تاثیر بازارهای سهام خارجی در پویایی اقتصاد کلان در اقتصادهای باز : یک برآورد ساختاری

With the increased international financial integration in recent years, bilateral financial linkages between countries may have a growing influence on their real economies. This paper employs a structural two-country New Keynesian model, which incorporates a cross-border wealth channel, to estimate the effect that foreign stock market fluctuations may have on macroeconomic variables in open economy countries. The model is estimated using Bayesian methods on a sample of open economies that can potentially be affected by changes in a larger foreign stock market: Australia, Canada, New Zealand, Ireland, Austria, and the Netherlands. The estimation allows for deviations from rational expectations and for learning by economic agents. The empirical results indicate important cross-country wealth effects for Ireland and Austria, from fluctuations in the U.S. and U.K. and in the U.S. and German stock markets, respectively; the wealth effect is largest in Ireland. The data favor, instead, specifications with no significant wealth effect for the remaining countries. Foreign stock price fluctuations, however, still play a role by affecting domestic expectations about future output gaps in all countries in the sample.

The past two decades have been characterized by a substantial increase in international financial integration. Lane and Milesi-Ferretti, 2001, Lane and Milesi-Ferretti, 2003, Lane and Milesi-Ferretti, 2007 and Lane and Milesi-Ferretti, 2008 extensively document the rapid growth over the past years in the external wealth held by most countries: they show, for example, that the stock of external assets and liabilities as a fraction of GDP has risen by a factor of seven over the 1970–2004 period in industrial countries. During the same period, the share of equities in their external wealth has also increased and the home bias in equity holdings has become less severe for several countries (e.g., Sorensen et al., 2007 and Baele et al., 2007). As a consequence, bilateral financial linkages between countries may matter more than they did in the past. Those economies in which a large fraction of wealth is invested in foreign equities, for example, may be affected by fluctuations in stock prices in a foreign financial market. A cross-border wealth effect from changes in international stock prices may hence have an important impact on open economies’ aggregate consumption and real activity. Several studies have analyzed the wealth channel in a closed-economy framework, from early work by Ando and Modigliani (1963) to more recent contributions.1 The majority of studies focus on the U.S., but similar regressions have been estimated for a variety of countries.2 The potential effects of fluctuations in international asset prices on domestic economies, instead, have not been widely researched yet. This paper tries to fill this gap by estimating the magnitude of the international wealth effect for a set of open economies. It does so by estimating a structural model, which follows Di Giorgio and Nisticó (2007), for a two-country open economy, extended to incorporate an international wealth channel. The magnitude of the wealth channel depends on the length of the planning horizon agents use in forming their financial decisions and on the degree of financial openness. In the model, current output is affected by expectations of future output, real interest rates, and the terms of trade, but also by swings in foreign stock prices. The model is estimated for a set of open economies – Australia, Canada, New Zealand, Ireland, Austria, and the Netherlands – which are thought to be potentially affected by one or more foreign stock markets. The ideal country in the estimation, i.e. one that most closely conforms to the theoretical model, would be an open economy that lacks an important domestic stock market, but which is characterized by a large fraction of residents that invest in equities, mainly abroad. None of the countries, with the possible exception of Ireland, is a flawless candidate; considering all of them, therefore, is important to interpret the results and to assess which factors may affect the size of wealth effects. Most of the wealth that is invested abroad is typically directed to the U.S. Therefore, the U.S. stock market will usually represent the relevant foreign stock market to be considered in the estimation. But in some cases, financial markets situated in other countries (in the U.K. for Ireland, in the U.K. and Australia for New Zealand, and in Germany for Austria) also matter and they will be taken into account in the empirical analysis. The models are estimated by likelihood-based Bayesian methods as in Milani, 2007 and Milani, 2008. In the estimation, the assumption of rational expectations is relaxed in favor of learning by economic agents. This is motivated by the necessity to induce the needed persistence in the model (as an alternative to assume habit formation in consumption and inflation indexation in price-setting), but especially by the results in Milani (2008), which shows that asset prices may play a large role through their influence on expectations about future real activity. The paper considers an explicit model of expectations formation, which allows me to disentangle the direct effect of asset prices on output from the indirect effect through expectations. 1.1. Results The empirical estimates identify important wealth channels in Austria and in Ireland. The wealth effect is largest in Ireland, which is also the country in the sample in which foreign equity holdings are largest in relation to GDP and in which they comprise a larger fraction of the total equity portfolio. The data suggest no relevant wealth effect from foreign asset price fluctuations in Canada, Australia, the Netherlands, and New Zealand. The Bayesian model comparison exercise, in fact, indicates that, for these countries, the data favor the models in which the wealth effect is set to zero. For all countries, however, foreign stock prices, still play a role by affecting domestic macroeconomic variables through their effect on expectations, particularly about future real activity. Including this expectational effect leads to improvements in model fit in all cases. Foreign stock prices are helpful in forecasting future output in the Netherlands, Canada, and Australia, while they do not matter in New Zealand. Through the direct wealth effect, but mainly through the indirect expectations-driven effect, shocks that originate in a large foreign stock market may have non-trivial effects on open economies, as they account for about 10–20% of output fluctuations in Austria, Ireland, and the Netherlands, while they have modest effects in other countries. 1.2. Contribution to the literature The paper aims to contribute to the literature on the increasing international financial integration, by evaluating the effects that fluctuations in international stock markets may have on aggregate macroeconomic dynamics in open economies. While estimates of the wealth channel abound in a closed-economy context, corresponding estimates in an international dimension, which this paper aims to provide, are rare or missing. The paper is related to the literature on international portfolio holdings: various studies investigate the determinants of bilateral positions (Portes and Rey, 2005, Lane and Milesi-Ferretti, 2008 and Faruqee et al., 2004). Here the paper is agnostic about the causes of those investments patterns, while it analyzes, instead, the macroeconomic implications that large bilateral investment positions may have on the countries involved. The paper is also connected to recent works that stress the “valuation channel” of external adjustment (e.g., Obstfeld, 2004 and Ghironi et al., 2007; Gourinchas and Rey, 2007) and to the literature that incorporates international equity trading in international macro models (e.g., Engel and Matsumoto, 2006 and Devereux and Sutherland, 2007). The paper is less focused on the endogenous optimal portfolio choice and more on the aggregate wealth effect from fluctuations in value of given foreign stock portfolios. Finally, the paper is related to the papers that estimate New Keynesian open economy models, but which typically abstract from any effect from asset prices (e.g., Bergin, 2006, Dennis et al., 2007, Smets and Wouters, 2002, Adolfson et al., 2007 and Justiniano and Preston, 2010, and Rabanal and Tuesta, 2006). This paper investigates whether the omission of foreign financial variables represents a misspecification of the benchmark open economy model that is worth taking into account. In this way, the paper extends recent work by Castelnuovo and Nisticó (2009) and Milani (2008), who incorporate a wealth channel in closed-economy general equilibrium models and estimate its magnitude on U.S. data.

This paper has examined one potential implication of the rapid increase in international financial integration that has occurred in recent years: the possibility of positive cross-border wealth effects from foreign equity holdings, which can affect macroeconomic dynamics in open economies. The estimates suggest a positive and rather large wealth effect in Ireland from fluctuations in the U.S. and U.K. stock markets. The result is sensible as Ireland has the largest foreign equity to GDP ratio and the largest amount of foreign equities in the total portfolio, among the countries in the sample. There is a significant, but smaller, wealth effect from foreign stock prices also for Austria. The data do not support the existence of direct wealth channels for Canada, Australia, New Zealand, and the Netherlands. But for all countries in the sample, foreign stock prices still play a role through an effect that operates through the formation of domestic expectations, particularly regarding future real activity. The effect is especially relevant in the Netherlands, quite important in the other countries, and almost nil for New Zealand. The impact of foreign stock price fluctuations can be expected to intensify as the degree of financial integration increases further. The cross-border wealth effects may also evolve over time as the geographic distribution of bilateral positions among countries changes.