Summary

International Credit Supply Shocks
Author(s):
Ambrogio Cesa-Bianchi, Bank of England
Andrea Ferrero, University of Oxford
Alessandro Rebucci, Johns Hopkins University and NBER
Discussant(s):
Alan M. Taylor, University of California, Davis and NBER
Summary:

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.

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In addition to the conference paper, the research was distributed as NBER Working Paper w23841, which may be a more recent version.

Commodity Booms and Busts in Emerging Economies
Author(s):
Thomas Drechsel, University of Maryland
Silvana Tenreyro, London School of Economics
Summary:

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.

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In addition to the conference paper, the research was distributed as NBER Working Paper w23716, which may be a more recent version.

Default Risk, Sectoral Reallocation, and Persistent Recessions
Author(s):
Cristina Arellano, Federal Reserve Bank of Minneapolis
Yan Bai, University of Rochester and NBER
Summary:

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.

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Sovereign Debt Enforcement: Historical Evidence on the Role of Financial Engineering
Author(s):
Marc Flandreau, University of Pennsylvania
Summary:

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.

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Monetary Fiscal Interactions and the Euro Area’s Malaise
Author(s):
Bartosz Maćkowiak, European Central Bank
Marek Jarociński, European Central Bank
Discussant(s):
Pierre-Olivier Gourinchas, University of California, Berkeley and NBER
Summary:

Abstract
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. We 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. (Keywords: self-fulfilling expectations, zero lower bound, fiscal theory of the
price level, eurobond. JEL: E31, E32, E63.)

Jarociński: European Central Bank, 60640 Frankfurt, Germany (e-mail: marek.jarocinski@ecb.int);
Maćkowiak: European Central Bank, 60640 Frankfurt, Germany (e-mail: bartosz.mackowiak@ecb.int). We
thank for helpful comments Francesco Bianchi, Giancarlo Corsetti, Jean-Pierre Danthine, Luca Dedola,
Pierre-Olivier Gourinchas, Christophe Kamps, Robert Kollmann, Karel Mertens, Hélène Rey, Sebastian
Schmidt, Harald Uhlig, Xuan Zhou, and conference and seminar participants at the ADEMU conference at
the Bank of Spain, Universitat Autònoma de Barcelona, University of Chicago, Annual Research Conference
of the ECB, European Summer Symposium in International Macroeconomics, London Business School,
Annual Research Conference of the National Bank of Ukraine, Symposium of the Society for Nonlinear
Dynamics and Econometrics, and Tsinghua University. The views expressed in this paper are solely those
of the authors and do not necessarily reflect the views of the European Central Bank.

1

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The Permanent Effects of Fiscal Consolidations
Author(s):
Lawrence H. Summers, Harvard University and NBER
Discussant(s):
Alan J. Auerbach, University of California, Berkeley and NBER
Ethan Ilzetzki, London School of Economics
Summary:

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.

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In addition to the conference paper, the research was distributed as NBER Working Paper w22374, which may be a more recent version.

The U.S. Treasury Premium
Author(s):
Wenxin Du, University of Chicago and NBER
Jesse Schreger, Columbia University and NBER
Joanne I. Im, Federal Reserve Board
Discussant(s):
Annette Vissing-Jorgensen, University of California, Berkeley and NBER
Summary:

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." The researchers 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. Du, Im, and Schreger 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, they present evidence that the relative supply of government bonds in the United States and foreign countries affects the U.S. Treasury Premium.

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Domestic and International Sectoral Portfolios:
Network Structure and Balance-Sheet Effects
Author(s):
Romain Rancière, University of Southern California and NBER
Discussant(s):
Ralph S. J. Koijen, University of Chicago and NBER
Summary:

Heipertz, Ouazad, Ranciere and 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. Their general equilibrium analysis predicts the propagation of real, financial and regulatory shocks as well as the change in the network caused by the shock.

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Balance-Sheet Diversification in General Equilibrium: Identification and Network Effects
Author(s):
Jonas Heipertz, Paris School of Economics
Amine Ouazad, HEC Montreal
Romain Rancière, University of Southern California and NBER
Natacha Valla, European Investment Bank and Paris School of Economics
Summary:

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.

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