Dominant Currency Paradigm

Transcription

1 Dominant Currency Paradigm A New Model for the Small Open Economy Camila Casas Banco de la República Gita Gopinath Harvard Federico Díez Federal Reserve Bank of Boston Pierre-Olivier Gourinchas UC Berkeley The views expressed in this paper are those of the authors and do not indicate concurrence by other members of the research staff or principals of the Board of Governors, the Federal Reserve Bank of Boston, or the Federal Reserve System. The views expressed in the paper do not represent those of the Banco de la República or its Board of Directors. All remaining errors are our own. / 33

2 International Spillovers Nominal Rigidities First generation ( Consensus View ): Fleming (962), Mundell (963), Dornbusch (976), Svenson & van Wijnbergen (989), Obstfeld & Rogoff (995) Prices rigid in the producer s currency (PCP) Depreciations (appreciations) are inflationary (deflationary) P M = E h/f P f f E h/f, P M Depreciations (appreciations) deteriorate (improve) terms of trade. TOT P M P X = E h/f P f f P h h E h/f, TOT Expenditure Switching: Improvement in trade balance. 2 / 33

3 International Spillovers Nominal Rigidities 2 Second generation: Betts and Devereux (2), Devereux and Engel (23) Prices rigid in the local (destination) currency (LCP) Depreciations have no impact on inflation P M = P h E h/f, P M Depreciations (appreciations) improve (deteriorate) terms of trade. TOT P M P X = P h f P f h E h/f E h/f, TOT No expenditure switching 3 Symmetry, Bilateral ERs important 3 / 33

4 Disconnect between Model and Facts go Neither PCP, nor LCP, but pricing in very few currencies Outsized role for dollar Dollar invoicing share: 4.7 times its share in world imports, 3. times its share in world exports. Euro invoicing share:.2 times for imports and exports. 2 Prices are rigid in their currency of invoicing 3 Conditional on a price change, prices not very sensitive to exchange rates Strategic complementarity in pricing Variable desired mark-ups Imported intermediate inputs 4 dominant currency Paradigm: / 33

5 Literature Dollar Pricing: Corsetti and Pesenti (25), Goldberg and Tille (28, 29), Devereux et al. (27), Canzoneri et al (23). One-period ahead price stickiness. No intermediate inputs No strategic complementarity in pricing 5 / 33

6 What we do Model the dominant currency paradigm dominant currency pricing imported inputs strategic complementarity in pricing 2 Empirically evaluate DCP Colombian customs and firm data 3 Derive optimal monetary policy 6 / 33

7 Model: small open economy Home H trades with U (dominant currency) and R All prices and quantities in U and R are exogenous Households Utility: U(C t, N t ) = σ c Ct σc κ +ϕ N t +ϕ Consumption Aggregator: Kimball ( ) Ωi C ih (ω) γ i Υ dω =. Ω i ω Ω i γ i C i Strategic complementarities/variable mark-ups Wage setting (Calvo) Trade international risk-free bonds in U currency 7 / 33

8 Producers Production Function: Y t = e at Lt α Xt α Labor Aggregator: Standard CES Intermediate input aggregator X: Same as C Profits Π t = i,j E j,t P j Hi,t Y j Hi,t MC t Y t Roundabout production: Y Hi,t = C Hi,t + X Hi,t Price Stickiness: Calvo Nest producer, local, dominant currency θi,j k share of prices from i to j in currency k. Domestic prices and wages in H currency (θi,i i = ) 8 / 33

9 Closing the Model Domestic interest rates i t i = ρ m (i t i ) + ( ρ m )φ M π t + ɛ M,t Dollar interest rate i U,t = i t + ψ(e B U,t+ B ) + ɛ U,t Exchange rate U-R ln E R,t + ln P R R,t ln P t = η ( ln E U,t + ln P U U,t ln P t ) + ɛr,t 9 / 33

10 Price Dynamics Export prices π j Hi,t = λ [( ) ( ) ] p mc j H,t + Γ pj Hi,t + Γ p j i,t pj Hi,t + µ + βe t π j Hi,t+ λ p = ( δ p)( βδ p)/δ p Marginal costs and prices: mc j H,t = ( α)w t + α i γ k p ih,t a t e j,t p ih,t = j θ j ih,t (pj ih,t + e j,t) Cost shocks in U, R, directly impact H pricing. / 33

11 Calibration with Klenow & Willis (26) Preferences go Parameter Value Household Preferences Discount factor β.99 Risk aversion σ c 2. Frisch elasticity of N ϕ.5 Disutility of labor κ. Production Interm share α 2/3 Demand Elasticity σ 2. Super-elasticity ɛ. Rigidities Wage δ w.85 Price δ p.75 Monetary Rule Inertia ρ m.5 Inflation sensitivity φ M.5 Shock persistence ρ εi.5 Note: SS Markup elasticity Γ = ɛ/(σ ) = / 33

12 H Monetary policy shock (25bp cut in policy rate) Γ =, α =.66, γ H =.6, η = # DCP PCP LCP (a) ER # DCP PCP LCP (b) π # DCP PCP LCP (c) Output # DCP PCP LCP (d) TOT 2 / 33

13 H Monetary policy shock (25bp cut in policy rate) Γ =, α =.66, γ H =.6, η = # DCP PCP LCP (a) Exports # DCP PCP LCP (b) Imports 5 # PCP LCP DCP (c) Trade(X + M) 3 / 33

14 Colombia Commodity Currency, free float since September 999 Currency composition of exports: USD: 98.4% Weighted (by income) average imported input share: 38% for manufacturers, 44% for manuf exporters q3 28q 2q3 23q 25q3 TIME ER TOT β TOT,ER =.5 4 / 33

15 Colombia Commodity Currency, free float since September 999 Currency composition of exports: USD: 98.4% Weighted (by income) average imported input share: 38% for manufacturers, 44% for manuf exporters q3 28q 2q3 23q 25q3 TIME ER TOT (Manuf) TOT β TOT,ER =.5, β MTOT,ER =.33 5 / 33

16 Dollar Pass-through, Dollar Destinations/Origins Data p t = α + 8 k= β k e t k + ɛ t (prices in peso, quarter*year clusters) P PT HU UH Dollar Destinations/Origins (USA, Panama, Puerto Rico, Ecuador, and El Salvador) PT PT HR RH Non-Dollar Destinations/Origins 6 / 33

17 Non-Dominant Vs. Dominant Currency Prices Table: ERPT (Non-Dollarized Economies) () (2) (3) (4) p HR p HR p RH p RH e R.697***.896*.742***.3*** (.5) (.464) (.26) (.79) e U.66***.54*** (.473) (.662) 7 / 33

18 Non-Dominant Vs. Dominant Currency Quantities Table: ERPT (Dollarized Economies) () (2) y HU y UH e U ** (.344) (.397) Table: ERPT (Non-Dollarized Economies) () (2) (3) (4) y HR y HR y RH y RH e R -.872*** ** (.254) (.278) (.26) (.246) e U -.972** -.942*** (.327) (.27) 8 / 33

19 Discerning Pricing Paradigms Shocks: Commodity prices, Productivity, E R/E U Parameter Value Measured Export Invoicing Shares to U θhu U. to R θhr, U θhr R.93,.7 Shocks commodity prices σ ζ, ρ ζ.9,.74 Estimated Import Invoicing Shares from U θuh U. from R θrh, U θrh R.93,.7 e R process η, ρ ɛr, σ r.74,.82,.6 a process σ a, ρ a, ρ a,ζ.3,.49,-.26 Note: other parameter values as reported in the text. 9 / 33

20 Dollar Pass-through, Dollar Destinations/Origins Data Vs. DCP P HU (Est) P HU (Data) P UH (Est) P UH (Data) 2 / 33

21 Dollar Pass-through, Dollar Destinations/Origins Data Vs. PCP P HU (PCP) P HU (Data) P UH (PCP) P UH (Data) 2 / 33

22 Dollar Pass-through, Dollar Destinations/Origins Data Vs. LCP go P HU (LCP) P HU (Data) P UH (LCP) P UH (Data) 22 / 33

23 Role of Γ > α > P HU P HR =; =2/3 Data =; = =; =2/3 Data =; = / 33

24 Non-Dominant Vs. Dominant Currency Table: ERPT (Non-Dollarized Economies, R) () (2) (3) (4) p HR p HR p RH p RH Data e R.697***.896*.742***.3*** (.5) (.464) (.26) (.79) e U.66***.54*** (.473) (.662) DCP e R e U.66.7 PCP e R e U.36.6 LCP e R e U / 33

25 Optimal Monetary Policy When ε = α = ϕ =, σ c =, and complete markets, π HH,t = λ p γ [ỹ t ( γ) s t ] + βe t π HH,t+ ỹ t = E t ỹ t+ (i t E t π HH,t+ r n t ) + ( γ)e t ( m t+ ) m t = γ (ỹ t s t ) s t terms of trade m t = ẽ U,t + p U HU,t p HH,t: LOP deviation r n t = log β + E t a t+ : natural real rate γ measures home-bias; λ p = ( δ p )( βδ p )/δ p x: log-deviation from flex price allocation 25 / 33

26 Optimal Monetary Policy When ε = α = ϕ =, σ c =, and complete markets, Welfare loss function [ W DCP E β t 2ỹ2 t + γ σ ] π 2 γ( γ) HH,t + m 2 t + t.i.p 2λ p 2 t= Terms-of-trade evolves independently of monetary policy. Optimal discretionary policy: PPI Inflation targeting: ỹ t + ( γ) m t = σπ HH,t π HH,t = ỹ t = ( γ) s t No divine coincidence. Without cost-push shocks, no gains to commitment 26 / 33

27 Conclusion Dominant currency paradigm Shock transmission different stable terms of trade high dominant currency ERPT into trade prices and volumes regardless of origin or destination low pass-through of non-dominant currencies weak export expansions following depreciations stronger dominant currency may lower global trade Data strongly supports DCP Monetary policy targets dollar driven failure of LOP besides inflation and output gap PPI inflation targeting, output gap fluctuates with the terms of trade 27 / 33

28 Dominance of dollar invoicing in world trade back Dollar Euro Own Currency US Export Euro Export Share Share Share Share Share Argentina Australia Brazil Canada China Denmark France Germany Japan South Africa South Korea Switzerland Thailand Turkey United Kingdom United States EM share in world imports: 38%, exports: 33% 28 / 33

29 Parameterization back Preferences: Klenow and Willis (26) ( Y ih,t(ω) C ih,t(ω) + X ih,t(ω) = γ i + ɛ ln σ ) σ/ɛ ɛ ln Z ih,t (C t + X t) σ Z P ih(ω) P D Demand elasticity Mark-up elasticity σ ih,t = Γ ih,t = Symmetry: Z ih,t = (σ )/σ σ ( + ɛ ln σ σ ɛ ln Z ) ih,t ɛ ( σ ɛ ln σ σ + ɛ ln Z ) ih,t 29 / 33

30 Dollar Pass-through, Non-Dollar Destinations/Origins Data Vs. DCP back P HR (Est) P HR (Data) P RH (Est) P RH (Data) 3 / 33

31 Dollar Pass-through, Non-Dollar Destinations/Origins Data Vs. PCP back P HR (PCP) P HR (Data) P RH (PCP) P RH (Data) 3 / 33

32 Dollar Pass-through, Non-Dollar Destinations/Origins Data Vs. LCP back P HR (LCP) P HR (Data) P RH (LCP) P RH (Data) 32 / 33

33 Estimation Minimum distance estimator: m( τ)ω m T ( τ) moments, 9 parameters: τ = {θ U UH, θu RH, θr RH, η, ρ ɛ r, σ r, σ a, ρ a, ρ a,ζ } Data Model β,uh U β,rh U.89.8 β,rh H.8.3 ˆη ˆσ r.8.7 ˆρ ɛr ˆρ a,ζ ˆσ a ˆρ a β,hr U.86.8 β,rh U / 33