Productivity shocks, stabilization policies and the dynamics of net foreign assets (original) (raw)
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Metroeconomica, 2018
In recent times, the credibility of Minsky's financial instability hypothesis (Minsky, 1982, 1986) which means that a financially dominated capitalist economy is inherently unstable, is growing rapidly. It seems that recent turbulence in the world economy has proved it. For example, the Japanese economy experienced serious deflationary depression in the 1990s and the 2000s, and the serious financial crisis, which began in the USA with the 2008 mortgage crisis, rapidly spread to other parts of the world such as Europe and Asia. 1 But Minsky did not think that such inherent instability was uncontrollable by the government and the central bank. He emphasized that it is important to 'stabilize an unstable economy' by means of proper macroeconomic stabilization policies implemented by the government and the central bank. In this respect, Minsky inherits Keynes' spirit (Keynes, 1936). 1 See Asada (2011), Krugman (2012) and Wolf (2015) as for the detailed description of such phenomena.
Macroeconomic Stabilization Policies in Intrinsically Unstable Macroeconomies
Studies in Nonlinear Dynamics & Econometrics, 2000
Many monetary and fiscal policy measures have aimed at mitigating the effects of the financial market meltdown that started in the U.S. subprime sector in 2008 and has subsequently spread world wide as a great recession. Slowly some recovery appears to be on the horizon, yet it is worthwhile exploring the fragility and potentially destabilizing feedbacks of advanced macroeconomies in the context of a framework that builds on the ideas of Keynes and Tobin. This framework stresses the fragilities and destabilizing feedback mechanisms that are potential features of all major markets-those for goods, labor, and financial assets. We use a Tobin macroeconomic portfolio approach and the interaction of heterogeneous agents on the financial market to characterize the potential for financial market instability. Though the study of the latter has been undertaken in many partial models, we focus here on the interconnectedness of all three markets. Furthermore, we study what potential labor market, fiscal and monetary policies can have in stabilizing unstable macroeconomies. In order to study this problem we introduce, besides money, long term bonds and equity into the asset market. We in particular propose a countercyclical monetary policy that sells assets in the boom and purchases them in recessions. Modern stability analysis is brought to bear to demonstrate the stabilizing effects of the suggested policies. The policies suggested here could help the Fed in its search for an appropriate exit strategy after its massive intervention in the financial market.
Working Papers in Economic Theory, 2008
This paper analyzes the international transmission of shocks in economies with financial frictions. In a two-country flexible price monetary model with distribution costs in the imported good I study the transmission of shocks to productivity, money supply, government spending and to entrepreneurs' net worth. Financial frictions amplify the effects of shocks both at the domestic and at the international level. In the model, international business cycle comovement, measured as crosscountry output correlations, is increasing in the degree of openness and distribution costs, and as in previous literature, decreasing in the degree of financial frictions. Finally, fiscal shocks play an important role in international business cycle comovement in the presence of financial frictions. First, because the crowding out effect is stronger on private consumption and weaker on investment if there are financial frictions, and second, because fiscal shocks may reduce the crosscountry correlation of output.
Fiscal Policy, Monetary Regimes and Current Account Dynamics
Review of International Economics, 2013
For the individual European Monetary Union (EMU) members fiscal policy has gained in importance owing to the loss of monetary policy as an autonomous policy instrument. Based on a small open economy dynamic stochastic general equilibrium (DSGE) model with fiscal feedback rules, we analyze the dynamic macroeconomic response in particular of the current account under alternative exchange rate regimes. Our results indicate that entry into monetary union makes the economy more vulnerable to a productivity shock and leads to higher variability of the current account. For a risk premium shock, an entry into EMU implies lower variability of most macroeconomic variables, but a higher persistence in the adjustment process of the current account. For both shocks, a countercyclical fiscal response to the current account is more stabilizing for most macroeconomic variables than a conventional countercyclical response to output. Stabilizing the current account comes at the price of higher variability of output in the short-run, however.
Fiscal policy in a monetary economy with capital and finite lifetime
2006
This paper develops a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite lifetimes. The framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. When calibrated to euro area quarterly data, the model
International interdependencies in fiscal stabilization policies
European Economic Review, 2006
Trade links imply that business cycle fluctuations are transmitted among trade partners. To the extent that fiscal policy can mitigate business cycle fluctuations international interdependencies in stabilization policies arise. We analyse in a two country general equilibrium model the role of fiscal policy in mitigating risk or providing implicit insurance in the presence of capital market imperfections and adjustment failures (rigid wages). It is shown that there is a welfare case for an active stabilization policy, and that it is larger in the presence of adjustment failures (rigid wages). Non-cooperative policy decisions imply inefficiencies in fiscal stabilization policies, which in the case of flexible wages may imply too much stabilization, whereas stabilization is always insufficient in the case of rigid wages.
Dynamic effects of terms of trade shocks: The impact on debt and growth
Journal of International Money and Finance, 2008
The recent empirical literature on the economic effects of terms of trade shocks highlights not only the direct effects on growth, but also the resulting changes in volatility and debt. We link the procyclicality of sovereign debt to terms of trade shocks and provide theoretical underpinnings for standby facilities such as the "Exogenous Shocks Facility" recently created by the IMF. By modeling international capital market imperfections and changes in creditworthiness during adverse terms of trade shocks, we show that transitions can involve excessive adjustment as debt decumulation overshoots its long run equilibrium to prolong the adjustment recession. Our model adds a novel dynamic dimension to the Harberger-Laursen-Metzler effect. In contrast to the previous terms of trade literature, we highlight that the precise nature of the capital imperfection is key to the results. When credit depends not on the level of debt but on the debt to equity ratio the model naturally features dynamic effects that are not found in previous models. It also highlights that how a country responds to terms of trade shocks depends importantly on whether the country is a creditor or debtor. Finally we assess the welfare costs associated with terms of trade shocks. For plausible parameterizations we find that a 20 percent deterioration in the terms of trade may lead to a welfare loss on the order of 10 to 15 percent.
FISCAL POLICY, MACROECONOMIC STABILITY AND FINITE HORIZONS
Scottish Journal of Political Economy, 2006
In this paper we analyse the stabilisation properties of distortionary taxes in a New Keynesian model with overlapping generations of finitely-lived consumers. In this framework, government debt is part of net wealth and this adds a number of interesting channels through which fiscal policy could affect output and inflation. Output volatility, in presence of technology shocks, is not substantially affected by the operation of automatic stabilisers but we find interesting composition effects. While the presence of finitely-lived households strengthens the stabilisation performance of distortionary taxes through the reduction of the volatility of consumption, it does so at the cost of more volatile investment and real balances. These conflicting responses add up to a very small overall welfare losses associated with distortionary taxation.
Fiscal deficits and relative prices in a growing world economy
Journal of Monetary Economics, 1989
This paper studies the transmission of fiscal disturbances between countries, and the effect of those disturbances on worldwide capital intensity, in a context of growth. The model developed to address these issues allows for the production of both nontradable and relatively capital-intensive tradable goods; a central finding is that factor markets can be a major channel for the communication of fiscal policy shocks to world interest rates, to private saving decisions, and, ultimately, to global asset supplies and their distribution among countries. Particular predictions of the model illustrate how changes in public debt ratios and shifts in government spending patterns affect resource allocation and welfare. For example, an increase in a small country's per capita public debt leads to long-run crowding-in of capital and the impoverishment of future generations; a similar policy shift by a large country crowds out capital on a global scale, impoverishes future domestic generations, and has ambiguous effects abroad.