International Seminar on Macroeconomics

June 30-July 1, 2017
Jeffrey Frankel of Harvard University and Hélène Rey of London Business School, Organizers

Thomas Drechsel and Silvana Tenreyro, London School of Economics

Commodity Booms and Busts in Emerging Economies

Emerging economies, in particular those that are dependent on commodity exports, are prone to highly disruptive economic cycles. This paper proposes a small open economy (SOE) model to study the triggers of these cycles, highlighting the role of commodity prices. The economy consists of two main sectors, one of which produces commodities whose prices are subject to exogenous international fluctuations. The model nests various candidate sources of shocks proposed in previous work on emerging economy business cycles and additionally allows for a double-role of commodity prices. International changes in commodity prices improve both the competitiveness of the economy, as Drechsel and Tenreyro consider a net commodity exporter, and its borrowing terms, as higher commodity prices are associated with lower spreads between the country's borrowing rate and world interest rates. Both effects jointly result in strongly positive effects of commodity price increases on GDP, consumption and investment, and a negative effect on the total trade balance. They also generate excess volatility of consumption over output and a large volatility of investment. The researchers estimate the model using data on Argentina from 1900 to 2015 to provide a quantitative evaluation of the various sources of shocks and their effect on macroeconomic aggregates over a long time horizon. Their estimate of the contribution of commodity price shocks to fluctuations in output growth of Argentina is in the order of 17%. In addition, commodity prices account for around 21% and 50% of the variation in consumption and investment growth, respectively. These estimates are even higher in the post-1950 period. Furthermore, Drechsel and Tenreyro find transitory productivity shocks to be an important driver of output fluctuations, exceeding the contribution of shocks to the trend, which are smaller, although not negligible.

Jonas Heiperz, Paris School of Economics; Amine Ouazad, HEC Montreal; Romain Rancière, the University of Southern California and NBER; and Natacha Valla, European Investment Bank and Paris School of Economics

Balance-Sheet Diversification in General Equilibrium: Identification and Network Effects(NBER Working Paper No. 23572)

Jonas Heiperz, Amine Ouazad, Romain Rancière and Natacha Valla use disaggregated data on asset holdings and liabilities to estimate a general equilibrium model where each institution determines the diversification and size of the asset and liability sides of its balance-sheet. Their model endogenously generates two types of financial networks: (i) a network of institutions when two institutions share common asset or liability holdings or when an institution holds an asset that is the liability of another. In both cases demand/supply decisions by one institution affect the value of other institutions' holdings/liabilities, (ii) a network of financial instruments implied by the distribution of assets and liabilities within and across institutions. A change in the price of one asset induces change in demand/supply for all other assets, thus generating price comovement. The general equilibrium analysis predicts the propagation of real, financial and regulatory shocks as well as the change in the network caused by the shock.

Antonio Fatás, INSEAD, and Lawrence H. Summers, Harvard University and NBER

The Permanent Effects of Fiscal Consolidations (NBER Working Paper No. 22374)

The global financial crisis has permanently lowered the path of GDP in all advanced economies. At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. Fatás and Summers empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Their results provide support for the presence of strong hysteresis effects of fiscal policy. The large size of the effects points in the direction of self-defeating fiscal consolidations as suggested by DeLong and Summers (2012). Attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their long-term negative impact on output.

Wenxin Du and Joanne Im, Federal Reserve Board, and Jesse Schreger, Harvard University and NBER

The U.S. Treasury Premium

Du, Im and Schreger quantify the "specialness" of U.S. Treasuries relative to near default-free developed market sovereign bonds by measuring the gap between the swap-implied dollar yield paid by foreign governments and the U.S. Treasury yield. They call this wedge the "U.S. Treasury Premium." They find that the U.S. Treasury Premium was approximately 21 basis points at the five-year horizon prior to the Global Financial Crisis and has disappeared since the crisis with the post-crisis mean at -8 basis points. They argue that the decline in the long-term U.S. Treasury Premium was largely driven by the decline in the liquidity premium component of U.S. Treasuries relative to foreign government bonds. In addition, the researchers present evidence that the relative supply of government bonds in the United States and foreign countries affects the U.S. Treasury Premium.

Cristina Arellano, Federal Reserve Bank of Minneapolis and NBER; Yan Bai, the University of Rochester and NBER; and Gabriel Mihalache, Stony Brook University

Default Risk, Sectoral Reallocation, and Persistent Recessions

Sovereign debt crises are associated with large and persistent declines in economic activity, disproportionately so for nontradable sectors. Arellano, Bai and Mihalache document these patterns using Spanish data and they build a two sector dynamic quantitative model of sovereign default with capital accumulation. Recessions are very persistent in the model and more pronounced for nontraded sectors because of default risk. An adverse domestic shock raises default risk and limits capital inflows which restrict the ability of the economy to exploit investment opportunities. The economy responds by reducing investment, reallocating capital towards the traded sector, and reducing tradable consumption to support the repayment of debt. Real exchange rates depreciate, as a reflection of the scarcity of traded goods. The researchers find that these mechanisms are quantitatively important for rationalizing the experience of Spain during the recent debt crisis.

Marc Flandreau, the University of Pennsylvania

Sovereign Debt Enforcement: Historical Evidence on the Role of Financial Engineering

The paper contributes to recent work exploring alternative mechanisms for enforcing sovereign debt beyond the classical dichotomy of reputation versus sanctions. Flandreau reviews the ultimately successful efforts by lawyers to structure sovereign debt products so as to enable courts to become competent in matters of sovereign debt, thus anticipating on some aspects of the Griesa ruling on Argentina. His findings qualify the absolute immunity story, and opens new perspective on the significance of sovereign debt contracts and contractual clauses.

Bartosz Mackowiak, European Central Bank, and Marek Jarocinski, ECB

Monetary Fiscal Interactions and the Euro Area's Malaise

When monetary and fiscal policy are conducted as in the euro area, output, inflation, and government bond default premia are indeterminate according to a standard general equilibrium model with sticky prices extended to include defaultable public debt. With sunspots, the model mimics the recent euro area data. Mackowiak and Jarocinski specify an alternative configuration of monetary and fiscal policy, with a non-defaultable eurobond. If this policy arrangement had been in place since the onset of the Great Recession, output could have been much higher than in the data with inflation in line with the ECB's objective.

Ambrogio Cesa-Bianchi, Bank of England; Andrea Ferrero, the University of Oxford; and Alessandro Rebucci, Johns Hopkins University and NBER

International Credit Supply Shocks

House prices and exchange rates can potentially amplify the expansionary effects of capital inflows by inflating the value of collateral. Cesa-Bianchi, Ferrero, and Rebucci first document that during a boom in capital inflows real exchange rates, house prices and equity prices appreciate; the current account deteriorates; and consumption and GDP expand; while in a bust these dynamics reverse sharply. Next they set up a model of collateralized borrowing in foreign currency with international financial intermediation in which a shock to the international supply of credit is expansionary. In this environment, the researchers illustrate how exchange rate and house price appreciations may contribute to fueling the boom by inflating the value of collateral. They finally show that an identified change to the international supply of credit in a Panel VAR for 50 advanced and emerging countries displays a similar transmission. Moreover, they show that the intensity of the consumption response to such a shock differs significantly across countries and it is associated with country characteristics of both the housing finance system and the monetary policy framework like in the researcher's model.

NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us