This paper examines how private bank regulation and liquidity provided by the Federal Reserve in the US are related to deviations from the covered interest parity (CIP). We find evidence that the effects of bank liquidity on CIP deviations partially offset those resulting from regulatory changes in a sample of 11 OECD countries over the 2001-2019 period. This finding supports the conjecture that changes in private banks’ liquidity and regulation can significantly affect the cross-currency basis. Interestingly, the effects of liquidity on CIP deviations become more pronounced as bank regulation intensifies, reflecting interaction effects. One implication is that stricter regulations may amplify liquidity-related distortions, thereby increasing CIP deviations.

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There is a well-established literature that documents the failure of the uncovered interest parity (UIP) condition. While a host of factors have been examined as possible reasons behind this result, the role of uncertainty is not fully understood. In this paper, we examine the extent to which economic uncertainty affects the UIP condition in a sample of fourteen economies over the period 2003:1-2018:12. Using threshold panel regression models and exchange rate survey data, we find evidence that the UIP condition holds during low-uncertainty periods but does not during high-uncertainty periods. This finding is robust to the inclusion of other controls, different proxies of uncertainty, changes in the deposit maturity, and estimation method.

The world economy has experienced four global recessions over the past seven decades: in 1975, 1982, 1991, and 2009. During each of these episodes, annual real per capita global GDP contracted, and this contraction was accompanied by weakening of other key indicators of global economic activity. The global recessions were highly synchronized internationally, with severe economic and financial disruptions in many countries around the world. The 2009 global recession, set off by the global financial crisis, was by far the deepest and most synchronized of the four recessions. As the epicenter of the crisis, advanced economies felt the brunt of the recession. The subsequent expansion has been the weakest in the post-war period in advanced economies as many of them have struggled to overcome the legacies of the crisis. In contrast, most emerging market and developing economies weathered the 2009 global recession relatively well and delivered a stronger recovery than after previous global recessions.

Following the economic and political reforms of the 1990s, the Peruvian economy experienced two decades of exceptional growth in the 2000s. How was inequality affected by the strong growth performance of 2004-19? Which were the main factors associated with these inequality changes? The distribution of both income and consumption in Peru was highly unequal in 2004, with important geographic and regional differences. Since then, the degree of economic disparity decreased significantly associated with the exceptional growth of 2004–19. This decline in inequality was broad-based, yet it was not homogeneous across geographic areas, regions, or time. A correlate of this reduction in inequality has been a falling polarization. While wages and, to a lesser extent, government transfers accounted for most of the decline in income inequality, food prepared at home played a pivotal role in reducing consumption inequality, particularly in rural areas.

There is an important debate about how economies with different exchange rate regimes performed during the Great Recession and its ensuing recovery. While economic theory suggests that economies with fixed exchange rates are more affected and recover more slowly from global shocks than economies with non-fixed exchange rates, the empirical evidence on the most recent global recession has been mixed. This paper uses dynamic panel models to examine how the exchange rate and economic growth nexus is affected by the four global recessions and recoveries the world economy has experienced post-Bretton Woods. While there is no robust long-term relationship between exchange rate regimes and growth, there is evidence that fixers recover from global recessions at a weaker pace than non-fixers. These findings are robust across the different de facto exchange rate regime measures. Crown Copyright (C) 2020 Published by Elsevier Ltd. All rights reserved.

A sizeable literature suggests that financial sector development could be an important enabler of the growth benefits of trade openness. We provide a comprehensive analysis of how financial development can affect the relationship between trade openness and growth using a dynamic panel threshold model and an extensive dataset for a large sample of countries for the 1970–2015 period. We find that there is a financial development threshold in which trade openness has a positive and significant link with economic growth. We also find that when splitting the sample into industrialized and non-industrialized countries, the financial development threshold that enables the trade and growth association is higher in the former group of countries than in the latter. This finding is consistent with the fact that the export composition of industrialized countries is tilted towards more capital-intensive finance-constrained goods.

We examine the properties of house price fluctuations across 18 advanced economies over the past 40 years. We ask two specific questions: First, how synchronized are housing cycles across these countries? Second, what are the main shocks driving movements in global house prices? To address these questions, we first estimate the global components in house prices and various macroeconomic and financial variables. We then evaluate the roles played by a variety of global shocks, including shocks to interest rates, monetary policy, productivity, credit, and uncertainty, in explaining house price fluctuations using a wide range of FAVAR models. We find that house prices are synchronized across countries, and the degree of synchronization has increased over time. Global interest rate shocks tend to have a significant negative effect on global house prices whereas global monetary policy shocks per se do not appear to have a sizeable impact. Interestingly, uncertainty shocks seem to be important in explaining fluctuations in global house prices. JEL Classification Numbers: E32; E43; E52; G15; R31

We re-appraise the cross-country evidence on the dollarization of financial systems in emerging market economies. Amidst striking heterogeneity of patterns across regions, we identify a broad global trend towards financial sector de-dollarization from the early 2000s to the eve of the global financial crisis of 2008–09. Since then, de-dollarization has broadly stalled or even reversed in many economies. Yet a few of them have continued to de-dollarize. This suggests that domestic factors are also important and interact with global factors. To gain insight into such an interaction, we examine the experience of Peru since the early 1990s and find that low global interest rates, low global risk-aversion, and high commodity prices have fostered de-dollarization. Domestic macro-prudential measures that raise the relative cost of domestic dollar loans and the introduction and adherence to inflation targeting have also been key.

This paper examines the usefulness of asset prices in predicting recessions in the G-7 countries. It finds that asset price drops are significantly associated with the beginning of a recession in these countries. In particular, the marginal effect of an equity/house price drop on the likelihood of a new recession can be substantial. Equity price drops are, however, larger and are more frequent than house price drops, making them on average more helpful as recession predictors. These findings are robust to the inclusion of the term-spread, uncertainty, and oil prices. Lastly, there is no evidence of significant bias resulting from the rarity of recession starts.

We test the hypothesis that net foreign asset positions are consistent with external solvency and examine the dynamics of external adjustment using data for 50 countries over the 19702006 period. Our analysis adapts Bohn's (2007) error-correction reaction function approach - which tests for a negative long-run relationship between net exports (NX) and net foreign assets (NFA) as a sufficiency condition for the intertemporal budget constraint to hold - to a dynamic panel framework. Pooled Mean Group (PMG) and Mean Group error-correction estimation yield evidence of a statistically significant, negative response of NX to NFA. Moreover, we cannot reject the hypothesis that the response is largely homogeneous across countries. Our sensitivity analysis shows that the countries with relatively weaker fundamentals need to respond more strongly to the changes in NFA to keep their NFAs on a sustainable path. Published by Elsevier Ltd.

We examine the properties of house price fluctuations across 18 advanced economies over the past 40 years.We ask two specific questions: First, how synchronized are housing cycles across these countries?Second, what are the main shocks driving movements in global house prices?To address these questions, we first estimate the global components in house prices and various macroeconomic and financial variables.We then evaluate the roles played by a variety of global shocks, including shocks to interest rates, monetary policy, productivity, credit, and uncertainty, in explaining house price fluctuations using a wide range of FAVAR models.We find that house prices are synchronized across countries, and the degree of synchronization has increased over time.Global interest rate shocks tend to have a significant negative effect on global house prices whereas global monetary policy shocks per se do not appear to have a sizeable impact.Interestingly, uncertainty shocks seem to be important in explaining fluctuations in global house prices.

This paper examines the linkages between the global business cycle and national cycles. We first analyse the evolution of the global business cycle and present its main properties during global recessions and recoveries. We then consider how the sensitivity of national cycles to the global cycle varies over different phases of the global cycle and depends on country-specific features. Our findings collectively portray an intricate liaison between the global business cycle and national cycles. National business cycles are tightly linked to the global cycle, but the sensitivity of national cycles to the global cycle is much higher during global recessions than expansions. There are significant differences across countries in how they respond to the global cycle as advanced economies appear to be more sensitive to global recessions than are developing economies. Moreover, countries tend to be more sensitive to the global cycle, the more integrated they are to the global economy.