nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒01‒19
nine papers chosen by
Martin Berka
Victoria University of Wellington

  1. The Effect of Real Exchange Rate Changes on Labour Productivity Growth By Murphy, Gavin; Siedschlag, Iulia
  2. History, Gravity and International Finance By Livia Chițu; Barry Eichengreen; Arnaud J. Mehl
  3. Currency intervention and the global portfolio balance effect: Japanese lessons By Gerlach, Petra; McCauley, Robert N.; Ueda, Kazuo
  4. Global imbalances and the Intertemporal External Budget Constraint: A multicointegration approach By Mariam Camarero; Josep Lluís Carrion-i-Silvestre; Cecilio Tamarit
  5. Default Risk and Economic Activity: A Small Open Economy Model with Sovereign Debt and Default By Jessica Roldán-Peña
  6. International Income Risk-Sharing and the Global Financial Crisis of 2008--2009 By Balli, Faruk; Basher, Syed Abul; Balli, Hatice Ozer
  7. The impact of structural policies on external accounts in infinite-horizon and finite-horizon models By Lukas Vogel
  8. Trade Structure and Belief-Driven Fluctuations in a Global Economy By Yunfang Hu; Kazuo Mino
  9. Sovereign Default, Domestic Banks, and Financial Institutions By Nicola Gennaioli; Alberto Martin; Stefano Rossi

  1. By: Murphy, Gavin; Siedschlag, Iulia
    Abstract: We examine the effect of changes in international competitiveness on labour productivity growth through three channels: (i) export, (ii) import, and (iii) import competition. Using micro data from the Irish manufacturing over the period 1995-2002, we account for firms' heterogeneity in their exposure to international competitive pressure. Our econometric estimates indicate that a real exchange rate appreciation had a negative effect on labour productivity growth once a firm's export exposure was greater than 14 per cent. When a firm's import exposure exceeded 33 per cent, a real exchange rate appreciation had a positive effect on labour productivity. An increase in import competition due to a real exchange rate appreciation had no effect on a firm's labour productivity growth.
    Keywords: exchange/growth/Productivity/competitiveness/competition/data/manufacturing
    Date: 2012–08
  2. By: Livia Chițu; Barry Eichengreen; Arnaud J. Mehl
    Abstract: We analyze patterns of bilateral financial investment using data on US investors' holdings of foreign bonds. We document a "history effect" in which the pattern of holdings seven decades ago continues to influence holdings today. 10 to 15% of the cross-country variation in US investors' foreign bond holdings is explained by holdings 70 years ago, plausibly reflecting fixed costs of market entry and exit together with endogenous learning. This effect is twice as large for bonds denominated in currencies other than the dollar, suggesting the existence of even higher fixed costs of initiating US foreign investment in such currencies. Our findings point to history and path dependence as key sources of financial market segmentation.
    JEL: F30 N20
    Date: 2013–01
  3. By: Gerlach, Petra; McCauley, Robert N.; Ueda, Kazuo
    Abstract: This paper shows that the Japanese foreign exchange interventions in 2003/04 seem to have lowered long-term interest rates in a wide range of countries, including Japan. It seems that this decline was triggered by the investment of the intervention proceeds in US bonds and that a global portfolio balance effect spread the resulting decline in US yields to other bond markets, thus easing global monetary conditions.
    Keywords: exchange/investment/US
    Date: 2012–10
  4. By: Mariam Camarero (Department of Economics, Jaume I University); Josep Lluís Carrion-i-Silvestre (Department of Econometrics, Statistics and Spanish Economy, University of Barcelona); Cecilio Tamarit (Department of Applied Economics II, University of Valencia)
    Abstract: This paper analyzes the external solvency of a group of 23 OECD countries for the period 1970-2012 The empirical strategy adopted underlines the increasing importance of the ?nancial channel for the external adjustment as proposed in Gourinchas and Rey (2007). We unify the traditional approaches to testing for external sustainability considering the stock-?ow system created by the variables representing the external relationships of an open economy. External sustainability is tested using several types of cointegration and multicointegration tests. The results obtained point to weak sustainability in the ?ows analysis, whereas some degree of strong sustainability is found for up to six countries in the stock ?ow approach. Among these countries we ?nd both non-European economies, such as Japan and New Zealand, and Euro-area members especially those with more restricted access to ?nancing in the international markets.
    Keywords: Current account, net foreign assets, multicointegration, structural breaks
    JEL: F32 F36 F37 C22
    Date: 2013–01
  5. By: Jessica Roldán-Peña
    Abstract: Empirical evidence shows that sovereign defaults are associated with significant downturns in economic activity in defaulting countries. However, the existing literature on sovereign debt and default mainly analyzes endowment economies and, therefore, does not address the relationship between default risk and macroeconomic dynamics. This paper develops a general equilibrium small open economy model with financial frictions that allows to simultaneously examine the behavior of output, investment and borrowing dynamics and its interaction with sovereign default. When calibrated to match the business cycles properties of an average emerging market economy, the model is able to reproduce the countercyclicality of net exports and sovereign spreads and the negative correlation between investment and net exports observed in the data. Furthermore, when analyzing its behavior around sovereign default, the model successfully captures the declines in output, consumption and investment that are actually associated with these episodes.
    Keywords: Sovereign debt, sovereign default, business cycles, small open economy.
    JEL: E32 E44 F32 F34
    Date: 2012–12
  6. By: Balli, Faruk; Basher, Syed Abul; Balli, Hatice Ozer
    Abstract: We examine the impact of the global financial crisis on the degree of international income and consumption risk-sharing among industrial economies using returns on cross-border portfolio holdings (e.g., debt, equity, fdi). We split the returns from the net foreign holdings as receipts (inflows) and payments (outflows) to investigate which of the two sides exhibited the greater resilience for income risk-sharing during the recent crisis. First, we find that debt delivered better risk-sharing than equity, mainly reflecting the deficit deterioration in EMU countries during the post-crisis period. FDI, by contrast, did not correspond to noticeable risk diversification. Second, separating output shocks into positive and negative components reveals that debt holding receipts (equity liability payments) performed better under negative (positive) realizations of the shock variable. Third, the unwinding of capital flows resulted in a sharp fall in income dis-smoothing via the debt liability channel in the new EU countries.
    Keywords: Financial crisis; international portfolio diversification; income smoothing
    JEL: F36
    Date: 2013–01–12
  7. By: Lukas Vogel
    Abstract: The paper uses the European Commission's QUEST III model to compare the impact of product market reform, labour market re-form and fiscal devaluation on economic activity and external accounts in infinite-horizon and finite-horizon versions of the model for a small open economy in monetary union with tradable and non-tradable sectors. The impact of structural policies on external positions tends to be stronger and more persistent, but also more diverse in the finite-horizon specification because of the impact of structural reforms on financial wealth and its transmission to consumption demand in the finite-horizon setting. The improvement in the net foreign asset position tends to be stronger if structural reforms are accompanied by fiscal consolidation and if countries start with high pre-reform levels of net foreign debt.
    JEL: F30 F41 F42
    Date: 2012–12
  8. By: Yunfang Hu (Tohoku University); Kazuo Mino (Kyoto University)
    Abstract: This paper constructs a dynamic two-country model with country-specific production externalities and inspects the presence of equilibrium indeterminacy under alternative trade structures. It is shown that the presence of belief?driven economic fluctuations caused by equilibrium indeterminacy is closely related to the specified trade structure. If investment goods are not internationally traded and international lending and borrowing are allowed, then indeterminacy arises in a wider set of parameter space than in the corresponding closed economy. By contrast, either if both consumption and investment goods are traded in the absence of international lending and borrowing or if only investment goods are traded with financial transactions, then the indeterminacy conditions are the same as those for the closed economy counterpart.
    Keywords: two-country model, non-traded goods, equilibrium indeterminacy, social constant returns
    JEL: F43 O41
    Date: 2013–01
  9. By: Nicola Gennaioli; Alberto Martin; Stefano Rossi
    Abstract: We present a model of sovereign debt in which, contrary to conventional wisdom, government defaults are costly because they destroy the balance sheets of domestic banks. In our model, better financial institutions allow banks to be more leveraged, thereby making them more vulnerable to sovereign defaults. Our predictions: government defaults should lead to declines in private credit, and these declines should be larger in countries where financial institutions are more developed and banks hold more government bonds. In these same countries, government defaults should be less likely. Using a large panel of countries, we find evidence consistent with these predictions. JEL classification: F34, F36, G15, H63. Keywords: Sovereign Risk, Capital Flows, Institutions, Financial Liberalization, Sudden Stops
    Date: 2012

This nep-opm issue is ©2013 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.