Creator: Chari, V. V. and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 589 Abstract:
We show that the desirability of fiscal constraints in monetary unions depends critically on the extent of commitment of the monetary authority. If the monetary authority can commit to its policies, fiscal constraints can only impose costs. If the monetary authority cannot commit, there is a free-rider problem in fiscal policy, and fiscal constraints may be desirable.
Stichwort: Free riding problem, Growth and stability pact, International cooperation, and Time inconsistency Fach: E58 - Central Banks and Their Policies, F33 - International Monetary Arrangements and Institutions, E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems, F31 - Foreign Exchange, and F36 - Financial Aspects of Economic Integration
Creator: Heathcote, Jonathan and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 480 Abstract:
This chapter is structured in three parts. The first part outlines the methodological steps, involving both theoretical and empirical work, for assessing whether an observed allocation of resources across countries is efficient. The second part applies the methodology to the long-run allocation of capital and consumption in a large cross section of countries. We find that countries that grow faster in the long run also tend to save more both domestically and internationally. These facts suggest that either the long-run allocation of resources across countries is inefficient, or that there is a systematic relation between fast growth and preference for delayed consumption. The third part applies the methodology to the allocation of resources across developed countries at the business cycle frequency. Here we discuss how evidence on international quantity comovement, exchange rates, asset prices, and international portfolio holdings can be used to assess efficiency. Overall, quantities and portfolios appear consistent with efficiency, while evidence from prices is difficult to interpret using standard models. The welfare costs associated with an inefficient allocation of resources over the business cycle can be significant if shocks to relative country permanent income are large. In those cases partial financial liberalization can lower welfare.
Stichwort: International risk sharing, Real exchange rate, International business cycles, Long-run growth, and Long-run risk Fach: F36 - Financial Aspects of Economic Integration and F41 - Open Economy Macroeconomics
Creator: Heathcote, Jonathan and Perri, Fabrizio Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 398 Abstract:
In simple one-good international macro models, the presence of non-diversifiable labor income risk means that country portfolios should be heavily biased toward foreign assets. The fact that the opposite pattern of diversification is observed empirically constitutes the international diversification puzzle. We embed a portfolio choice decision in a frictionless two-country, two-good version of the stochastic growth model. In this environment, which is a workhorse for international business cycle research, we derive a closed-form expression for equilibrium country portfolios. These are biased towards domestic assets, as in the data. Home bias arises because endogenous international relative price fluctuations make domestic stocks a good hedge against non-diversifiable labor income risk. We then use our theory to link openness to trade to the level of diversification, and find that it offers a quantitatively compelling account for the patterns of international diversification observed across developed economies in recent years.
Fach: F36 - Financial Aspects of Economic Integration and F41 - Open Economy Macroeconomics