nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2014‒07‒28
eleven papers chosen by
Martin Berka
University of Auckland

  1. Fiscal Devaluations By Farhi, Emmanuel; Gopinath, Gita; Itskhoki, Oleg
  2. Trade Adjustment and Productivity in Large Crises By Gopinath, Gita; Neiman, Brent
  3. Labor Mobility in Currency Unions By Ivan Werning; Emmanuel Farhi
  4. A Model of the Twin Ds: Optimal Default and Devaluation By Seunghoon Na; Stephanie Schmitt-Grohé; Martin Uribe; Vivian Z. Yue
  5. Alternatives to Currency Manipulation: What Switzerland, Singapore, and Hong Kong Can Do By Joseph E. Gagnon
  6. Are exporting firms always a good hedge against currency risk? Evidence from Central and Eastern European Countries By M. FRÖMMEL; M. LUETJE
  7. International Banking and Liquidity Risk Transmission: Lessons from Across Countries By Claudia M. Buch; Linda S. Goldberg
  8. Did Purchasing Power Parity Hold in Medieval Europe? By Adrian R. Bell; Chris Brooks; Tony K. Moore
  9. Estimates of Fundamental Equilibrium Exchange Rates, May 2014 By William R. Cline
  10. The role of Institutions in explaining wage determination in the Euro Area: a panel cointegration approach By Mariam Camarero; Gaetano D’Adamo; Cecilio Tamarit
  11. A Surplus of Ambition: Can Europe Rely on Large Primary Surpluses to Solve its Debt Problem? By Barry Eichengreen; Ugo Panizza

  1. By: Farhi, Emmanuel; Gopinath, Gita; Itskhoki, Oleg
    Abstract: We show that even when the exchange rate cannot be devalued, a small set of conventional fiscal instruments can robustly replicate the real allocations attained under a nominal exchange rate devaluation in a dynamic New Keynesian open economy environment. We perform the analysis under alternative pricing assumptions—producer or local currency pricing, along with nominal wage stickiness; under arbitrary degrees of asset market completeness and for general stochastic sequences of devaluations. There are two types of fiscal policies equivalent to an exchange rate devaluation—one, a uniform increase in import tariff and export subsidy, and two, a value-added tax increase and a uniform payroll tax reduction. When the devaluations are anticipated, these policies need to be supplemented with a consumption tax reduction and an income tax increase. These policies are revenue neutral. In certain cases equivalence requires, in addition, a partial default on foreign bond holders. We discuss the issues of implementation of these policies, in particular, under the circumstances of a currency union.
    Date: 2014
  2. By: Gopinath, Gita; Neiman, Brent
    Abstract: We empirically characterize the mechanics of trade adjustment during the Argentine crisis. Though imports collapsed by 70 percent from 2000-2002, the entry and exit of firms or products at the country level played a small role. The within-firm churning of imported inputs, however, played a sizeable role. We build a model of trade in intermediate inputs with heterogeneous firms, fixed import costs, and roundabout production. Import demand is non-homothetic and the implications of an import price shock depend on the full distribution of firm-level adjustments. An import price shock generates a significant decline in productivity.
    Date: 2014
  3. By: Ivan Werning (Massachusetts Institute of Technology); Emmanuel Farhi (Harvard University)
    Abstract: We study the effects of labor mobility within a currency union suffering from nominal rigidities. When the demand shortfall in depressed region is mostly internal, migration may not help regional macroeconomic adjustment. When external demand is also at the root of the problem, migration out of depressed regions may produce a positive spillover for stayers. We consider a planning problem and compare its solution to the equilibrium. We find that the equilibrium is generally constrained inefficient, although the welfare losses may be small if the economy suffers mainly from internal demand imbalances.
    Date: 2014
  4. By: Seunghoon Na; Stephanie Schmitt-Grohé; Martin Uribe; Vivian Z. Yue
    Abstract: This paper characterizes jointly optimal default and exchange-rate policy. The theoretical environment is a small open economy with downward nominal wage rigidity as in Schmitt-Grohé and Uribe (2013) and limited enforcement of international debt contracts as in Eaton and Gersovitz (1981). It is shown that under optimal policy default is accompanied by large devaluations. At the same time, under fixed exchange rates, optimal default takes place in the context of large involuntary unemployment. Fixed- exchange-rate economies are found to be able to support less external debt than economies with optimally floating rates. In addition, the following three analytical results are presented: (1) Real economies with limited enforcement of international debt contracts in the tradition of Eaton and Gersovitz (1981) can be decentralized using capital controls. (2) Real economies in the tradition of Eaton and Gersovitz can be interpreted as the centralized version of models with downward nominal wage rigidity, optimal capital controls, and a full-employment exchange-rate policy. And (3) Full-employment is optimal in an economy with downward nominal wage rigidity, limited enforcement of debt contracts, and optimal capital controls.
    JEL: E52 F31 F34 F41
    Date: 2014–07
  5. By: Joseph E. Gagnon (Peterson Institute for International Economics)
    Abstract: Economists have long decried the efforts of large, advanced economies to manipulate their currencies to boost net exports at their trading partners' expense. But the International Monetary Fund appears to have ignored the beggar-thy-neighbor exchange rate policies of countries with developed, highly open economies. This Policy Brief examines Switzerland, Singapore, and Hong Kong, which have actively kept the value of their currencies low since the 2008–09 global recession. In each case, greater fiscal and especially domestic monetary ease would have achieved similar macroeconomic outcomes with less currency intervention and declining current account surpluses. If such countries had adopted these strategies to increase domestic demand, the global economy would have rebounded faster.
    Date: 2014–05
  6. By: M. FRÖMMEL; M. LUETJE (-)
    Abstract: This paper analyzes the exchange rate exposure of exporting firms in (the so far rarely addressed) largest Eastern European transition economies, i.e. Russia and three EU accession countries (CEEC-3). It also controls for possible effects of different exchange rate regimes. Substantially improving the results from the existing literature we find for more than 80% of firms in our sample a significant exchange rate exposure. However, the magnitude and direction of firms’ exposure depends on the particular exchange rate and clearly differs between Russia and the CEEC-3. We find that share prices increase with a depreciation of the domestic currency and only against the US Dollar in Russia, but decrease with a depreciation and only against the Euro in the CEEC-3. Such substantial differences may result from a differing dominance of exposure channels in the respective economies, such as the countryspecific export structure and foreign debt. Finally, the switch from a pegged to a flexible exchange rate regime appears to be less important for exposure.
    Keywords: Exchange Rate Exposure, Transition Economies, Central and Eastern Europe, International Finance
    JEL: F3 G12 G15
    Date: 2014–02
  7. By: Claudia M. Buch; Linda S. Goldberg
    Abstract: Activities of international banks have been at the core of discussions on the causes and effects of the international financial crisis. Yet we know little about the actual magnitudes and mechanisms for transmission of liquidity shocks through international banks, including the reasons for heterogeneity in transmission across banks. The International Banking Research Network, established in 2012, brings together researchers from around the world with access to micro-level data on individual banks to analyze issues pertaining to global banks. This paper summarizes the common methodology and results of empirical studies conducted in eleven countries to explore liquidity risk transmission. Among the main results is, first, that explanatory power of the empirical model is higher for domestic lending than for international lending. Second, how liquidity risk affects bank lending depends on whether the banks are drawing on official-sector liquidity facilities. Third, liquidity management across global banks can be important for liquidity risk transmission into lending. Fourth, there is substantial heterogeneity in the balance sheet characteristics that affect banks’ responses to liquidity risk. Overall, balance sheet characteristics of banks matter for differentiating their lending responses, mainly in the realm of cross-border lending.
    JEL: F3 F42 G21 G28 G38
    Date: 2014–07
  8. By: Adrian R. Bell (ICMA Centre, Henley Business School, University of Reading); Chris Brooks (ICMA Centre, Henley Business School, University of Reading); Tony K. Moore (ICMA Centre, Henley Business School, University of Reading)
    Abstract: This paper employs a unique, hand-collected dataset of exchange rates for five major currencies (the lira of Barcelona, the pound sterling of England, the pond groot of Flanders, the florin of Florence and the livre tournois of France) to consider whether the law of one price and purchasing power parity held in Europe during the late fourteenth and early fifteenth centuries. Using single series and panel unit root and stationarity tests on ten real exchange rates between 1383 and 1411, we show that the parity relationship held for the pound sterling and some of the Florentine florin series individually and for almost all of the groups that we investigate. Our findings add to the weight of evidence that trading and arbitrage activities stopped currencies deviating permanently from fair values and that the medieval financial markets were well functioning. This supports the results reported in other recent studies which indicate that many elements of modern economic theories can be traced back over 700 years in Europe.
    Keywords: Law of one price, purchasing power parity, medieval markets, historical finance
    JEL: F31 N13 N23
    Date: 2014–01
  9. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: The latest estimates of fundamental equilibrium exchange rates (FEERs) in this semiannual series indicate that the currencies of the United States, the euro area, China, and Japan are approximately at their FEER levels and need no adjustment to reduce excessive external imbalances. The medium-term current account, however, is at the lower bound of the desired range for the United States and at the upper bound for the euro area and China. For Japan, even though a large improvement in the current account remains in the pipeline from the lagged influence of the past sharp depreciation of the yen, higher fuel import costs and export weakness mean the surplus is unlikely to rise above 3 percent of GDP; the new FEER estimate for the yen is therefore significantly lower than before. A familiar list of currencies remain persistently overvalued (New Zealand, Turkey, South Africa, and Brazil) and undervalued (Singapore, Taiwan, Sweden, and Switzerland).
    Date: 2014–05
  10. By: Mariam Camarero (Department of Economics, University Jaume I, Castellón, Spain); Gaetano D’Adamo (Department of Applied Economics II, University of Valencia, Spain); Cecilio Tamarit (Department of Applied Economics II, University of Valencia, Spain)
    Abstract: Over the last 15 years, the evolution of labor costs has been very diverse across EMU countries. Since wages have important second-round effects on prices and competitiveness, and EMU countries do not have the tool of the nominal exchange rate to correct for such imbalances, understanding the determinants of the wage is a matter of increasing concern and debate. We estimate the equilibrium wage equation for the Euro Area over the period 1995-2011 using panel cointegration techniques that allow for cross-section dependence and structural breaks. The results show that the equilibrium wage has a positive relation with productivity and negative relation with unemployment, as expected. We also include institutional variables in our analysis, showing that a more flexible labor market is consistent with long-run wage moderation. Allowing for a regime break, we find that, since 2004, possibly due to increased international competition, wage determination was more strictly related to productivity, and real wage appreciation triggers a drop in the real wage. Furthermore, results point to a wage-moderating role of government intervention and concertation in wage bargaining.
    Keywords: panel cointegration, wage setting, labor market
    JEL: E24 J31 C23
    Date: 2014
  11. By: Barry Eichengreen; Ugo Panizza
    Abstract: IMF forecasts and the EU’s Fiscal Compact foresee Europe’s heavily indebted countries running primary budget surpluses of as much as 5 percent of GDP for as long as 10 years in order to maintain debt sustainability and bring their debt/GDP ratios down to the Compact’s 60 percent target. We show that primary surpluses this large and persistent are rare. In an extensive sample of high- and middle-income countries there are just 3 (nonoverlapping) episodes where countries ran primary surpluses of at least 5 per cent of GDP for 10 years. Analyzing a less restrictive definition of persistent surplus episodes (primary surpluses averaging at least 3 percent of GDP for 5 years), we find that surplus episodes are more likely when growth is strong, when the current account of the balance of payments is in surplus (savings rates are high), when the debt-to-GDP ratio is high (heightening the urgency of fiscal adjustment), and when the governing party controls all houses of parliament or congress (its bargaining position is strong). Left wing governments, strikingly, are more likely to run large, persistent primary surpluses. In advanced countries, proportional representation electoral systems that give rise to encompassing coalitions are associated with surplus episodes. The point estimates do not provide much encouragement for the view that a country like Italy will be able to run a primary budget surplus as large and persistent as officially projected.
    JEL: E0 E6 F0 F34
    Date: 2014–07

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