Download This PDF is a selection from a published volume from... Economic Research Volume Title: NBER International Seminar on Macroeconomics 2007

This PDF is a selection from a published volume from the National Bureau of
Economic Research
Volume Title: NBER International Seminar on Macroeconomics 2007
Volume Author/Editor: Richard Clarida and Francesco Giavazzi, organizers
Volume Publisher: University of Chicago Press
ISSN: 1932-8796
Volume URL: http://www.nber.org/books/clar07-1
Conference Date: June 15-16, 2007
Publication Date: January 2009
Chapter Title: Introduction to "NBER International Seminar on Macroeconomics
2007"
Chapter Author: Richard Clarida and Francesco Giavazzi
Chapter URL: http://www.nber.org/chapters/c2996
Chapter pages in book: (1 - 5)
Introduction
Richard Clarida, ColumbiaUniversity and NBER
Francesco Giavazzi, IGIER,Universita' L. Bocconiand NBER
In June2007 the InternationalSeminaron Macroeconomics(ISoM)met
in Istanbul.The seminarconvened- as it has done year afteryear since
1978- a group of about thirty Europeanand Americaneconomists to
study a variety of topics within macroeconomics,defined very broadly.
As it has becomecustomary,we have been hosted by a Europeancentral
bank, this year the CentralBank of Turkey.Authors, discussants, and
participantswere equally divided between Americansand Europeans.
After a long association with the EuropeanEconomicReviewand the
Journalof the EuropeanEconomicAssociation,a selection of the papers pre-
sented in the past four seminarswere published by MITPress in three
volumes entitled NBER InternationalSeminaron Macroeconomics.Starting
last year a selectionof the ISoMpaperswas publishedby the University
of ChicagoPress.This volume is the second in the new series.
The volume containsa selection of the papers originallypresented at
the thirtiethISoMmeeting, which took place in Istanbulon June 15-16,
2007.Wethankour hosts at the CentralBankof Turkey,and particularly
Hakan Karaand the two deputy governors,ErdemBa^i and Mehmet
Yorukoglu,who have also kindly accepted to serve as discussants.The
program was organized by RichardClarida and FrancescoGiavazzi.
The decision regardingpublicationof each paper is made by a committee consisting of the six membersof the ISoMboard, with the advice of
a refereewhen necessary.
Overview of the Volume
Theseven paperspublished in this volume cover quite a rangeof topics.
While the subjectmatterof the chaptersranges widely, one can weave
some overarchingthemes. The seven chaptersfall into four categories.
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Claridaand Giavazzi
PartI deals with optimal monetarypolicy,part IIwith the international
transmissionof disturbances,partIIIwith capitalaccountliberalization,
and part IV with Europeanfinancialintegration.
PART I: Optimal Monetary Policy
Central banks have become increasingly transparent,but just how
transparentshould they be? Some centralbanks (e.g., the ReserveBank
of New Zealand, the Riksbank,the Bank of Norway) strive to reveal
just about everything that is relevant;others (e.g., the Bankof England)
are more circumspect. Likewise, the academic literature is divided
about the welfare case for full transparency.In "InterestRate Signals
and Central Bank Transparency"Charles Wyplosz, Pierre Gosselin,
and Aileen Lotz analyze the signaling role of the interestrate and consider various degrees of transparency,rangingfrom full opacity,to just
publishing the interest rate, to also revealing the signals and an estimate of their precision.The interestrate is a special signal because, unlike informationabout the state of the economy, it can be used by the
centralbank to affect market expectations. In other words, it is a manipulable signal. The authorspush this logic to its end and assume that
the interest rate is only a signaling device and that it does not play any
direct macroeconomicrole. If the interest rate allows the centralbank
to shape expectations,by optimally choosing the interest rate the central bank can deal with the unavoidable common knowledge effect in
a way that is welfare enhancing. That tends to make partial transparencypreferableto full transparencybecause in the lattercase the interest rate does not convey any additional informationand cannot be
used by the centralbank to shape private sector expectations.If, however, the central bank ignores the precision of private sector signals,
its optimally chosen interest rate may do more harm than good. This
tends to make full transparencythe best regime choice. The chapter
produced a lively discussion. Some participants questioned the assumption that the rate of interestis a signal but has otherwise no effect
on the economy. Othersobserved that the chaptermisses an important
source of uncertainty:markets observe the same data as the central
bank, where the relevant uncertaintylies in the way the centralbank
will interpretthese data.While thereis little the authorscould do about
the first criticism, the second observation is addressed in the version
published in this volume.
Introduction
3
PART II: International Transmission
"TheSimple Geometryof Transmissionand Stabilizationin Closed and
Open Economies"by Paolo Pesenti and GiancarloCorsettiprovides a
simple,but informative,frameworkfor understandingmonetarypolicy
choices in an open economy.The frameworkfeaturesa two period, two
countryanalysis and, as the title indicates,highlights the geometricintuitionbehind the results.The chaptercomparesand contraststhe cases
of:(a)Closed and open economies,(b)Flexibleand presetprices,(c)Producer and local currencypricing, (d) Nash and cooperativeequilibria.
The presentationat the conferencegenerated a lively discussion about
the generalityof the two by two approachas well as the intuitionbehind
some of the results. The chapter'ssimple geometry was thought to be
well-suited to provide insights into certainquestionsin particular,such
as producerversus local currencypricing.
Charles Engel and Michael Devereux, in "Expectations,Monetary
Policy, and the Misalignmentof TradedGoods Prices,"develop a potentiallyimportanttheme:that shocks to informationabout future fundamentalscan cause excessive volatility in exchange rates in the presence of plausiblemarketfrictions.Nominal exchangeratesare modeled
as asset prices, the relative price of two moneys, and are determined
largelyby expectedfuturemacroeconomicconditions.Whensome goods
pricesare sticky in each currency,exchangeratechanges also determine
changesin the relativepricesof goods. Thereis a sticky price distortion,
since freely set relative goods prices do not in general act like the relative price of two moneys. Largenominal exchange rate swings, reflecting expectations of the future, can thus lead to substantial misalignments in prices, even flexible commodity prices. Engel and Devereux
point out that even in theirmodel, a fixed exchange rate is not the optimal policy, because flexibilityhelps to obtain the relative price adjustment needed in responseto currentshocks.Butthey also argue thatneitheris benign neglect the best policy.
PART III: Capital Account Liberalization
After liberalizingthe capital account,many countriesexperiencelarge
swings in asset prices,capitalflows, and aggregateproduction.In "Capital Flows and Asset Prices," Kosuke Aoki, Gianluca Benigno, and
Nobuhiro Kiyotakiinvestigate how the adjustmentto capital account
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Clarida and Giavazzi
liberalizationdepends upon the development of the domestic financial
system. They show that the less developed the domestic financialsystem the more the economy is vulnerableto domestic and foreign financial shocks. The mechanismthat drives the result is the difficultyat enforcing contracts.In the small open economy model that they analyze,
contractscan only be enforcedif debts are securedby collateral.Butthe
assets thatcanbe used as collateralfor internationalborrowingaremore
restrictedthan domestic borrowing.The chaptergenerateda lively discussion. The main objectionswere relatedto the "dum"characterof the
capital inflows considered in the model. Moreover,the distinctionbetween productiveand unproductiveentrepreneursis hardlyexogenous
since, as the Chinese case illustratesand some participantsnoted, Foreign DirectInvestment(FDI)flows often come with built-inmanagerial
skills that can raise a firm'sproductivity.
Three facts characterizecountries that have opened up their capital
account:(a) portfolioholdings arebiased towardslocal equity;(b) international portfolios are long in foreign currencyassets and short in domestic currencyassets;(c) the depreciationof a country'sexchangerate
is associatedwith a net externalcapitalgain (i.e., with a positive wealth
transferfrom the rest of the world). In "InternationalPortfolios with
Supply, Demand, and RedistributiveShocks,"RobertKollmann,Nicolas Coeurdacier,and Philippe Martin analyze these facts in a twocountry,two-good model with tradein stocksand bonds. Thetwo countries are subjectto three types of disturbances:shocks to endowments,
to the relativedemand for home versus foreign goods, and to the distribution of income between laborand capital.Withthese shocks,optimal
internationalportfolios are shown to be consistent with the stylized
facts.
EnriqueMendoza, Vincenzo Quadrini,and Jose-VictorRios-Rull,in
"Onthe WelfareImplicationsof FinancialGlobalizationwithout Financial Development"use a rigorousmulti-countrymodel with noninsurable idiosyncraticriskto show that,if countriesdifferin the degreeof asset marketincompleteness,financialglobalizationcan hurt the poor in
countrieswith less developed financialmarkets.Thisis becausein these
countries liberalizationleads to an increase in the cost of borrowing,
which is harmfulfor the poor becausethey have largerliabilitiesrelative
to theirstock of assets. The quantitativeanalysis shows that the welfare
effects are sizable and can justify policy intervention.This is an important question, because marketincompletenessdoes seem to be a major
challenge for emerging markets.But the chapteralso raises other ques-
Introduction
5
tions.Forexample,a featureof the globaleconomy at presentis the huge
flow of capital from poor emerging economies to rich emerged economies. This is not well capturedby the model, and it led some in the audience to question the implicationsof the model for the presentcircumstances.
PART IV: European Financial Integration
"FinancialIntegrationwithin EU Countries:The Role of Institutions,
Confidence,and Trust"by Sebnem Kalemli-Ozcan,Bent E. Sorensen,
and Mehmet Fatih Ekinci is an ambitious empirical chapter that constructstwo measures of defactointegrationacross Europeanregions to
capturetwo dimensions of global financialflows, those for diversification and for development.The chapterfinds evidence that capitalmarket integrationwithin the EuropeanUnion is less than what is implied
by theoreticalbenchmarksand less thanwhat is found for U.S. states.In
the second partof the chapter,the authorsuse datafromthe WorldValue
Surveysto investigatethe effect of social capitalon financialintegration
among Europeanregions, controllingfor the effect of country-levelinstitutions. They report that regions where the level of confidence and
trust is high are more financiallyintegratedwith each other.Thus, the
authors argue that social capital is a potentially important factor encouragingcapitalinflows. While this is an intriguinghypothesis, it was
questioned by some at the conference.For example, the evaluation of
capital flows is relative to a very simple theoreticalbenchmark that
omits variablesthat are in factimportant.If this were the case, the effect
of social capitalcould capturethese omitted variables.