nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2014‒01‒10
thirteen papers chosen by
Martin Berka
Victoria University of Wellington

  1. Rounding the Corners of the Policy Trilemma: Sources of Monetary Policy Autonomy By Michael W. Klein; Jay C. Shambaugh
  2. Global Imbalances, Risk, and the Great Recession By Evans, Martin
  3. International Capital Flows and Domestic Financial Conditions: Lessons for Emerging Asia By Philip Lane
  4. Robust Control, Informational Frictions, and International Consumption Correlations By Yulei Luo; Jun Nie; Eric R. Young
  5. Sovereigns versus banks: credit, crises, and consequences By Jorda, Oscar; Schularick, Moritz; Taylor, Alan M.
  6. Local Currency Sovereign Risk By Du, Wenxin; Schreger, Jesse
  7. Inflation targeting, flexible exchange rates, and macroeconomic performance since the Great Revolution By Andersen, Thomas Barnebeck; Malchow-Møller, Nikolaj; Nordvig, Jens
  8. Real Exchange Rate Misalignment in the cfa franc zone after the cfa franc devaluation of January 1994 By Kuikeu, Oscar
  9. Growth and competitiveness as factors of Eurozone external imbalances : evidence and policy implications By Sanchez , Jose Luis Diaz; Varoudakis, Aristomene
  10. The International Finance Multiplier in Business Cycle Fluctuations By Naohisa Hirakata; Takushi Kurozumi
  11. Transmitting Global Liquidity to East Asia: Policy Rates, Bond Yields, Currencies and Dollar Credit By Dong He; Robert N McCauley
  12. In the wake of the global crisis : evidence from a new quarterly database of export competitiveness By Gaulier, Guillaume; Santoni, Gianluca; Taglioni, Daria; Zignago, Soledad
  13. Systemic Risk, International Regulation, and the Limits of Coordination By Kara, Gazi

  1. By: Michael W. Klein (Fletcher School, Tufts University, and NBER (E-mail:; Jay C. Shambaugh (George Washington University and NBER (E-mail:
    Abstract: A central result in international macroeconomics is that a government cannot simultaneously opt for open financial markets, fixed exchange rates, and monetary autonomy; rather, it is constrained to choosing no more than two of these three. In the wake of the Great Recession, however, there has been an effort to address macroeconomic challenges through intermediate measures, such as narrowly targeted capital controls or limited exchange rate flexibility. This paper addresses the question of whether these intermediate policies, which round the corners of the triangle representing the policy trilemma, afford a full measure of monetary policy autonomy. Our results confirm that extensive capital controls or floating exchange rates enable a country to have monetary autonomy, as suggested by the trilemma. Partial capital controls, however, do not generally enable a country to have greater monetary control than is the case with open capital accounts unless they are quite extensive. In contrast, a moderate amount of exchange rate flexibility does allow for some degree of monetary autonomy, especially in emerging and developing economies.
    Keywords: Exchange Rate Regimes, Trilemma, Monetary Policy, Capital Controls
    JEL: F3 F33 F42 E42 E58
    Date: 2013–12
  2. By: Evans, Martin
    Abstract: This paper describes a new analytical framework for the quantitative assessment of international external positions. The framework links each country’s current net foreign asset position to its current trade flows, forecasts of future trade flows, and expectations concerning future returns on foreign assets and liabilities in an environment where countries cannot run Ponzi schemes or exploit arbitrage opportunities in world financial markets. It provides guidance on how external positions should be measured in the data, and on how the sustainability of a country’s current position can be assessed. To illustrate its usefulness, I study the external positions of 12 countries (Australia, Canada, China, France, Germany, India, Italy, Japan, South Korea, Thailand, The United States and The United Kingdom) between 1970 and 2011. In particular, I examine how changes in the perceived risk associated with future returns across world financial markets contributed to evolution of external positions before the 2008 financial crisis, and during the ensuing Great Recession.
    Keywords: Global Imbalances, Foreign Asset Positions, Current Accounts, International Debt, International Solvency, Great Recession
    JEL: F3 F32
    Date: 2013–10–01
  3. By: Philip Lane (Trinity College Dublin)
    Abstract: This paper provides an empirical review of the dynamics of international capital áows, with a focus on emerging Asia. Next, it outlines the various channels by which international capital flows affect domestic financial conditions in the host economies. Finally, it explores the implications for the design of policy frameworks that can deliver macro-financial stability.
    Keywords: international capital flows, financial stability, emerging Asia
    JEL: E42 E58 F32 F36
    Date: 2013–12
  4. By: Yulei Luo (The University of Hong Kong and Hong Kong Institute for Monetary Research); Jun Nie (Federal Reserve Bank of Kansas City); Eric R. Young (University of Virginia)
    Abstract: In this paper we examine the effects of model misspecification (robustness or RB) on international consumption correlations in two otherwise standard small open economy models: one with perfect state observation and the other with imperfect state observation. We show that in the presence of capital mobility in financial markets, RB lowers the international consumption correlations by generating heterogeneous responses of consumption to income shocks across countries facing different macroeconomic uncertainty. However, the calibrated RB model with perfect state observation cannot explain the observed consumption correlations quantitatively. We then show that the RB model with imperfect state observation is capable of matching the behavior of international consumption quantitatively via two channels: (i) the gradual response to income shocks that increases the correlations and (ii) the presence of the common noise shocks that reduce the correlations.
    Keywords: Robustness, Imperfect State Observation, International Consumption Correlations
    JEL: D83 E21 F41 G15
    Date: 2013–11
  5. By: Jorda, Oscar (Federal Reserve Bank of San Francisco); Schularick, Moritz (University of Bonn); Taylor, Alan M. (University of California, Davis)
    Abstract: Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms and not from the expansion of public debt. However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sector deleveraging after crises, leading to more prolonged periods of economic depression. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now.
    Keywords: leverage; booms; recessions; financial crises; business cycles; local projections
    JEL: C14 C52 E51 F32 F42 N10 N20
    Date: 2013
  6. By: Du, Wenxin (Board of Governors of the Federal Reserve System (U.S.)); Schreger, Jesse (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Do governments default on debt denominated in their own currency? We introduce a new measure of sovereign credit risk, the local currency credit spread, defined as the spread of local currency bonds over the synthetic local currency risk-free rate constructed using cross currency swaps. We find that local currency credit spreads are positive and sizable. Compared with credit spreads on foreign currency denominated debt, local currency credit spreads have lower means, lower cross-country correlations, and are less sensitive to global risk factors. Global risk aversion and liquidity factors can explain more time variation in these credit spread differentials than macroeconomic fundamentals.
    Keywords: Local currency; sovereign debt; currency swaps
    JEL: F31 F34 G15
    Date: 2013–12–10
  7. By: Andersen, Thomas Barnebeck (Department of Business and Economics); Malchow-Møller, Nikolaj (Department of Business and Economics); Nordvig, Jens (Nomura Securities)
    Abstract: Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? Analyzing the sample of all OECD countries, we answer this question in the affirmative: Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other regimes. This includes in particular countries with fixed exchange rate regimes, but also countries with flexible exchange rates without IT. The result holds in the full sample; it holds when we exclude the so-called peripheral Eurozone countries (Greece, Italy, Ireland, Portugal, and Spain); and it holds when we exclude all Eurozone countries. It is, in other words, a robust empirical finding. We demonstrate that part of the explanation for this difference in growth performance is found in differences in export performance during the initial years of the crisis, which in turn is explained by real exchange rate depreciations. However, this cannot explain the entire difference in performance between countries with flexible and fixed exchange rates in the aftermath of the Great Recession. IT seems also to confer other benefits on the countries above and beyond the effect from currency depreciation.
    Keywords: Inflation targeting; flexible exchange rates; economic growth; OEDC; Great Recession
    JEL: E42 E58 O43
    Date: 2013–12–21
  8. By: Kuikeu, Oscar
    Abstract: In cfa franc zone, the exchange rate was devalued, in January 1994, in order to deal with the major macroeconomic imbalances that have affected the members during the 1980 decade. Thus, the aim of this paper is to assess the degree of over/undervaluation (namely real exchange rate misalignment) of the currency in the cfa franc zone since the cfa franc devaluation of January 1994.
    Keywords: equilibrium real exchange rate, cfa franc zone, cointegration, panel
    JEL: C33 F31
    Date: 2013–12–31
  9. By: Sanchez , Jose Luis Diaz; Varoudakis, Aristomene
    Abstract: The paper assesses the contribution of key factors associated with external imbalances in the Eurozone through the estimation of a panel-data vector autoregressive model over 1975-2011. Growth fluctuations, initially associated with demand booms triggered by unusually low interest rates and later with demand contractions resulting from the crisis and policy adjustments, have been key drivers of current account fluctuations. Changes in competitiveness, measured by real exchange rates or unit labor costs, have played a less important role. Demand shocks have contributed more to current account balance dynamics in the Eurozone periphery than in the core, whereas competitiveness has been a less prominent factor in the periphery but relatively more important in the core. Changes in competitiveness are positively associated with changes in growth. Preventing imbalances from building up in a context of growing financial integration and easy finance warrants enhanced mutual surveillance of fiscal imbalances, but also better regulation of credit markets to prevent excess leverage and concentration of lending in investments prone to speculative bubbles. Coordination of fiscal policy across the Eurozone would facilitate the management of external imbalances without placing an often unwarranted burden on fiscal tightening in countries with sound fiscal positions affected by credit booms. The policies of internal devaluation implemented in the periphery, aimed at promoting external competitiveness, may have had only limited effectiveness in restoring the external balance to equilibrium.
    Keywords: Currencies and Exchange Rates,Economic Theory&Research,Debt Markets,Emerging Markets,Macroeconomic Management
    Date: 2013–12–01
  10. 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:; Takushi Kurozumi (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In the wake of the gGreat Recessionh of 2007-09, recent studies have emphasized the importance of the ginternational finance multiplier (IFM)h mechanism for inter- national business cycles, using calibrated two-country models. This paper develops and estimates a two- country model with the IFM mechanism using 21 time series from the Euro Area (EA) and the US. The estimation results show that during the past quarter-century, EA shocks to the external finance premium and net worth not only had a considerable effect on the EA economy together with an EA neutral technology shock, but also were transmitted to the US through the IFM mechanism and had a great impact on the US economy together with a US marginal efficiency of investment (MEI) shock. The rate of EA neutral technological change and the US MEI shock then have strong correlations with lending attitudes of banks in the EA and the US, and thus the EA neutral technology shock and the US MEI shock are likely to represent disturbances to the banking sectors in the EA and the US. These findings therefore demonstrate that financial factors are important sources of EA and US business cycle fluctuations over the past quarter-century.
    Keywords: Business cycle fluctuations, International finance multiplier mechanism, Financial accelerator mechanism
    JEL: F3 F4
    Date: 2013–12
  11. By: Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Robert N McCauley (Bank for International Settlements)
    Abstract: We review extant work on the transmission of monetary policy, both conventional and unconventional, of the major advanced economies to East Asia through monetary policy reactions, integrated bond markets and induced currency appreciation. We present new results on the growth of foreign currency credit, especially US dollar credit, as a transmission mechanism. Restrained growth of dollar credit in Korea contrasts with very rapid growth on the Chinese mainland and in Hong Kong SAR.
    Date: 2013–10
  12. By: Gaulier, Guillaume; Santoni, Gianluca; Taglioni, Daria; Zignago, Soledad
    Abstract: Over the past two decades, international trade has become a privileged engine of growth for much of the developing world. With the global economy evolving continuously and rapidly, countries must pay close attention to their positioning on the map of global trade and production. Within this framework, countries must also become aware of how they fare relative to competitors and to their past export performance. Of particular importance is the extent to which their performance is driven by exporter own supply-side capacity as opposed to external or compositional factors, including product and geographical specialization and how these trends compare across countries. This paper describes a new initiative that uses quarterly data for 2005q1-2013q1 to compute comparable indicators of export performance for 228 countries and territories. The database, the Export Competitiveness Database, reveals interesting patterns in trade performance. Export performance, stripped of compositional effects, was strongest for countries from the Asia and Pacific region, on average. Moreover, such performance was almost entirely driven by exporting country specific factors, with changes reflecting growth in volume rather than price developments. All emerging and developing regions have, on average, improved export performance. The indicators in the database trace the legacy of supply-side capacity and the overall export performance of the double-dip recession in the euro area. An illustrative set of results suggests that the paper's measure of competitiveness correlates to a country's nominal and real effective exchange rate, factors that are commonly perceived as important determinants of competitiveness.
    Keywords: Currencies and Exchange Rates,Markets and Market Access,E-Business,Economic Theory&Research,Emerging Markets
    Date: 2013–12–01
  13. By: Kara, Gazi (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper examines the incentives of national regulators to coordinate regulatory policies in the presence of systemic risk in global financial markets. In a two-country and three-period model, correlated asset fire sales by banks generate systemic risk across national financial markets. Relaxing regulatory standards in one country increases both the cost and the severity of crises for both countries in this framework. In the absence of coordination, independent regulators choose inefficiently low levels of macro-prudential regulation. A central regulator internalizes the systemic risk and thereby can improve the welfare of coordinating countries. Symmetric countries always benefit from coordination. Asymmetric countries choose different levels of macro-prudential regulation when they act independently. Common central regulation will voluntarily emerge only between sufficiently similar countries.
    Keywords: Systemic risk; macroprudential regulation; international policy coordination
    Date: 2013–09–16

This nep-opm issue is ©2014 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.