nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒08‒05
fourteen papers chosen by
Martin Berka
Victoria University of Wellington

  1. International reserves and rollover risk By Javier Bianchi; Juan Carlos Hatchondo
  2. Bad Investments and Missed Opportunities? Capital Flows to Asia and Latin America, 1950-2004 By Paulina Restrepo-Echavarria; Mark Wright; Lee Ohanian
  3. Debt dilution and seniority in a model of defaultable sovereign debt By Satyajit Chatterjee; Burcu Eyigungor
  4. Country Portfolios with Heterogeneous Pledgeability By Tommaso Trani
  5. Distributional Impact of Commodity Price Shocks: Australia over a Century By Sambit Bhattacharyya; Jeffrey G. Williamson
  6. Terms of Trade Shocks and Incomplete Information By Daniel Rees
  7. Export price adjustments under financial constraints By Angelo Secchi; Federico Tamagni; Chiara Tomasi
  8. Exchange Rate Pass-through and Market Power: Empirical analysis on Japanese automobile exports (Japanese) By SASAKI Yuri
  9. How do Different Government Spending Categories Impact on Private Consumption and the Real Exchange Rate? By Baldi, Guido
  10. Optimal monetary policy in open economies: the role of reference currency in vertical production and trade By Chan Wang; Heng-fu Zou
  11. Optimal monetary and tariff policy in open economies By Chan Wang; Heng-fu Zou
  12. Shocks Abroad, Pain at Home? Bank-Firm Level Evidence on the International Transmission of Financial Shocks By Steven Ongena; Jose Luis Peydro; Neeltje van Horen
  13. Fiscal multipliers in a small euro area economy: How big can they get in crisis times? By Gabriela Lopes de Castro; Ricardo Mourinho Félix; Paulo Júlio; José R. Maria
  14. Not all international monetary shocks are alike for the Japanese economy By Vespignani, Joaquin L.; Ratti , Ronald A.

  1. By: Javier Bianchi; Juan Carlos Hatchondo
    Abstract: This paper provides a theoretical framework for quantitatively investigating the optimal accumulation of international reserves as a hedge against rollover risk. We study a dynamic model of endogenous default in which the government faces a tradeoff between the insurance benefits of reserves and the cost of keeping larger gross debt positions. A calibrated version of our model is able to rationalize large holdings of international reserves, as well as the procyclicality of reserves and gross debt positions. Model simulations are also consistent with spread dynamics and other key macroeconomic variables in emerging economies. The benefits of insurance arrangements and the effects of restricting the use of reserves after default are also analyzed.
    Keywords: Macroeconomics - Econometric models
    Date: 2013
  2. By: Paulina Restrepo-Echavarria (The Ohio State University); Mark Wright (UCLA); Lee Ohanian (University of California Los Angeles)
    Abstract: From the end of the SecondWorldWar to the beginning of the Twenty-First Century, per-capita GDP in the economies of East Asia grew almost three times as fast as in the economies of Latin America. Specifically, in 1950, the economies of the Asian Tigers (Japan, South Korea, Singapore and Taiwan) had just 17 percent of US per capita GDP, but grew to have 67 percent by 2001. In contrast, Latin America had 28 percent of US per capita GDP in 1950, and only had 23 percent in 2001. Despite this large growth differential, with Latin America falling behind the US, and with Asia catching up, capital predominantly flowed out of Asia and into Latin America. This paper studies this apparent gross misallocation of capital, and how the global development process after World War II would have differed had capital flowed to the region with the highest returns. We present an analytical framework for analyzing the incentives facing investors who allocate capital internationally. Applying the framework to data on the major Asian and Latin American economies, we account for the pattern of observed capital flows by quantifying distortions in the markets for labor, domestic capital, and international capital. We find that inefficiencies in the allocation of resources within countries play a significant role in determining how capital is allocated across them. Specifically we observe that the reallocation of capital from Asia to Latin America is motivated by a quantitatively important labor market distortion that is isomorphic to a very high labor income tax in Asia. We then use the framework to explore the effect of different policy interventions in labor, domestic capital, and international capital markets at different stages in history, and on the sequencing of these interventions, on capital flows and development.
    Date: 2012
  3. By: Satyajit Chatterjee; Burcu Eyigungor
    Abstract: An important ineffciency in sovereign debt markets is debt dilution, wherein sovereigns ignore the adverse impact of new debt on the value of existing debt and, consequently, borrow too much and default too frequently. A widely proposed remedy is the inclusion of seniority clause in sovereign debt contracts: Creditors who lent first have priority in any restructuring proceedings. We incorporate seniority in a quantitatively realistic model of sovereign debt and find that seniority is quite effective in mitigating the dilution problem. We also show theoretically that seniority cannot be fully effective unless the costs of debt restructuring are zero.
    Keywords: Debt
    Date: 2013
  4. By: Tommaso Trani (School of Economics and Business Administration University of Navarra)
    Abstract: In this paper, I study the international transmission of shocks when assets traded across borders are differently suitable as collateral for borrowing (i.e., pledgeability). Under financial integration, differences in pledgeability have implications for the demand for assets. For instance, if a shock makes it more difficult to pledge the assets of the country receiving the shock, agents expect these assets to yield a relatively higher premium than foreign assets in the near future. I develop an approach to determine the optimal portfolio allocations, as existing methods cannot be directly applied to capture differences in asset pledgeability. In this case of heterogeneously pledgeable assets, financial shocks are transmitted from one country to another because the same asset is held by residents of different countries. Valuation effects arise as a consequence of the reaction of asset returns in different countries. In contrast, a standard model cannot generate any of these implications when assets have the same degree of pledgeability. Indeed, when assets have the same degree of pledgeability, financial shocks are country-specific and hinder the access to credit only for the residents of the country hit by the shock. * The external appendix with the methodological details is available upon request.
    Keywords: international portfolio choice, riskiness of pledged collateral, return dierentials, macroeconomic interdependence
    JEL: E44 F32 F41 G11 G15
    Date: 2013–02–20
  5. By: Sambit Bhattacharyya; Jeffrey G. Williamson
    Abstract: This paper studies the distributional impact of commodity price shocks over the both the short and very long run. Using a GARCH model, we find that Australia experienced more volatility than many commodity exporting developing countries over the periods 1865-1940 and 1960-2007. A single equation error correction model suggests that commodity price shocks increase the income share of the top 1, 0.05, and 0.01 percents in the short run. The very top end of the income distribution benefits from commodity booms disproportionately more than the rest of the society. The short run effect is mainly driven by wool and mining and not agricultural commodities. A sustained increase in the price of renewables (wool) reduces inequality whreas the same for non-renewable resources (minerals) increases inequality. We expect that the initial distribution of land and mineral resources explains the asymmetric result.
    Keywords: commodity price shocks; commodity exporters; top incomes; inequality
    JEL: F14 F43 N17 O13
    Date: 2013
  6. By: Daniel Rees (Reserve Bank of Australia)
    Abstract: The terms of trade are subject to both permanent and transitory shocks. Particularly for commodity-producing small open economies, it is sometimes argued that the inability of agents to determine which of these shocks are permanent and which are transitory leads to more macroeconomic volatility than would be the case if agents had perfect information about the persistence of these shocks. I set up a small open economy model in which agents have imperfect information about the persistence of terms of trade shocks and estimate the parameters of the model using Australian data. The results point to the existence of large informational frictions. In fact, agents' beliefs about the future path of the terms of trade following transitory and permanent shocks are almost identical. However, the results also suggest that incomplete information causes agents to respond more cautiously to terms of trade shocks. Consequently, consumption, output and the trade balance are less volatile under incomplete information than they are under full information.
    Keywords: terms of trade; imperfect information; small open economy; real business cycle
    JEL: C32 E32 F41 Q33
    Date: 2013–07
  7. By: Angelo Secchi (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, Laboratory of Economics and Management (LEM) - Scuola Superiore Sant'Anna); Federico Tamagni (Laboratory of Economics and Management (LEM) - Scuola Superiore Sant'Anna); Chiara Tomasi (Laboratory of Economics and Management (LEM) - Scuola Superiore Sant'Anna, Università di Trento - Dipartimento di Economia e Management)
    Abstract: By exploring a rich dataset that links international trade transactions to a panel of Italian manufacturing firms, this paper provides new evidence on the role of financial constraints on price variations across exporting firms. After controlling for relevant firm characteristics and potential endogeneity of financial constraints, we find that constrained firms charge higher prices than unconstrained firms exporting in the same product-destination market. The positive price difference increases with the degree of horizontal differentiation of products, while it is smaller for vertically differentiated products, where there is more scope for quality adjustment. Our results are consistent with a scenario where constrained firms exploit demand rigidities to push up their prices to sustain revenues and keep operations going in the attempt to escape the constraints.
    Keywords: Financial constraints; export prices; horizontal and vertical differentiation; quality adjustment
    Date: 2013–07
  8. By: SASAKI Yuri
    Abstract: This paper investigates exchange rate pass-through in Japanese automobile exports. Using customs data, we show that the exchange rate pass-through into import goods are lower in developed countries. Interviews with automobile companies were conducted by the members of RIETI's Asian currency project, and the results show that the key element for determining pass-through of exchange rates is market power. This paper also examines whether it is affected by market power. We make several market indexes and compare those with the exchange rate pass-through.
    Date: 2013–07
  9. By: Baldi, Guido
    Abstract: The macroeconomic literature has found puzzling effects of government spending on private consumption, the real exchange rate and the terms of trade. Some authors find that private consumption increases after a shock to government spending, while others report a decrease. The same ambiguity can be found for the real exchange rate and the terms of trade. Our paper offers an intuitive explanation for these divergent results by distinguishing between productive and unproductive government spending. We show within a calibrated two-sector DSGE model that the two government spending categories have different effects on private consumption, the real exchange rate and the terms of trade. Hence, our findings suggest that the composition of government spending matters not only for long-run growth, but also impacts on the short-run.
    Keywords: Fiscal Policy, Productive Public Capital, Government Spending, Open Economy Macroeconomics
    JEL: E62 F41 H11
    Date: 2013–07
  10. By: Chan Wang (China Economics and Management Academy, Central University of Finance and Economics); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics; Institute for Advanced Study, Wuhan University; Institute for Advanced Study, Shenzhen University)
    Abstract: This paper examines optimal monetary policy rules in open economies with vertical production and trade in which we emphasize the role played by reference currency. As evidenced by empirical ï¬ndings, we assume ï¬nal goods prices are sticky, but intermediate goods prices are flexible. We ï¬nd that the asymmetry of exporters' pricing behavior implies that the responses of monetary authorities to productivity shocks from the stage of ï¬nal goods production are asymmetric but symmetric to productivity shocks from the stage of intermediate goods production. We also ï¬nd that gains from cooperation are related to the covariance of productivity shocks in two stages. In addition, we give the conditions under which home and foreign are willing to take part in cooperation respectively. As for exchange rate policy, we ï¬nd that the volatility of nominal exchange rate in RCP case is greater than that in LCP case, but smaller than that in PCP case. The volatility of real exchange rate in RCP case is, however, greater than those in PCP and LCP cases.
    Keywords: Vertical production and trade, Reference-currency pricing, Optimal monetary policy, Monetary cooperation, Exchange rates
    JEL: E5 F3 F4
    Date: 2013–07–28
  11. By: Chan Wang (China Economics and Management Academy, Central University of Finance and Economics); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics; Institute for Advanced Study, Wuhan University; Institute for Advanced Study, Shenzhen University)
    Abstract: This paper investigates the relationship between optimal monetary and tariff policy in open economies. In producer-currency pricing (PCP) case, as in Obstfeld and Rogoff (2002), optimal tariff policy rules are separable from optimal monetary policy rules. Except for PCP case, they are not separable from each other. The increase of tariffs will lead to a more insulated world economy in the sense that both home and foreign pay more attention to their domestic goals respectively. When tariffs are chosen optimally, except for PCP and reference-currency pricing (RCP) cases, optimal monetary policy is inward-looking. We also extend the model to consider gains from cooperation. Except for LCP case, there are gains from cooperation between Home and Foreign monetary policy makers. By comparison, there are gains from cooperation between Home and Foreign tariff policy makers in various cases.
    Keywords: Open economies, Tariff policy, Monetary policy, Exchange rate pass-through elasticity, International cooperation
    JEL: E52 F41 F42
    Date: 2013–07–28
  12. By: Steven Ongena; Jose Luis Peydro; Neeltje van Horen
    Abstract: We study the international transmission of shocks from the banking to the real sector during the global financial crisis. For identification, we use matched bank-firm level data, including many small and medium-sized firms, in Eastern Europe and Central Asia. We find that internationally-borrowing domestic and foreign-owned banks contract their credit more during the crisis than domestic banks that are funded only locally. Firms that are dependent on credit and at the same time have a relationship with an internationally-borrowing domestic or a foreign bank (as compared to a locally-funded domestic bank) suffer more in their financing and real performance. Single-bank-relationship firms, small firms and firms with intangible assets suffer most. For credit-independent firms, there are no differential effects. Our findings suggest that financial globalization has intensified the international transmission of financial shocks with substantial real consequences
    Keywords: international transmission; firm real effects; foreign banks; international wholesale funding; credit shock
    JEL: G01 G21 F23 F36
    Date: 2013–07
  13. By: Gabriela Lopes de Castro; Ricardo Mourinho Félix; Paulo Júlio; José R. Maria
    Abstract: Using PESSOA, a small open economy DSGE model, we analyze the size of short-runfiscal multipliers associated with fiscal consolidation under two distinct alternative scenarios, viz "normal times" and "crisis times." The crisis times scenario embodies a higher share of hand-to-mouth households, stronger nominal rigidities, and more severe financial frictions, which purportedly better refflect the underlying economic environment during the "Great Recession." Results show that fiscal multipliers can be twice as large in crisis times, being approximately 2 for a government consumptionbased fiscal consolidation in the first year. One-year ahead effects are also substantially larger if this type of consolidation is performed in crisis times. Revenue-based fiscal consolidations are also more recessive in crisis times, though the differences against normal times are less pronounced.
    JEL: E62 F41 H62
    Date: 2013
  14. By: Vespignani, Joaquin L.; Ratti , Ronald A.
    Abstract: It is found that over 1999:1-2012:12 China’s monetary expansion influences Japan through the effect of China’s growth on world commodity prices, increased demand for imports, and exchange rate policy. China’s monetary expansion is associated with significant increases in Japan’s industrial production, exports and inflation, and decreases in the trade-weighted yen. In contrast, U.S. monetary expansion results in contraction in Japan’s industrial production, exports and trade balance (expenditure-switching). Monetary expansion in the Euro area does not significantly affect Japan. Structural vector error correction models are estimated. Results are robust to various contemporaneous restrictions for the effect of international monetary variables, the interaction of foreign and domestic variables and to factor augmented VAR to identify monetary shocks.
    Keywords: International Monetary shocks, Japanese economy, Oil/commodity prices, SVEC models
    JEL: E4 E42 E5 E58 F0 F00
    Date: 2013–07–15

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