Mr. Paul Cashin, Mr. Kamiar Mohaddes, and Mr. Mehdi Raissi
This paper employs a dynamic multi-country framework to analyze the international
macroeconomic transmission of El Niño weather shocks. This framework comprises 21
country/region-specific models, estimated over the period 1979Q2 to 2013Q1, and accounts for
not only direct exposures of countries to El Niño shocks but also indirect effects through thirdmarkets.
We contribute to the climate-macroeconomy literature by exploiting exogenous
variation in El Niño weather events over time, and their impact on different regions crosssectionally,
to causatively identify the effects of El Niño shocks on growth, inflation, energy
and non-fuel commodity prices. The results show that there are considerable heterogeneities in
the responses of different countries to El Niño shocks. While Australia, Chile, Indonesia, India,
Japan, New Zealand and South Africa face a short-lived fall in economic activity in response to
an El Niño shock, for other countries (including the United States and European region), an El
Niño occurrence has a growth-enhancing effect. Furthermore, most countries in our sample
experience short-run inflationary pressures as both energy and non-fuel commodity prices
increase. Given these findings, macroeconomic policy formulation should take into
consideration the likelihood and effects of El Niño weather episodes.
Emerging markets are more volatile and face different types of shocks, in size and nature, compared to their developed counterparts. Accurate identification of the stochastic properties of shocks is difficult. We show evidence suggesting that uncertainty about the underlying stochastic process is present in commodity prices. In addition, we build a dynamic stochastic general equilibrium model with informational frictions, which explicitly considers uncertainty about the nature of shocks. When formulating expectations, the economy assigns some probability to the shocks being temporary even if they are actually permanent. Parameter instability in the stochastic process implies that optimal saving levels (debt holdings) should be higher (lower) compared to a process with fixed parameters. Imperfect information about the nature of shocks matters when commodity GDP shares are high. Thus, economic policies based on misperception of the underlying regime can lead to substantial over/under saving with important associated costs.
Mr. Charalambos G Tsangarides, Mr. Carlo Cottarelli, Mr. Gian M Milesi-Ferretti, and Mr. Atish R. Ghosh
Exchange rate analysis lies at the center of the IMF's surveillance mandate and policy advice, as well as in the design of IMF-supported programs, and IMF staff are called upon to analyze a wide variety of exchange rate issues in various member countries, both small and large, from the least economically developed to the most advanced, and from those whose currencies circulate only locally to those whose currencies are of global importance. Each year, IMF staff produce dozens of studies on exchange rate issues, some published by the IMF, others in various professional journals or books. This book aims to give a flavor of the topics the IMF staff typically examine under the broad rubric of exchange rate analysis, encompassing several topics: determination and impact of the real exchange rate, assessing competitiveness and the equilibrium real exchange rate in specific countries or country groups, and considerations in the choice of exchange rate regime.