tariff scenarios through the lens of ecb-global

Tariff scenarios through the lens of ECB-Global

M. Ricci B. Schumann B. van Roye

Disclaimer: The views expressed in this presentation are those of the authorsand do not necessarily reflect those of the ECB.

04 April 2019

Outline

1 ECB-Global: a global macro-model for spillover analysis

2 ECB-Global comparative advantages

3 Tariff policy scenarios: Uncovering the transmission channels inECB-G

4 Limitations of ECB-Global in trade policy analysis

5 Current developments

ECB The ECB-Global Model 04 April 2019 1 / 30

A first glance at ECB-Global

A global semi-structural rational expectations generalequilibrium model

(Dieppe, Georgiadis, Ricci, Van Robays, van Roye, 2017)

Focus on global spillovers

Shocks propagate via realchannels:

Oil pricesTrade linkages...

...and financial channels:

Asset pricesRisk premiaCross boarder bank lendingFinancial channel ofexchange rates

8 Country Blocks/Regions


“It [modeling] has to become less imperialistic. [...] models used forpolicy purposes, [...] must fit the data more closely, and this is likely torequire in particular more flexible, less microfounded, lag structures.”

O. Blanchard*

*Do DSGE Models Have a Future? - Policy Brief - Peterson Institute for International Economics (2016)


Theoretical consistency vs. Practical flexibility

Semi-structural modelsbalance theoretical coherence,empirical fit and practicalusefulness

They are flexible enough toquickly adapt to a changingeconomic and policyenvironment

DSGE

Semi‐structural

Reduced‐form

Practical flexibility/empirical fit

Theo

retical con

sisten

cy


A Graphical Overview of ECB-Global

Global oil price

Financial Sector

Equity prices

Interbank rate spread

Bank lending tightness

Sovereign Risk

Term premium

UIP: exchange rateGovernment debt

dynamics

CPI Inflation PPI Inflation Marginal Costs

Domestic Output

Consumption & Investment

Government spending

Net Exports

policy rule

Private-sector risk premium

Net oil exporters

Oil supply

Euro Area United Kingdom

Japan China

Emerging Asia Rest of the World

United States

Global Trade

Oil Trade

Non-Oil Trade

Financial Spillovers

Central Bank

Intermediate goods


Overview: Domestic output

Global oil price

Financial Sector

Equity prices



Sovereign Risk

Term premium


dynamics


Domestic Output


Government spending

Net Exports

policy rule


Net oil exporters

Oil supply


Japan China


United States

Global Trade

Oil Trade

Non-Oil Trade


Central Bank

Intermediate goods


Overview: Inflation

Global oil price

Financial Sector

Equity prices



Sovereign Risk

Term premium


dynamics


Domestic Output


Government spending

Net Exports

policy rule


Net oil exporters

Oil supply


Japan China


United States

Global Trade

Oil Trade

Non-Oil Trade


Central Bank

Intermediate goods


Overview: Monetary policy

Global oil price

Financial Sector

Equity prices



Sovereign Risk

Term premium


dynamics


Domestic Output


Government spending

Net Exports

policy rule


Net oil exporters

Oil supply


Japan China


United States

Global Trade

Oil Trade

Non-Oil Trade


Central Bank

Intermediate goods


Advantages: the transmission channels captured

Financial sector

Macro-financial linkagesEndogenous financial spillovers

Trade sector

Trade in a composite intermediate and final good + oilDominant Currency PricingTariffs and Trade diversionImported Intermediates affect marginal costs (layer of GVCs)

Heterogeneity

China → different monetary policy set-up; managed currencyOil producers → demand affected by oil-revenuesEMEs → risk-taking channel of currency appreciation


Overview: Financial sector

Global oil price

Financial Sector

Equity prices



Sovereign Risk

Term premium


dynamics


Domestic Output


Government spending

Net Exports

policy rule


Net oil exporters

Oil supply


Japan China


United States

Global Trade

Oil Trade

Non-Oil Trade


Central Bank

Intermediate goods


Financial sector


bltea,t = αblt,bltea bltea,t−1 − αblt,yea yea,t + αblt,rsea rsea,t

+ ϕBLTea ·

(j−1∑i=1

ωAEea,iblti,t

)+ ξbltea,t

with j ∈ all AEs and j 6= ea

function of macro and financial variables

AEs (partly) determine other countries’ banking conditions..

..on the basis of bilateral financial exposure (CPIS)


Overview: Trade

Global oil price

Financial Sector

Equity prices



Sovereign Risk

Term premium


dynamics


Domestic Output


Government spending

Net Exports

policy rule


Net oil exporters

Oil supply


Japan China


United States

Global Trade

Oil Trade

Non-Oil Trade


Central Bank

Intermediate goods


Salient features of the trade block in ECB-Global

Trade in a composite intermediate and final good + oil

Dominant Currency Pricing

Tariffs and Trade diversion

Imported Intermediates affect marginal costs (layer of GVCs)


Dominant currency pricing

Growing literature documents that USD drives global trade pricesand volumesLarge share of trade is priced, sticky and invoiced in USD(Boz et al. 2017; Gopinath, 2015; Goldberg and Tille, 2008)

0.0

0.2

0.4

0.6

0.8

1.0

US EA JP Other AE EME

USD Euro Other

(a) Export invoicing

0.0

0.2

0.4

0.6

0.8

1.0

US EA JP Other AE EME

USD EUR Other

(b) Import invoicing


Bilateral import demand: an example

The Euro Area’s Import Demand for PCP exports from emerging Asiais given by

mnonoil,pcpea,as,t =

(Sasea,tP

ppias,t

P cpiea,t

)−θnonoilea

daea,t (1)

For DCP exports it becomes

mnonoil,dcpea,as,t =

(Susea,tP

xdcpas,t

P cpiea,t

)−θnonoilea

daea,t (2)

where P xdcp

as,t represents Asia’s DCP export prices in USD.

For the US PCP exports = DCP exports


Summary DCP in ECB-G

DCP operates via two complementary channels:

The competitiveness channel causes some countries to looseand others to gain competitiveness, when the US-$ appreciates

→ if a country imports more in US-$ than it exports, a US-$appreciation will have a positive net trade effect via trade withnon-US countries

The inflation channel via import prices → CPI inflation in allcountries rise as the US-$ appreciates.


Assumptions on Tariffs in ECB-G

Tariffs are not paid to the exporter and do not leave the country

For the simulations we assume they are used to consolidate publicfinances

We differentiate between post- and pre boarder import prices

Post-border import prices are relevant for import demand, CPIand marginal costs

Pre-border is used for GDP aggregation and current account

Tariffs do not directly affect the price-setting behaviour of foreignfirms (perfect pass-through assumption)


Bilateral import demand: with tariffs

The Euro Area’s Import Demand for PCP exports from emerging Asiais given by

mnonoil,pcpea,as,t =

(Sasea,tP

ppias,t(1 + τasea )

P cpiea,t

)−θnonoilea

daea,t (3)

For DCP exports it becomes

mnonoil,dcpea,as,t =

(Susea,tP

xdcpas,t (1 + τasea )

P cpiea,t

)−θnonoilea

daea,t (4)

where P xdcp

as,t represents Asia’s DCP export prices in USD.

For the US PCP exports = DCP exports


Trade Diversion

Demand for as exports also depend on a export competitors priceindex:

masea,t =

(Sasea,tP

ppias,t(1 + τasea )

P cpiea,t

)−θea (Sasea,tP ppias,t(1 + τasea )

P as,compea,t

)−θea

daea,t


Tariff policy scenarios: uncovering thetransmission channels in ECB-G


GDP Responses


Exports in the China retaliation scenario


The impact of trade diversion and financial spillovers


To peg or not to peg?


DCP vs PCP


Limitations of ECB-Global simulations

General limitations

Linear model

No separation between consumption and investment

Calibration: limited cross-country heterogeneity

Limited country coverage

Stylised fiscal block

Uninformative LR dynamics

Tariffs do not impact trends dynamics

No effect on productivity

Other issues

Uncertainty about trade policies

Confidence effects (only partially taken into account)

Role of GVCs (only partially taken into account)


Development priorities

Small, low-hanging fruits

Refinements to financial sector: Endogenise term-premium

Increase country coverage (e.g. EM Latin America)

Large, high-hanging fruits

(Partial) estimation

Develop fiscal block

Split Consumption and Investment

Other?


Thank you!


tariff scenarios through the lens of ecb-global

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