nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒09‒24
fourteen papers chosen by
Martin Berka
Victoria University of Wellington

  1. Capital Flows in the Euro Area By Lane, Philip R.
  2. A bargaining theory of trade invoicing and pricing By Goldberg, Linda S.; Tille, Cédric
  3. A Tale of Two Deficits: Public Budget Balance of Reserve Currency Countries By Andreas Steiner
  4. Roads and the Real Exchange Rate By Qingyuan Du; Shang-Jin Wei; Peichu Xie
  5. Capital Account Policies in Chile Macro-financial considerations along the path to liberalization By Yan Carriere-Swallow; Pablo Garcia-Silva
  6. Global Imbalances and Capital Account Openness: an Empirical Analysis By Jamel Saadaoui
  7. Which Fundamentals Drive Exchange Rates? A Cross-Sectional Perspective By Sarno, Lucio; Schmeling, Maik
  8. The Comovement in Commodity Prices: Sources and Implications By Ron Alquist; Olivier Coibion
  9. Why do governments default, and why don't they default more often? By Buiter, Willem H.; Rahbari, Ebrahim
  10. Is Inflation Targeting Operative in an Open Economy Setting? By Esteban Pérez Caldentey; Matías Vernengo
  11. How the Euro Crisis Evolved and How to Avoid Another: EMU, Fiscal Policy and Credit Ratings By Polito, Vito; Wickens, Michael R.
  12. International monetary transmission to the Euro area: Evidence from the U.S., Japan and China By Vespignani, Joaquin L.; Ratti, Ronald A.
  13. “The relationship between debt level and fiscal sustainability in OECD countries” By Mariam Camarero; Josep Lluís Carrion-i-Silvestre; Cecilio Tamarit
  14. The Greek Debt Restructuring: An Autopsy By Gulati, Mitu; Trebesch, Christoph; Zettelmeyer, Jeromin

  1. By: Lane, Philip R.
    Abstract: We investigate the behaviour of gross capital flows and net capital flows for euro area member countries. We highlight the extraordinary boom-bust cycles in both gross flows and net flows since 2003. We also show that the reversal in net capital flows during the crisis has been very costly in terms of macroeconomic and financial outcomes for the high-deficit countries. Finally, we describe the reforms that can improve macro-financial stability across the euro area.
    Keywords: capital flows; euro; imbalances
    JEL: E42 F32 F41
    Date: 2013–05
  2. By: Goldberg, Linda S.; Tille, Cédric
    Abstract: We develop a theoretical model of international trade pricing in which individual exporters and importers bargain over the transaction price and exposure to exchange rate fluctuations. We find that the choice of price and invoicing currency reflects the full market structure, including the extent of fragmentation and the degree of heterogeneity across importers and across exporters. Our study shows that a party has a higher effective bargaining weight when it is large or more risk tolerant. A higher effective bargaining weight of importers relative to exporters in turn translates into lower import prices and greater exchange rate pass-through into import prices. We show the range of price and invoicing outcomes that arise under alternative market structures. Such structures matter not only for the outcome of specific exporter-importer transactions, but also for aggregate variables such as the average price, the average choice of invoicing currency, and the correlation between invoicing currency and the size of trade transactions.
    Keywords: currency invoicing; exchange rate
    JEL: F30 F40
    Date: 2013–04
  3. By: Andreas Steiner (Universitaet Osnabrueck)
    Abstract: Central banks invest their foreign exchange reserves predominantly in government bonds. The global accumulation of reserves therefore affects the equilibrium in the market for government bonds of reserve currency countries. By means of a panel data analysis we examine the relationship between reserve currency status and public budget balance during different constellations of the international monetary system: the sterling period (1890-1935) and the dollar dominance (since World War II). We show for both periods that reserve currency status significantly lowers the fiscal balance. Any additional dollar of reserves lowers the center's balance by 0.7-1.4 dollars. These novel findings show that reserve currency status increases sovereign debt of the center country.
    Keywords: Reserve Currency, Public Balance, International Monetary System
    JEL: F31 F33 F41 H62 E62 C23
    Date: 2013–09–13
  4. By: Qingyuan Du; Shang-Jin Wei; Peichu Xie
    Abstract: This paper studies the effect of transport infrastructure on the real exchange rate (RER) and reaches two relatively strong conclusions. First, while the list of robust determinants of the RER is not long, transport infrastructure belongs to that list. Many other potential determinants proposed in the literature, such as net foreign asset position or terms of trade, turn out to be not robust. Second, in terms of economic significance, the infrastructure effect follows closely the well-known Balassa-Samuelson effect and is one of the most important explanatory variables for RER movements, especially in developing countries.
    JEL: F3 F31 F41
    Date: 2013–08
  5. By: Yan Carriere-Swallow; Pablo Garcia-Silva
    Abstract: This paper recounts Chile’s experience with capital account policies since the 1990s. We present how two external shocks were confronted under very different macroeconomic and capital account frameworks. We show that during the 1997-98 Asian-LTCM-Russia crisis, a closed capital account and relatively rigid exchange rate severely constrained the monetary policy response to the shock, aggravating the fall in domestic demand. During the 2008-09 crisis, a full-fledged inflation targeting framework allowed the authorities to implement a significant countercyclical response. We argue that domestic stability considerations lay behind the policy regime switch toward capital account liberalization from 1999 onwards.
    Keywords: Capital account;Chile;Capital account liberalization;Capital controls;Financial crisis;Monetary policy;Inflation targeting;Global Financial Crisis 2008-2009;capital controls, monetary policy, exchange rate policy, small-open economy, inflation targeting
    Date: 2013–05–14
  6. By: Jamel Saadaoui (BETA - Bureau d'économie théorique et appliquée - CNRS : UMR7522 - Université Louis Pasteur - Strasbourg I)
    Abstract: We investigate if capital account openness has played a major role in the evolution of global imbalances on the period 1980-2003. We estimate, with panel regression techniques, the impact of capital account openness on medium-term current account imbalances for industrialized and emerging countries by using a de jure measure of capital account openness (the KAOPEN index (Chinn and Ito, 2002, 2006) and a de facto measure of capital account openness (the gross foreign assets measured as the sum of foreign assets and foreign liabilities). By increasing the opportunities of overseas investments, the relative capital account openness has had a positive impact on medium-term current account balances of industrialized countries (because of downward pressures on domestic investment rates). Conversely, the relative capital account openness has had a negative impact on medium-term current account balances of emerging countries (because of upward pressures on domestic investment rates). Nowadays, current account imbalances are larger in reason of higher capital mobility. Nevertheless, a large part of imbalances may be considered as unrelated with the evolution of macroeconomic fundamentals.
    Keywords: Global Imbalances; Capital Account Openness; Panel Data
    Date: 2013–06–24
  7. By: Sarno, Lucio; Schmeling, Maik
    Abstract: Standard present-value models suggest that exchange rates are driven by expected future fundamentals, implying that exchange rates contain information about future fundamentals. We test this key empirical prediction of present-value models in a sample of 35 currency pairs ranging from 1900 to 2009. Employing a variety of tests, we find that exchange rates have strong and significant predictive power for nominal fundamentals (inflation, money balances, nominal GDP), whereas predictability of real fundamentals and risk premia is much weaker and largely confined to the post-Bretton Woods era. Overall, we uncover ample evidence that future macro fundamentals drive current exchange rates.
    Keywords: economic fundamentals; Exchange rates; forecasting; present value model
    JEL: F31 G10
    Date: 2013–05
  8. By: Ron Alquist; Olivier Coibion
    Abstract: We present a simple macroeconomic model with a continuum of primary commodities used in the production of the final good, such that the real prices of commodities have a factor structure. One factor captures the combined contribution of all aggregate shocks which have no direct effects on commodity markets other than through general equilibrium effects on output, while other factors represent direct commodity shocks. Thus, the factor structure provides a decomposition of underlying structural shocks. The theory also provides guidance on how empirical factors can be rotated to identify the structural factors. We apply factor analysis and the identification conditions implied by the model to a cross-section of real non-energy commodity prices. The theoretical restrictions implied by the model are consistent with the data and thus yield a structural interpretation of the common factors in commodity prices. The analysis suggests that commodity-related shocks have generally played a limited role in global business cycle fluctuations.
    Keywords: Commodity prices;Business cycles;Commodity price fluctuations;Economic models;Commodity prices; comovement: factor models
    Date: 2013–06–05
  9. By: Buiter, Willem H.; Rahbari, Ebrahim
    Abstract: This paper considers the economic and political drivers of sovereign default, focusing on countries rich enough to render sovereign default a ‘won’t pay’ rather than a ‘can’t pay’ phenomenon. Unlike many private contracts, sovereign debt contracts rely almost exclusively on self-enforcement rather than on third-party enforcement. Among the social costs of sovereign default are contagion and concentration risk, both within and outside the jurisdiction of the sovereign, and ‘rule of law externalities’. We consider illiquidity as a separate trigger for sovereign default and emphasize the role of lenders of last resort for the sovereign. Not only do political economy factors drive sovereign insolvency, they also influence the debt sustainability analyses performed by national and international agencies. We consider it likely that the absence of sovereign defaults in the advanced economies since the (West) German defaults of 1948 and 1953 until the Greek defaults of 2012 was a historical aberration that is unlikely to be a reliable guide to the future.
    Keywords: fiscal sustainability; intertemporal budget constraint; political economy.; solvency; sovereign default; strategic default
    JEL: E62 E63 F34 F41 G01 G18 H26 H63
    Date: 2013–05
  10. By: Esteban Pérez Caldentey; Matías Vernengo
    Abstract: The justification for inflation targeting rests on three core propositions. The first is called ‘lean against the wind’, which refers to fact that the monetary authority contracts (expands) aggregate demand below capacity when the actual rate of inflation is above (below) target. The second is ‘the divine coincidence’, which means that stabilizing the rate of inflation around its target is tantamount to stabilizing output around its full employment level. The third proposition is that of stability. This means that the inflation target is part of an equilibrium configuration which generates convergence following any small disturbance to its initial conditions. These propositions are derived from a closed economy setting which is not representative of the countries that actually have adopted inflation targeting frameworks. Currently there are 27 countries, 9 of which are classified as industrialized and 18 as developing countries that have explicitly implemented a fully fledged inflation targeting regime (FFIT). These countries are open economies and are concerned by the evolution of the external sector and the exchange rate as proven by their interventions in the foreign exchange markets. We show that these three core propositions and the practice of inflation targeting are inoperative in an open economy context.
    Keywords: Inflation Targeting, Open Economies, Exchange Rate
    JEL: E42 E58 F41
    Date: 2013
  11. By: Polito, Vito; Wickens, Michael R.
    Abstract: This paper argues that the crisis was an outcome of EMU: setting a common monetary policy for countries with different initial inflation rates. The crisis countries were those with high inflation rates which then had negative real interest rates and consequently over-borrowed. Current policy discussions focus on crisis measures: fiscal, banking and political union, not avoiding another crisis. This paper suggests two ways to avoid a future crisis: offset an inappropriate monetary policy using fiscal policy; markets could better price loan rates by taking into account default risk. The paper shows that neither was done prior to the crisis.
    Keywords: credit ratings; EMU; euro crisis; fiscal policy
    JEL: E52 E62 H63 H68
    Date: 2013–06
  12. By: Vespignani, Joaquin L.; Ratti, Ronald A.
    Abstract: There are marked differences in the effect of increases in monetary aggregates ‎in China, Japan ‎and the U.S. on Euro area economic and financial variables over 1999-2012. Increases in ‎monetary aggregates ‎in China are associated with significant increases in the world price of ‎commodities and with increases in Euro area inflation, industrial production and exports. ‎Results are consistent with shocks to China’s M2 facilitating domestic growth with ‎expansionary consequences for the Euro area economy. In contrast, increases in monetary ‎aggregates in Japan are associated with significant appreciation of the Euro and decreases in ‎Euro area industrial production and exports. Production of goods highly competitive with ‎European goods in Japan and expenditure switching in Japan are consistent with the results. ‎U.S. monetary expansion has relatively small effects on the Euro area over this period ‎compared to results reported in the literature for earlier sample periods.‎
    Keywords: International monetary transmission, China’s monetary aggregates, Euro area Commodity prices
    JEL: E52 E58 F31 F42
    Date: 2013–09–10
  13. By: Mariam Camarero (Jaume I University); Josep Lluís Carrion-i-Silvestre (Faculty of Economics, University of Barcelona); Cecilio Tamarit (University of Valencia)
    Abstract: In this paper we unify the traditional approaches to testing for fiscal sustainability considering the stock-flow system that fiscal variables configure. Our approach encompasses previous ways of testing for sustainability. The results obtained for a group of 17 OECD countries point to weak fiscal sustainability, as well as to the existence of cointegration between deficit and debt, confirming the relevance of the stock-flow approach. Allowing for structural breaks and multicointegration turns out to be of critical importance to assess whether the fiscal authorities apply their policies looking for sustainability and whether, simultaneously, they try to stabilize real debt target levels..
    Keywords: fiscal sustainability, cointegration, unit roots, structural breaks. JEL classification: H62, E62, C22.
    Date: 2013–09
  14. By: Gulati, Mitu; Trebesch, Christoph; Zettelmeyer, Jeromin
    Abstract: The Greek debt restructuring of 2012 stands out in the history of sovereign defaults. It achieved very large debt relief – over 50 per cent of 2012 GDP – with minimal financial disruption, using a combination of new legal techniques, exceptionally large cash incentives, and official sector pressure on key creditors. But it did so at a cost. The timing and design of the restructuring left money on the table from the perspective of Greece, created a large risk for European taxpayers, and set precedents – particularly in its very generous treatment of holdout creditors – that are likely to make future debt restructurings in Europe more difficult.
    Keywords: debt restructuring; Eurozone crisis; financial crises; Greece; sovereign debt; sovereign default
    JEL: F34
    Date: 2013–07

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