1,720,973 research outputs found
Optimal inflation, average markups and asymmetric sticky prices
Get PDFIn state-of-the-art New Keynesian model firms are monopolistically competitive and prices are sticky. However, the average markup resulting from the monopolistic competition is usually assumed away either by production subsidy or by the zero-inflation steady state. Also, in models of an open economy the same level of price stickiness is assumed for both countries. In this paper I study the optimal rate of inflation in a two country model keeping the average markup and allowing price stickiness to differ between countries. There are two channels that govern the optimal rate of inflation. First, with local currencies an inflation tax is partly imposed on the foreign country, so it is optimal to inflate. Second, the average markup constitutes a cost of holding money so it is optimal to deflate, to compensate this cost. The paper has four novel findings: 1) in the local currencies regime the first motive dominates and the optimal inflation is positive. 2) In a monetary union the first motive is absent and the optimal inflation is negative and below the Friedman rule. 3) A monetary union improves global welfare even when stickiness is different in two countries. However, when this difference is large, only one country (the one with higher stickiness) benefits from the integration. 4) A monetary union can be welfare improving for each of both countries, if a transfer is introduced from the more sticky to the more flexible country of (depending on the parameters up to) 2% of its GDP
Essays in international macroeconomics
Get PDFDefence date: 11 March 2016Examining Board: Prof. Árpád Ábrahám, EUI, Supervisor; Prof. Luisa Lambertini, École Polytechnique Fédérale de Lausanne (EPFL); Prof. Evi Pappa, EUI; Prof. Jaume Ventura, CREI and Barcelona GSE.This thesis studies how frictions shape macroeconomic outcomes and affect policies. The thesis consists of three chapters. The first chapter studies how distortionary taxation and volatile output together with government discretion shape sovereign debt issuance and sovereign defaults. It is a novel theory to explain why sovereigns borrow on both domestic and international markets and why defaults are mostly selective (on either domestic or foreign investors). The model matches business cycle moments and frequencies of different types of defaults in emerging economies. It is also shown, that secondary markets are not a sufficient condition to avoid sovereign defaults. The outcome of the trade in bonds on secondary markets depends on how well each group of investors can coordinate their actions. The second chapter studies how the price stickiness friction affects the optimal rate of inflation and gains from a monetary integration. Inflation constitutes a tax on consumption so the local monetary authority finds it optimal to inflate. But also the average markup constitutes a cost of holding money so the monetary authority finds it optimal to deflate. The findings are: i) in the local currencies the first motive dominates and the optimal inflation is positive. ii) In a monetary union the first motive is absent and the optimal inflation is negative. iii) A monetary union improves global welfare. However, when the difference in price stickiness between two countries is large, only one country benefits. The third chapter studies how the intermediation friction affects a transmission of monetary policy. It provides new evidence on the bank lending channel using bank-level data from Central and Eastern Europe economies. The findings are: i) banks adjust their loans to changes in host country's monetary policy, ii) foreign-owned banks are less responsive to monetary policy of a host country than domestic-owned banks, iii) contrary to previous studies, the effects i) and ii) are present not only in the times of a crisis, but also in normal times. Second part of this chapter presents two mechanisms that can explain the second effect. First, foreign banks may have access to funds from parent banks. Second, foreign banks may serve more profitable borrowers. The first mechanism renders monetary policy less effective in the level of foreign banks penetration, while the second one does not. However, data do not unambiguously favor one explanation over the other
Impact of COVID‐19 vaccinations on the UK stock market
Get PDFThis study sheds light on the interaction between COVID‐19 vaccinations and economic recovery from the pandemic crisis. Using London Stock Exchange data (Jan 10, 2021, to Feb 24, 2022) and fixed‐effects regression methods, this study assesses COVID‐19 vaccine effects on UK stock returns. Initial protocol doses have a strong positive impact on returns, while boosters have a modest positive impact. A logarithmic unit increase in daily vaccine doses corresponds to a 0.07 percentage point increase in daily stock return. Stringent closure policies strengthen the positive influence of the vaccine on returns. Sector‐wise, healthcare responds most positively, while basic resources and food/beverage industries show positive but muted effects
Defaulting on Covid debt
Get PDFThe COVID-19 pandemic causes sharp reductions in economic output and sharp increases in government expenditures. These increase the riskiness of sovereign debts, especially in emerging economies. This paper proposes a framework to study debt sustainability. The economy is subject to productivity and expenditure shock. The government sets distortionary labour taxes and decides whether to repay its past domestic and foreign obligations. Foreign default is more likely after a negative productivity shock, while domestic default is more likely after a negative expenditure shock. This mechanism finds support in the data. Recent proposals that would ease the burden of foreign debt after COVID-19 would not prevent a wave of domestic defaults
Optimal inflation, monetary integration, and asymmetric sticky prices
Get PDFThis paper explores the optimal rate of trend inflation in open economies with and without a monetary union, accounting for empirically observed differences in the degree of price stickiness across countries. In a closed economy, the optimal inflation rate is negative to offset the markup caused by imperfect competition. In an open economy there is a ‘beggar-thy-neighbour’ incentive and the optimal inflation is positive. Monetary union is globally welfare improving because it removes this externality. In both setups, as price stickiness increases, the degree of price dispersion increases, and the optimal inflation rate tends towards zero. Gains from monetary integration are higher for economies with more flexible prices
Euro adoption and bank profitability in Central and Eastern Europe
Get PDFWe provide new evidence on the effects of adopting a common European currency on bank profitability in Central and East ern Europe (CEE). We construct a panel of 1033 bank-year observations across 11 countries between 2006 and 2020. Our results suggest that the effect of joining the euro area on bank profitability is not statistically significant over a longer period, but that the euro exerts downward pressure on banks’ profits in a stable economic climate. Additionally, we contribute to the existing literature on determinants of bank profitability in the CEE region and confirm that capitalisation and bank size have a positive influence, while liquidity and the loans-to-assets ratio have a negative influence on profitability
Investments in human capital should be at the heart of Europe’s Covid-19 recovery strategy
No full textWhen the state spends money on roads and railways, we call it ‘investment’. When the state spends on nurseries, school meals, or health care, we call it social, educational, and health expenditure. Yet as Jakub Sawulski and Wojtek Paczos argue, the latter form of spending may yield a higher rate of return in the long-term
Euro adoption and banks profitability in Central and Eastern Europe
No full textWe provide new evidence on the effects of adopting a common European currency on banks' profitability in the Central and Eastern Europe (CEE) region. We construct a panel of 1033 bank-year observations across 11 countries between 2006 and 2020. Our results suggest that the effect of the eurozone on the banks' profitability is statistically not significant over a longer period but that the euro exerts downward pressure on banks' profits when economic conditions are stable. Additionally, we contribute to the existing literature on banks' profitability determinants in the CEE region and confirm that capitalization and bank size have positive, while liquidity and loans-to-assets ratio have a negative influence on profitability
Imperfect financial markets and the cyclicality of social spending
Get PDFThis paper explores the link between default risk and fiscal procyclicality. We show that countries with higher sovereign risk have a more procyclical fiscal expenditure policy, which is driven mostly by transfers. We build a small open economy model with income inequality, social transfers, and default risk to rationalize this fact. Without default risk transfers are countercyclical, inequality is procyclical, and external debt is used to smooth distortionary taxation. With default risk, transfers account for most of fiscal adjustment because taxation becomes costly for the government. Transfers become procyclical and inequality worsens during times when risk premia are high. We confirm the predictions of the model in the data: in recessions in economies with default risk, transfers take the bigger burden relative to government consumption, whereas the opposite is true in economies with low default risk
The impact of China's zero-COVID policy on stock returns
No full textThis study examines the impact of China's "Zero-COVID" policies on stock returns in the healthcare sector from January 2020 to December 2022. Using panel regression analysis, we find that increases in the Stringency Index increased healthcare stock returns. In contrast, vaccination rates are associated with a decline in returns when averaged across the full sample. However, a time-disaggregated analysis reveals heterogeneity: in the period of the initial vaccine rollout, vaccination had a statistically significant positive effect, while in the later period, the relationship turned negative. The interaction analysis indicates that the effect of stringency on returns was stronger and the effect of vaccinations was weaker when the number of new cases of COVID-19 was high. These findings indicate that investor responses were nonlinear and evolved over time, reflecting changing expectations around pandemic control
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