We provide a theory of the determination of exchange rates based on capital flows in imperfect financial markets. Capital flows drive exchange rates by altering the balance sheets of financiers that ...bear the risks resulting from international imbalances in the demand for financial assets. Such alterations to their balance sheets cause financiers to change their required compensation for holding currency risk, thus affecting both the level and volatility of exchange rates. Our theory of exchange rate determination in imperfect financial markets not only helps rationalize the empirical disconnect between exchange rates and traditional macroeconomic fundamentals, it also has real consequences for output and risk sharing. Exchange rates are sensitive to imbalances in financial markets and seldom perform the shock absorption role that is central to traditional theoretical macroeconomic analysis. Our framework is flexible; it accommodates a number of important modeling features within an imperfect financial market model, such as nontradables, production, money, sticky prices or wages, various forms of international pricing-to-market, and unemployment.
The paper moves from a discussion of the challenges posed by the crisis to standard macroeconomics and the solutions adopted within the DSGE community. Although several recent improvements have ...enhanced the realism of standard models, we argue that major drawbacks still undermine their reliability. In particular, DSGE models still fail to recognize the complex adaptive nature of economic systems, and the implications of money endogeneity. The paper argues that a coherent and exhaustive representation of the inter-linkages between the real and financial sides of the economy should be a pivotal feature of every macroeconomic model and proposes a macroeconomic framework based on the combination of the Agent Based and Stock Flow Consistent approaches. The papers aims at contributing to the nascent AB-SFC literature under two fundamental respects: first, we develop a fully decentralized AB-SFC model with several innovative features, and we thoroughly validate it in order to check whether the model is a good candidate for policy analysis applications. Results suggest that the properties of the model match many empirical regularities, ranking among the best performers in the related literature, and that these properties are robust across different parameterizations. Second, the paper has also a methodological purpose in that we try to provide a set or rules and tools to build, calibrate, validate, and display AB-SFC models.
Economic policy uncertainty (EPU) reflects more information related to exchange rate volatility than traditional macroeconomic variables do, and thus may have stronger predictive power in forecasting ...exchange rate volatility. Based on data from developed and developing economies (including Japan, the United Kingdom, the Euro Area, Brazil, the Russian Federation, India, and China), this paper provides in- and out-of-sample evidence that the EPU differential between two economies outperforms several macroeconomic predictors (for example, GDP growth and volatility of inflation growth) in forecasting exchange rate volatility, which is also supported by a Monte Carlo experiment. Moreover, the mechanism analysis shows that increased EPU differential is associated with increased foreign exchange trading activities and reduced bilateral trade, which helps explain the predictive power of EPU for exchange rate volatility. Furthermore, we find that EPU can predict both long- and short-run components of exchange rate volatility. Our main findings are robust after using alternative empirical proxies or controlling for endogeneity.
This paper presents a method for creating machine learning models, specifically a gradient boosting model and a random forest model, to forecast real GDP growth. This study focuses on the real GDP ...growth of Japan and produces forecasts for the years from 2001 to 2018. The forecasts by the International Monetary Fund and Bank of Japan are used as benchmarks. To improve out-of-sample prediction, the cross-validation process, which is designed to choose the optimal hyperparameters, is used. The accuracy of the forecast is measured by mean absolute percentage error and root squared mean error. The results of this paper show that for the 2001–2018 period, the forecasts by the gradient boosting model and random forest model are more accurate than the benchmark forecasts. Between the gradient boosting and random forest models, the gradient boosting model turns out to be more accurate. This study encourages increasing the use of machine learning models in macroeconomic forecasting.
Milton Friedman's presidential address, “The Role of Monetary Policy,” which was delivered 50 years ago in December 1967 and published in the March 1968 issue of the American Economic Review, is ...unusual in the outsized role it has played. What explains the huge influence of this work, merely 17 pages in length? One factor is that Friedman addresses an important topic. Another is that it is written in simple, clear prose, making it an ideal addition to the reading lists of many courses. But what distinguishes Friedman's address is that it invites readers to reorient their thinking in a fundamental way. It was an invitation that, after hearing the arguments, many readers chose to accept. Indeed, it is no exaggeration to view Friedman's 1967 AEA presidential address as marking a turning point in the history of macroeconomic research. Our goal here is to assess this contribution, with the benefit of a half-century of hindsight. We discuss where macroeconomics was before the address, what insights Friedman offered, where researchers and central bankers stand today on these issues, and (most speculatively) where we may be heading in the future.
•Determinants of the attention dedicated to the forecasts of macroeconomic indicators.•Measures of attention based on: “active participation” and “update forecasts”•Routines, incentives, risk, and ...information releases affect attention.•Inflation is the macroeconomic indicator that attracts more attention.
This article analyzes the daily determinants of the degree of attention dedicated to the forecasts of three macroeconomic indicators: inflation, exchange rate, and output growth. Based on micro-data of expectations provided by the Central Bank of Brazil, we calculated two measures of the degree of attention: “active participation” and “update forecasts”. In addition, we present various stylized facts and perform several regressions that explain the daily degree of attention dedicated to forecasts taking into account: routine and horizons, incentives, risk, and information release events. The findings show that the main aspects that can increase the attention are: routines, incentive events, and releases of direct information regarding the macroeconomic indicator under consideration. Moreover, information concerning monetary policy decisions increases the degree of attention.
We find a significant positive relation between changes in policy uncertainty and changes in credit spreads. Macroeconomic conditions, including general uncertainty, do not explain this result, which ...also holds when we use instrumental variables to address endogeneity issues. The impact of policy uncertainty is greater for firms that operate in regulation-intensive industries, face high tax rates, or are dependent on government spending. It is also stronger for firms that engage in political activities or rely on external financing. We conclude that policy uncertainty has a significant effect on firms’ borrowing costs, with exposure to government policies representing an important channel.
The 800 pound gorilla in the room of macroeconomics is the question of why the overlapping generations model didn't become the central workhorse model for macroeconomics, as opposed to the ...neoclassical growth model. The authors here explore the co-evolution of the two models.
The Macroeconomics of the Greek Depression Chodorow-Reich, Gabriel; Karabarbounis, Loukas; Kekre, Rohan
The American economic review,
09/2023, Letnik:
113, Številka:
9
Journal Article
Recenzirano
Greece experienced a boom until 2007, followed by a collapse of unprecedented magnitude and persistence. We assess the sources of the boom and the bust, using a rich estimated dynamic general ...equilibrium model. External demand and government consumption fueled the boom in production, whereas transfers fueled the boom in consumption. Different from the standard narrative, wages and prices declined substantially during the bust. Tax policy accounts for the largest fraction of the bust in production, whereas uninsurable risk accounts for the bust in consumption and wages. We assess how the composition of fiscal adjustment and bailouts affected the crisis. (JEL E21, E23, E24, E32, E62, F41, H20)
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