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Working Paper
Sudden Stops and Optimal Foreign Exchange Intervention
Davis, J. Scott; Devereux, Michael B.; Yu, Changhua (2020-11-10)
This paper shows how foreign exchange intervention can be used to avoid a sudden stop in capital flows in a small open emerging market economy. The model is based around the concept of an under-borrowing equilibrium defined by Schmitt-Grohe and Uribe (2020). With a low elasticity of substitution between traded and non-traded goods, real exchange rate depreciation may generate a precipitous drop in aggregate demand and a tightening of borrowing constraints, leading to an equilibrium with an inefficiently low level of borrowing. The central bank can preempt this deleveraging cycle through ...
Globalization Institute Working Papers , Paper 405

Working Paper
Financial integration and international business cycle co-movement: the role of balance sheets
Davis, J. Scott (2011)
This paper investigates the effect of international financial integration on international business cycle co-movement. We first show with a reduced form empirical approach how capital market integration (equity) has a negative effect on business cycle co-movement while credit market integration (debt) has a positive effect. We then construct a model that can replicate these empirical results.> ; In the model, capital market integration is modeled as crossborder equity ownership and involves wealth effects. Credit market integration is modeled as cross-border borrowing and lending between ...
Globalization Institute Working Papers , Paper 89

Working Paper
Pegging the exchange rate to gain monetary policy credibility
Davis, J. Scott; Fujiwara, Ippei (2015-01-01)
Central banks that lack credibility often tie their exchange rate to that of a more credible partner in order to ?import? credibility. We show in a small open economy model that a central bank that displays ?limited credibility? can deliver significant improvements to a social welfare function that contains no role for exchange rate stabilization by maximizing an objective function that places weight on exchange rate stabilization, and thus the central bank with limited credibility will peg their currency to that of a more credible partner. As the central bank?s credibility improves it will ...
Globalization Institute Working Papers , Paper 224

Working Paper
Evolving comparative advantage, sectoral linkages, and structural change
Sposi, Michael (2015-03-01)
I quantitatively examine the effects of location-and sector-specific productivity growth on structural change across countries from 1970-2011. The results shed new light on the ?hump shape" in industry's share in GDP across levels of development. There are two key features. First, otherwise identical changes in the composition of final demand translate differently into changes in the composition of value added because of systematic differences in sectoral linkages. Second, the mapping between sector-specific productivity and the composition of final demand systematically differs because of ...
Globalization Institute Working Papers , Paper 231

Working Paper
The international monetary and financial system: its Achilles heel and what to do about it
Borio, Claudio (2014-10-01)
This essay argues that the Achilles heel of the international monetary and financial system is that it amplifies the ?excess financial elasticity? of domestic policy regimes, ie it exacerbates their inability to prevent the build-up of financial imbalances, or outsize financial cycles, that lead to serious financial crises and macroeconomic dislocations. This excess financial elasticity view contrasts sharply with two more popular ones, which stress the failure of the system to prevent disruptive current account imbalances and its tendency to generate a structural shortage of safe assets ? ...
Globalization Institute Working Papers , Paper 203

Working Paper
The international monetary and financial system: a capital account historical perspective
Shin, Hyun Song; Borio, Claudio; James, Harold (2014-10-01)
In analysing the performance of the international monetary and financial system (IMFS), too much attention has been paid to the current account and far too little to the capital account. This is true of both formal analytical models and historical narratives. This approach may be reasonable when financial markets are highly segmented. But it is badly inadequate when they are closely integrated, as they have been most of the time since at least the second half of the 19th century. Zeroing on the capital account shifts the focus from the goods markets to asset markets and balance sheets. Seen ...
Globalization Institute Working Papers , Paper 204

Working Paper
Commodity house prices
Shi, Song; Leung, Charles Ka Yui; Tang, Edward (2013)
This paper studies how commodity price movements have affected local house prices in commodity-dependent economies, Australia and New Zealand. We build a geographically hierarchical empirical model and find that commodity prices influence local house prices directly and also indirectly through macroeconomic variables. While commodity price changes function more like ?income shocks? rather than ?cost shocks? in both Australia and New Zealand, regional heterogeneity is also observed in terms of differential dynamic responses of local house prices to energy versus non-energy commodity price ...
Globalization Institute Working Papers , Paper 154

Working Paper
In the shadow of the United States: the international transmission effect of asset returns
Chang, Kuang-Liang; Leung, Charles Ka Yui; Chen, Nan-Kuang (2012)
We examine how the fluctuations in financial and housing markets in U.S. affect the asset returns and GDP in Hong Kong. In contrast to the results from linear specifications, which concludes that the U.S. and Hong Kong are virtually delinked in terms of the asset markets, our regime-switching models indicate that the unexpected shock of US stock returns, followed by the TED spread, has the most significant effect on HK asset returns and GDP, typically in the regime with high return and low volatility. For the in-sample one-step-ahead forecasting, US Term spread stands out to be the best ...
Globalization Institute Working Papers , Paper 121

Working Paper
What drives the German current account? and how does it affect other EU member states?
Kollmann, Robert; in't Veld, Jan; Vogel, Lukas; Roeger, Werner; Ratto, Marco (2014-05-13)
We estimate a three-country model using 1995-2013 data for Germany, the Rest of the Euro Area (REA) and the Rest of the World (ROW) to analyze the determinants of Germany?s current account surplus after the launch of the Euro. The most important factors driving the German surplus were positive shocks to the German saving rate and to ROW demand for German exports, as well as German labour market reforms and other positive German aggregate supply shocks. The convergence of REA interest rates to German rates due to the creation of the Euro only had a modest effect on the German current account ...
Globalization Institute Working Papers , Paper 176

Working Paper
Breaking down world trade elasticities: a panel ECM approach
Martinez-Martin, Jaime (2016-07-18)
This paper exhaustively analyses the recent decline of international trade elasticities to output growth. We extend an empirical model of import demand functions to account not only for transitory factors, such as relative prices and import intensity-adjusted measures of demand (I-O Tables), but also for habitually neglected permanent factors such as protectionism, vertical integration (i.e. Global Value Chains) and foreign direct investment (FDI). Dealing with a non-stationary heteregenous panel of 27 countries, we estimate a panel Error Correction Model from 1960 to 2015 in order to break ...
Globalization Institute Working Papers , Paper 275

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