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Recent Advances in International Macro

Paper Session

Saturday, Jan. 4, 2020 2:30 PM - 4:30 PM (PDT)

Marriott Marquis, La Costa
Hosted By: Econometric Society
  • Chair: Loukas Karabarbounis, University of Minnesota

The Macroeconomics of the Greek Depression

Gabriel Chodorow-Reich
,
Harvard University
Loukas Karabarbounis
,
University of Minnesota
Rohan Kekre
,
University of Chicago

Abstract

The Greek economy experienced a boom until 2007, followed by a prolonged depression resulting in a 25 percent shortfall of GDP by 2016. Informed by a detailed analysis of macroeconomic patterns in Greece, we estimate a rich dynamic general equilibrium model to assess quantitatively the sources of the boom and bust. Lower external demand for traded goods and contractionary fiscal policies account for the largest fraction of the Greek depression. A decline in total factor productivity, due primarily to lower factor utilization, substantially amplifies the depression. Given the significant adjustment of prices and wages observed throughout the cycle, a nominal devaluation would only have short-lived stabilizing effects. By contrast, shifting the burden of adjustment away from taxes toward spending or away from capital taxes toward other taxes would generate longer-term production and consumption gains. Eliminating the rise in transfers to households during the boom would significantly reduce the burden of tax adjustment in the bust and the magnitude of the depression.

Exchange Rates and Uncovered Interest Differentials: The Role of Permanent Monetary Shocks

Stephanie Schmitt-Grohé
,
Columbia University
Martin Uribe
,
Columbia University

Abstract

We estimate an empirical model of exchange rates with transitory and permanent monetary shocks. Using monthly post-Bretton-Woods data from the United States, the United Kingdom, and Japan, we report four main findings: First, there is no exchange rate overshooting in response to either temporary or permanent monetary shocks. Second, a transitory increase in the nominal interest rate causes appreciation, whereas a permanent increase causes persistent depreciation. Third, transitory increases in the interest rate cause short-run deviations from uncovered interest-rate parity in favor of domestic assets, whereas permanent increases cause deviations against domestic assets. Fourth, permanent monetary shocks explain the majority of short-run movements in nominal exchange rates.

Sovereign Default Risk and Firm Heterogeneity

Cristina Arellano
,
Federal Reserve Bank of Minneapolis
Yan Bai
,
University of Rochester
Luigi Bocola
,
Stanford University

Abstract

This paper measures the output costs of sovereign risk by combining a sovereign debt model with firm- and bank-level data. In our framework, an increase in sovereign risk lowers the price of government debt and has an adverse impact on banks’ balance sheets, disrupting their ability to finance firms. Importantly, firms are not equally affected by these developments: those that have greater financing needs and borrow from banks that are more exposed to government debt cut their production the most in a debt crisis. We measure the extent of this heterogeneity using Italian data and parameterize the model to match these cross-sectional facts. In counterfactual analysis, we find that heightened sovereign risk was responsible for one-third of the observed output decline during the 2011-2012 crisis in Italy.

The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis

Pierre-Olivier Gourinchas
,
University of California-Berkeley
Philippe Martin
,
Sciences Po
Todd Messer
,
University of California-Berkeley

Abstract

Despite a formal ‘no-bailout clause’, we estimate significant transfers from the European Union to Cyprus, Greece, Ireland, Portugal, and Spain, ranging from roughly 0% (Ireland) to 43% (Greece) of output during the recent sovereign debt crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Because of collateral damage to the union in case of default, these bailouts are ex-post efficient. Our model embeds a ‘Southern view’ of the crisis (assistance was insufficient) and a ‘Northern view’ (assistance weakens fiscal discipline). Ex-post, bailouts do not improve the welfare of the recipient country, since creditor countries get the entire surplus from avoiding default. Ex-ante, bailouts generate risk shifting with an incentive to over-borrow by fiscally fragile countries. While a stronger no-bailout commitment reduces risk-shifting, we find that it may not be ex-ante optimal from the perspective of the creditor country, if there is a risk of immediate insolvency. Hence, the model provides some justification for the often decried policy of ‘kicking the can down the road’.
JEL Classifications
  • F4 - Macroeconomic Aspects of International Trade and Finance
  • F3 - International Finance