Ties that Bind: Estimating the Natural Rate of Interest for Small Open Economies

Grossman, Valerie Aarne; Martínez‐García, Enrique; Wynne, Mark A.; Zhang, Ren

doi:10.24149/gwp359

Cited by 9 publications

(5 citation statements)

References 60 publications

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“…This topic is very important for several reasons: (1) Trade integration has important implications for business cycle synchronization [13,14], and there is substantial empirical evidence indicating that business cycles are more synchronized in countries with strong trade intensity [15][16][17], which provides further indication of policy coordination [18,19], one of the five priorities of the BRI; (2) Bilateral trade links have always played an important role in the overall relationship between countries. In a world economy that increasingly has a regional architecture, national developments and regional trajectories will be intertangled [20], so that countries with more intense reciprocal trade links are inclined to have fewer trade conflicts.…”

Section: Introductionmentioning

confidence: 99%

Has China’s Belt and Road Initiative Intensified Bilateral Trade Links between China and the Involved Countries?

Ren

et al. 2020

Sustainability

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The Belt and Road Initiative (BRI) is designed to intensify reciprocal trade preferentiality between China and the Belt-Road countries. However, there has been little research empirically examining the policy effects on the trade links between China and the involved countries. This paper attempts to evaluate the BRI effects quantitatively by constructing a new bilateral revealed trade preference index to measure the bilateral trade preferentiality between China and its 114 trading partners. Using a difference in differences model, we show that the trade of China with the Belt-Road countries has become more preferentially linked since the implementation of the BRI. In particular, the bilateral revealed trade preference index between China and the Belt-Road countries has grown approximately 8% faster than has that with the non-Belt-Road countries. We further show that the BRI effects are heterogeneous across different regions. The bilateral trade links have been more significantly intensified in the regions of the China–Indochina Peninsula Economic Corridor, the China–Pakistan Economic Corridor, the China–Central Asia–West Asia Economic Corridor and the Bangladesh–China–India–Myanmar Economic Corridor. The findings strongly indicate that BRI has been acting as a catalyst for intensifying bilateral trade preferentiality between China and the Belt-Road countries.

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Section: Introductionmentioning

confidence: 99%

Has China’s Belt and Road Initiative Intensified Bilateral Trade Links between China and the Involved Countries?

Ren

et al. 2020

Sustainability

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“…First, the struggles of the BOJ and ECB to achieve their mandates illustrate the difficulties in raising inflation once longer-run inflation expectations become entrenched 38 For a review of financial and macroeconomic effects in the United States and abroad, see Andrade and others (2016); Lombardi, Siklos, and St. Amand (2018); Kuttner (2018); and Dell'Ariccia, Rabanal, and Sandri (2018) on the effect on yields and bank lending. On the international experience and spillovers, see Clarida (2019b), Martínez-García (2019), and the evidence in Haldane and others (2016), Chen and others (2016), and Martínez-García (2018). communications and actions at the time also conveyed a lack of confidence in its tools and uneasiness with their deployment.…”

Section: Monetary Policy Framework?mentioning

confidence: 99%

Monetary Policy and Economic Performance Since the Financial Crisis

et al. 2020

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We review macroeconomic performance over the period since the Global Financial Crisis and the challenges in the pursuit of the Federal Reserve's dual mandate. We characterize the use of forward guidance and balance sheet policies after the federal funds rate reached the effective lower bound. We also review the evidence on the efficacy of these tools and consider whether policymakers might have used them more forcefully. Finally, we examine the post-crisis experience of other major central banks with these policy tools.

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“…8 In this paper, I build on the theoretical two-country work of Martínez-García (2019) and Clarida (2019), among others. 9 Structural estimates of the natural rate of interest motivated by New Keynesian theory do exist such as the closed-economy estimate of Cúrdia et al (2015) for the U.S. and the small-open economy estimates of Grossman et al (2019) which are shown to strongly comove with the U.S. natural rate. 10 However, I argue that the two-country setup is particularly well suited to explore the domestic and foreign sources of ‡uctuations on the U.S. natural rate (and on U.S. output potential) because it recognizes the in ‡uence that domestic conditions can have on terms of trade for large economies like the U.S. and because it explicitly incorporates potentially important trade and technological linkages between the U.S. and the rest of the world.…”

Section: Introductionmentioning

confidence: 99%

Get the Lowdown: The International Side of the Fall in the U.S. Natural Rate of Interest

Martínez‐García

2020

gwp

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Much consideration has been given among scholars and policymakers to the decline in the U.S. natural rate of interest since the 2007-09 global financial crisis. In this paper, I investigate its determinants and drivers through the lens of the workhorse two-country New Keynesian model that captures the trade and technological interconnectedness of the U.S. with the rest of the world economy. Using Bayesian techniques, I bring the set of binding log-linearized equilibrium conditions from this model to the data, but augmented with survey-based forecasts in order to align the solution with observed expectations incorporating the macro effects of the zero-lower bound constraint. With this structural framework, I recover a novel open-economy estimate of the U.S. natural rate. The paper's main results are: (a) the decline in the U.S. natural rate largely follows the slide of the longrun real interest rate in the forecast data, but is partly cushioned in the short run by the contribution of domestic and to a significant extent also foreign productivity shocks; (b) the fall of U.S. measured labor productivity during this time contributed to a concomitant fall in U.S. output potential; (c) the past decade is also characterized by the compression of markups (negative cost-push shocks) which accounts for much of the cyclical upswing in U.S. output in spite of the fall in its potential; and (d) monetary policy has shown its efficacy boosting U.S. output and sustaining U.S. inflation close to its 2 percent target against the drag on inflation from the negative cost-push shocks during this time. Finally, I also argue that ignoring the international linkages may result in biased estimates and can distort the empirical inferences on U.S. monetary policy in important ways.

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Ties that Bind: Estimating the Natural Rate of Interest for Small Open Economies

Abstract: This paper estimates the natural interest rate for six small open economies (

Cited by 9 publications

References 60 publications

Has China’s Belt and Road Initiative Intensified Bilateral Trade Links between China and the Involved Countries?

Has China’s Belt and Road Initiative Intensified Bilateral Trade Links between China and the Involved Countries?

Monetary Policy and Economic Performance Since the Financial Crisis

Get the Lowdown: The International Side of the Fall in the U.S. Natural Rate of Interest

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