nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒06‒30
eleven papers chosen by
Martin Berka
Victoria University of Wellington

  1. China’s financial linkages with Asia and the global financial crisis By Reuven Glick; Michael Hutchison
  2. Fear of Sovereign Default, Banks, and Expectations-driven Business Cycles By Christopher M. Gunn; Alok Johri
  3. Real exchange rates, commodity prices and structural factors in developing countries By Vincent Bodart; Bertrand Candelon; Jean-François Carpantier
  4. International transmission of financial stress: evidence from a GVAR By Jonas Dovern; Björn van Roye
  5. Large global volatility shocks, equity markets and globalisation: 1885-2011 By Arnaud Mehl
  6. Domestic Versus International Determinants Of European Business Cycles: A GVAR Approach By Melisso Boschi; Massimiliano Marzo; Simone Salotti
  7. Global Banks, Financial Shocks And International Business Cycles: Evidence From An Estimated Model By Robert Kollmann
  8. Macro-Financial Linkages in Egypt: A Panel Analysis of Economic Shocks and Loan Portfolio Quality By Inessa Love; Rima Turk Ariss
  9. On Modeling Economic Default Time: A Reduced-Form Model Approach By Jia-Wen Gu; Bo Jiang; Wai-Ki Ching; Harry Zheng
  10. Capital flows to emerging market economies: a brave new world? By Shaghil Ahmed; Andrei Zlate
  11. Financial Frictions, Capital Misallocation, and Structural Change By Naohisa Hirakata; Takeki Sunakawa

  1. By: Reuven Glick; Michael Hutchison
    Abstract: This paper presents empirical evidence on asset market linkages between China and Asia and how these linkages have shifted during and after the global financial crisis of 2008-2009. We find only weak cross-country linkages in longer-term interest rates, but much stronger linkages in equity markets. This finding is consistent with the greater development and liberalization of equity markets relative to bond markets in China, as well as increasing business and trade linkages in the region. We also find that the strength of the correlation of equity prices changes between China and other Asia countries increased markedly during the crisis and has remained high in recent years. We attribute this development to greater “attentiveness” of international investors to China’s role as a source and destination of equity finance during the crisis rather than to any greater financial deepening and liberalization, as China did not implement any major policy measures during this period. By contrast, the transmission of U.S. equity returns to Asian countries decreased after the crisis.
    Keywords: Global Financial Crisis, 2008-2009 ; China
    Date: 2013
  2. By: Christopher M. Gunn; Alok Johri
    Abstract: What is the effect of the fear of future sovereign default on the economy of the defaulting country? The typical sovereign default model does not address this question. In this paper we wish to explore the possibility that changing expectations about future default themselves can lead to financial stress (as measured by credit spreads) and recessionary outcomes. We exploit the "news-shock" framework to consider an environment in which sovereign debt-holders receive imperfect signals about the portion of debt that a sovereign may default on in the future. We then investigate how domestic banks can play a role in transmitting the expectation of default into a realized recession through the interaction of the domestic banks' holdings of government debt and their risk-weighted capital requirements. Our results suggest that, consistent with the data, even in the absence of actual realized government default, an increase in pessimism regarding the prospect of future default results in a rise in yields on government debt and an increase in interest rates on private domestic loans, as well as a recession in the economy.
    Keywords: expectations-driven business cycles, sovereign defaults; financial inter-mediation, news shocks, business cycles, interest rate spreads, capital adequacy requirements
    JEL: E3 E44 F36 F37 F4 G21
    Date: 2013–06
  3. By: Vincent Bodart (University of Maastricht); Bertrand Candelon (IRES, Université catholique de Louvain); Jean-François Carpantier (CREA, University of Luxembourg)
    Abstract: This paper provides new empirical evidence about the relationship that may exist between real exchange rates and commodity prices in developing countries that are specialized in the export of a main primary commodity. It investigates how structural factors like the exchange rate regime, the degree of financial and trade openness, the degree of export concentration and the type of the commodity exports affect the strength of the commod- ity price-real exchange rate dependence.
    Keywords: Real exchange rates; commodity prices; exchange rate regime; financial openness; dynamic panel analysis;
    Date: 2013
  4. By: Jonas Dovern; Björn van Roye
    Abstract: We analyze the international transmission of financial stress and its effects on economic activity. We construct country specific monthly financial stress indexes (FSI) using dynamic factor models from 1970 until 2012 for 20 countries. We show that there is a strong co-movement of the FSI during financial crises and that the FSI of financially open countries are relatively more correlated to FSI in other countries. Subsequently, we investigate the international transmission of financial stress and its impact on economic activity in a Global VAR (GVAR) model. We show that i) financial stress is quickly transmitted internationally, ii) financial stress has a lagged but persistent negative effect on economic activity, and iii) that economic slowdowns induce only limited financial stress
    Keywords: Financial stress, Financial crises, Business Cycles, Dynamic Factor Model, Global VAR
    JEL: E32 E52 F36 F37 F41
    Date: 2013–06
  5. By: Arnaud Mehl
    Abstract: I estimate the transmission of large global volatility shocks in international equity markets from the earlier (pre-1914) to the modern era of globalisation. To that end, I identify 43 such shocks over the period 1885-2011, defined as significant increases in unanticipated volatility in US equity markets, which I relate to well-known historical events. My estimates suggest that the response of global equity markets to these shocks in a panel of 16 countries is both statistically significant and large economically. On average, global equity market valuations correct by about 20% in the month when a shock occurs. There is substantial heterogeneity in responses both across countries and time, however, which can be partly explained by differences in global trade integration. I find no evidence that other potential theoretical determinants, such as output composition, country fundamentals or global policy responses matter, by contrast. These results shed light on a neglected aspect of globalisation, which creates opportunities but also heightens the exposure of economies to acute surges in global uncertainty and risk aversion.
    Keywords: Foreign exchange ; Financial markets
    Date: 2013
  6. By: Melisso Boschi; Massimiliano Marzo; Simone Salotti
    Abstract: We investigate the sources of macroeconomic (output and inflation) variability in selected European countries within and outside the European Monetary Union: Germany, Italy, Austria, the UK and Poland. Using quarterly data from 1985:1 to 2005:4, we estimate a Global Vector Autoregressive (GVAR) model that includes fifteen countries and regions, covering more than 90 per cent of the World GDP. We find that domestic factors explain most of the macroeconomic variability over the short horizon, i.e. from zero to four quarters, but become progressively dominated by international ones at larger horizons. Regional factors appear to be particularly important. As for output, we detect no significant differences between countries currently members of the European Monetary Union and non-members. As for inflation, on the contrary, regional factors are more influential than those of the rest of the world for the EMU member countries, differently from non-members..
    Keywords: Business cycle, inflation, European Monetary Union, Global VAR (GVAR)
    JEL: C32 E32
    Date: 2013–05
  7. By: Robert Kollmann
    Abstract: This paper estimates a two-country model with a global bank, using US and Euro Area (EA) data, and Bayesian methods. The estimated model matches key US and EA business cycle statistics. Empirically, a model version with a bank capital requirement outperforms a structure without such a constraint. A loan loss originating in one country triggers a global output reduction. Banking shocks matter more for EA macro variables than for US real activity. Banking shocks account for about 3%-5% of the unconditional variance of US GDP and for 4%-14% of the variance of EA GDP. During the Great Recession (2007-09), banking shocks accounted for about 12%-20% of the fall in US and EA GDP, and for more than a third of the fall in EA investment and employment.
    Keywords: financial crisis, global banking, real activity, investment, Bayesian econometrics.
    JEL: F36 F37 E44 G21
    Date: 2013–05
  8. By: Inessa Love (University of Hawaii at Manoa Economic Research Organization); Rima Turk Ariss (Lebanese American University)
    Abstract: This paper investigates macro-financial linkages in Egypt using two complementary methods, assessing the interaction between different macroeconomic aggregates and loan portfolio quality in a multivariate framework as well as through a panel vector autoregressive method that controls for bank-level characteristics. Using a panel of banks over 1993-2010, the authors find that a positive shock to capital inflows and growth in gross domestic product improves banks’ loan portfolio quality, and that the effect is fairly similar in magnitude using the multivariate and panel vector autoregressive frameworks. In contrast, higher lending rates may lead to adverse selection problems and hence to a drop in portfolio quality. The paper also reports that a larger market share of foreign banks in the industry improves loan quality.
    Keywords: Macroeconomic Shocks; Banks; Loan Quality; Panel Vector Autoregression
    JEL: C63 E44 G21 G28
    Date: 2013–06
  9. By: Jia-Wen Gu; Bo Jiang; Wai-Ki Ching; Harry Zheng
    Abstract: In the aftermath of the global financial crisis, much attention has been paid to investigating the appropriateness of the current practice of default risk modeling in banking, finance and insurance industries. A recent empirical study by Guo et al.(2008) shows that the time difference between the economic and recorded default dates has a significant impact on recovery rate estimates. Guo et al.(2011) develop a theoretical structural firm asset value model for a firm default process that embeds the distinction of these two default times. To be more consistent with the practice, in this paper, we assume the market participants cannot observe the firm asset value directly and developed a reduced-form model to characterize the economic and recorded default times. We derive the probability distribution of these two default times. The numerical study on the difference between these two shows that our proposed model can both capture the features and fit the empirical data.
    Date: 2013–06
  10. By: Shaghil Ahmed; Andrei Zlate
    Abstract: We examine the determinants of net private capital inflows to emerging market economies. These inflows are computed from quarterly balance-of-payments data from 2002:Q1 to 2012:Q2. Our main findings are: First, growth and interest rate differentials between EMEs and advanced economies and global risk appetite are statistically and economically important determinants of net private capital inflows. Second, there have been significant changes in the behavior of net inflows from the period before the recent global financial crisis to the post-crisis period, especially for portfolio inflows, partly explained by the greater sensitivity of such flows to interest rate differentials and risk aversion. Third, capital control measures introduced in recent years do appear to have discouraged both total and portfolio inflows. Fourth, in the pre-crisis period, there is some evidence that greater foreign exchange intervention to curb currency appreciation pressures brought more capital inflows down the line, but we cannot identify such an effect in the post-crisis period. Finally, we do not find statistically significant positive effects of unconventional U.S. monetary expansion on total net EME inflows, although there does seem to be a change in composition toward portfolio flows. Even for portfolio flows, U.S. unconventional policy is only one among several important factors.
    Date: 2013
  11. By: Naohisa Hirakata (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan (E-mail:; Takeki Sunakawa (Deputy Director and Economist, Institute for Monetary and Economic Studies (currently, International Department), Bank of Japan (E-mail:
    Abstract: We develop a two-sector growth model with financial frictions to examine the effects of a decline in the working population ratio and change in the structure of household demand on sectoral TFP and structural change. Our findings are twofold. First, with financial frictions, a decline in labor input reduces the real interest rate and increases excess demand for borrowing, tightening collateral constraints at a given credit-to-value ratio and generating capital misallocation and lower sectoral TFP. Second, compared to the case with no financial frictions, such changes in sectoral TFP impede structural changes driven by the change in the structure of household demand.
    Keywords: Financial frictions, heterogeneous firms, capital misallocation, total factor productivity, structural change
    JEL: E23 E44 O41 O47
    Date: 2013–06

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.