Risks for the Long Run and the Real Exchange Rate

Colacito, Riccardo; Croce, Mariano Massimiliano

doi:10.1086/659238

Cited by 301 publications

(199 citation statements)

References 31 publications

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“…See equation (65) in Section 6 for a more formal definition. 6 We note here that these patterns of cross-country correlations are consistent with those documented by Tesar (1995), Colacito and Croce (2011), and Lewis and Liu (2015) for consumption growth and equity returns, respectively.…”

Section: Correlationsupporting

confidence: 79%

Uncertainty and Economic Activity: A Multi-Country Perspective

2018

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Measures of economic uncertainty are countercyclical, but economic theory does not provide definite guidance on the direction of causation between uncertainty and the business cycle. This paper proposes a new multi-country approach to the analysis of the interaction between uncertainty and economic activity, without a priori restricting the direction of causality. We develop a multi-country version of the Lucas tree model with time-varying volatility and show that in addition to common technology shocks that affect output growth, higher-order moments of technology shocks are also required to explain the cross country variations of realized volatility. Using this theoretical insight, two common factors, a 'real' and a 'financial' one, are identified in the empirical analysis assuming different patterns of cross-country correlations of country-specific innovations to real GDP growth and realized stock market volatility. We then quantify the absolute and the relative importance of the common factor shocks as well as country-specific volatility and GDP growth shocks. The paper highlights three main empirical findings. First, it is shown that most of the unconditional correlation between volatility and growth can be accounted for by the real common factor, which is proportional to world growth in our empirical model and linked to the risk-free rate. Second, the share of volatility forecast error variance explained by the real common factor and by country-specific growth shocks amounts to less than 5 percent. Third, shocks to the common financial factor explain about 10 percent of the growth forecast error variance, but when such shocks occur, their negative impact on growth is large and persistent. In contrast, country-specific volatility shocks account for less than 1-2 percent of the growth forecast error variance. Terms of use: Documents inJEL-Codes: E440, F440, G150.

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Section: Correlationsupporting

confidence: 79%

Uncertainty and Economic Activity: A Multi-Country Perspective

2018

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“…Thus, introducing trade in a bond changes interest rates in a way that effectively amplifies the differential impact of the initial shock across countries, reduces effective insurance, and moves equilibrium allocations further away from the efficient ones. 26 This finding is intriguing from a policy point of view because it suggests that it might be desirable for two countries that can only a trade a noncontingent bond to close international financial markets altogether. Interestingly, the model suggests that this situation is more likely in exactly those cases where welfare differs significantly across market structures.…”

Section: Welfare and Policiesmentioning

confidence: 99%

Assessing International Efficiency

Heathcote¹,

Perri²

2014

Handbook of International Economics

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This paper 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.

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“…In this study, I develop a two-country endogenous growth economy with complete and frictionless financial markets that matches major stylized facts in international macroeconomics and that provides a comprehensive analysis of cross-sectional and aggregate asset prices. Major stylized facts in international macroeconomics include: (i) the cross-country correlations of macroeconomic quantities are moderate; (ii) asset markets highly comove; and (iii) asset markets are highly integrated nowadays among developed countries (see Rabanal, Rubio-Ramírez, and Tuesta (2011), Colacito and Croce (2013), and Fitzgerald (2012), respectively). Moreover, the cross-country correlation of consumption growth is significantly lower than the one of output growth (see Backus, Kehoe, and Kydland (1994)).…”

Section: Introductionmentioning

confidence: 99%

“…However, the model does not account for the fact that output growth is internationally more correlated than consumption growth (the quantity anomaly of Backus, Kehoe, and Kydland (1994)). Colacito and Croce (2011) study exchange rates in a suitable exchange economy and explain the high variability of exchange rate growth relative to consumption growth ("exchange rate volatility puzzle"). Tretvoll (2013) explains the exchange rate volatility puzzle in a related production economy and provides a good fit to cross-country correlations of growth rates.…”

mentioning

confidence: 99%

International endogenous growth, macro anomalies, and asset prices

Grüning

2017

Journal of Economic Dynamics and Control

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Technology spillover and international patent diffusion are important sources of economic growth. Moreover, international and domestic financial markets are highly developed and close-to-perfect in developed economies nowadays. Especially over the last decade, financial markets have become increasingly integrated. Asset returns are also typically quite highly correlated across countries. Another stylized fact in international macroeconomics is the robustly observed spread between the cross-country correlations of consumption growth to the one of output growth. Consumption growth is typically less correlated across countries than output growth.So far, little is known about the equilibrium effects of technology spillover on asset prices and, in particular, on the cross-section of equity returns. This study develops a two-country endogenous growth economy with complete and frictionless financial markets that matches major stylized facts in international macroeconomics and provides a comprehensive analysis of cross-sectional and aggregate asset prices.In the model, each country is populated by a single representative household, a single perfectly competitive final good firm, and a continuum of monopolistic intermediate good producers. The final good firm uses capital, labor, and a composite of intermediate goods to produce the respective country's final good. The production output is subject to both common and idiosyncratic productivity shocks affecting both countries simultaneously and only one country, respectively. The monopolistic intermediate good producers ("incumbents") each produce a single intermediate good. These incumbents can innovate on the quality of their products themselves or they can be displaced by new firms ("entrants") if these potential entrants make a successful innovation. Households consume both countries' consumption goods and display home bias for their domestic goods. The constant R&D technology of incumbents and the stochastic technology of potential entrants use goods from both countries to capture endogenous technology spillover effects.There are two important mechanisms at the core of this model. First, there is realistic competition between incumbents and potential entrants in innovations. Second, households and innovators share their risks internationally by using both final goods for consumption and R&D. Due to these risk-sharing opportunities, innovations in one country thus induce a positive effect also on the productivity of the other country.Three different versions of the model are analyzed. The initial model features a constant R&D technology for entrants and no technology spillover. Next, technology spillover is added by allowing incumbents and entrants to use both goods for their R&D technologies. Finally, the elasticity of entrants' R&D is allowed to be stochastic. The first model only allows a small amount of final good trade and thus the households mainly resort to financial markets to share their risks. This induces a very high volatility of the exchange rate and negati...

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Risks for the Long Run and the Real Exchange Rate

Cited by 301 publications

References 31 publications

Uncertainty and Economic Activity: A Multi-Country Perspective

Uncertainty and Economic Activity: A Multi-Country Perspective

Assessing International Efficiency

International endogenous growth, macro anomalies, and asset prices

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