Some central banks have maintained overvalued official exchange rates, while unable to ensure that supply of foreign exchange meets legitimate demand for current account transactions at that price. A parallel exchange rate market develops, in such circumstances; and when the spread between the official and parallel rates is both substantial and sustained, price levels in the economy typically reflect the parallel market exchange rate. “Recognizing reality” by allowing economic agents to use a market clearing rate benefits economic activity without necessarily leading to more inflation. But a unified, market-clearing exchange rate will not stabilize without a supportive fiscal and monetary context. A number of country case studies are included; my thanks to Jie Ren for pulling together all the data for the country case studies, and the production of the charts.
Mr. Benjamin L Hunt, Susanna Mursula, Mr. Rafael A Portillo, and Marika Santoro
In this paper, we investigate the mechanisms through which import tariffs impact the macroeconomy in two large scale workhorse models used for quantitative policy analysis: a computational general equilibrium (CGE) model (Purdue University GTAP model) and a multi-country dynamic stochastic general equilibrium (DSGE) model (IMF GIMF model). The quantitative effects of an increase in tariffs reflect different mechanisms at work. Like other models in the trade literature, in GTAP higher tariffs generate a loss in terms of output arising from an inefficient reallocation of resources between sectors. In GIMF instead, as in other DSGE models, tariffs act as a disincentive to factor utilization. We show that the two models/channels can be broadly interpreted as capturing the impact of tariffs on different components of a country’s aggregate production function: aggregate productivity (GTAP) and factor supply/utilization (GIMF). We discuss ways to combine the estimates from these two models to provide a more complete assessment of the macro effects of tariffs.
Wouter Bossu, Mr. Masaru Itatani, and Arthur D. P. Rossi
This paper analyzes the legal foundations of central bank digital currency (CBDC) under central bank and monetary law. Absent strong legal foundations, the issuance of CBDC poses legal, financial and reputational risks for central banks. While the appropriate design of the legal framework will up to a degree depend on the design features of the CBDC, some general conclusions can be made. First, most central bank laws do not currently authorize the issuance of CBDC to the general public. Second, from a monetary law perspective, it is not evident that “currency” status can be attributed to CBDC. While the central bank law issue can be solved through rather straithforward law reform, the monetary law issue poses fundmental legal policy challenges.
Antoine Berthou, John Jong-Hyun Chung, Kalina Manova, and Charlotte Sandoz
We examine the gains from globalization in the presence of firm heterogeneity and potential resource misallocation. We show theoretically that without distortions, bilateral and export liberalizations increase aggregate welfare and productivity, while import liberalization has ambiguous effects. Resource misallocation can either amplify, dampen or reverse the gains from trade. Using model-consistent measures and unique new data on 14 European countries and 20 industries in 1998-2011, we empirically establish that exogenous shocks to export demand and import competition both generate large aggregate productivity gains. Guided by theory, we provide evidence consistent with these effects operating through reallocations across firms in the presence of distortions: (i) Both export and import expansion increase average firm productivity, but the former also shifts activity towards more productive firms, while the latter acts in reverse; (ii) Both export and import exposure raise the productivity threshold for survival, but this cut-off is not a sufficient statistic for aggregate productivity; (iii) Efficient institutions, factor and product markets amplify the gains from import competition but dampen those from export access.