یکپارچگی مالی، انعطاف ناپذیری اسمی و سیاست های پولی
|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|27836||2013||16 صفحه PDF||سفارش دهید||11497 کلمه|
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : International Review of Economics & Finance, Volume 25, January 2013, Pages 75–90
This paper shows that financial integration may reduce welfare in the presence of nominal price rigidity. From a policy perspective, the model implies that developing countries that are experiencing financial integration may attempt to alleviate the welfare cost of integration by stabilizing the exchange rate. Hence, this paper provides a novel explanation for “fear of floating”. For industrial countries that have the ability to operate efficient inflation targeting policy, financial integration is always beneficial. Thus, the different monetary regimes implemented in the industrial vs. the developing countries explain their divergent degrees of financial integration since the early 1990s.
Cross-country gross asset positions have increased dramatically in the past few decades. According to Lane and Milesi-Ferretti (2007), the sum of foreign assets and liabilities to GDP ratio (IFIGDP) has increased from approximately 45% to over 300% in industrial countries and from about 40% to nearly 150% in developing countries between 1970 and 2004.1 As shown in Fig. 1, the increase in cross-border asset trade was fairly stable during the 1970s and the 1980s. The two country groups had very similar trends in international financial integration up to the early 1990s. Since then, an acceleration of cross-border asset trade has taken place in industrial countries, while developing countries have failed to pick up the pace. The main goal of this paper is to explain the observed evolution of financial integration. Obviously, the early 1990s is a decisive period to focus on.In 1990, New Zealand adopted the first inflation targeting regime, quickly followed by other developed countries. In line with Goodfriend (2003), Ito and Mishkin (2004), Rose (2007), and Wyplosz (2006), all the 23 industrial countries classified by Lane and Milesi-Ferretti (2007) target inflation either explicitly or implicitly. In other words, the entire industrial country group has essentially adopted the same monetary strategy since the early 1990s, which is exactly the time when the acceleration in cross-border asset trade began. However, as stated by the De Facto Classification of Exchange Rate Regime and Monetary Policy Framework (IMF, 2006), only 19 out of the 155 developing countries classified by Lane and Milesi-Ferretti (2007) have adopted an inflation targeting regime.2 Most of these countries started targeting inflation after the 1997 Asian Financial Crisis. The majority of developing countries still use exchange rate as the nominal anchor when conducting monetary policy. Overall the industrial country group and the developing country group participate at very different levels in the international financial markets. The two groups also adopt very different monetary strategies. This gives rise to the following questions: (1) Does the monetary policy regime have an impact on the desirability of financial integration? (2) Is there a welfare case for fixed exchange rate regime as financial openness increases? To answer these questions, I study the interaction between financial integration and monetary policy in a simple two-country general equilibrium model with endogenous portfolio choices and nominal price rigidity. Households choose optimal portfolio positions from familiar assets such as bonds and equities. Conditional on the range of assets and other aspects of the model, the financial market structure can be divided into three types: financial autarky, incomplete financial market, and complete financial market. By contrasting the financial autarky with the complete and the incomplete financial market, this paper unifies the analysis of full and partial financial integration. To facilitate the comparison of my results with those of the standard new open-economy models, I assume that there exists a production subsidy. Consequently, I abstract from distortion caused by monopolistic competition and focus on two types of frictions, namely imperfect international consumption risk sharing and nominal price rigidity. To complete the model, I specify the monetary policy as a simple money supply rule. I then base the comparison of several monetary regimes, such as money targeting, unilateral peg, bilateral peg, and producer price targeting, on the welfare of each country. The monetary policy is ‘active’ or ‘passive’ depending on the responsiveness of monetary authorities to the stochastic shocks in the economy. Out of the four sets of monetary regimes considered in this paper, only the money targeting regime is passive because both home and foreign monetary authorities keep their money supply constant. All the other regimes are active due to the presence of active involvement of the monetary authorities. Notice that both the money targeting and the producer price targeting regime have flexible exchange rate. To distinguish the two, the money targeting regime can be described as a passive floating exchange rate regime, while the producer price targeting regime represents a form of active floating exchange rate regime. The most striking result of this paper is that financial integration reduces welfare under the money targeting regime. The reason is that financial integration leads to an increase in the terms of trade volatility, which is already excessive from a welfare standpoint in financial autarky. Pegging exchange rate eliminates the excessive terms of trade adjustment. Hence, fixed exchange rate regimes become more appealing than the passive floating exchange rate regime to a country that has some access to the international financial market. Nonetheless, targeting producer price removes the sticky price distortion and replicates the flexible price equilibrium. In this case, although financial integration still results in a higher volatility in terms of trade, the terms of trade volatility is below optimal in financial autarky. In fact, this active floating exchange rate regime, combined with perfect international risk sharing, brings the economy to the first-best, which is consistent with the well known result in the literature that it is optimal to stabilize producer price in a benchmark complete market open economy model without local currency pricing, cost-push or government expenditure shocks (e.g., see Benigno and Benigno, 2003, Clarida et al., 2001 and Clarida et al., 2002, and Gali & Monacelli, 2005). Therefore, countries that can successfully target inflation will benefit the most from financial integration. Finally, countries adopting exchange rate targeting regimes are indifferent to the international financial market structures as there is no idiosyncratic income risk when exchange rate is fixed. Many argue that the increased financial integration is a result of the removal of capital controls and changes in technology and institutional structure. Moreover, the process of financial integration has led various central banks to adopt inflation targeting as their monetary policy during the 1990s in order to cope with a global financial environment that is highly uncertain and volatile. This paper shows that the adoption of inflation targeting policy, furthermore, reinforces the advantage of financial liberalization because only countries that can manage to pursue an efficient inflation targeting regime may gain from financial integration. In order to implement efficient inflation targeting, countries need to meet certain preconditions, such as having a central bank that is independent of political influences, accountable to the public, and transparent in its policies, having well developed domestic financial markets and sufficient financial stability, and having adequate research and statistic resources. Industrial countries seem to have no problem fitting into an inflation targeting regime, which explains the observed acceleration in cross-border asset trade among industrial countries in the early 1990s, as it was mainly the industrial countries that have switched to an inflation targeting regime at that time. Nevertheless, developing countries may find it significantly challenging to carry out successful inflation targeting. Thus this paper sheds light on the well known “fear of floating” phenomenon as documented by Calvo and Reinhart (2002), Reinhart and Rogoff (2002), and Levy-Yeyati and Sturzenegger (2005). Besides the reasons, such as dollarized financial liabilities, rapid pass-through to inflation, and vulnerability to the occurrence of sudden stops of capital inflows, which have been discussed in the “fear of floating” literature, this paper provides an alternative rationale for the “fear of floating” phenomenon. That is, when financial liberalization is inevitable, it is rational for developing countries to adopt fixed exchange rate regimes first to alleviate the welfare cost of financial integration before they are ready to adopt an inflation targeting regime. In addition, this paper justifies the slow progress of developing countries in the process of financial integration because most developing countries still implement a de facto fixed exchange rate regime. This paper contributes to the literature on the impact of financial integration. A large literature in international finance analyzes the size of gains from financial integration. As models in this literature are frictionless other than having imperfect risk sharing, they all imply positive gains from financial integration. Some find large welfare gains (e.g., see van Wincoop, 1994, van Wincoop, 1996, Lewis, 1996 and Obstfeld, 1994), while others find rather small benefits (e.g., see Backus et al., 1992, Cole and Obstfeld, 1991, Mendoza, 1995 and Tesar, 1995). However, in an environment with more than one distortion, financial integration may not always be beneficial. This result resembles that of others based on the theory of the second-best. For instance, in a multi-country model with endogenous growth, Devereux and Smith (1994) show that increased international risk sharing discourages precautionary saving, which reduces the growth rate. Hence, welfare in complete financial markets is actually lower than that in financial autarky. In an open-economy framework similar to this paper, Tille (2005) also finds that financial integration is not universally beneficial. However, he assumes a unity elasticity of substitution between home and foreign goods and focuses on the degree of exchange rate pass-through. Instead, I assume a general elasticity of substitution between home and foreign goods, which is a critical parameter that determines the welfare impact of financial integration. I find detrimental effect of financial integration when this elasticity is greater than unity, a case that is more empirically relevant and indicates that terms of trade play a key role in welfare evaluations. This paper is closely related to the literature that analyzes endogenous portfolio choices in dynamic general equilibrium models.3 Papers closest to this one are Devereux and Sutherland, 2007 and Devereux and Sutherland, 2008. Both papers study the impact of monetary policy on country asset positions in complete as well as incomplete financial market environments. They limit their analysis to a producer price targeting rule and focus on the impact of the stance of monetary policy on the equilibrium asset holdings. They find that the case for price stability as an optimal monetary rule not only remains but is reinforced because it improves the hedging properties of nominal bonds. In contrast, this paper mainly emphasizes the welfare comparisons across different financial market structures and across different monetary regimes. Although it is also found that price stability is optimal as it supports the flexible price equilibrium and enhances the degree of international risk sharing, the key finding of this paper is that financial integration may reduce welfare in the presence of nominal price rigidity and constraints on the efficient use of monetary policy. For countries where price stability is hard to achieve, a second-best option is to attain exchange rate stability. This paper models financial integration as international portfolio allocations. There are other ways to model financial integration in the open economy literature. For instance, Sutherland (1996) has modeled financial integration as a result of reduction in trading frictions between financial markets in different countries. He assumes that households can only trade domestic and foreign bonds. Financial integration arises when it becomes less costly to adjust the holdings of foreign bonds4. Faia and Iliopulos (2011), on the other hand, focus on collateral constrained lending. They assume that households finance consumption of durable and non-durable goods with foreign lending, which is constrained by a borrowing limit where durables play the role of the collateral assets. Due to information asymmetry, only a fraction of the durable good value can be used as a collateral. A higher value of this fraction relaxes the borrowing constraint and results in greater financial integration. Faia and Iliopulos (2011) then study the effect of financial integration and its link to monetary policy. They find that fluctuations in the exchange rate induce swings in the value of the collateral, which affects the availability of credit, leading to higher volatility in consumption, output, and inflation and destabilizing the whole economy. Moreover, financial integration exacerbates these effects because it makes the availability of credit more sensitive to exchange rate fluctuations. Therefore, in a model with collateral constraint, optimal monetary policy calls for stabilization of the exchange rate and deviation from price stability. Their result is fundamentally different from what I find in this paper. I do not challenge the optimality of the inward-looking price stability policy, but rather emphasize that when there exist institutional and market barriers to implement the optimal policy, pegging exchange rate can serve as a second-best policy. The rest of the paper proceeds as follows. Section 2 describes the structure of the model. Section 3 presents the method used to solve optimal portfolios and welfare. Section 4 discusses the impact of financial integration under the money targeting regime. Section 5 analyzes alternative monetary regimes. Some conclusions then follow.
نتیجه گیری انگلیسی
This paper analyzes the welfare impact of financial integration in a standard monetary open economy model with nominal price rigidity. Financial integration may reduce welfare if integration leads to excessive terms of trade adjustment. This can happen when financial market segmentation is not the only distortion in the economy. Fixed exchange rate eliminates the excessive terms of trade volatility. Hence, this model implies that developing countries which are experiencing financial integration may attempt to alleviate the welfare cost of integration by stabilizing the exchange rate. This prediction is consistent with the widespread reluctance to following freely floating exchange rates observed in these countries, a phenomenon that has been well documented in the “fear of floating” literature. On the other hand, for developed countries that have the ability to operate efficient inflation targeting, financial integration is always beneficial. The model thus predicts that developed countries which have adopted inflation targeting should experience a deeper level of financial integration. Most industrial countries started an inflation targeting regime in the early 1990s, which gives a potential explanation for the acceleration of cross-border asset trade observed among industrial countries since that time. Given that most developing countries still conduct a de facto fixed exchange rate regime, the slow progress of developing countries in the process of financial integration is then not very surprising.