RESEARCH
【LATEST】Renminbi Internationalization in Trade？
Abstract: Through a transaction-level dataset in the year 2015, this paper presents comprehensive evidence on the invoicing patterns concerning Chinese manufacture trade. Despite inclusion into the SDR, trade invoicing in Renminbi remain limited, in sharp contrast to US dollar s popularity. Several novel determinants can contribute to the pattern. First, exporter s stock of foreign direct investment at importer country is supportive of Renminbi invoicing and vehicle currency is less needed for non-U.S. trade. Second, for Chinese exporters, labor-intensive industries prefer invoicing more in producer currency. At transaction level, exporting on CIF term increases the probable use of local and vehicle currency as exporters are better insured against uncertainty, and the likelihood grows with value of transaction. Participation in processing trade strongly advocates vehicle currency invoicing, and greater geographical distance generally favors the use of exporter currency. These results points to potential policies for Renminbi internationalization in trade, such as greater exchange rate flexibility and capital account liberalization.
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【Job Market Paper】Capital Controls, Macroprudential Policy, and the Mundellian Trilemma
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Abstract: Can exchange rate flexibility ensure the policy autonomy of open economies, as indicated by the trilemma? The rising spillovers from US monetary shocks through the global financial cycle have led researchers (such as Rey, 2015) to postulate a dilemma where the independence of monetary policy only exists under capital controls. Using an interacted panel vector autoregression (PVAR) model, this paper tests the validity of the trilemma, and potential remedial effects of capital control and macroprudential policies, for 45 key advanced and emerging economies during 1999-2016. We find exchange rate flexibility remain effective in lowering the domestic monetary response to US interest rate shocks, especially in emerging economies, and capital controls are not necessary. Macroprudential policies also provide policy autonomy in advanced economies by reducing the domestic monetary sensitivity to U.S. shocks. Our results support the validity of the trilemma even in the time of financial globalisation, and show that sensitivity to the global financial cycle can be handled with macroprudential policies.
Real Currency Depreciation and Output Growth in Developing Countries — Evidence from A Multinomial Logit Model
joint with Lisandro Abrego, Nkunde Mwase, and Jose Nicholas Rosas Garcia (African Department, IMF)
Abstract: Applying a multinomial logit model, the paper assesses the underlying factors affecting output growth following real depreciation, using data for 80 developing countries over 1990- 2017. We categorize outcome of growth from episodes of real depreciation as expansionary, contractionary, or neutral, and directly evaluate the drivers behind the likelihood, rather than the direction, of each growth outcome. We find, at first, monetary tightening in the context of a real depreciation is less expansionary in the short run, while it is not necessarily more contractionary. Second, fiscal prudence can mitigate the short run contractionary effect of real depreciation, with partially offsetting effects in the medium term. Third, we constructed a novel measure of import expenditure switching, and found this dominates short run trade adjustment through decreasing imports toward domestic demand. Fourth, the recessionary valuation effect from dollar-denominated external liability may offset the expansionary impacts of expenditure switching when it is at excessive degrees relative to a country’s foreign exchange reserves. Moreover, we find a real depreciation during stronger credit expansion and/or large in size are both more likely to be contractionary. Finally, we find real depreciation per se is likely to be significantly more expansionary for low- income countries. Overall, trade-related effects remain the crucial channel for output growth following a real depreciation, implying that flexibility to depreciate remains important to facilitate external adjustment, even in the presence of balance sheet effects.
Uncertainty of Policy Matters:
The Role of Policy Uncertainty in Oil Price Shocks
Abstract: Does the ability of policy to absorb an oil price shock rely on policy uncertainty? In an interacted VAR model focusing on advanced economies, we show that high policy uncertainty leads to hesitant policy rate response to rising oil prices, i.e. central banks tend to tighten later and less in response to expansionary demand shocks, and are less dovish when falling oil production drives oil prices up. The policy gradualism accompanies similar responses of price and output and more volatile yield curves under high undertainty, suggesting magnified impact of single policy moves. Moreover, we find a contrasting term structure evolution between the US and other key advanced economies, i.e. US yield curve steepens more in response to falling oil production than the other industrial economies. This implies that dependence on oil imports enlarges pessimistic outlook especially when policy uncertainty is high. These findings highlighted the role of transparent policy communication to maintain its anchored objectives in the time of higher perceived uncertainty, in order to counter over-reactions in expectation that disturb long-term interest rates and real activities.