International Finance and Macroeconomics

Article excerpt

The NBER's Program on International Finance and Macroeconomics met in Cambridge on March 24. NBER Research Associates Menzie D. Chinn, University of Wisconsin, and Lars E.O. Svensson, Princeton University, organized this program:

Ricardo J. Caballero, MIT and NBER; Emmanuel Farhi, MIT; and Pierre-Olivier Gourinchas, University of California, Berkeley and NBER, "An Equilibrium Model of 'Global Imbalances' and Low Interest Rates" Discussant: Paolo A. Pesenti, Federal Reserve Bank of New York

Andrew K. Rose, University of California, Berkeley and NBER, and Mark M. Spiegel, Federal Reserve Bank of San Francisco, "Offshore Financial Centers: Parasites or Symbionts? (NBER Working Paper No. 12044) Discussant: Sebnem Kalemli-Ozcan, University of Houston and NBER

Romain Ranciere, IMF; Aaron Tornell, University of California, Los Angeles and NBER; and Frank Westermann, University of Munich, "Systemic Crises and Growth" Discussant: Roberto Chang, Rutgers University and NBER

Julian Di Giovanni and Andrei A. Levchenko, IMF, "Openness, Volatility, and the Risk Content of Exports" Discussant: Sylvain Leduc, Federal Reserve Board

Michael Kumhof and Stijn Van Nieuwerburgh, IMF, "Monetary Policy in an Equilibrium Portfolio Balance Model" Discussant: Michael Devereux, University of British Columbia

Eduardo A. Cavallo, Harvard University, and Jeffrey A. Frankel, Harvard University and NBER, "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality" Discussant: Graciela L. Kaminsky, George Washington University and NBER

Three of the most important recent facts in global macroeconomics--the sustained rise in the U.S. current account deficit, the stubborn decline in long-run real rates, and the rise in the share of U.S. assets in global portfolio--appear as anomalies from the perspective of conventional wisdom and models. Caballero, Farhi, and Gourinchas provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: 1) potential growth differentials among different regions of the world and, 2) heterogeneity in these regions' capacity to generate financial assets from real investments. In extensions of the basic model, they also generate exchange rate and gross flows patterns that are broadly consistent with the recent trends observed in these variables. Unlike the conventional wisdom, in the absence of a large change in the two forces, the model does not augur any catastrophic event. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.

Rose and Spiegel analyze the causes and consequences of offshore financial centers (OFCs). Since OFCs are likely to be tax havens and money launderers, they encourage bad behavior in source countries. Nevertheless, OFCs may also have unintended positive consequences for their neighbors, since they act as a competitive fringe for the domestic banking sector. The authors derive and simulate a model of a home country monopoly bank facing a representative competitive OFC that offers tax advantages attained by moving assets offshore at a cost that is increasing in distance between the OFC and the source. The model predicts that proximity to an OFC is likely to have pro-competitive implications for the domestic banking sector, although the overall effect on welfare is ambiguous. Rose and Spiegel test and confirm the predictions empirically. OFC proximity is associated with a more competitive domestic banking system and greater overall financial depth.

Ranciere, Tornell, and Westermann document the fact that countries that have experienced occasional financial crises have, on average, grown faster than countries with stable financial conditions. The authors measure the incidence of crisis using the skewness of credit growth, and find that it has a robust negative effect on GDP growth. …