Cédric Tille

The Great Retrenchment: International Capital Flows During the Global Financial Crisis

The current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization. We identify the stylized facts and main drivers of this development. The retrenchment in international capital flows is a highly heterogeneous phenomenon: first across time, being especially dramatic in the wake of the Lehman Brothers’ failure, second across types of flows, with banking flows being the hardest hit due to their sensitivity of risk perception, and third across regions, with emerging economies experiencing a shorter-lived retrenchment than developed economies. Our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration, its specific nature—with countries relying on bank flows being the hardest hit—as well as domestic macroeconomic conditions and their connection to world trade flows.

Competitive devaluations: toward a welfare-based approach

Abstract This paper revisits the international transmission of exchange rate shocks in a multicountry economy, providing a choice-theoretic framework for the policy analysis of competitive devaluations. As opposed to the traditional view, a devaluation by one country does not necessarily have an adverse beggar-thy-neighbor effect on its trading partners, because they can benefit from an improvement in their terms of trade. Furthermore, a retaliatory devaluation need not be the optimal strategy for the neighbor countries, as the induced terms of trade deterioration can be large enough to offset the gains from defending their export market share. The concern over competitive devaluations reflected in the Funds charter, and the system-wide implications of changes in exchange rates, still motivate Fund policy recommendations. A major Fund concern in the Asian crisis has been the fear that Asian currencies would become so undervalued and current account surpluses so large as to damage the economies of other countries, developing countries included. This is one reason the Fund has stressed the need first to stabilize and then to strengthen exchange rates in the Asian countries now in crisis — and for this purpose, not to cut interest rates until the currency stabilizes and begins to appreciate.

Micro, Macro, and Strategic Forces in International Trade Invoicing

The use of different currencies in the invoicing of international trade transactions plays a major role in the international transmission of economic fluctuations. Existing studies argue that an exporters invoicing choice reflects structural aspects of her industry, such as market share and the price-sensitivity of demand, the hedging of marginal costs, due for instance to the use of imported inputs, and macroeconomic volatility. We use a new highly disaggregated dataset to assess the roles of the various invoicing determinants. We find support for the factors identified in the literature, and document a new feature, in the form of a link between shipments size and invoicing. Specifically, larger transactions are more likely to be invoiced in the importers currency. We offer a potential theoretical explanation for the empirical link between transaction size and invoicing by allowing invoicing to be set through a bargaining between exporters and importers, a feature that is absent from existing models despite its empirical relevance.

To What Extent Does Productivity Drive the Dollar

The continuing strength of the dollar has fueled interest in the relationship between productivity and exchange rates. An analysis of the link between the dollars movements and productivity developments in the United States, Japan, and the euro area suggests that productivity can account for much of the change in the external value of the dollar over the past three decades.

Competitive Devaluations: A Welfare-Based Approach

This paper studies the mechanism of international transmission of exchange rate shocks within a 3-country Center-Periphery model, providing a choice-theoretic framework for the policy analysis and empirical assessment of competitive devaluations. If relative prices and terms of trade exhibit some flexibility conforming to the law of one price, a devaluation by one country is beggar-thy-neighbor relative to another country through its effects on cost-competitiveness in a third market. Yet, due to direct bilateral trade among the two countries, there is a large range of parameter values for which a country is better off by maintaining a peg in response to its partners devaluation. If instead deviations from the law of one price are to be considered the dominant empirical paradigm, then the beggar-thy-neighbor effect based on competition in a third market may disappear. However, a countrys devaluation has a negative welfare impact on the economies of its trading partners based on the deterioration of their export revenues and profits and the increase in disutility from higher labor effort for any level of consumption.

How valuable is exchange rate flexibility? Optimal monetary policy under sectoral shocks

The paper explores the optimal monetary policy reaction to productivity shocks in an open economy. Whereas earlier studies assume that countries specialize in producing particular goods, I enrich the analysis by allowing for incomplete specialization. I confirm the finding of Obstfeld and Rogoff (2000)--who build on Friedman (1953)--that a flexible exchange rate is highly valuable in delivering the optimal response to country- specific shocks. Its value is, however, much smaller when shocks are sector-specific, because exchange rate fluctuations then lead to misallocations between different firms within a sector. The limitation on the value of flexibility is sizable even when specialization is high.

Sailing through this Storm? Capital Flows in Asia during the Crisis

The current crisis has led to an unprecedented collapse in international capital flows, with substantial heterogeneity across regions. Asian economies were relatively unaffected, despite having been the center of the storm in the crisis of the late 1990s. The contraction in capital flows for Asian countries was limited to the most acute phase of the crisis following the collapse of Lehman Brothers, after which capital flows rebounded. We find that the stronger performance of Asia primarily reflects its more limited reliance on international banking compared to Europe and the United States. We find little evidence that the drivers of capital flows had a differentiated impact in Asia. Finally, we show that while higher initial levels of foreign reserves did not insulate countries from a turnaround in private capital flows, a larger use of reserves at the height of the crisis limited the contraction in gross private outflows.

A Bargaining Theory of Trade Invoicing and Pricing

We develop a theoretical model of international trade pricing in which individual exporters and importers bargain over the transaction price and exposure to exchange rate fluctuations. We find that the choice of price and invoicing currency reflects the full market structure, including the extent of fragmentation and the degree of heterogeneity across importers and across exporters. Our study shows that a party has a higher effective bargaining weight when it is large or more risk tolerant. A higher effective bargaining weight of importers relative to exporters in turn translates into lower import prices and greater exchange rate pass-through into import prices. We show the range of price and invoicing outcomes that arise under alternative market structures. Such structures matter not only for the outcome of specific exporter-importer transactions, but also for aggregate variables such as the average price, the average choice of invoicing currency, and the correlation between invoicing currency and the size of trade transactions.

The internationalization of the dollar and trade balance adjustment

The pattern of international trade adjustment is affected by the continuing international role of the dollar and related evidence on exchange rate pass-through to prices. This paper argues that a depreciation of the dollar would have asymmetric effects on flows between the United States and its trading partners. With low exchange rate pass-through to U.S. import prices and high exchange rate pass-through to the local prices of countries consuming U.S. exports, the effect of dollar depreciation on real trade flows is dominated by an adjustment in U.S. export quantities, which increase as U.S. goods become cheaper in the rest of the world. Real U.S. imports are affected less because U.S. prices are more insulated from exchange rate movements-pass-through is low and dollar invoicing is high. In relation to prices, the effects on the U.S. terms of trade are limited: U.S. exporters earn the same amount of dollars for each unit shipped abroad, and U.S. consumers do not encounter more expensive imports. Movements in dollar exchange rates also affect the international trade transactions of countries invoicing some of their trade in dollars, even when these countries are not transacting directly with the United States.

Composition of International Assets and the Long-Run Current Account

We document the role of capital gains and losses for the current account that a country can sustain along a balanced growth path. While it is well know that growth allows a country to run a current account deficit and still keep its external debt stable as a share of GDP, the sensitivity of the current account to the composition of external assets and liabilities has received little attention. We show that this composition matters because several assets, such as equity or FDI, earn substantial capital gains that are not reflected in the current account. A country that is a net creditor in such assets can then sustain a larger current account deficit. Using a broad sample, we show that this aspect substantially tilts estimates of the long-run current account towards a deficit among industrialized economies, with the opposite situation for emerging markets. We also show that industrialized economies are likely to benefit from predictable capital gains in the future.