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BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Spillovers, Capital Flows and Prudential
Regulation in Small Open Economies
BANCO CENTRAL DE RESERVA DEL PERÚ
Paul Castillo, César Carrera, Marco Ortiz & Hugo Vega
Presented by:
Hugo Vega
RBNZ Workshop
“The Interaction of Monetary and
Macroprudential Policy”
[email protected]
The opinions expressed in this paper
are not necessarily shared by the
institutions with which we are currently
affiliated.
Hugo Vega
October 22nd 2014
1/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Contents
Motivation
BANCO CENTRAL DE RESERVA DEL PERÚ
Literature
The Model
Workers
Tradable Good Producers
Non-Tradable Good Producers
Results
Policy
Conclusions
Hugo Vega
October 22nd 2014
2/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Motivation
BANCO CENTRAL DE RESERVA DEL PERÚ
Some stylized facts we attempt to replicate:
I
Strong capital inflows in Latin-American region.
I
Rapid output growth in both tradable and non-tradable
sectors.
I
Increase in indebtedness, asset prices booms, real
appreciation, and current account deficit.
I
Active policy response using macroprudential instruments.
Hugo Vega
October 22nd 2014
3/29
Current8account8balance
Housing8Prices
USG
3.2
S/.
USG81857
2000
1.4
5000
S/.84588
1600
-0.6
-2.5
2006
2007
2008
3000
-3.6
-4.2
800
-4.9
2009
2010
2011
4000
1200
-1.9
2012
2013,
2000
400
USN
Output8Growth
15Y0
III. 13
III. 12
III. 11
III. 10
III. 09
III. 08
III. 07
III. 06
III. 05
III. 04
III. 03
III. 02
III. 01
III. 00
III. 99
1000
III. 98
0
Constant.domestic.currency
Multilateral8RER8Index
Index.2009.=.100
120Y00
120Y0
115Y00
115Y0
110Y00
110Y0
5Y0
105Y00
105Y0
0Y0
100Y00
100Y0
95Y00
95Y0
10Y0
2006 2007 2008 2009 2010 2011 2012
Nongtradable
September 2013:.92h56
MoM. Change: g0h36
YoY.Change:.2h39
90Y00
85Y00
90Y0
85Y0
Figure: Peru - Key Macroeconomic Variables
Julg13
Jang13
Julg12
Jang12
Julg11
Julg10
Jang11
Jang10
Julg09
Jang09
Julg08
Jang08
Julg07
Jang07
Julg06
Julg05
Jang06
Julg04
Jang05
80Y0
Julg03
80Y00
Jang04
Tradable
Jang03
g5Y0
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Literature
I
Kiyotaki & Moore (1997): credit limits and asset prices.
Role of financial development in the amplification of capital
flow externalities (Aghion et al. (2004), Aoki et al. (2009)).
Caballero & Krishnamurthy (2001) study the interaction
between domestic and foreign lending during periods of
sudden stops, using collateral assumptions similar to ours.
Paasche (2001): Two credit constrained SOEs who borrow
and export commodities to a third large one. A negative
productivity shock in one SOE generates an adverse terms
of trade shock on the other, which is amplified.
Sudden stop episodes associated with higher borrowing
(Mendoza (2002), Jeanne & Korinek (2010), Bianchi
(2011)).
BANCO
I CENTRAL DE RESERVA DEL PERÚ
I
I
I
Hugo Vega
October 22nd 2014
5/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
What we do
BANCO CENTRAL DE RESERVA DEL PERÚ
I
We build a stylized two sector real business cycle model
incorporating borrowing constraints that generates the
co-movements pointed out in the data, emphasizing spill
over effects from the tradable to the non-tradable sector.
I
We propose a countercyclical LTV rule that manages to
reduce output volatility in this economy, generating
redistributive welfare effects.
Hugo Vega
October 22nd 2014
6/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Some intuition
BANCO CENTRAL DE RESERVA DEL PERÚ
1. Borrowing constraints generate a link between
entrepreneurs’ credit limits and the price of assets used as
collateral.
2. This link is responsible for the co-movement between sectors
in response to a productivity shock to the tradable sector.
3. When tradable productivity increases, factor demand
pushes asset prices up, expanding the borrowing capacity
of entrepreneurs in both sectors.
4. This yields output co-movement and increased borrowing in
the non-tradable sector.
Hugo Vega
October 22nd 2014
7/29
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Economic Studies
The Model
BANCO CENTRAL DE RESERVA DEL PERÚ
1. Extension of the model of Aoki et al. (2009) considering a
2 sector SOE in which entrepreneurs require collateral to
borrow as in Iacoviello (2005).
2. Real DSGE model without money or price rigidity.
3. Three agents: Workers (W ) and entrepreneurs/producers of
tradable (T ) and non-tradable (N T ) goods.
Hugo Vega
October 22nd 2014
8/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
The Model (II)
4. Besides the markets for tradable and non-tradable goods,
the model incorporates markets for labour, capital, housing
and credit.
BANCO CENTRAL DE RESERVA DEL PERÚ
5. The credit market is segmented by collateral asset and
production sector.
6. The tradable sector uses capital (k) as collateral to obtain
foreign lending while the non-tradable sector uses housing
(h) as collateral to borrow from domestic agents (the
workers).
7. We assume a fixed aggregate supply for both capital and
housing assets.
Hugo Vega
October 22nd 2014
9/29
Wages
Labour supply
Final goods
imports (NT)
Non-tradable
entrepreneurs
Non-tradable goods supply (HH)
Debt service (NT)
Intermediate goods
imports (NT)
Credit (NT)
Net capital
demand(NT)
Net housing
demand(NT)
Workers
Net housing
demand (HH)
Housing
market
T goods
supply (NT)
Net housing
demand(T)
NT goods
supply (T)
Net capital
demand(T)
Capital
market
Tradable goods supply (HH)
Tradable
entrepreneurs
Wages
Labour supply
Final goods
imports (HH)
Final goods
exports
Foreign economy
Figure: The Model
Credit (T)
Final goods
imports (T)
Intermediate goods
imports (T)
Debt
service (T)
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Workers
BANCO CENTRAL DE RESERVA DEL PERÚ
I
Are the “patient” agents in the domestic economy.
I
T
Lend to entrepreneurs producing non-tradable goods (bN
s )
charging the domestic interest rate (Rs ).
I
Consume a basket (Cw,s ) of tradable (cTw,s ) and non-tradable
T
W
(cN
w,s ) goods; use housing services (hs ) and supply labour
(ls ).
Worker Equations
Hugo Vega
October 22nd 2014
11/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Tradable Good Producers/Entrepreneurs
I
Consume the same basket of goods (Ct,s ) as workers.
Combine housing services (hTs ), capital (ksT ), labour (lsT )
T ).
and imported inputs (mTs ) to produce (ys+1
Given the lag in production, entrepreneurs need working
capital loans (bTs ∗ ). These are subject to borrowing
constraints:
i
h
k
ksT
Rs∗ bTs ∗ ≤ θsT ∗ Es qs+1
BANCO CENTRAL DE RESERVA DEL PERÚ
I
I
where qsk is the price of capital, Rs∗ is the foreign interest
rate and θsT ∗ is the fraction of capital value accepted as
collateral.
Tradable Entrepreneur Equations
Hugo Vega
October 22nd 2014
12/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Non-Tradable Good Producers/Entrepreneurs
I
Consume the same basket of goods (Cnt,s ) as workers.
I
T
NT NT
NT
Use the same inputs (hN
s , ks , ls , ms ) as tradable good
N
T
producers to manufacture (ys+1 ).
I
They are also subject to borrowing constraints in the
domestic credit market that only admits housing as
collateral.
h
i
NT
h
T
NT
q
Rs PsW bN
≤
θ
E
s
s+1 hs
s
s
I
T
Producers of non-tradable goods sell at relative price pN
s
which is expressed in units of tradable goods.
BANCO CENTRAL DE RESERVA DEL PERÚ
Non-Tradable Entrepreneur Equations
Hugo Vega
October 22nd 2014
13/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Results: A tradable productivity shock
I
An increase in productivity in the tradable sector generates
an expansion in the tradable and non-tradable sectors and
boosts the price of both assets used as collateral.
The positive wealth effect experienced by tradable
entrepreneurs increases demand for non-tradable goods.
This generates a real appreciation which leads to an
expansion in the non-tradable sector. Given the increase in
housing prices, the borrowing constraint of the non-tradable
sector is relaxed.
Non-tradable firms’ demand for housing decreases. Such a
decrease is not big enough to outweigh the effect of higher
housing prices on their borrowing.
BANCO CENTRAL DE RESERVA DEL PERÚ
I
I
I
Hugo Vega
October 22nd 2014
14/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
I
During the adjustment process, collateral assets are
exchanged between the non-tradable and the tradable
sector.
BANCO CENTRAL DE RESERVA DEL PERÚ
Non-tradable firms use less housing and the excess is
absorbed by tradable firms. The latter liberate capital which
is acquired by their non-tradable counterparts.
I
Workers experience a positive wealth effect because of
higher wages. This stimulates savings, reducing the
domestic interest rate. As a result, the borrowing constraints
of non-tradable firms relax even further and housing
becomes less attractive.
I
Higher demand for imported inputs in both sectors explains
the current account deficit that follows the shock.
Hugo Vega
October 22nd 2014
15/29
−3
15
x 10
Agg. Output
Current Acc.
−3
0.02
10
0.01
5
0
0
−0.01
6
x 10
House prices
4
2
−5
2
4
8
10
12
−0.02
Output (T)
−3
20
6
x 10
2
−3
1
x 10
4
6
8
10
12
For. debt (T)
x 10
4
6
8
10
12
10
12
10
12
Capital prices
4
0
10
5
3
2
−1
0
1
2
−3
4
2
−3
5
15
−5
0
x 10
4
6
8
10
12
−2
Output (NT)
2
−3
2
3
1.5
2
1
1
0.5
x 10
4
6
8
10
12
0
Dom. debt (NT)
2
−3
8
x 10
4
6
8
NT
T
RER (p /p )
6
4
2
0
2
4
6
8
10
12
0
0
2
4
6
8
10
12
−2
2
∗
4
6
8
Figure: Tradable Productivity Shock (γ = 0.98, R = 1.005, θ = 0.6)
More shocks
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
The Role of Borrowing Constraints
BANCO CENTRAL DE RESERVA DEL PERÚ
I
The next figure shows the dynamics of the model
considering different values of θ.
I
A larger θ implies less restrictive borrowing constraints on
entrepreneurs. Consequently, when θ is relative large, the
model does not generate spillover effects.
I
On the contrary, output in the non-tradable sector falls
instead of rising in response to a positive productivity shock
in the tradable sector.
I
Debt of non-tradable entrepreneurs falls instead of rising
and both houses and capital prices are muted.
Hugo Vega
October 22nd 2014
17/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
The real appreciation is much smaller in this case, which
also is consistent with a milder current account deficit.
BANCO CENTRAL DE RESERVA DEL PERÚ
I
I
But, tradable (and aggregate) output response is not very
different.
I
The opposite is observed when θ is relative low: the real
exchange rate appreciates substantially, and the current
account deficit is much higher, output in the non-tradable
sector expands, and the debt of the non-tradable sector
increases. Asset prices also increase, amplifying the initial
impact of productivity shocks.
Hugo Vega
October 22nd 2014
18/29
−3
15
x 10
Agg. Output
Current Acc.
−3
0.03
10
x 10
House prices
0.02
10
5
0.01
5
0
0
−5
2
4
6
8
10
12
−0.02
Output (T)
−3
20
x 10
2
10
1
5
0
0
−1
2
−3
6
x 10
4
6
8
2
−3
3
15
−5
0
−0.01
10
12
−2
Output (NT)
x 10
6
8
10
12
For. debt (T)
2
−3
10
x 10
4
6
8
10
12
10
12
Capital prices
0
2
x 10
4
6
8
10
12
−5
Dom. debt (NT)
2
−3
15
4
4
−5
5
−3
6
4
x 10
4
6
8
NT
T
RER (p /p )
θ = 0.6
θ = 0.3
θ = 0.9
θ = 1.18
10
2
2
5
0
0
−2
0
−2
2
4
6
8
10
12
−4
2
4
6
8
10
12
−5
2
4
6
8
10
12
Figure: Tradable Productivity Shock: The role of borrowing constraints
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Policy
I
The analysis of the role of borrowing constraints suggests a
role for policy: minimize spillover effects.
But the presence of borrowing constraints in our model is a
structural one. The values for θT ∗ and θN T should be
treated either as deep parameters or an endogenous
response of agents to the frictions present in credit markets.
For this reason, an authority that employs LTV ratios as a
policy instrument faces an upper bound, as it is not possible
to force lenders to accept less collateral than the one they
privately deem adequate.
We explore a (potentially) second best solution: time
varying LTV rules in which the policy value of θ (θint ) must
be set below the private one (θpriv ).
BANCO CENTRAL DE RESERVA DEL PERÚ
I
I
I
Hugo Vega
October 22nd 2014
20/29
θpriv
θ
τ + θint
int
0
time
Figure: LTV Rules
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Policy (II)
BANCO CENTRAL DE RESERVA DEL PERÚ
We propose a countercyclical rule that takes into account the
position of the economy with respect to the business cycle.
θsT ∗,int
θ
T ∗,int
=
θsN T,int
θ
N T,int
= Es
Ys+1
Y
−φθ
where Y denotes aggregate output (value added) defined as
W
T
NT NT
NT
Ys = ysT − pM
− pM
s−1 ms−1 + ps ys
s−1 ms−1 /Ps
and φθ > 0.
Hugo Vega
October 22nd 2014
22/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Policy (III)
I
An LTV rule targeting aggregate output does a good job
dampening the spillover from the tradable to the
non-tradable sector in the aftermath of a tradable
productivity shock.
Aggregate output is slightly affected, but there is a sizeable
dampening on asset prices and the real exchange rate.
Tighter LTV ratios imposed on the economy manage to
curtail the expansion in debt in both sectors but the effect is
bigger on non-tradable firms.
Actually, borrowing taken by these firms diminishes, forcing
non-tradable entrepreneurs to hold on to their houses. This
reduces their demand for capital, explaining why tradable
firms cannot exchange capital for housing.
BANCO CENTRAL DE RESERVA DEL PERÚ
I
I
I
Hugo Vega
October 22nd 2014
23/29
−3
15
x 10
Agg. Output
Current Acc.
−3
0.02
10
0.01
5
0
0
−0.01
6
x 10
House prices
4
2
−5
2
4
8
10
12
−0.02
Output (T)
−3
20
6
x 10
2
−3
1
x 10
4
6
8
10
12
For. debt (T)
x 10
4
6
8
10
12
10
12
Capital prices
4
0
10
5
3
2
−1
0
1
2
−3
4
2
−3
5
15
−5
0
x 10
4
6
8
10
12
−2
Output (NT)
2
−3
2
3
x 10
4
6
8
10
12
0
Dom. debt (NT)
2
−3
8
x 10
4
6
8
NT
T
RER (p /p )
Base
LTV y
6
0
2
4
−2
1
2
−4
0
−1
2
4
6
8
10
12
−6
0
2
4
6
8
10
12
−2
2
4
6
8
10
Figure: Tradable Productivity Shock: Countercyclical LTV Rule
12
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Welfare and Volatility
In order to further analyse the impact of LTV rules, we solve
the model using a second order approximation around the
non-stochastic steady state. We find that the countercyclical
rule reduces the volatility of output. Table
I CENTRAL DE RESERVA DEL PERÚ
BANCO
I
We also investigate the second order effects on welfare.
This measure is the difference between the mean welfare
measure and its non-stochastic steady-state value.
I
Results show that the introduction of a countercyclical LTV
policy rule generates strong redistribution effects. Namely,
its use produces welfare increases for a subset of agents in
the economy, while the rest suffer a reversal.
Hugo Vega
October 22nd 2014
25/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Welfare and Volatility (II)
BANCO CENTRAL DE RESERVA DEL PERÚ
I
Which agents are favoured by the rule depends on the
source of the shocks and how limiting the borrowing
constraints are, captured by θ.
I
For example, when all shocks are taken into account,
imposing the countercyclical rule on an economy with low θ
makes the entrepreneurs better off and the workers worse
off. This outcome is reversed when θ is high. The intuition is
that at low values of θ the entrepreneurs are very
constrained and shocks generate high domestic interest rate
fluctuations which disappear at high levels of θ. Table
Hugo Vega
October 22nd 2014
26/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Conclusions
BANCO CENTRAL DE RESERVA DEL PERÚ
1. A productivity shock in the tradable sector generates an
increase in both asset prices and borrowing. Those effects
spillover to the non-tradable sector and generate a real
appreciation.
2. The appreciation and the increase in housing prices further
reinforces this mechanism by increasing the ability of
non-tradable firms to borrow.
3. As a result, non-tradable sector borrowing increases and a
current account deficit appears.
Hugo Vega
October 22nd 2014
27/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Conclusions (II)
4. In the model, the response to a positive tradable
productivity shock is similar to the response that an increase
in commodity prices would generate for economies where
tradable sector production is mostly commodities.
Therefore, the model simulations can also be interpreted as
showing a positive correlation between capital flows and
terms of trade, a stylized fact observed in many commodity
producer economies, such as Chile, Peru and Canada.
BANCO CENTRAL DE RESERVA DEL PERÚ
5. On the policy side, we show that countercyclical LTV rules
can dampen the spillover effects of borrowing constraints.
6. We find that these LTV rules reduce the volatility of output
and generate redistributive welfare effects.
Hugo Vega
October 22nd 2014
28/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Spillovers, Capital Flows and Prudential
Regulation in Small Open Economies
BANCO CENTRAL DE RESERVA DEL PERÚ
Paul Castillo, César Carrera, Marco Ortiz & Hugo Vega
Presented by:
Hugo Vega
RBNZ Workshop
“The Interaction of Monetary and
Macroprudential Policy”
[email protected]
The opinions expressed in this paper
are not necessarily shared by the
institutions with which we are currently
affiliated.
Hugo Vega
October 22nd 2014
29/29
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Worker Equations
Consumption basket:
BANCO CENTRAL DE RESERVA DEL PERÚ
Cw,s ≡
γ
T
1ε
cTw,s
ε−1
ε
+ 1−γ
T
1ε
T
cN
w,s
ε−1
ε
ε
ε−1
Price index:
PsW
1
h
N T 1−ε i 1−ε
T
T
= γ + 1−γ
ps
Euler equation:
"
#
Rs PsW
1
= βEs
W
Cw,s
Cw,s+1 Ps+1
Hugo Vega
October 22nd 2014
1/13
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Workers Equations (II)
BANCO CENTRAL DE RESERVA DEL PERÚ
Labour supply:
ws
= Cw,s λ (ls )η
PsW
Housing demand:
"
qsh − Es
h
qs+1
Rs
#
= j hW
s
−φ
PsW Cw,s
Back
Hugo Vega
October 22nd 2014
2/13
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Factor Demands (Tradable Goods Production)
h
i
T
∂ys+1
h = γE F T q h
qBANCO
+
s DE sRESERVA
s
s+1
CENTRAL
∂hT
s
h
DEL PERÚ∂y
i T
k s+1
k
T
k
qs = γEs Fs qs+1 + ∂kT
+ R1∗ − γEs FsT θsT ∗ Es qs+1
s
s
h ∂yT i
ws = γEs FsT ∂ls+1
T
h ∂ysT i
s+1
T
pM
s = γEs Fs ∂mT
s
where pM
s is the price of the imported input in tradable good
units and:
FsT ≡
Ct,s PsW
W
Ct,s+1 Ps+1
Back
Hugo Vega
October 22nd 2014
3/13
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Factor Demands (Non-Tradable Goods Production)
NT 1
h =CENTRAL
NRESERVA
T q hDEL PERÚ
N T ∂ys+1 +
N T θN T E qh
DE
qBANCO
γE
F
+
p
−
γE
F
s
s
s s+1
N
T
s
s
s
s
s+1
s+1 ∂hs
Rs
h
i
N
T
k
T ∂ys+1
qsk = γEs FsN T qs+1
+ pN
T
s+1 ∂kN
s
h
N T i
∂y
s+1
T
ws = γEs FsN T pN
s+1 ∂lsN T
h
N T i
N T pN T ∂ys+1
F
pM
=
γE
s
s
s
s+1 ∂mN T
s
where
FsN T ≡
Cnt,s PsW
W
Cnt,s+1 Ps+1
Back
Hugo Vega
October 22nd 2014
4/13
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Table: Parameter calibration
Preferences
β = 0.99
BANCO CENTRAL DE RESERVA DEL PERÚ
γ T = 0.3
Technologies
α = 0.3
ν = 0.3
ρA = 0.7
Collateral constraint
θT ∗ = 0.3
Open economy
R∗ = 1.005
Rules
φθ = −0.8
Hugo Vega
γ = 0.98
ε = 0.5
λ=1
j=5
χ = 0.2
κ = 0.2
ρζ = 0.7
κ = 0.2
ψ = 0.2
η=1
φ=3
θN T = 0.3
pM = 0.8
φb = −5
October 22nd 2014
5/13
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Results: A non-tradable productivity shock
BANCO CENTRAL DE RESERVA DEL PERÚ
I
Non-tradable output expands, coupled with a very mild
increase in tradable output, a fall in asset prices and a short
lived current account surplus consistent with a real
depreciation.
I
The key difference between the non-tradable productivity
shock and the tradable productivity shock is that the price of
tradable goods is fixed by arbitrage with the foreign sector
while the price of non-tradable goods is determined
domestically under perfect competition.
Hugo Vega
October 22nd 2014
6/13
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Thus, the increase in productivity in the non-tradable sector
assimilated
in PERÚ
the form of lower prices, generating a
BANCO is
CENTRAL
DE RESERVA DEL
significant depreciation. As a result, asset and input prices
are virtually unchanged and there is hardly any shift in
factor allocation.
I
I
The depreciation has the added benefit of relaxing the
non-tradable sector’s borrowing constraint. This is a
balance-sheet effect: firms in the non-tradable sector
contract debt in domestic (basket) units, therefore
non-tradable debt in tradable good units expands.
Hugo Vega
October 22nd 2014
7/13
−3
8
x 10
Agg. Output
−3
1
x 10
Current Acc.
−4
1
0.5
6
x 10
House prices
0
0
4
−1
−0.5
2
0
2
4
6
8
10
12
Output (T)
−5
15
−2
−1
−1.5
x 10
2
−4
3
x 10
4
6
8
10
12
−3
For. debt (T)
−4
0
10
2
5
1
−1
0
0
−1.5
−5
2
−3
10
x 10
4
6
8
10
12
−1
Output (NT)
x 10
4
6
8
10
12
10
12
10
12
Capital prices
−0.5
2
−3
8
2
x 10
4
6
8
10
12
−2
2
4
6
8
NT
Dom. debt (NT)
T
RER (p /p )
0
6
5
−0.005
4
2
0
−0.01
0
−5
2
4
6
8
10
12
−2
2
4
6
8
10
12
−0.015
2
4
Figure: Non-Tradable Productivity Shock
6
8
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Results: A foreign interest rate shock
A higher foreign interest rate tightens the borrowing
constraint of tradable firms, forcing a fall in tradable output.
I CENTRAL DE RESERVA DEL PERÚ
BANCO
I
Lower input demand by tradable firms leads to a fall in the
prices of houses and labour.
I
The negative wealth effect on tradable entrepreneurs
reduces demand for non-tradable goods, triggering a real
depreciation.
I
Output in the non-tradable sector falls as well, reducing
demand for capital and labour further. The decline in wages
prompts workers to borrow, pushing the domestic interest
rate up, and discouraging borrowing by non-tradable firms.
Hugo Vega
October 22nd 2014
9/13
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Given tighter borrowing constraints, housing is reallocated
from the tradable to the non-tradable sector, and capital is
reallocated from the non-tradable to the tradable sector,
BANCO CENTRAL DE RESERVA DEL PERÚ
allowing the later to borrow more.
I
I
The contraction in foreign debt and the depreciation that
occurs when the shock hits is consistent with a current
account surplus.
I
This shock is basically the opposite of the tradable
productivity shock. Thus, a fall in the foreign interest rate
that generates capital inflows into this SOE would produce:
higher asset prices, current account deficit, real
depreciation and a boom in the non-tradable sector coupled
with higher debt.
Hugo Vega
October 22nd 2014
10/13
−3
2
x 10
Agg. Output
Current Acc.
House prices
0.02
0
0.01
0
−0.005
0
−2
−0.01
−0.01
−4
−0.02
−6
2
4
6
8
10
12
−0.03
Output (T)
−3
2
−0.015
x 10
2
−3
4
x 10
4
6
8
10
12
−0.02
2
For. debt (T)
4
6
8
10
12
10
12
10
12
Capital prices
0
0
−0.005
2
−2
−0.01
0
−4
−0.015
−6
2
−3
5
x 10
4
6
8
10
12
−2
2
Output (NT)
4
6
8
10
12
−0.02
Dom. debt (NT)
0.005
0
0
−0.01
−10
−0.005
−0.02
−15
−0.01
8
10
12
2
4
6
8
10
12
−0.03
2
Figure: Foreign Interest Rate Shock
Back
8
T
0.01
0
6
6
RER (p /p )
0.01
4
4
NT
−5
2
2
4
6
8
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Table: Coefficient of variability
V ariable
θ = 0.3
φθ = 0 φθ = 0.8
θ = 0.6
θ = 0.9
φθ = 0 φθ = 0.8 φθ = 0 φθ = 0.8
All shocks
2.808
2.244
4.683
2.867
9.935
3.775
7.242
5.673
17.482 11.651 83.293 47.001
7.247
6.335
8.747
6.538
12.829
5.447
T radable productivity shock
2.149
1.69
2.59
1.588
2.931
1.259
3.645
2.281
5.101
2.394
12.926
4.166
7.149
6.238
7.771
6.104
7.34
4.28
N on − tradable productivity shock
1.451
1.195
1.539
1.043
1.745
0.886
4.284
3.525
5.639
4.477
15.04
13.978
0.116
0.591
0.1
0.979
0.094
2.103
F oreign interest rate shock
1.075
0.866
3.583
2.147
9.353
3.451
4.552
3.811
15.737 10.489
81.71
45.763
1.161
0.915
4.003
2.132
10.604
2.626
BANCO CENTRAL DE RESERVA DEL PERÚ
Y
Y NT
YT
Y
Y NT
YT
Y
Y NT
YT
Y
Y NT
YT
Back
Hugo Vega
October 22nd 2014
12/13
BANCO CENTRAL DE RESERVA DEL PERÚ
Economic Studies
Table: Welfare
θ = 0.6
θ = 0.9
φθ = 0 φθ = 0.8
φθ = 0
φθ = 0.8
BANCO CENTRAL DE RESERVA DEL PERÚ
All shocks
w
W
4.178
3.148
-3.204
0.607
-104.083 -1.429
W NT
-3.827 -2.254 -2.139 -3.031
244.964 56.912
WT
-4.036 -2.923 -9.366
-5.37
59.211
6.348
T radable productivity shock
Ww
1.102
0.639
-0.029
1.593
-0.712
20.101
W NT
-0.541
0.246
1.04
1.187
4.055
12.979
WT
-1.232 -0.419 -0.771 -0.873
0.251
-6.203
N on − tradable productivity shock
Ww
-0.118
0.277
-0.124
0.52
-0.129
5.367
W NT
-0.081 -0.104 -0.074
0.346
-0.068
5.991
WT
-0.047 -0.684 -0.043 -0.749
-0.039
-1.506
F oreign interest rate shock
Ww
3.193
2.233
-3.05
-1.506 -103.242 -26.896
N
T
W
-3.205 -2.395 -3.106 -4.564
240.977 37.942
WT
-2.757
-1.82
-8.552 -3.748
59
14.057
V ariable
θ = 0.3
φθ = 0 φθ = 0.8
Back
Hugo Vega
October 22nd 2014
13/13