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Capital controls: a normative analysis
Countries' concerns about the value of their currency have been studied and documented extensively in the literature. Capital controls can be?and often are?used as a tool to manage exchange rate fluctuations. This paper investigates whether countries can benefit from using such a tool. We develop a welfare-based analysis of whether (or, in fact, how) countries should tax international borrowing. Our results suggest that restricting international capital flows through the use of these taxes can be beneficial for individual countries, although it would limit cross-border pooling of risk. The ...
Working Paper
Sectoral Shocks, Reallocation, and Labor Market Policies
Unemployment insurance and wage subsidies are key tools to support labor markets in recessions. We develop a multi-sector search and matching model with on-the-job human capital accumulation to study labor market policy responses to sector-specific shocks. Our calibration accounts for structural differences in labor markets between the United States and the euro area, including a lower job-finding rate in the latter. We use the model to evaluate unemployment insurance and wage subsidy policies in recessions of different duration. We find that, after a temporary sector-specific shock, ...
Discussion Paper
Real Effects of Uncertainty: Evidence from Brexit
In the historic Brexit referendum on June 23, 2016, U.K. citizens voted in favor of leaving the European Union (EU), a result that created substantial uncertainty regarding the future economic relationship between the United Kingdom and the EU. As can be seen in Figure 1, uncertainty, measured by the Economic and Policy Uncertainty (EPU) index of Baker et al. (2016), spiked around the Brexit referendum date and has remained elevated relative to its pre-referendum levels since then.
Working Paper
Practical tools for policy analysis in DSGE models with missing channels
In this paper we analyze the propagation of shocks originating in sectors that are not present in a baseline dynamic stochastic general equilibrium (DSGE) model. Specifically, we proxy the missing sector through a small set of factors, that feed into the structural shocks of the DSGE model to create correlated disturbances. We estimate the factor structure by matching impulse responses of the augmented DSGE model to those generated by an auxiliary model. We apply this methodology to track the effects of oil shocks and housing demand shocks in models without energy and housing sectors.
Conference Paper
Capital controls: a normative analysis
Countries' concerns with the value of their currency have been extensively studied and documented in the literature. Capital controls can be (and often are) used as a tool to manage exchange rate fluctuations. This paper investigates whether countries can benefi t from using such a tool. We develop a welfare based analysis of whether (or, in fact, how)countries should tax international borrowing. Our results suggest that managing exchange rate movements with the use of these taxes can be benefi cial for individual countries although it would limit cross-border pooling of risk. This is because ...
Working Paper
Sharing Asymmetric Tail Risk: Smoothing, Asset Prices and Terms of Trade
Crises and tail events have asymmetric effects across borders, raising the value of arrangements improving insurance of macroeconomic risk. Using a two-country DSGE model, we provide an analytical and quantitative analysis of the channels through which countries gain from sharing (tail) risk. Riskier countries gain in smoother consumption but lose in relative wealth and average consumption. Safer countries benefit from higher wealth and better average terms of trade. Calibrated using the empirical distribution of moments of GDP-growth across countries, the model suggests non-negligible ...
Working Paper
International policy spillovers at the zero lower bound
In this paper, we consider how monetary policy in a large, foreign economy affects optimal monetary policy in a small open economy (`home') in response to a large global demand shock that pushes both economies to the zero lower bound (ZLB) on nominal interest rates. We show that the inability of foreign monetary policy to stabilise the foreign economy at the ZLB creates a spillover that affects how well the home policymaker is able to stabilise its own economy. We show that more stimulatory foreign policy worsens the home policymaker's trade-off between stabilising inflation and the output ...
Working Paper
On the (in)effectiveness of fiscal devaluations in a monetary union
This paper explores the fiscal devaluation hypothesis in a model of a monetary union characterised by national fiscal policies and supranational monetary policy. We show that a unilateral tax shift towards indirect taxes in one of the countries produces small but non-negligible long run effects on output and consumption within and between the two countries only when international financial markets are perfectly integrated. In contrast to the existing literature, we find that short-run effects are not always amplified by nominal wage rigidities. We document also how short-run effects of the ...