nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒03‒30
ten papers chosen by
Martin Berka
Victoria University of Wellington

  1. Exchange Rate Determination, Risk Sharing and the Asset Market View By A. Craig Burnside; Jeremy J. Graveline
  2. Exchange rate volatility, financial constraints and trade: empirical evidence from Chinese firms By Jérôme Héricourt; Sandra Poncet
  3. Feedback Effects of Commodity Futures Prices By Michael Sockin; Wei Xiong
  4. Barriers to Firm Growth in Open Economies By Facundo Piguillem; Loris Rubini
  5. Political Credit Cycles: The Case of the Euro Zone By Jesus Fernandez-Villaverde; Luis Garicano; Tano Santos
  6. Expected Regime Change: Transition Toward Nominal Exchange Rate Stability By Frantisek Brazdik
  7. The effect of capital flows composition on output volatility By Federico, Pablo; Vegh, Carlos A.; Vuletin, Guillermo
  8. Financial stress, regime switching and macrodynamics: Theory and empirics for the US, EU and non-EU countries By Chen, Pu; Semmler, Willi
  9. Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance: Comparing Alternative Exchange Rate Regimes in Eastern Europe By Khan, Muhammad; Kebewar, mazen; Nenovsky, Nikolay
  10. Interest Rate Pass-Through and Monetary Policy Asymmetry: A Journey into the Caucasian Black Box By Rustam Jamilov; Balázs Égert

  1. By: A. Craig Burnside; Jeremy J. Graveline
    Abstract: Recent research in international finance has equated changes in real exchange rates with differences between the marginal utility growths of representative agents in different economies. The asset market view of exchange rates, encapsulated in this equation, has been used to gain insights into exchange rate determination, foreign exchange risk premia, and international risk sharing. We argue that, in fact, this equation is of limited usefulness. By itself, the asset market view does not identify the economic mechanism that determines the exchange rate. It only holds under complete markets, and even then, it does not generally allow us to identify the marginal utility growths of distinct agents. Moreover, if we allow for incomplete asset markets, measures of agents' marginal utility growths, and international risk sharing, cannot be based on asset market and exchange rate data alone. Instead, we argue that in order to explain how exchange rates are determined, it is necessary to make specific assumptions about preferences, goods market frictions, the assets agents can trade, and the nature of endowments or production.
    Date: 2013
  2. By: Jérôme Héricourt; Sandra Poncet
    Abstract: This paper studies how firm-level export performance is affected by Real Exchange Rate (RER) volatility and investigates whether this effect depends on existing financial constraints. Our empirical analysis relies on export data for more than 100,000 Chinese exporters over the period 2000-2006. We confirm a trade-deterring effect of RER volatility. We find that the value exported by firms, as well as their probability of entering new export markets, decrease for destinations with higher exchange rate volatility and that this effect is magnified for financially vulnerable firms. As expected, financial development does seem to dampen this negative impact, especially on the intensive margin of export. These results provide microfounded evidence that financial constraints may play a key role in determining the macro impact of RER volatility on real outcomes.
    Keywords: Exchange rate volatility, financial development, exports
    JEL: F1 F31 L25
    Date: 2013–03
  3. By: Michael Sockin; Wei Xiong
    Abstract: A widely held view posits that when speculators drive up the futures price of a commodity, real demand must fall. This paper develops a model to contrast this view through an informational feedback effect. Our model builds on two practical observations: 1) Futures prices of key industrial commodities such as copper and oil became barometers of global demand in the recent decade as a result of the rapid economic expansions of emerging economies; and 2) complementarity exists in industrial producers' production decisions as a result of their need to trade produced goods. In the presence of information frictions and production complementarity, an increase in commodity futures prices, even if driven by non-fundamental factors, signals strong global economic strength, and may thus induce increased commodity demand.
    JEL: F3 G1 G14
    Date: 2013–03
  4. By: Facundo Piguillem (EIEF); Loris Rubini (UC3M)
    Abstract: The international trade literature finds strong links between firm growth and export decisions. In spite of this, the literature analyzing cross-country differences in firm growth commonly abstracts from trade. We develop a tractable, dynamic model to understand the consequences of this abstraction. We find that the closed economy (i) under-estimates domestic (firm) growth barriers, potentially modifying the rankings across countries; and (ii) over-predicts the effects of counterfactuals. To asses the quantitative relevance of these findings, we calibrate the model to a set of European countries. The model successfully captures differences in value added per worker, accounting for between 54 and 87% of the differences across countries. We find that a closed economy alters the ranking of countries according to the size of these barriers and over-predicts the effects of counterfactuals on welfare by between 31 and 64% relative to the open economy. Thus, trade is essential for measuring barriers to firm growth and their counterfactuals in open economies.
    Date: 2013
  5. By: Jesus Fernandez-Villaverde; Luis Garicano; Tano Santos
    Abstract: We study the mechanisms through which the adoption of the Euro delayed, rather than advanced, economic reforms in the Euro zone periphery and led to the deterioration of important institutions in these countries. We show that the abandonment of the reform process and the institutional deterioration, in turn, not only reduced their growth prospects but also fed back into financial conditions, prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident. We analyze empirically the interrelation between the financial boom and the reform process in Greece, Spain, Ireland, and Portugal and, by way of contrast, in Germany, a country that did experience a reform process after the creation of the Euro.
    JEL: D72 E0 G15
    Date: 2013–03
  6. By: Frantisek Brazdik
    Abstract: This work presents an extension of a small open economy DSGE model allowing the transition toward a monetary policy regime aimed at exchange rate stability to be described. The model is estimated using the Bayesian technique to fit the properties of the Czech economy. In the scenarios assessed, the monetary authority announces and changes its policy so that it is focused solely on stabilizing the nominal exchange rate after a specific transition period is over. Four representative forms of monetary policy are followed to evaluate their properties over the announced transition period. Welfare loss functions assessing macroeconomic stability are defined, allowing the implications of the transition period regime choice for macroeconomic stability to be assessed. As these experiments show, exchange rate stabilization over the transition period does not deliver the lowest welfare loss. Under the assumptions taken, the strict inflation-targeting regime is identified as the best-performing regime for short transition periods. However, it can be concluded that for longer transition periods the monetary policy regime should respond to changes in the exchange rate.
    Keywords: monetary policy change, new Keynesian models, small open economy.
    JEL: E17 E31 E52 E58 E61 F02 F41
    Date: 2013–03
  7. By: Federico, Pablo; Vegh, Carlos A.; Vuletin, Guillermo
    Abstract: A large literature has argued that different types of capital flows have different consequences for macroeconomic stability. By distinguishing between foreign direct investment and portfolio and other investments, this paper studies the effects of the composition of capital inflows on output volatility. The paper develops a simple empirical model which, under certain conditions that hold in the data, yields three key testable implications. First, output volatility should depend positively on the volatilities of both foreign direct investment and portfolio and other inflows. Second, output volatility should be an increasing function of the correlation between both kinds of inflows. Third, output volatility should be a decreasing function of the share of foreign direct investment in total capital inflows, for low values of that share. The data provide strong support for all three implications, even after controlling for other factors that may influence output volatility, and after dealing with potential endogeneity problems. These findings call attention to the importance of taking into account the synchronization and composition of capital flows for output stabilization purposes, as opposed to just focusing on the volatility of each component of capital flows.
    Keywords: Emerging Markets,Economic Conditions and Volatility,Investment and Investment Climate,Debt Markets,Economic Theory&Research
    Date: 2013–03–01
  8. By: Chen, Pu; Semmler, Willi
    Abstract: Over-borrowing and financial stress has recently become an important issue in macroeconomic and policy discussions in the US as well as in the EU. In this paper we study two regimes of financial stress. In a regime of high financial stress, stress shocks can have large and persistent impacts on the real side of the economy whereas in regimes of low stress, shocks can easily dissipate having no lasting effects. In order to study the macroeconomic dynamics, with alternative paths resulting from financial stress shocks, we introduce a macromodel with a finance-macro link which uses multi-period decisions framework of economic agents. The agents can, in a finite horizon context, borrow and accumulate assets where however the above two scenarios may occur. The model is solved through nonlinear model predictive control (NMPC). Empirically then we use a Multi-Regime VAR (MRVAR) to study the impact of financial stress shocks on the macroeconomy in a large number of countries. --
    Keywords: financial stress,macro dynamics,MRVAR
    JEL: E3 G21
    Date: 2013
  9. By: Khan, Muhammad; Kebewar, mazen; Nenovsky, Nikolay
    Abstract: In the late 90's, after severe financial and economic crisis, accompanied by inflation and exchange rate instability, Eastern Europe emerged into two groups of countries with radically contrasting monetary regimes (Currency Boards and Inflation targeting). The task of our study is to compare econometrically the performance of these two regimes in terms of the relationship between inflation, output growth, nominal and real uncertainties from 2000 till now. In other words, we test the hypothesis of non-neutrality of monetary and exchange rate regimes with respect to these connections. In a whole, the empirical results do not allow us to judge which monetary regime is more appropriate and reasonable to assume. EU enlargement is one of the possible explanations for the numbing of the differences and the lack of coherence between the two regimes in terms of inflation, growth and their uncertainties
    Keywords: Inflation, inflation uncertainty, real uncertainty, monetary regimes, Eastern Europe
    JEL: C22 C51 C52 E0
    Date: 2013–03
  10. By: Rustam Jamilov; Balázs Égert
    Abstract: This paper analyses the interest rate pass-through for five economies of the Caucasus – Armenia, Azerbaijan, Georgia, Kazakhstan, and Russia. Employing an autoregressive distributed lag (ARDL) specification to monthly data, we find that the interest rate pass-through is systematically incomplete and sluggish, probably due to macroeconomic instability and low banking sector competition. It is not clear whether pass-through has improved over time and asymmetric adjustment is found to characterize the pass-through only occasionally. Overall, our results show a considerable degree of cross-country heterogeneity in the size and speed of the pass-through.
    Keywords: Interest Rate Pass-Through; Asymmetric Adjustment; Caucasus
    JEL: E43 E52 N25
    Date: 2013

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.