This paper examines how monetary policy affects the asymmetric effects of globalization. Guo, Ottonello, and Perez build an open-economy heterogeneous-agent New Keynesian model (HANK) in which households differ in their income, wealth, and real and financial integration with international markets. The researchers use the model to reassess classic questions in international macroeconomics, but from a distributional perspective: What are the effects of monetary policy in open economies? What are the international spillovers of policies and shocks? And how do alternative exchange-rate regimes compare? Their results reveal the presence of a trade-off between aggregate stabilization and inequality in consumption responses to external shocks. The asymmetric effects of globalization can be smaller for economies with higher international integration.
Governments face a trade-off between insuring bondholders and taxpayers. If the government fully insures bondholders by manufacturing risk-free zero-beta debt, then it cannot also insure taxpayers against permanent macroeconomic shocks over long horizons. Instead, taxpayers will pay more in taxes in bad times. Conversely, if the government fully insures taxpayers against adverse macro shocks, then the debt becomes risky, at least as risky as unlevered equity claim. As the world's safe asset supplier, the U.S. appears to have escaped this trade-off thus far, whereas the U.K. has not.
In addition to the conference paper, the research was distributed as NBER Working Paper w27786, which may be a more recent version.
Bianchi, Bigio, and Engel develop a theory of exchange rate fluctuations arising from financial institutions' demand for liquid dollar assets. Financial flows are unpredictable and may leave banks "scrambling for dollars." As a result of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield. In their framework, an increase in the volatility of idiosyncratic liquidity shocks leads to a rise in the convenience yield and an appreciation of the dollar - as banks scramble for dollars - while foreign exchange interventions matter because they alter the relative supply of liquidity in different currencies. Bianchi, Bigio, and Engel present empirical evidence on the relationship between exchange rate fluctuations for the G10 currencies and the quantity of dollar liquidity consistent with the theory.
How do the choices of individual firms contribute to the dominance of a currency in global trade? Using export transactions data from the UK over 2010-2016, Crowley, Han, and Son document strong evidence of two mechanisms that promote the use of a dominant currency: (1) prior experience: the probability that a firm invoices its exports to a new market in a dominant currency is increasing in the number of years the firm has used the dominant currency in its existing markets; (2) strategic complementarity: a firm is more likely to invoice its exports in the currency chosen by the majority of its competitors in a foreign destination market in order to stabilize its residual demand in that market. Crowley, Han, and Son show that the introduction of a managerial fixed cost of currency management into a model of invoicing currency choice yields dynamic paths of currency choice that match our empirical findings.
Using a novel data set containing all bids by all bidders for Mexican government bonds from 2001 to 2017, Cole, Neuhann, and Ordoñez demonstrate that asymmetric information about default risk is a key determinant of primary market bond yields. Empirically, large bidders do not pay more for bonds than the average bidder but their bids are accepted more frequently. The researchers construct a model where investors may differ in wealth, risk aversion, market power and information, and find that only heterogeneous information can qualitatively account for these patterns. Moreover, asymmetric information about rare disasters can quantitatively match key moments of bids and yields, both within and across periods.
In addition to the conference paper, the research was distributed as NBER Working Paper w28459, which may be a more recent version.
In this paper Ayres, Hevia, and Nicolini show that explicitly modeling primary commodities in an otherwise totally standard incomplete markets open economy model can go a long way in explaining some of the main puzzles in the international economics literature.