Thirty-sixth International Seminar on Macroeconomics

June 21 and 22, 2013
Richard Clarida, Columbia University, and Lucrezia Reichlin, London Business School, Organizers

Ugo Albertazzi, Banca d'Italia, and Margherita Bottero, Bank of Italy

The Procyclicality of Foreign Bank Lending: Evidence from the Global Financial Crisis

Albertazzi and Bottero exploit highly disaggregated bank-firm level data to investigate the dynamics of foreign versus domestic credit supply in Italy around the period of the Lehman collapse, which brought a sudden and unexpected deterioration of economic conditions and credit risk. Taking advantage of the presence of multiple lending relationships to effectively control for credit demand and risk at the individual-firm level, they show that foreign lenders restricted credit supply (to the same firm) more severely than their domestic counterparts. Based on a number of exercises which test alternative explanations for such procyclicality, the authors document that it mainly reflects the (functional) distance between a foreign bank's headquarters and the Italian credit market.

David Miles and Jochen Schanz, Bank of England

The Relevance or Otherwise of the Central Bank's Balance Sheet

This paper explores the impacts on an economy of a central bank changing the size and composition of its balance sheet. Whether the central bank purchasing longer term bonds can affect the real economy is a key policy issue. With a representative, infinitely-lived agent facing no credit restrictions and in a world of complete markets, such central bank asset purchases are ineffective (Eggertson and Woodford 2003). Miles and Schanz develop a simple OLG model to assess what might be the impact of central bank purchases of long-term government bonds against money. This framework allows them to incorporate in a simple way heterogeneity among households and incomplete financial markets in an otherwise standard rational expectations model. They find that the ineffectiveness result of Woodford and Eggertson is surprisingly robust. That is not to say that the big expansion of central bank balance sheets in recent years has been ineffective. Their finding is rather that the portfolio balance channel evaluated in an environment of normally functioning (though nonetheless incomplete) asset markets is fairly weak. That is not inconsistent with the evidence that large-scale asset purchases by central banks since 2008 have had significant effects, because those purchases were made when financial markets were, to varying extents, dysfunctional. Nonetheless, the authors' results are relevant to those purchases because they may be unwound in an environment where financial markets are no longer dysfunctional.

Galina Hale, Federal Reserve Bank of San Francisco; Jean Imbs, Paris School of Economics; and Elliot Marks, Federal Reserve Bank of San Francisco

Bank Linkages, Diversification, and Contagion

The relation between international financial linkages and the synchronization of business cycles is ambiguous. In cross-section, business cycles in countries with large cross-holdings of financial assets are highly correlated; but controlling for country-pair fixed effects, capital tends to flow between economies that are out of sync. This could mean that highly correlated economies tend to be financially integrated because of time-invariant social or cultural commonalities, or that the consequences of financial linkages on cycle synchronization depend on the frequency of observation. Hale, Imbs, and Marks introduce a panel estimation where long and short run relationships can be estimated simultaneously. It shows that both low and high frequency changes in financial integration have negative consequences on the international synchronization of cycles over time. Recent vintages of loans only matter in the short run, while older vintages matter in the long run. Interestingly, both effects are driven by bank loans to the non-financial sector, rather than by interbank lending.

David Backus and Thomas Cooley, New York University and NBER, and Espen Henriksen, University of California at Davis

Demography and Low-Frequency Capital Flows

Backus, Cooley, and Henriksen verify that fluctuations in international capital flows and stocks are persistent, and they consider a role for demography. In an overlapping generations model with uncertain lifetimes, the authors explore the impact of increases in life expectancy caused by decreases in adult mortality. Reductions in mortality affect the aggregate accumulation of assets in two ways: by changing household saving behavior and by changing the age distribution of the population. In an open economy, demographic differences across countries can produce large persistent capital flows, even if the countries are otherwise similar. The authors use a quantitative version of the model to illustrate the impact of demography on capital flows and net foreign assets in China, Germany, Japan, and the United States.

Martin Evans, Georgetown University

Hot Money and Dark Matter

Evans studies the behavior of international capital flows driven by the portfolio reallocation decisions of international investors: so called hot money. He develops an open economy model with endowment and preference shocks that can account for the empirical behavior of real exchange rates, interest rates and consumption across countries. The model includes financial frictions that impede international risk-sharing and hot money flows driven by optimal portfolio reallocations. The analysis reveals that hot money flows are an economically insignificant part of the international adjustment process following standard (temporary) endowment shocks. In contrast, preference shocks that change investors' risk aversion produce sizable hot money flows. As in Evans (2012a), these shocks are the source of the dark matter that drive excess exchange rate volatility. They also produce sizable variations in the expected return differentials on foreign assets and liabilities that allow for international adjustment via the valuation channel. Consistent with the model's predictions, Evans shows that forecasts of future return differentials contributed most to the volatility of the U.S. net foreign asset position in the post Bretton-Woods era. Together, these findings indicate that hot money flows comprise an integral and empirically important part of the international adjustment process. Moreover, they appear beneficial in the sense that they allow households to fund consumption paths that closely approximate the paths under complete markets.

Eric Swanson and John Williams, Federal Reserve Bank of San Francisco

Measuring the Effect of the Zero Lower Bound on Yields and Exchange Rates in the U.K. and Germany

The zero lower bound on nominal interest rates began to constrain many central banks' setting of short-term interest rates by late 2008 or early 2009. According to many macroeconomic models, this should have greatly reduced the effectiveness of monetary policy and increased the efficacy of fiscal policy. However, standard macroeconomic theory also implies that private-sector decisions depend on the entire path of expected future short-term interest rates, not just the current level of the monetary policy rate. Thus, interest rates with a year or more to maturity are arguably more relevant for the economy, and it is unclear to what extent those yields have been constrained. In this paper, the authors apply the methods of Swanson and Williams (2013) to interest and exchange rates in the UK and Germany. In particular, the authors compare the sensitivity of these rates to macroeconomic news during periods when short-term interest rates were very low to that during normal times. Swanson and Williams find that: 1) exchange rates have been essentially unaffected by the zero lower bound, 2) German bunds were essentially unconstrained by the zero bound until late 2012, and 3) UK gilts were substantially constrained by the zero lower bound in 2009 and 2012, but were surprisingly responsive to news in 2010–11. The authors compare these findings to the U.S. and discuss their broader implications.

Jiandong Ju, University of Oklahoma; Kang Shi, Chinese University of Hong Kong; and Shang-Jin Wei, Columbia University and NBER

On the Connections between Intertemporal and Intra-temporal Trades

Ju, Shi, and Wei explore the role of domestic labor market flexibility in understanding current account patterns. To do so, they consider a dynamic general equilibrium model with tradable sectors of different factor intensities, which allows for substitution between intertemporal trade (current account adjustment) and intra-temporal trade (goods trade). An economy's response to a shock generally involves a combination of a change in the composition of goods trade and a change in the current account. Flexible factor markets reduce the need for the current account to adjust. On the other hand, the more rigid the factor markets, the larger the size of current account adjustment relative to the volume of goods trade, and the slower the speed of adjustment of the current account towards its long-run equilibrium. The authors present empirical evidence consistent with the theory.

Alejandro Justiniano, Federal Reserve Bank of Chicago; Giorgio Primiceri, Northwestern University and NBER; and Andrea Tambalotti, Federal Reserve Bank of New York

The Effects of the Saving and Banking Glut on the U.S. Economy

Justiniano, Primiceri, and Tambalotti use a quantitative equilibrium model with houses, collateralized debt and foreign borrowing to study the impact of global imbalances on the U.S. economy in the 2000s. Their results suggest that the dynamics of foreign capital flows account for between one fourth and one third of the recent cycle in U.S. house prices and household debt. The key to these findings is that the model generates the sustained low level of interest rates observed in the last 15 years.

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