Euro Area and U.S. External Adjustment: The Role of Commodity Prices and Emerging Market Shocks

Giovannini, Massimo and Hohberger, Stefan and Kollmann, Robert and Ratto, Marco and Roeger, Werner and Vogel, Lukas (2018): Euro Area and U.S. External Adjustment: The Role of Commodity Prices and Emerging Market Shocks.

Abstract

The trade balances of the Euro Area (EA) and of the US have improved markedly after the Global Financial Crisis. This paper quantifies the drivers of EA and US economic fluctuations and external adjustment, using an estimated (1999-2017) three-region (US, EA, rest of world) DSGE model with trade in manufactured goods and in commodities. In the model, commodity prices reflect global demand and supply conditions. The paper highlights the key contribution of the post-crisis collapse in commodity prices for the EA and US trade balance reversal. Aggregate demand shocks originating in Emerging Markets too had a significant impact on EA and US trade balances. The broader lesson of this paper is that Emerging Markets and commodity shocks are major drivers of advanced countries’ trade balances and terms of trade.

• Item Type: MPRA Paper
• Language: English
• Keywords: Euro Area and US external adjustment, commodity markets, emerging markets
• Subjects: F - International Economics > F2 - International Factor Movements and International Business; F - International Economics > F3 - International Finance; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance

References

Adjemian, Stéphane, Houtan Bastani, Michel Juillard, Frédéric Karamé, Ferhat Mihoubi, George Perendia, Johannes Pfeifer, Marco Ratto and Sébastien Villemot, 2011. Dynare: Reference Manual, Version 4. Dynare Working Papers, 1, CEPREMAP.

Arezki, Rabah, Zoltan Jakab, Douglas Laxton, Akito Matsumoto, Armen Nurbekyan, Hou Wang, and Jiaxiong Yao, 2017. Oil Prices and the Global Economy. IMF Working Paper WP/17/15.

Backus, David and Mario Crucini, 2000. Oil Prices and the Terms of Trade. Journal of International Economics 50, 185–213.

Baffes, John, Ayhan Kose, Franziska Ohnsorge and Marc Stocke, 2015. The Great Plunge in Oil Prices: Causes, Consequence and Policy Responses. World Bank Policy Research Note.

Bernanke, Ben, 2005. Sandridge Lecture, Virginia Association of Economists.

Betts, Caroline and Michael B. Devereux, 2000. Exchange rate dynamics in a model of pricing-to-market. Journal of International Economics 50, 215–244.

Bornstein, Gideon, Per Krusell and Sergio Rebelo, 2018. Lags, Costs, and Stocks: An Equilibrium Model of the Oil Industry. Working Paper, Northwestern University.

Caldara, Dario, Michele Cavallo and Matteo Iacoviello, 2017. Oil Price Elasticities and Oil Price Fluctuations. Working Paper, Federal Reserve Board.

Dieppe, Alastair, Georgios Georgiadis, Martino Ricci, Ine Van Robays and Björn van Roye, 2018. ECB-Global: Introducing the ECB’s Global Macroeconomic Model for Spillover analysis. Economic Modelling 72, 78-98.

European Central Bank, 2010. Energy Markets and the European Macroeconomy. ECB Occasional Paper 113.

Finn, Mary, 1995. Variance Properties of Solow’s Productivity Residual and Their Cyclical Implications. Journal of Economic Dynamics & Control 19, 1249-1281.

Finn, Mary, 2000. Perfect Competition and the Effects of Energy Price Increases on Economic Activity. Journal of Money, Credit and Banking 32, 400-416.

Forni, Lorenzo, Andrea Gerali, Alessandro Notarpietro and Massimiliano Pisani, 2015. Euro Area, Oil and Global Shocks: An Empirical Model-Based Analysis. Journal of Macroeconomics 46, 295-314.

Gars, Johan and Conny Olovsson, 2017. International Business Cycles: Quantifying the Effects of a World Market for Oil. Working Paper, Riksbank (Sweden).

in’t Veld, Jan, Robert Kollmann, Beatrice Pataracchia, Marco Ratto and Werner Roeger, 2014. International Capital Flows and the Boom-Bust Cycle in Spain. Journal of International Money and Finance 48, 314-335.

Jacks, David, 2013. From Boom to Bust: A Typology of Real Commodity Prices in the Long Run. NBER Working Paper 18874.

Jacks, David, 2016. Chartbook for “From Boom to Bust”, Working Paper, Simon Fraser University.

Kilian, Lutz, Alessandro Rebucci and Nikola Spatafora, 2009. Oil shocks and external balances. Journal of International Economics 77, 181-194.

Kilian, Lutz and Bruce Hicks, 2012. Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003-2008? Journal of Forecasting.

Kollmann, Robert, 2002. Monetary Policy Rules in the Open Economy: Effects on Welfare and Business Cycles. Journal of Monetary Economics 49, 989-1015.

Kollmann, Robert, 2004. Welfare Effects of a Monetary Union: the Role of Trade Openness. Journal of the European Economic Association 2, 289-301.

Kollmann, Robert, Jan in’t Veld, Marco Ratto, Werner Roeger and Lukas Vogel, 2015. What Drives the German Current Account? And How Does it Affect Other EU Member States? Economic Policy 40, 47-93.

Kollmann, Robert, Beatrice Pataracchia, Marco Ratto, Werner Roeger and Lukas Vogel, 2016. The Post-Crisis Slump in the Euro Area and the US: Evidence from an Estimated Three-Region DSGE Model. European Economic Review 88, 21–41.

McKibbin, Warwick and Jeffery Sachs, 1991. Global Linkages. The Brookings Institution.

McKibbin, Warwick and Andrew Stoeckel, 2018. Modelling a Complex World: Improving Macro-Models. Oxford Review of Economic Policy 34, 329–347.

Miura, Shogo, 2017. World Price Shocks and Business Cycles. Working Paper, Université Libre de Bruxelles.

Obstfeld, Maurice and Kenneth Rogoff, 1996. Foundations of International Macroeconomics. MIT Press.

Peersman, Gert and Ine Van Robays, 2009. Oil and the European Economy. Economic Policy.

Ratto Marco, Werner Roeger and Jan in ’t Veld, 2009. QUEST III: An Estimated Open-Economy DSGE Model of the Euro Area with Fiscal and Monetary Policy, Economic Modelling, 26, 222–33.

Sachs, Jeffrey, 1981. The Current Account and Macroeconomic Adjustment in the 1970s. Brookings Papers on Economic Activity, 201-268.