Discussion of Cook and Devereux: Sharing the Burden: International Policy Cooperation. Gernot Müller

Transcription

1 Discussion of Cook and Devereux: Sharing he Burden: Inernaional Policy Cooperaion in a Liquidiy Trap Gerno Müller Universiy of Bonn

2 The paper Quesion: Opimal global policy response o counry specific shock which pushes (possibly several) economies ino liquidiy rap? Grea paper, los of (well inegraed) algebra; argumen very ransparen Discussion Summaryof main resuls Remarks on relevance in he conex of he crisis 2

3 Two counry model dl Model / Seup Sicky prices; PCP: full pass hrough Complee financial markes Various degrees of good marke inegraion (home bias) Moneary policy can sabilize oupu gap and inflaion as long as naural ineres raes 0 Negaive demand (preference) shock, persising wih probabiliy μ (no endogenous sae variables) 3

4 Equilibrium relaionships (in deviaions from seady sae) Complee financial markes (full risk sharing) rx c c Complee rade inegraion (no home bias) rx c c Real exchange rae consan Real ineres raes equal across counries q ) ( ( ) r E r c E c ) ( ) ( r E r E c c ) ( ) ( 4

5 (Moderae) negaive demand shock in home counry: normal imes Assume Taylor rules for moneary policy (ha (h is, less han full sabilizaion) Full good marke inegraion: real ineres rae declines by same amoun in home and foreign Home bias: domesic real rae falls more rx ( r c c ) ( r ) 0 Real exchange rae (erms of rade) )depreciaion Expendiure swiching owards domesic goods 5

6 (Very large) negaive demand shock in home counry: liquidiy rap Deflaion and consrained policy rae: real rae rises; more so a home iff home bias rx c c (0 ) (0 ) 0 Real appreciaion: exchange rae movemen amplifies negaive oupu effec of shock Fiscal muliplier large: lower real raes depreciae exchange rae (adds o beneficial effec of ineremporal subsiuion) 6

7 Opimal cooperaive policy w/o commimen Fiscal and moneary policy se o maximize world welfare Negaive demand shock in Home which implies negaive naural ineres raes Moneary policy No home bias: se boh policy raes o zero Srong home bias: foreign policy rae > 0 sabilize real exchange rae 7

8 Governmen spending Domesic spending should increase, and more so han foreign spending Foreign spending should increase in baseline scenario Ye, if foreign policy rae is se o zero (subopimally), opimal foreign spending can be negaive 8

9 Summary / Quesions In a nushell: hll domesic demand shock affecs boh counries (naural ineres raes fall) Opimal policy response may be asymmeric: raise foreign policy rae o depreciae home real exchange rae Quesions Paper (curren version) silen on empirical relevance? Wha s possibly missing? Some qualificaions 9

10 US policy rae and real effecive exchange rae (relaive o 2/2007) 5 FRR RX 0 Pe ercen

11 Two concerns. Key mechanism in he model Complee pass hrough/law of one price: real exchange rae perfecly correlaed wih erms of rade real exchange depreciaion worsens erms of rade expendiure swiching No longer rue in models of local currency pricing ii pioneered dby Mick ik( (Bes and Devereux 996, Devereux 997 )

12 2. Inernaional ransmission of financial crisis This paper: US financial secor meldown gave rise o Counry specific demand shock Transmied o ROW via rade Foreign oupu falls less in case of home bias Counerfacual, as far as US EA is concerned 2

13 Oupu growh (yoy) and simulaneous collapse 3

14 Wha abou financial channels of inernaional ransmission? E.g. Devereux and Yeman (20) Also Kollmann, Enders and Müller (20): Counry specific financial shock riggers simulaneous decline in aciviy 4

15 Kollmann e al: U.S. financial shock desroys global bank capial ZLB relevan in sicky price version of he model, bu opimal policy response compleely symmeric 5