nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒02‒27
five papers chosen by
Martin Berka
Victoria University of Wellington

  1. Funding under Borrowing Limits in International Portfolios By Tommaso Trani
  2. Government Spending and the Real Exchange Rate: a Cross - Country Perspective By Rodrigo Caputo; Miguel Fuentes
  3. Country Portfolios with Heterogeneous Pledgeability By Tommaso Trani
  4. Regional and Global Monetary Cooperation By Lamberte, Mario; Morgan , Peter J.
  5. Efficiency of monetary and fiscal policy in open economies By Chan Wang; Heng-fu Zou

  1. By: Tommaso Trani (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: I develop an open economy portfolio model to study how leveraged investors' wholesale funding affects the international transmission of shocks. Under binding borrowing limits, there is a link between the international investment positions of integrated economies as investors diversify the asset side of their balance sheets. Building on this mechanism, I introduce the liability side, allowing investors sell domestic and foreign bonds and capturing changes in counterparty risk in a stylized way (i.e., debt-to-asset ratios are specific to each borrower and time-varying). I model and parameterize these ratios, conditional on portfolio choice. I can solve for portfolios taking advantage of the link between assets and liabilities which is implied by the borrowing constraints. Equilibrium portfolios feature home funding bias, which is justified by a crucial interaction between the terms of trade and the tightness of the borrowing constraints. Dynamically, this interaction implies that the source of debt which is most sensitive to shocks is foreign funding. In fact, any shock creates a wedge between the cost of funding in different countries; the value of collateral must adjust accordingly through asset prices. Yet, asset prices are mainly affected by financiers' concern for counterparty risk: impact effects are deep and in line with the terms of trade effect. Combined, these effects have somehow novel implications for the net foreign asset positions. The cumulative effects have instead more mixed results on fluctuations.
    Keywords: borrowing limits, counterparty risk, ?nancial ?ows, international ?nancial markets, international lending, macroeconomic interdependence
    JEL: E21 F32 F34 F41 G15
    Date: 2012–02–14
  2. By: Rodrigo Caputo; Miguel Fuentes
    Abstract: In this paper we study, from an empirical point of view, the determinants of the real exchange rate (RER). Relative to the vast previous literature on this topic we aim to distinguish the impact of two important components of government expenditure—public investment and transfers—on the RER, which has usually been neglected. Using panel cointegration techniques, we assess the relevance of those variables in the determination of the RER for a wide set of countries from 1980 to 2009. Our results suggest that changes in either government transfers or public investment have an impact on the RER in emerging economies. On one hand, transfers tend to appreciate the RER because they induce an increase in the relative demand for nontraded goods. On the other, an increase in public investment generates an RER depreciation. This result can be explained by the fact that, in this case, there is an increase in the relative productivity in the nontraded sector of the economy. We also study the effect of countries’ net external assets position on the RER and find that it differs markedly between developed and developing countries: this variable has a significant effect only in the case of developing economies.
    Date: 2012–01
  3. By: Tommaso Trani (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: In a two-country portfolio model with leverage constraints, I focus on private assets in order to understand how their behaviour can justify an expected excess return as well as the flight-to-safety observed in the data. The specific goal is to study how much these phenomena are explained by the fact that investors cannot always borrow the same amount of resources pledging domestic assets as pledging foreign collateral. Modeling the leverage constraints accordingly, I propose a methodology to deal with this heterogeneous pledgeability and solve for country portfolios. The central feature of this approach is that any idiosyncratic shocks generate an expected excess returns which compensate the current effects of the shock on the relative riskiness of local versus foreign collateral. The resulting portfolio solution shows that, in equilibrium, investors care for this risk and renounce to a part of the expected excess return - favouring current borrowing. The main consequences are: the home equity bias is smaller than in a model where assets are homogeneously pledgeable; the ex post dynamics of the relative premium paid on collateralized assets contribute to the cross-border transmission of shocks. Given these dynamics, idiosyncratic shocks to the pledgeability of local assets affect the value of external claims and liabilities of the country hit by the shock in such a way that its net foreign assets match those observed in the data during times of flight-to-safety.
    Keywords: portfolio choice, riskiness of pledged collateral, return di¤erentials, macroeconomic interdependence
    JEL: E44 F32 F41 G11 G15
    Date: 2012–02–12
  4. By: Lamberte, Mario (Asian Development Bank Institute); Morgan , Peter J. (Asian Development Bank Institute)
    Abstract: The increasing occurrence of national, regional, and global financial crises, together with their rising costs and complexity, have increased calls for greater regional and global monetary cooperation. This is particularly necessary in light of volatile capital flow movements that can quickly transmit crisis developments in individual countries to other countries around the world. Global financial safety nets (GFSNs) are one important area for monetary cooperation. This paper reviews the current situation of regional and global monetary cooperation, focusing on financial safety nets, with a view toward developing recommendations for more effective cooperation, especially between the International Monetary Fund (IMF) and regional financial arrangements (RFAs).
    Keywords: monetary cooperation; regional monetary cooperation; global monetary cooperation; regional financial arrangements; financial safety nets; global financial crises
    JEL: F33 F34 F36 F53 F55
    Date: 2012–02–23
  5. By: Chan Wang (CEMA, Central University of Finance and Economics); Heng-fu Zou (CEMA, Central University of Finance and Economics)
    Abstract: This paper investigates the efficiency of monetary and fiscal policy in two-country general equilibrium model with monopolistic competition and price stickiness. Comparing the efficiency of global monetary policy that replicates the real allocations with flexible wages before and after introducing stochastic government spending, we conclude that stochastic government spending is vital, the global monetary policy replicating the real allocations with flexible wages will turn from being efficient to being inefficient when some conditions are satisfied. When the stochastic government spending is present, we also find that the monopoly distortions are essential for the efficiency of the global monetary policy that replicates the real allocations with flexible wages. Complete removal of the monopoly distortions will cause the efficient global monetary policy replicating the real allocations with flexible wages to be inefficient when some conditions are satisfied. Fiscal policy is found to be unable to replicate the real allocations with flexible wages.
    Keywords: New open-economy macroeconomics, Efficiency of monetary policy, Stochastic government spending, Monopoly distortions
    Date: 2012–02–13

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