35th International Seminar on Macroeconomics

June 15-16, 2012
Francesco Giavazzi, Bocconi University, and Kenneth West, University of Wisconsin, Organizers

Hideaki Hirata, Hosei University; M. Ayhan Kose and Marco Terrones, International Monetary Fund; and Christopher Otrok, University of Missouri

Global House Price Fluctuations: Synchronization and Determinants

Hirata, Kose, Otrok, and Terrones examine the dynamic properties of house price fluctuations across 18 advanced economies over the past 40 years. They ask two specific questions: first, how synchronized are housing cycles across these countries? Second, what are the main shocks driving movements in global and national house prices? To address these questions, they estimate common components in house prices and various macroeconomic and financial variables. They then evaluate the roles played by a variety of shocks, including shocks to monetary policy, productivity, credit, and uncertainty, in explaining house price fluctuations using several VAR and FAVAR models. They find that house prices tend to be synchronized across countries and the degree of synchronization has increased over time. They document that global interest rate shocks have a significant effect on global house prices. However, global monetary policy shocks per se do not appear to have a sizeable impact on global house price movements. Interestingly, uncertainty shocks appear to be important in explaining fluctuations in global house prices.

Tanya Molodtsova, Emory University, and David Papell, University of Houston

Taylor Rule Exchange Rate Forecasting During the Financial Crisis

Molodtsova and Papell evaluate out-of-sample exchange rate predictability of Taylor rule models for the euro/dollar exchange rate with real-time data before, during, and after the financial crisis of 2008-9. While all Taylor rule specifications outperform the random walk with forecasts ending between 2007:Q1 and 2008:Q2, the specifications with estimated coefficients and/or the output gap outperform those with postulated coefficients and/or the unemployment gap, both during and after the financial crisis. Only the specification with both estimated coefficients and the output gap consistently outperforms the random walk from 2007:Q1 through 2012:Q1. Several Taylor rule models that are augmented with credit spreads or financial condition indexes outperform the original Taylor rule models. The performance of the Taylor rule models is far superior to the interest rate differentials, monetary, and purchasing power parity models.

Nicolas Berman, Graduate Institute of International & Development Studies; José De Sousa, Paris-Sud 11 University; and Philippe Martin and Thierry Mayer, Sciences-Po

Time to Ship during Financial Crises

Berman, De Sousa, Martin, and Mayer show that the negative impact of financial crises on international trade is magnified for destinations with longer time-to-ship. They analyze a specific theoretical mechanism that could explain this time-to-ship effect: exporters react to an increase in the probability of default of importers by increasing their export price and decreasing their export volumes to the destination in crisis. For destinations with longer shipping time, these reactions are magnified because the probability that a payment incident occurs increases as time passes. Some exporters also decide to stop exporting to the crisis destination. This extensive margin effect of the financial crisis is again amplified towards destinations with longer time-to-ship. The authors generate testable implications both at the aggregate and firm levels. Using aggregate data from 1950 to 2009, they show that this magnification effect is robust to alternative specifications, samples, and inclusion of additional controls, including distance. They test the firm-level results on French exporter data from 1995 to 2005 and find that they are broadly consistent with the data, both for the intensive and the extensive margins.

Olivier Jeanne, Johns Hopkins University and NBER

Capital Account Policies and the Real Exchange Rate

Jeanne presents a simple model of how a small open economy can undervalue its real exchange rate using its capital account policies. He presents several properties of such policies, and proposes a rule of thumb to assess their welfare cost. The model is then applied to an analysis of Chinese capital account policies.

Christophe Chamley, Paris School of Economics, and Brian Pinto, The World Bank

Official Bailouts of Sovereigns: Seniority, Catalytic Effects and Insolvency

Chamley and Pinto evaluate institutional lending in crisis from a theoretical point of view. They suggest four points: first, the importance of seniority may be irrelevant; second, institutional lending may be powerful in a liquidity crisis; third, when a crisis takes place where solvency is an issue, some immediate debt reduction is efficient; fourth, in a situation of multiple equilibria in private loan rates, institutional lending may induce a switch to a low private loan rate only if it can be done with a sufficiently high amount.

Luca Sala and Antonella Trigari, Bocconi University, and Ulf Soderstrom, Sveriges Riksbank

Structural and Cyclical Forces in the Great Recession: Cross-Country Evidence

Sala, Soderstrom, and Trigari use an estimated monetary business cycle model with search and matching frictions in the labor market and nominal price and wage rigidities to study three countries (the United States, the United Kingdom, and Sweden) during the financial crisis and the Great Recession. They estimate the model over the period before the financial crisis and then use the model to interpret movements in GDP, unemployment, and vacancies in the period from 2007 until 2011. They show that contractionary financial factors and reduced efficiency in labor market matching were largely responsible for the experience in the United States. Financial factors also were important in the United Kingdom and (to a lesser extent) in Sweden, while reduced matching efficiency was considerably less important in the European countries than in the United States.

Luca Guerrieri and Matteo Iacoviello, Federal Reserve Board, and Raoul Minetti, Michigan State University

Banks, Sovereign Debt and the International Transmission of Business Cycles

Guerrieri, Iacoviello, and Minetti study the international transmission of bank credit crunches triggered by sovereign debt defaults. They posit a two-country economy where capital constrained banks grant loans to firms and then invest in bonds issued by the domestic and the foreign government. The model economy is calibrated to data from the euro area, the United Kingdom, and Switzerland, with the two countries representing the core and the periphery countries, respectively. Large contractionary shocks in the periphery trigger sovereign default. Sizing the default to match recent credit events in Greece, the authors find sizable spillover effects to the core bloc through a drop in the volume of credit extended by the banking sector.

Alessandra Fogli and Enoch Hill, University of Minnesota, and Fabrizio Perri, University of Minnesota and NBER

The Geography of the Great Recession

Fogli, Hill, and Perri document some geographical features of the US business cycle over the past 30 years, with particular focus on the Great Recession, using county-level data. They show that county-level unemployment rates are spatially dispersed and spatially correlated, and that these characteristics increase during recessions. Next they show that these features of county data can be generated by a model that includes simple channels of transmission of economic conditions from a county to its neighbors. The model also suggests that these local channels might matter a great deal for the amplification of aggregate shocks.

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