Objectives
The research group on International Macroeconomics will provide a forum for the study of the link between international capital markets and the less developed countries’ macroeconomics, with a focus on understanding the implications for economic policy. The group will combine theoretical and empirical state of art methods to improve the knowledge on the sources of financial instability in a world of interconnected financial markets. In particular, this agenda will include the study of the sources of macro-financial risk at the international level as well as its management. A complementary line of research will address the effectiveness of the less developed countries’ policy response to the challenges imposed by the new international conditions. The interaction between policy makers and academics will be vital to design innovative economic models that are able to deal with the challenges faced by policy makers during turbulent financial times. The research group is expected to push forward a transformative agenda in international macroeconomics aiming to better serve the needs of central banks in emerging markets.

During 2014-2015 financial markets will assist to important changes and transformations on international liquidity conditions with high impact on capital flows, commodity prices and global imbalances. Less developed countries will confront new international risks that may challenge their financial and economic stability. Hence, it is worth to study the sources of risk and the potential policy response for effective risk management. Research questions in this agenda may include: Which are the main changes in international financial markets, market fragmentation, financial flows and the threat of sudden stops? What are the associated risks of sovereign default and international contagion? Will the US Dollar continue to be the main World currency? Which currency may substitute it, in which time horizon? How the transition could be and what measures less developed countries may adopt? What will the new international financial architecture imply for the design of domestic financial stability nets?
Closely related with the previous research questions is the study of policy responses. In particular, it will focus on developing economic models that can be useful for policy evaluation in emerging markets that face unique challenges including liability dollarization, uncertainty in commodity markets and monetary policy abroad. Many central banks, aware of the new economic challenges, have responded to new conditions in financial markets by following various new policies, including macroprudencial policies and capital controls. The research program would help to improve our understanding of the effectiveness of these policies and to evaluate the potential necessary shifts in economic policies. The themes that will be studied in the research program include: which is the optimal mix of macroeconomic and prudential policies for an emerging market economy? How fiscal, monetary and prudential policies should interact? Which is the optimal level of reserves and public debt? How should risks be diversified and managed? Which is the optimal target for the level of inflation? Which markets and instruments need to be developed? Which is the long-run impact of the new financial conditions and of the potential policy responses?

Details of the research program: The group will bring together academics and policy makers from a wide range of backgrounds to discuss cutting-edge ideas in a series of workshops organized around specific themes. The interaction between policy makers and academics will be vital to design innovative economic models that are able to deal with the challenges faced by policy makers during turbulent financial times.
Broader impact: The research group is expected to push forward a transformative agenda in international macroeconomics aiming to better serve the needs of central banks in emerging markets.

Activities
A workshop on “Financial Crises: Conventional and Unconventional Policies” to be held in Montevideo, December 9-10 2014.

Organizers:

Javier Bianchi (Wisconsin), Alberto Martin (CREI and Barcelona GSE), Martin Uribe (Columbia) and Ivan Werning (MIT).

Invited speaker: Joseph Stiglitz (Columbia).

Local Host Institution and Organizer
Central Bank of Uruguay, Gerardo Licandro.
Courses
A course on International Capital Flows and Policy Responses to be held in March 2015 by Javier Bianchi, Pablo D’Erasmo and Enrique Mendoza.

Co-sponsor
Central Bank of Uruguay.