nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2014‒03‒01
eleven papers chosen by
Martin Berka
Victoria University of Wellington

  1. Real Exchange Rates and Skills By Vincent BODART; Jean-François CARPANTIER
  2. Debt Crises and Risk Sharing: The Role of Markets versus Sovereigns By Sebnem Kalemli-Ozcan; Emiliano E. Luttini; Bent Sørensen
  3. Exchange-rate regimes and economic growth: An empirical evaluation By Simón Sosvilla-Rivero; María del Carmen Ramos-Herrera
  4. Exchange Rate Predictability in a Changing World By Joseph P. Byrne; Dimitris Korobilis; Pinho J. Ribeiro
  5. Is It Too Late to Bail Out the Troubled Countries in the Eurozone? By Juan Carlos Conesa; Timothy J. Kehoe
  6. Macroprudential Policies in a Global Perspective By Olivier Jeanne
  7. Reconstructing the Savings Glut: The Global Implications of Asian Excess Saving By Vipin Arora; Rod Tyers; Ying Zhang
  8. Lucas Paradox and Allocation Puzzle - Is the euro area different? By Sabine Herrmann; Joern Kleinert
  9. Maturity Structure and Debt Renegotiation in International Lending By Jaromir Nosal
  10. Purchasing power parity (PPP) between South Africa and her main currency exchange partners: Evidence from asymmetric unit root tests and threshold co-integration analysis By Phiri, Andrew
  11. Financial Stress, Sovereign Debt and Economic Activity in Industrialized Countries: Evidence from Dynamic Threshold Regressions By Christian R. Proaño; Christian Schoder; Willi Semmler

  1. By: Vincent BODART (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Jean-François CARPANTIER (University of Luxembourg, CREA)
    Abstract: While most of the literature on the determination of real exchange rates is focused on the role of standard macroeconomic variables, there exists however a few papers that are more concerned by the impact of factors which are usually considered to play a key role in the process of economic development, like demography or inequality. In the present paper, we extend this small branch of the literature by exploring the relationship between labor skills and real exchange rates over the long-run. Using panel regressions covering 22 countries over the period 1950-2010, we find that labor skills are indeed a structural determinant of real exchange rates, with a permanent increase of the skilled-unskilled labor ratio leading to a long-run appreciation of the real exchange rate. This findings is robust to the inclusion of several control variables, like those used in traditional analyses of real exchange rates.
    Keywords: Real exchange rate, human capital, skills, Balassa-Samuelson effect
    JEL: C23 F31 F41 I25
    Date: 2014–02–12
  2. By: Sebnem Kalemli-Ozcan; Emiliano E. Luttini; Bent Sørensen
    Abstract: Using a variance decomposition of shocks to GDP, we quantify the role of international factor income, international transfers, and saving in achieving risk sharing during the recent European crisis. We focus on the sub-periods 1990-2007, 2008-2009, and 2010 and consider separately the European countries hit by the sovereign debt crisis in 2010. We decompose risk sharing from saving into contributions from government and private saving and show that fiscal austerity programs played an important role in hindering risk sharing during the sovereign debt crisis.
    JEL: E2 E6 F15
    Date: 2014–02
  3. By: Simón Sosvilla-Rivero (Department of Quantitative Economics, Universidad Complutense de Madrid); María del Carmen Ramos-Herrera (Department of Quantitative Economics, Universidad Complutense de Madrid)
    Abstract: Based on a dataset of 123 economies, this paper empirically investigates the relation between exchange-rate regimes and economic growth. We find that growth performance is best under intermediate exchange rate regimes, while the smallest growth rates are associated with flexible exchange rates. Nevertheless, this conclusion is tempered when we analyze the countries by income level: even though countries that adopt intermediate exchange-rate regimes are characterized by higher economic growth, the higher the level of income, less difference in growth performance across exchange rate regimes.
    Keywords: Exchange rate regime; economic growth
    JEL: E42 F31
    Date: 2014–01
  4. By: Joseph P. Byrne; Dimitris Korobilis; Pinho J. Ribeiro
    Abstract: An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction.
    Keywords: Exchange Rate Forecasting; Taylor Rules; Time-Varying Parameters; Bayesian Methods.
    JEL: C53 E52 F31 F37 G17
    Date: 2014–02
  5. By: Juan Carlos Conesa; Timothy J. Kehoe
    Abstract: In January 1995, U.S. President Bill Clinton organized a bailout for Mexico that imposed penalty interest rates and induced the Mexican government to reduce its debt, ending the debt crisis. Can the Troika (European Commission, European Central Bank, and International Monetary Fund) organize similar bailouts for the troubled countries in the Eurozone? Our analysis suggests that debt levels are so high that bailouts with penalty interest rates could induce the Eurozone governments to default rather than reduce their debt. A resumption of economic growth is one of the few ways that the Eurozone crises can end.
    JEL: F34 F53 G01
    Date: 2014–02
  6. By: Olivier Jeanne (Johns Hopkins University, Peterson Institute for International Economics, NBER and CEPR (E-mail:
    Abstract: This paper analyzes the case for the international coordination of macroprudential policies in the context of a simple theoretical framework. Both domestic macroprudential policies and prudential capital controls have international spillovers through their impact on capital flows. The uncoordinated use of macroprudential policies may lead to a "capital war" that depresses global interest rates. International coordination of macroprudential policies is not warranted, however, unless there is unemployment in some countries. There is scope for Pareto-improving international policy coordination when one part of the world is in a liquidity trap while the rest of the world accumulates reserves for prudential reasons.
    Keywords: Macroprudential Policy, Capital Flows, Capital Controls, International Reserves, International Coordination, Liquidity Trap
    JEL: F36 F41 F42
    Date: 2014–02
  7. By: Vipin Arora; Rod Tyers; Ying Zhang
    Abstract: East Asian, and primarily Chinese and Japanese, excess saving has been comparatively large and controversial since the 1980s. That it has contributed to the decline in the global “natural” rate of interest is consistent with Bernanke‟s much debated “savings glut” hypothesis for the decade after 1998, empirical explorations of which have proved unconvincing. In this paper it is argued that the comparatively integrated global market for long bonds is suggestive of trends in the “world” natural rate and that the longer term evidence supports a leading role for Asia‟s contribution to the expansion of ex ante global saving in explaining the declining trend in real long yields. Evidence is presented that trends in US 10 year bond yields are indeed representative of those in the “world” natural rate. The relationship between these yields and excess saving in China and Japan is then explored using a VECM that accounts for US monetary policy. The results support a negative long term relationship between 10-year yields and the current account surpluses of China and Japan. Projections using the same model then suggest that a feasible range of future pathways for those current accounts could cause the path of long rates to deviate by 330 basis points over the next decade.
    Keywords: China, International finance
    JEL: F42 F43 F47
    Date: 2014–02
  8. By: Sabine Herrmann (Deutsche Bundesbank); Joern Kleinert (University of Graz)
    Abstract: This paper examines the Lucas Paradox and the Allocation Puzzle of international capital flows referring to a panel data set of EMU countries and major industrialized and emerging economies. Overall, the results do not provide evidence in favour of the Lucas Paradox and the Allocation Puzzle. Rather, in line with neoclassical expectations, net capital flows are allocated according to income and growth differentials. The “downhill” flow of capital from rich to poor economies was particularly pronounced in intra-euro area capital flows and after the introduction of the common currency. If we control for the fact that the assumptions of the neoclassical model are not perfectly given in emerging markets, the Lucas Paradox and the Allocation Puzzle can be dismissed for these countries too. However, in periods of financial stress, the neoclassical behaviour of financial flows is to some extent dampened.
    Date: 2014–01
  9. By: Jaromir Nosal (Columbia University)
    Abstract: This paper presents a model of sovereign default with multi-period debt contracts with endogenous maturity. The sovereign in the model chooses the most favorable combination of interest rate, loan size and maturity out of the contracts oered in equilibrium by international lenders. All three characteristics of the contract endogenously vary with the business cycle of the sovereign. Additionally, in contrast to existing theories, we explicitly model the debt overhang problem: that the market power of the lenders depends on the renancing opportunities of the sovereign borrower. As a special case, we model how the debt is optimally restructured in case the sovereign decides to cease payments on outstanding debt. We explore the quantitative predictions of the calibrated model for debt, endogenous business cycle evolution of the debt contracts and the determination of the optimal debt relief when the sovereign is in default.
    Date: 2013
  10. By: Phiri, Andrew
    Abstract: Purpose: This purpose of this study is to examine the asymmetric adjustment effects for the purchasing power parity (PPP) for South Africa against her main currency trading partners; namely, the US, the UK, the Euro area, China and Japan. Design/Methodology/Approach: This study presents a two-fold empirical approach by using nominal exchange rate and aggregate price level data collected monthly for the periods 1971-2013. As a first step, the paper tests for nonlinear integration properties on the real exchange rate as computed as the nominal exchange rate adjusted for price differentials between the domestic and foreign price levels. The paper then proceeds to investigate asymmetric cointegration and error correction effects between nominal exchange rates and aggregate price differentials; and further supplements the empirical analysis by investigating granger causal effects between the variables. Findings: While the study is able to validate significant asymmetric PPP effects between South Africa and all her main currency exchange partners through the application of asymmetric unit root tests; the evidence presented when examining these PPP effects through the use of threshold cointegration and error correction analysis exempts the relationship explored between South African and the Euro area. Furthermore, the causal effects are found to run uni-directional from exchange rates to aggregate price differentials for all significant asymmetric cointegration relations. Originality/value: This study makes a novel contribution to literature by confirm significant asymmetric PPP effects between South Africa and her main currency exchange partners from both a unit root and a co-integration perspective.
    Keywords: Purchasing power parity (PPP); Threshold co-integration; Threshold unit root tests; South Africa
    JEL: C32 E31 E58 F31
    Date: 2014–02–13
  11. By: Christian R. Proaño (Department of Economics, The New School for Social Research); Christian Schoder (Department of Economics, Vienna University of Economics and Business); Willi Semmler (Department of Economics, The New School for Social Research)
    Abstract: We analyze how the impact of a change in the sovereign debt-to-GDP ratio on economic growth depends on the level of debt, the stress level on the financial market and the membership in a monetary union. A dynamic growth model is put forward demonstrating that debt affects macroeconomic activity in a non-linear manner due to amplifications from the financial sector. Employing dynamic country-specific and dynamic panel threshold regression methods, we study the non-linear relation between the growth rate and the debt-to-GDP ratio using quarterly data for sixteen industrialized countries for the period 1981Q1-2013Q2. We find that the debt-to-GDP ratio has impaired economic growth primarily during times of high financial stress and only for countries of the European Monetary Union and not for the stand-alone countries in our sample. A high debt-to-GDP ratio by itself does not seem to necessarily negatively affect growth if financial markets are calm.
    Keywords: financial stress, sovereign debt, economic growth, dynamic panel threshold regression
    JEL: E20 G15 H63
    Date: 2014–02

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