nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2014‒04‒05
eleven papers chosen by
Martin Berka
Victoria University of Wellington

  1. Network effects, homogeneous goods and international currency choice: new evidence on oil markets from an older era By Eichengreen, Barry; Chiţu, Livia; Mehl, Arnaud
  2. External and macroeconomic adjustment in the larger euro area countries By Angelini, Elena; Ca' Zorzi, Michele; Forster, Katrin
  3. Is It Too Late to Bail Out the Troubled Countries in the Eurozone? By Conesa, Juan Carlos; Kehoe, Timothy J.
  4. Cross-country insurance mechanisms in currency unions By Nancy van Beers; Michiel Bijlsma; Gijsbert T. J. Zwart
  5. The pricing of sovereign risk and contagion during the European sovereign debt crisis By Beirne, John; Fratzscher, Marcel
  6. Spillovers, capital flows and prudential regulation in small open economies By Paul Castillo; Cesar Carrera; Marco Ortiz; Hugo Vega
  7. Growth, real exchange rates and trade protectionism since the financial crisis By Georgiadis, Georgios; Gräb, Johannes
  8. The euro plus pact: cost competitiveness and external capital flows in the EU countries By Gabrisch, Hubert; Staehr, Karsten
  9. The impact of monetary policy and exchange rate shocks in Poland: evidence from a time-varying VAR By Arratibel, Olga; Michaelis, Henrike
  10. Honoring Sovereign Debt or Bailing Out Domestic Residents: A Theory of Internal Costs of Default. By Mengus, E.
  11. Putting the EMU integration into a new perspective: the case of capital market holdings By George T. Palaiodimos

  1. By: Eichengreen, Barry; Chiţu, Livia; Mehl, Arnaud
    Abstract: Conventional wisdom has it that network effects are strong in markets for homogeneous goods, leading to the dominance of one settlement currency in such markets. The alleged dominance of the dollar in global oil markets is said to epitomize this phenomenon. We question this presumption with evidence for earlier periods showing that several national currencies have simultaneously played substantial roles in global oil markets. European oil import payments before and after World War II were split between the dollar and non-dollar currencies, mainly sterling. Differences in use of the dollar across countries were associated with trade linkages with the United States and the size of the importing country. That several national currencies could simultaneously play a role in international oil settlements suggests that a shift from the current dollar-based system toward a multi-polar system in the period ahead is not impossible. JEL Classification: F30, N20
    Keywords: homogeneous goods, international invoicing currency, network effects, oil markets, US dollar role
    Date: 2014–03
  2. By: Angelini, Elena; Ca' Zorzi, Michele; Forster, Katrin
    Abstract: A balanced current account in the euro area has disguised sizeable net lending imbalances at the country level, exposing the common currency area to severe pressures during the financial crisis. The key contribution of this paper is to evaluate the adjustment process through the lenses of the New Multi Country Model at the country and sectoral level. We find that shocks to the external, fiscal and monetary environment help explain, to a large degree, the sizeable current account adjustment and rise in unemployment in Spain. The model also suggests that a recovery in wage competitiveness helps to reduce external deficits at the cost of higher net borrowing by households. The stimulus effects on aggregate demand, via the interest rate response of the common monetary authority and the competitiveness channel, are present but not overly large, as the rebound in economic activity depends mainly on global demand, supportive monetary policy, business and consumer confidence. JEL Classification: C5, F32, F41, O52
    Keywords: current account, euro area countries, modeling, net lending
    Date: 2014–03
  3. By: Conesa, Juan Carlos (Stony Brook University); Kehoe, Timothy J. (Federal Reserve Bank of Minneapolis)
    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.
    Keywords: Sovereign debt; Bailout; Penalty interest rate; Collateral
    JEL: F34 F53 G01
    Date: 2014–02–05
  4. By: Nancy van Beers; Michiel Bijlsma; Gijsbert T. J. Zwart
    Abstract: Countries in a monetary union can adjust to shocks either through internal or external mechanisms. We quantitatively assess for the European Union a number of relevant mechanisms suggested by Mundellâ??s optimal currency area theory, and compare them to the United States. For this purpose, we update a number of empirical analyses in the economic literature that identify (1) the size of asymmetries across countries and (2) the magnitude of insurance mechanisms relative to similar mechanisms and compare results for the European Monetary Union (EMU) with those obtained for the US. To study the level of synchronization between EMU countries we follow Alesina et al. (2002) and Barro and Tenreyro (2007). To measure the effect of an employment shock on employment levels, unemployment rates and participation rates we perform an analysis based on Blanchard and Katz (1992) and Decressin and Fatas (1995). We measure consumption smoothing through capital markets, fiscal transfers and savings, using the approach by Asdrubali et al. (1996) and Afonso and Furceri (2007). To analyze risk sharing through a common safety net for banks we perform a rudimentary simulation analysis.
    Date: 2014–03
  5. By: Beirne, John; Fratzscher, Marcel
    Abstract: The paper analyses the drivers of sovereign risk for 31 advanced and emerging economies during the European sovereign debt crisis. It shows that a deterioration in countries’ fundamentals and fundamentals contagion – a sharp rise in the sensitivity of financial markets to fundamentals – are the main explanations for the rise in sovereign yield spreads and CDS spreads during the crisis, not only for euro area countries but globally. By contrast, regional spill overs and contagion have been less important, including for euro area countries. The paper also finds evidence for herding contagion – sharp, simultaneous increases in sovereign yields across countries – but this contagion has been concentrated in time and among a few markets. Finally, empirical models with economic fundamentals generally do a poor job in explaining sovereign risk in the pre-crisis period for European economies, suggesting that the market pricing of sovereign risk may not have been fully reflecting fundamentals prior to the crisis. JEL Classification: E44, F30, G15, C23, H63
    Keywords: bond spreads, CDS spreads, contagion, ratings, sovereign debt crisis, sovereign risk
    Date: 2013–12
  6. By: Paul Castillo (Banco Central de Reserva del Perú); Cesar Carrera (Banco Central de Reserva del Perú); Marco Ortiz (Banco Central de Reserva del Perú); Hugo Vega (Banco Central de Reserva del Perú)
    Abstract: This paper extends the model of Aoki et al. (2009) considering a two sector small open economy. We study the interaction of borrowing, asset prices, and spillovers between tradable and non-tradable sectors. Our results suggest that when it is difficult to enforce debtors to repay their debt unless it is secured by collateral, a productivity shock in the tradable sector generates an increase in asset prices and leverage that spills over to the non-tradable sector, generating an appreciation of the real exchange and an increase in domestic lending. Macro-prudential instruments are introduced under the form of cyclical loan-to-value ratios that limit the amount of capital that entrepreneurs can pledge as collateral. Cyclical taxes that respond to the movements in the price of non-tradable goods are analysed. Simulation results show that this type of instruments significantly lessen the amplifying effects of borrowing constraints on small open economies and consequently reduce output and asset price volatility.
    Keywords: Collateral, productivity, small open economy
    JEL: E21 E23 E32 E44 G01 O11 O16
    Date: 2014–03
  7. By: Georgiadis, Georgios; Gräb, Johannes
    Abstract: Existing evidence suggests that protectionist activity since the financial crisis has been muted, raising the question whether the historically well-documented relationship between growth, real exchange rates and trade protectionism has broken down. This paper re-visits this relationship for the time period since 2009. To this end, we use a novel and comprehensive dataset which considers a wide range of trade policies stretching beyond the traditionally considered tariff and trade defence measures. We find that the specter of protectionism has not been banished: Countries continue to pursue more trade-restrictive policies when they experience recessions and/or when their competitiveness deteriorates through an appreciation of the real exchange rate; and this finding holds for a wide array of contemporary trade policies, including “murky” measures. We also find differences in the recourse to trade protectionism across countries: trade policies of G20 advanced economies respond more strongly to changes in domestic growth and real exchange rates than those of G20 emerging market economies. Moreover, G20 economies’ trade policies vis-à-vis other G20 economies are less responsive to changes in real exchange rates than those pursued vis-à-vis non-G20 economies. Our results suggest that—especially in light of the sluggish recovery—the global economy continues to be exposed to the risk of a creeping return of trade protectionism. JEL Classification: F13, F14
    Keywords: exchanges rates, growth, trade protectionism
    Date: 2013–11
  8. By: Gabrisch, Hubert; Staehr, Karsten
    Abstract: The Euro Plus Pact was approved by 23 EU countries in March 2011 and came into force shortly afterwards. The Pact stipulates a range of quantitative targets meant to strengthen cost competitiveness with the aim of preventing the accumulation of external financial imbalances. This paper uses Granger causality tests and vector autoregressive models to assess the short-term linkages between changes in the relative unit labour cost and changes in the current account balance. The sample consists of annual data for 27 EU countries for the period 1995-2012. The main finding is that changes in the current account balance precedes changes in relative unit labour costs, while there is no discernible effect in the opposite direction. The divergence in unit labour costs between the countries in Northern Europe and the countries in Southern and Eastern Europe may thus partly be the result of capital flows from the core of Europe to the periphery prior to the global financial crisis. The results also suggest that the measures in the Euro Plus Pact to restrain the growth of unit labour costs may not affect the current account balance in the short term. JEL Classification: E61, F36, F41
    Keywords: current account imbalances, economic crisis, European integration, policy coordination, unit labour costs
    Date: 2014–03
  9. By: Arratibel, Olga; Michaelis, Henrike
    Abstract: This paper follows the Bayesian time-varying VAR approach with stochastic volatility developed by Primiceri (2005), to analyse whether the reaction of output and prices to interest rate and exchange rate shocks has changed across time (1996-2012) in the Polish economy. The empirical findings show that: (1) output appears more responsive to an interest rate shock at the beginning of our sample. Since 2000, absorbing this shock has become less costly in terms of output, notwithstanding some reversal since the beginning of the global financial crisis. The exchange rate shock also has a time-varying effect on output. From 1996 to 2000, output seems to decline, whereas for periods between 2000 and 2008 it has a positive significant effect. (2) Consumer prices appear more responsive to an interest rate shock during the first half of our sample, when Poland experienced high inflation. The impact of an exchange rate shock on prices seems to slightly decrease across time. JEL Classification: C30, E44, E52, F41
    Keywords: Bayesian time-varying parameter VAR, exchange rate pass-through, monetary policy transmission
    Date: 2014–02
  10. By: Mengus, E.
    Abstract: The internal cost of default, an important driver of sovereign debt repayment, increases with domestic portfolios' home bias. And so, when using capital controls or other instruments to steer these portfolios, a country faces a trade-off between commitment to repay and diversification. But why does a borrowing country not eschew the internal cost of default through domestic sector bailouts? And why does their sovereign not intermediate the diversification through swaps and other hedging devices? Answering these two questions is key to fathom the nature of internal costs of default. This paper investigates sovereign debt sustainability in a model where domestic and foreign investors optimally select their portfolios and the sovereign optimizes over its debt, default and bailout policies. It derives conditions under which internal bailouts do not preclude sovereign borrowing and establishes when, despite their disciplining benefits, capital controls are undesirable.
    Keywords: sovereign debt, internal cost of default, bailouts, capital controls.
    JEL: F34 G15 G18
    Date: 2014
  11. By: George T. Palaiodimos (Bank of Greece)
    Abstract: This article investigates by means of an augmented gravity model, the impact of EMU on financial market integration across time by assessing its effect on capital (equities and bonds) holdings. We contribute to the respective literature by investigating this effect from a global perspective and also investigate the case of a pre-EMU effect on both equity and bond markets. Furthermore, we focus on the potential impact of recent financial crisis on international equity and bond holdings. Our estimates indicate that intra-EMU integration effect improved in both equity and bond markets during the period close to the formation of EMU i.e. 1997, 2001 and 2002. In the case of the EMU equity market, this effect is mostly centered on 2001 (18% increase of EMU holdings) reflecting the beneficial impact of EMU and the introduction of the euro, while in the case of bond market this EMU effect is centered on 1997 (50%), reflecting the existence of pre-EMU integration effects. These integration effects have been also accompanied by increased demand from the side of non-EMU investors in both markets. Lastly, these integration effects weaken significantly after 2007, mainly reflecting a post-crisis disintegration of EMU capital markets both internally and globally. These findings may be regarded as a red flag over the current status quo within EMU which is characterized by low levels of integration. This finding provides support for a push for a new EMU architecture in the form of greater fiscal and financial integration and supervision. Only in this way will EMU become a true currency union.
    Keywords: Market integration; Gravity models; equity holdings; bond holdings; EMU.
    JEL: F36 F30 F10 F41 G11
    Date: 2013–12

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