, with a focus on reserve-currency countries.
Exports and Imports --- Foreign Exchange --- Insurance --- Macroeconomics --- Financial Aspects of Economic Integration --- Current Account Adjustment --- Short-term Capital Movements --- Price Level --- Inflation --- Deflation --- Empirical Studies of Trade --- Insurance Companies --- Actuarial Studies --- Aggregate Factor Income Distribution --- International economics --- Insurance & actuarial studies --- Currency --- Foreign exchange --- Asset prices --- Trade balance --- Income shocks --- Exchange rates --- Prices --- International trade --- Financial institutions --- National accounts --- Balance of trade --- Income --- United States
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The strong US policy response to the 2008-09 financial crisis raised concerns about its impact (spillovers) on other countries, with great focus on the monetary stimulus but little attention to fiscal policy, despite their combined deployment. Using a sign-restricted structural VAR approach, we study the trade spillovers of the post-crisis policy mix, by assessing the joint impact of monetary and fiscal policy. We find that aggregate trade effects, as reflected in the trade balance, varied across time, reflecting the different timing of fiscal and monetary stimuli, with overall positive spillovers in the immediate aftermath of the crisis. At the same time, reflecting the different transmission mechanisms of monetary policy, we find that the effects differed greatly between trading partners with fixed and flexible exchange rates. In general, our results highlight (i) the importance of studying fiscal and monetary policy spillovers jointly in order to avoid attenuation bias from omitted variables; and (ii) that trading partners’ exchange rate regimes are of first order importance in determining the impact of policy spillovers.
Exports and Imports --- Financial Risk Management --- Foreign Exchange --- Public Finance --- Monetary Policy --- Empirical Studies of Trade --- Fiscal Policy --- Financial Crises --- Trade Policy --- International Trade Organizations --- International economics --- Macroeconomics --- Currency --- Foreign exchange --- Economic & financial crises & disasters --- Trade balance --- Fiscal policy --- Exchange rate arrangements --- Financial crises --- Trade policy --- International trade --- Balance of trade --- Commercial policy --- United States
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Monetary policy entails demand augmenting and demand diverting effects, with its impact on the trade balance—and spillovers to other countries—depending on the relative magnitude of these opposing effects. Using US data, and a sign-restricted structural VAR identification strategy, we investigate how monetary policy shocks affects the trade balance, shedding light on the importance of the two effects. Overall, the results indicate that monetary policy has a meaningful impact on the trade balance. A monetary loosening (tightening) leads to a strengthening (weakening) of the overall trade balance, indicating that, on average, demand diversion dominates. This effect of monetary policy on trade is revealed in full when distinguisging between trading partners with fixed exchange rates—for which only demand augmenting operates—and flexible exchange rates—for which both effects operate. We also explore spillover differences between conventional and unconventional monetary policy, as well as changes in spillovers in the postcrisis period (due to an impaired monetary transmission mechanism). While our results suggest that monetary policy comes with spillovers through trade, they should not be interpreted as evidence against the use of this policy instrument as such. From a global perspective, optimal monetary policy should be assessed in conjunction with deployment of other policy measures, inclluding the ability of recipient countries to deploy their own policy measures to offset undesirable spillovers.
Exports and Imports --- Foreign Exchange --- Money and Monetary Policy --- Empirical Studies of Trade --- Monetary Policy --- Trade Policy --- International Trade Organizations --- Currency --- Foreign exchange --- International economics --- Monetary economics --- Trade balance --- Exchange rate arrangements --- Unconventional monetary policies --- Exchange rate flexibility --- Conventional peg --- International trade --- Monetary policy --- Balance of trade --- Commercial policy --- United States
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