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

  1. External Balances, Trade Flows and Financial Conditions By Evans, Martin
  2. What drives the German current account? And how does it affect other EU member states? By Robert Kollmann; Marco Ratto; Werner Roeger; Jan in’t Veld; Lukas Vogel
  3. The two faces of cross-border banking flows: an investigation into the links between global risk, arms-length funding and internal capital markets By Reinhardt, Dennis; Riddiough, Steven
  4. Globalization and Inflation: A Swiss Perspective By John A. Tatom
  5. Exchange rates, expected returns and risk By Anella Munro
  6. Inflation-Targeting, Flexible Exchange Rates and Macroeconomic Performance since the Great Recession By Barnebeck Andersen, Thomas; Malchow-Møller, Nikolaj; Nordvig, Jens
  7. Overvaluation of the real exchange rate and the Dutch Disease: the Colombian case By Thomas Goda; Alejandro Torres
  8. The EMS Crisis of the 1990s: Parallels with the present crisis? By Gros, Daniel
  9. Throwing the Spanner in the Works: The Mixed Blessing of FDI By Jakob Schwab
  10. Exchange rate misalignment in Pakistan and its general equilibrium distributional implications: By Debowicz, Dario; Saeed, Wajiha

  1. By: Evans, Martin
    Abstract: This paper studies how changing expectations concerning future trade and financial con- ditions are reflected in international external positions. In the absence of Ponzi schemes and arbitrage opportunities, the net foreign asset position of any country must, as a matter of theory, equal the expected present discounted value of future trade deficits, discounted at the cumulated world stochastic discount factor (SDF) that prices all freely traded financial assets. I study the forecasting implications of this theoretical link in 12 countries (Australia, Canada, China, France, Germany, India, Italy, Japan, South Korea, Thailand, The United States and The United Kingdom) between 1970 and 2011. I find that variations in the ex- ternal positions of most countries reflect changing expectations about trade conditions far into the future. I also find the changing forecasts for the future path of the world SDF is reflected in the dynamics of the U.S. external position.
    Keywords: Global Imbalances, Foreign Asset Positions, Current Accounts, Trade Flows, International Asset Pricing
    JEL: F3 F31 F32 F34
    Date: 2014–05–01
  2. By: Robert Kollmann; Marco Ratto; Werner Roeger; Jan in’t Veld; Lukas Vogel
    Abstract: We estimate a three-country model using 1995-2013 data for Germany, the Rest of the Euro Area (REA) and the Rest of the World (ROW) to analyze the determinants of Germany’s current account surplus after the launch of the Euro. The most important factors driving the German surplus were positive shocks to the German saving rate and to ROW demand for German exports, as well as German labour market reforms and other positive German aggregate supply shocks. The convergence of REA interest rates to German rates due to the creation of the Euro only had a modest effect on the German current account and on German real activity. The key shocks that drove the rise in the German current account tended to worsen the REA trade balance, but had a weak effect on REA real activity. Our analysis suggests these driving factors are likely to be slowly eroded, leading to a very gradual reduction of the German current account surplus. An expansion in German government consumption and investment would raise German GDP and reduce the current account surplus, but the effects on the surplus are likely to be weak.
    JEL: F4 F3 F21 E3
    Date: 2014–04
  3. By: Reinhardt, Dennis (Bank of England); Riddiough, Steven (Warwick Business School)
    Abstract: We decompose gross cross-border bank-to-bank funding between arms-length (interbank) and related (intragroup) funding, and show that while interbank funding is withdrawn when global risk is high, intragroup funding remains stable during these periods, despite being more volatile on average. We disaggregate intragroup funding further and find advanced economy parent banks benefit from inflows during episodes of heightened global risk. However, we do not find evidence of significantly reduced intragroup funding to foreign affiliates during these periods. Our results are in contradiction with theoretical predictions on the behaviour of cross-border banking flows, and help explain why certain banking systems lost more cross-border bank-to-bank funding than others during the global financial crisis.
    Keywords: Cross-border banking flows; global risk; parent banks and foreign affiliates
    JEL: F32 F34 G21
    Date: 2014–04–17
  4. By: John A. Tatom
    Abstract: Globalization has given rise to new concerns that domestic inflation is caused by global developments, especially in the state of the global gap in GDP and resource utilization, and whether domestic monetary policy can control it. This paper explores the role of globalization, if any, for inflation, particularly in Switzerland, one of the smallest and most open economies where the globalization hypothesis should be most relevant, but where inflation historically has been among the lowest in the world. Is Switzerland and Swiss monetary policy unique in providing a benchmark for price stability, or is Swiss inflation performance an accident, with Swiss inflation being dictated by global experience or at least by its larger neighbors? It provides tests of whether inflation in Switzerland is causally related to inflation elsewhere. It focuses in more detail on Swiss inflation in a P* model and on whether it is also influenced by inflation in Germany, other countries or by inflation abroad via an import channel. Finally, the paper looks more broadly at other evidence of whether Swiss inflation or that in other industrial countries is influenced by globalization. Swiss inflation is largely made at home. There is evidence presented of a cointegrating relationship of Swiss and German inflation, but this and the high correlation of Swiss and German inflation are more likely due to common inflation objectives.
    Keywords: Inflation, Globalization, Switzerland, GDP gap
    JEL: E31 E32 F4
    Date: 2013–12
  5. By: Anella Munro (Reserve Bank of New Zealand)
    Abstract: According to theory, higher expected foreign risk-free returns and foreign currency risk both increase foreign yields, but have opposing effects on the value of the foreign currency. This paper exploits that relationship to jointly identify the unobserved risk-free return and risk premium components of exchange rates and expected relative returns. When risk and return are jointly modelled over a 10-year horizon, UIP cannot be rejected for any of the eight advanced country USD currency pairs examined. Innovations in the currency premium are correlated with 'speculative' positioning in foreign exchange markets, and for non-reserve currencies, with 'VIX' risk aversion. Innovations in the risk-free component are correlated with changes in nominal short-term interest rates. Both expected returns and risk play important roles in exchange rate dynamics.
    JEL: F31 G12
    Date: 2014–01
  6. By: Barnebeck Andersen, Thomas; Malchow-Møller, Nikolaj; Nordvig, Jens
    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? This paper answers this question in the affirmative. Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other monetary regimes, predominantly countries with fixed exchange rates. Part of this difference in growth performance reflects differences in export performance during the initial years of the crisis, which in turn can be explained by real exchange rate depreciations. However, IT seems also to confer other benefits on the countries above and beyond the effects from currency depreciation.
    Date: 2014–03
  7. By: Thomas Goda; Alejandro Torres
    Abstract: In this study, we estimate the impact of the 2004-2012 energy and mining boom on the real effective exchange rate in Colombia and the sectoral composition of its economy. To this end, we introduce the new “extended Dutch Disease” concept, according to which a currency appreciation may not only occur due to traditional “spending” and “relocation” effects but also due to exports and massive inflows of external capital that finances the booming sector. The empirical results indicate that Colombia experienced an overvaluation of its real exchange rate, which in turn negatively affected the competitiveness of its manufacturing and agricultural sector.
    Keywords: Dutch Disease; real effective exchange rate; capital flows; de-industrialization; Latin America; Colombia
    JEL: F4 O13 O14 O54
    Date: 2013–11–12
  8. By: Gros, Daniel
    Abstract: The EMS crisis of the 1990s illustrated the importance of a lack of confidence in price or exchange rate stability, whereas the present crisis illustrates the importance of a lack of confidence in fiscal sustainability. Theoretically the difference between the two should be minor since, in terms of the real return to an investor, the loss of purchasing power can be the same when inflation is unexpectedly high, or when the nominal value of government debt is cut in a formal default. Experience has shown, however, that expropriation via a formal default is much more disruptive than via inflation. The paper starts by providing a brief review of the EMS crisis, emphasising that the most interesting period might be the ‘post-EMS’ crisis of 1993-95. It then reviews in section 2 the crisis factors, comparing the EMS crisis to today’s euro crisis. Section 3 outlines the main analytical issue, namely the potential instability of high public debt within and outside a monetary union. Section 4 then compares the pressure on public finance coming from the crises for the case of Italy. Section 5 uses data on ‘foreign currency’ debt to disentangle expectations of devaluation/inflation from expectations of default. Section 6 concludes.
    Date: 2014–03
  9. By: Jakob Schwab (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)
    Abstract: FDI is generally attributed to have positive impact for developing countries. In contrast, this paper shows that foreign capital inflows may cause an economy to be stuck in a middle-income trap. Introducing a simple capital market imperfection into a standard neoclassical (open-economy) model of growth, I show that FDI crowds out domestic investment when countries are still growing. If profitable investments are pursued by foreign capital owners, this does reduce chances for domestic entrepreneurs that they would have otherwise been able to take, by means of economy-wide savings. The long term losses due to the crowding-out effect occur despite the short-term gains that sudden capital inflows entail, as in static models. At the same time, savings that are not invested leave the country in turn, generating reverse capital flows.
    Keywords: FDI, financial market globalization, welfare effects, open-economy growth, middle income trap, two-way capital flows
    JEL: F21 F43 F54 O16
    Date: 2014–02–21
  10. By: Debowicz, Dario; Saeed, Wajiha
    Abstract: Recent findings in the growth literature suggest that developing countries need to keep a devalued exchange rate to stimulate their economic growth. Building on these findings, we econometrically evaluate to what ex-tent the real exchange rate of Pakistan has been aligned with its economic fundamentals, and find that the Pa-kistan rupee has been significantly and systematically overvalued during the last years. We then simulate the general equilibrium effects of an eventual re-alignment of the real exchange rate with economic fundamen-tals, and find not only an expected increase in the relative size of the tradable sector - where productivity in-creases tend to be faster – but also an associated improvement in the income of the poorest groups.
    Keywords: economic growth, exchange rate, trade, Markets, Computable General Equilibrium (CGE) model,
    Date: 2014

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