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Currency Unions and Trade_ A Post-EMU Mea Culpa

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CurrencyWars?Unconventional Monetary Policy Does Not Stimulate Exports
AndrewK.RoseBerkeley-Haas, ABFER, CEPR,NBER
Motivation: What are the Export Effects of Unconventional Monetary Policy (UMP)?
“We’re in the midst of aninternational currency war, a general weakening of currency. This threatens us because it takes away our competitiveness…”-Brazilian Finance Minister Guido Mantega, Mon Sep 27, 2010, reported by the Financial Times and Reuters“A ‘currency war’ … occurs when a country eases monetary policyspecifically to depreciate its currency,with the ultimateobjective of cheapening its exportsand gaining unfair competitive advantage in international trade…”- Ben Bernanke (2016, p2)
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Rose: Export Effects of Currency Wars
Strategy
Use plain-vanilla gravity model of exportsRequires neither UMP exogeneity nor instrumental variablesStraightforward methodology, dataThree assumptionsIdentify “currency wars” with unconventional monetary policyUMP: Quantitative easing, negative nominal interest rates, …Currency wars arebilateralevents between those engaging in UMP and those notEstimate effect of UMPby aggressors on potential victimsFocus on export effects of UMP
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Rose: Export Effects of Currency Wars
Preview of Findings
Countries that engage in UMP experiencedropin exports vis-à-vis countries that did not engage in UMP, ceteris paribusQuantitative easing associated with drop in exports ≈10%Highly statistically significantNegative nominal interest rates have similar effectNo effect from conditional forward guidance policiesAny currency wars have been lostby aggressors!
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Rose: Export Effects of Currency Wars
A Naïve Look
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Rose: Export Effects of Currency Wars
But that’s … Simplistic
No obvious pattern:Bothexports and imports continue to drop following QE1, trends unaffected by QE2, stagnation unaffected by QE3But …Only US consideredMultilateral blurs American exports to importers engaged in their own UMP (EMU, Japan, UK, Switzerland, …) with exports to importersnotengaged in UMPNo controls at all
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Rose: Export Effects of Currency Wars
Standard Gravity Model
FollowHead-Mayer (2014) survey, use Least Squares with Time-Varying Country Dummy Variables:ln(Xijt) =UMPijt+1CUijt+2FTAijt+{λit} + {ψjt}+{φij}+ijt is coefficient of interestUMPijtis 1 if i engages in UMP at t and j does not, 0 ow
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Rose: Export Effects of Currency Wars
Estimation
LS withmanyfixed effects on positive export flow observations11,773 exporter-quarter12,997 importer-quarter26,096 exporter-importerFE hold constant anyoveralleffect UMP (or anything else!) had on exports/imports at a point in time estimatespair-specific time-varyingexport effect of UMPPlausibly exogenous since main UMP export effects through common export effect, {λit}isadditionaleffect of belligerent on defender
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Rose: Export Effects of Currency Wars
Data Set
IMFDoTStrade: >200 “countries”2000Q1-2016Q4(with gaps)Exports are US$ average of FOB exports and CIF importsRTAs:WTOCurrency Unions:Glick-Rose
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Rose: Export Effects of Currency Wars
Countries
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Rose: Export Effects of Currency Wars
Measures of Unconventional Monetary Policy
QE: 1 for quarters when central bank actively acquiring securities throughQuantitativeEasing program, 0 ow2.4% of sampleVariant with unusual stocks of assets held (not flow purchases)NNIR: 1 for quarters withNegativeNominal marketInterestRates, 0 ow2.5%of sampleVariant with official policy ratesCheck with state-contingent forward guidance0.4%of sample
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Rose: Export Effects of Currency Wars
Measures of Unconventional Monetary Policy
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Rose: Export Effects of Currency Wars
Main Results
Nuisance EffectsPositive, statistically significant of both controls on (log) exportsGood fitCoefficient of Interest ()Negative effect of QE on exports ≈ -11% ceteris paribus|t-statistic| > 5Similar effect of NNIRCannot reject equality of QE, UMP effectsNo significant effect of state-contingent forward guidanceFewobs?No indication of successful currency wars!
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Rose: Export Effects of Currency Wars
UnconventionalMonetary Policyand Exports
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Rose: Export Effects of Currency Wars
Results seem robust
Variants of UMP (key regressor)Stocks (not flows) of QEUsing official (not market) interest ratesUsing 1st/4thlag or 1stleadDropping early or late dataDrop exporters engaging in UMP, one by oneDrop large sets of importersDrop observations with large outliers
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Rose: Export Effects of Currency Wars
Sensitivity Analysis, 1
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Rose: Export Effects of Currency Wars
Sensitivity Analysis, 2
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Rose: Export Effects of Currency Wars
Monadic Fixed Effect Event Studies
Currency war effect buried within exporter-quarter FE, {λit}?Can examine{λit}directlyVery little movement when country begins to engage in UMP, either QE or NNIR
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Rose: Export Effects of Currency Wars
Exporter-Date Fixed Effects
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Rose: Export Effects of Currency Wars
Conclusion
Q: Did use of Unconventional Monetary Policy (UMP), deliberately or inadvertently, raise exports to countries that did not use UMP?A: No!Countries using quantitative easing and/or negative nominal interest rates did *not* experience export boomsIf anything, their exports fell, ceteris paribus
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Rose: Export Effects of Currency Wars

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Currency Unions and Trade_ A Post-EMU Mea Culpa