nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒03‒16
eleven papers chosen by
Martin Berka
Victoria University of Wellington

  1. The Impact of Cartelization, Money, and Productivity Shocks on the International Great Depression By Harold L. Cole; Lee E. Ohanian
  2. A Transfer Mechanism for a Monetary Union By Philipp Engler; Simon Voigts; ;
  3. International Prices and Exchange Rates By Ariel Burstein; Gita Gopinath
  4. The Impact of Market Regulations on Intra-European Real Exchange Rates By Agnès Bénassy-Quéré; Dramane Coulibaly
  5. Fiscal Policy, Interest Rates and Risk Premia in Open Economy By Salvatore Dell'Erba, Sergio Sola
  6. The International Monetary System in Flux: Overview and Prospects By Pedro Bação; António Portugal Durate; Mariana Simões
  7. The impact of yuan internationalization on the euro-dollar exchange rate. By Agnès Bénassy-Quéré; Yeganeh Forouheshfar
  8. What Drives Target2 Balances? Evidence From a Panel Analysis By Raphael A. Auer
  9. Risk-On/Risk-Off, Capital Flows, Leverage, and Safe Assets By Robert N. McCauley
  10. The fundamentals of sovereign debt sustainability: Evidence from 15 OECD countries. By Christian Schoder
  11. Common correlated effects and international risk sharing By Peter Fuleky; L Ventura; Qianxue Zhao

  1. By: Harold L. Cole; Lee E. Ohanian
    Abstract: This study exploits panel data from 18 countries to assess the contributions of cartelization policies, monetary shocks, and productivity shocks on macroeconomic activity during the Great Depression. To construct a parsimonious and common model framework, we use the fact that many cartel policies are observationally equivalent to a country-specific labor tax wedge. We estimate a monetary DSGE model with cartel wedges along with productivity and monetary shocks. Our main finding is that cartel policy shocks account for the bulk of the Depression in the countries that adopted significant cartel policies, including the large depressions in the U.S., Germany, Italy, and Australia, and that the estimated cartel policy shocks plausibly coincide with the actual evolution of policies in these countries. In contrast, cartel policy shocks in the countries that did not significantly change policies were small and account for little of their Depressions.
    JEL: F1 N12
    Date: 2013–02
  2. By: Philipp Engler; Simon Voigts; ;
    Abstract: We show in a dynamic stochastic general equilibrium framework that the introduction of a common currency by a group of countries with only partially integrated goods markets, incomplete …nancial markets and no labor migration across member states, signi…cantly increases volatility of consumption and employment in the face of asymmetric shocks. We propose a simple transfer mechanism between member countries of the union that reduces this volatility. Further- more, we show that this mechanism is more e¢ cient than anticyclical policies at the national level in terms of a better stabilization for the same budgetary e¤ects for households while in the long run deeper integration of goods markets could reduce volatility signi…cantly. Re- garding its implementation, we show that the centralized provision of public goods and services at the level of the monetary union implies cross-country transfers comparable to the scheme under study.
    Keywords: Monetary Union, Asymmetric Shocks, Fiscal Policy, Fiscal Transfers
    JEL: F41 F44 E2 E3 E52
    Date: 2013–03
  3. By: Ariel Burstein; Gita Gopinath
    Abstract: We survey the recent empirical and theoretical developments in the literature on the relation between prices and exchange rates. After updating some of the major findings in the empirical literature we present a simple framework to interpret this evidence. We review theoretical models that generate insensitivity of prices to exchange rate changes through variable markups, both under flexible prices and nominal rigidities, first in partial equilibrium and then in general equilibrium.
    JEL: E3 F12 F15 F4
    Date: 2013–02
  4. By: Agnès Bénassy-Quéré; Dramane Coulibaly
    Abstract: We study the contribution of market regulations in the dynamics of the real exchange rate within the European Union. Based on a model proposed by De Gregorio et al. (1994a), we show that both product market regulations in nontradable sectors and employment protection tend to inflate the real exchange rate. We then carry out an econometric estimation for European countries over 1985-2006 to quantify the contributions of the pure Balassa-Samuelson effect and those of market regulations in real exchange-rate variations. Based on this evidence and on a counter-factual experiment, we conclude that the relative evolution of product market regulations and employment protection across countries play a very significant role in real exchange- rate variations within the European Union and especially within the Euro area, through theirs impacts on the relative price of nontradable goods.
    Keywords: Real exchange rate, Balassa-Samuelson effect, Product market regulations, Employment protection
    JEL: F41 J50 L40
    Date: 2013
  5. By: Salvatore Dell'Erba, Sergio Sola (Graduate Institute of International Studies)
    Abstract: This paper reconsiders the effects of fiscal policy on long-term interest rates and sovereign spreads employing a Factor Augmented Panel (FAP) to control for the presence of common unobservable factors. We construct a real-time dataset of macroeconomic and fiscal variables for a panel of OECD countries for the period 1989-2009. We find that two global factors - the global monetary and fiscal policy stances - explain more than 60% of the variance in the long-term interest rates. The same two global factors play a relevant role also in explaining the variance of sovereign spreads, which in addition respond to global risk aversion. With respect to standard estimation techniques the use of the FAP reduces the importance of domestic fiscal variables in explaining long- term interest rates, while it emphasizes their importance in explaining sovereign spreads. Using the FAP framework we also analyse the cross-country differences in the propagation of a shock to global fiscal stance and global risk aversion. We find the effects of the former to be modest in large economies and strong in economies characterized by low financial integration and current account deficits. Changes in global risk aversion, instead, lead to higher spreads in countries with a high stock of public debt and weaker political institutions.
    Keywords: Fiscal Policy, Sovereign debt, Interest rates, Sovereign spreads, Real time data, Cross-sectional dependence, Heterogeneous panels, Factor model
    JEL: C10 E43 F42 H68
    Date: 2013–02–26
  6. By: Pedro Bação (Faculty of Economics, University of Coimbra and GEMF, Portugal); António Portugal Durate (Faculty of Economics, University of Coimbra and GEMF, Portugal); Mariana Simões (Faculty of Economics, University of Coimbra, Portugal)
    Abstract: This paper analyses the architecture of the International Monetary System (IMS) and the role of reserve currencies in it. We begin by describing the evolution of the IMS from the Gold Standard to the Bretton Woods system and the European integration process that led to the creation of the euro. We then discuss the role played by the euro in the IMS as an international reserve currency. Drawing on econometric estimations, we extrapolate the evolution of the shares in international reserves of the euro, the US dollar and the renminbi. In the discussion, we take into account the current sovereign debt crisis and the possibility of a currency war taking place as a result of the reportedly excessive undervaluation of the renminbi and of the expansionist monetary policies undertaken in several advanced economies, namely in the USA. The text ends with a review of proposals for reducing the likelihood of currency wars, which may disrupt the functioning of the current IMS.
    Keywords: currency war; euro; financial crisis; International Monetary System; exchange rate misalignments.
    JEL: E52 F31 F33 G15
    Date: 2013–01
  7. By: Agnès Bénassy-Quéré (Centre d'Economie de la Sorbonne - Paris School of Economics et CESIfo); Yeganeh Forouheshfar (Université Paris-Dauphine)
    Abstract: We study the implication of a multipolarization of the international monetary system on cross-currency volatility. More specifically, we analyze whether the internationalization of the yuan could modify the impact of asset supply and trade shocks on the euro-dollar exchange rate, within a three-country, three-currency portfolio model. Our static model shows that the internationalization of the yuan (defined as a rise in the yuan in international portfolios) would be either neutral or stabilizing for the euro-dollar rate, whatever the exchange-rate regime of China. Moving to a dynamic, stock-flow framework, we show that the internationalization of the yuan would make exchange-rate variations more efficient to stabilize net foreign asset positions after a trade shock.
    Keywords: China, yuan, exchange-rate regime, euro, dollar.
    JEL: F31 F33
    Date: 2013–02
  8. By: Raphael A. Auer (Swiss National Bank)
    Abstract: What are the drivers of the large Target2 (T2) balances that have emerged in the European Monetary Union since the start of the financial crisis in 2007? This paper examines the extent to which the evolution of national T2 balances can be statistically associated with cross-border private capital flows and current account (CA) balances. In a quarterly panel spanning the years 1999 to 2012 and twelve countries, it is shown that while the CA and the evolution of T2 balances were unrelated until the start of the 2007 financial crisis, since then, the relation between these two variables has become statistically significant and economically sizeable. This reflects the “sudden stop” to private sector capital that funded CA imbalances beforehand. I next examine how different types of private capital flows have evolved over the last years and how this can be related to the evolution of T2 balances, finding some deposit flight by private customers, a substantial retrenchment of cross-border interbank lending, and also an increase of bank’s holdings of high-quality sovereign debt. My first conclusion from this analysis is that since T2 imbalances were caused by a sudden stop and are unlikely to grow without bounds since Euro area CA imbalances are currently diminishing at a rapid pace, there is no evidence that the institutional setup of the European Monetary Union needs to be reformed fundamentally. My second conclusion relates to how the current system transfers risks across the currency union, both in terms of risk transfer from T2 debtor to T2 creditor nations and in terms of risk transfer from the private sector to the public sector within T2 creditor nations. I evaluate existing reform proposals in the light of these risk transfers.
    Date: 2013–03
  9. By: Robert N. McCauley (Asian Development Bank Institute (ADBI))
    Abstract: This paper describes the international flow of funds associated with calm and volatile global equity markets. During calm periods, portfolio investment by real money and leveraged investors in advanced countries flows into emerging markets. When central banks in the receiving countries resist exchange rate appreciation and buy dollars against domestic currency, they end up investing in medium-term bonds in reserve currencies. In the process they fund themselves (or “sterilize†the expansion of local bank reserves) by issuing safe assets in domestic currency to domestic investors. Thus, calm periods, marked by leveraged investing in emerging markets, lead to an asymmetric asset swap (risky emerging market assets against safe reserve currency assets) and leveraging up by emerging market central banks. In declining and volatile global equity markets, these flows reverse, and, contrary to some claims, emerging market central banks draw down reserves substantially. In effect emerging market central banks then release safe assets from their reserves, supplying safe havens to global investors.
    Keywords: global equity markets, porfolio investment, Emerging Markets, central banks
    JEL: E58 F3 G15
    Date: 2013–01
  10. By: Christian Schoder
    Abstract: We study the sustainability of sovereign debt accumulation in 15 OECD countries using quarterly data from 1980 to 2010 with a focus on how and in what countries debt sustainability changed after the commencement of the Euro Convergence Criteria in 1997 as well as after the financial meltdown in 2007. We define sustainability as the validity of the inter-temporal budget constraint of the government and test a sufficient condition motivated by Bohn (1998) using single-country and pooled regressions. We find evidence that the Euro Convergence Criteria contributed to the sustainability of debt accumulation. Further, while the yield spreads suggest the debt crisis is a problem of the southern Euro countries, we find a lack of debt sustainability for Greece, Portugal and France but not for Italy and Spain. In terms of debt sustainability, the crisis adversely affected primarily stand-alone countries rather than members of the European Monetary Union. Nevertheless, yield spreads increased more in the southern countries of the monetary union than in stand-alone countries. Our results support the view that countries within a monetary union are more prone to investors' sentiments than stand-alone countries.
    Keywords: sovereign debt, sustainability, debt crisis, bounds testing approach, pooled mean-group estimator
    JEL: H62 H63 E60
    Date: 2013
  11. By: Peter Fuleky (UHERO and Department of Economics, University of Hawaii at Manoa); L Ventura (Department of Economics and Law, Sapienza, University of Rome); Qianxue Zhao (Department of Economics, University of Hawaii at Manoa)
    Abstract: International risk sharing has been among the most actively researched areas of macroeconomics for the last two decades. Empirical contributions in this field make extensive use of so called "consumption insurance" tests evaluating the extent to which idiosyncratic shocks in income get transferred to consumption. A prerequisite of such a test is the isolation of country specific variation in the data. We show that the cross-sectional demeaning technique frequently used in the literature is in general inadequate to eliminate global factors from a panel data set, and can lead to misleading inference. We argue that international risk sharing tests should instead be based on a method that more reliably deals with global factors. We claim and illustrate in our empirical application that the fairly simple common correlated eects estimator for cross-sectionally dependent panels introduced by Pesaran (2006), and Kapetanios et al. (2010) is a tool that satisfies this requirement.
    Keywords: Panel data, Cross-sectional dependence, International risk sharing, Consumption insurance
    JEL: C23 C51 E21 F36
    Date: 2013–03

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.