nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2014‒08‒02
four papers chosen by
Martin Berka
University of Auckland

  1. Foreign exchange reserve diversification and the "exorbitant privilege" By Pietro Cova; Patrizio Pagano; Massimiliano Pisani
  2. Cross-Border Capital Flows into Real Estate By Baum, Andrew E.; Fuerst, Franz; Milcheva, Stanimira
  3. The European Monetary Union and Imbalances: Is it an Anticipation Story ? By D. Siena
  4. The Significance of Capital Flows into United Kingdom Commercial Property Markets By Newell, Graeme; McGreal, Stanley

  1. By: Pietro Cova (Bank of Italy); Patrizio Pagano (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We assess the global macroeconomic implications of different strategies of official reserve management by developing a large scale new-Keynesian dynamic general equilibrium model of the world economy, calibrated on the euro area, the United States, China, Japan and the rest of the world. An increase in global demand for euros would boost euro-area aggregate demand because of the reduction in euro-area interest rates (the main benefit associated with the “privilege” of being a global currency). If the higher demand for euros is associated with lower demand for US dollars, then US economic activity falls because of higher interest rates, which depress domestic aggregate demand, while the external balance improves; countries accumulating reserves continue to run a trade surplus, as exports to the euro-area increase. We also compute welfare gains/costs for all economies.
    Keywords: global imbalances, global currency, dynamic general equilibrium modelling
    JEL: F33 F41 C51 E52
    Date: 2014–07
  2. By: Baum, Andrew E.; Fuerst, Franz; Milcheva, Stanimira
    Abstract: Cross-border capital flows into real estate are marked by sharp inequalities among countries. Hypothetically, each country should receive capital flows commensurate with the size of its respective economy or, more accurately, the total size of its investible real estate market. In contrast to this hypothesis, the observed capital flows deviate substantially from this 'naive equilibrium' not only in the short run but persistently throughout economic cycles and long-run economic development trajectories. One of the possible explanations for the long-term aberration from expected values are institutional barriers encompassing a broad range of economic, legal and political risks as well as more intangible cultural factors. This study sets out to empirically test for the existence and significance of these barriers by investigating a unique database comprising real estate flow data and a large number of other economic and property market indicators.Following the above observation, we test for deviations of observed capital flows from expected capital flows using a regression framework. Given that cross-border real estate investment activity in each country should be directly proportional to the size of the investible or institutional-grade stock, and observed activity will be different from hypothesised levels, we investigate the determinants of any deviations we find, focussing on economic development, market transparency, rule of law and cultural factors. Based on earlier empirical studies, we expect that excess cross-border capital flows are driven by high GDP per capita, high real estate market transparency and low barriers to market entry. We expect that all countries 'punching above their weight' achieve high scores on all these factors and vice versa.
    Date: 2013
  3. By: D. Siena
    Abstract: This paper investigates the sources of current account imbalances accumulated within the European Monetary Union before the Great Recession. First, it documents that starting in 1996, before the actual introduction of the euro, countries in the euro area periphery experienced increasing current account deficits, appreciating real exchange rates and output growing faster than trends. Then, it develops and estimates a small open economy DSGE model which encompasses a variety of possible unanticipated and anticipated shocks. The main finding is that anticipated reductions in international borrowing costs can explain the observed evidence while productivity increases (anticipated or not) cannot: falling borrowing costs implies appreciation while increasing productivity implies depreciation. Quantitatively, anticipated shocks account for one third of output, half of real exchange rate and two third of current account fluctuations. In particular, anticipated fluctuations in international borrowing costs explain respectively 30 and 40 percent of current account and real exchange rate movements.
    Keywords: Current Account, Business cycles, Anticipated Shocks.
    JEL: E32 F32 F41
    Date: 2014
  4. By: Newell, Graeme; McGreal, Stanley
    Abstract: Global capital flows into property markets accounted for over $800 billion in 2011. Of these capital flows, the UK is an active, major property market in a local, European and global sense. Using the Real Capital Analytics database, a detailed analysis of these capital flows is carried out for a fuller understanding of the dynamics of these capital flows to UK commercial property over 2007-2012. A range of strategic property investment issues are assessed, including the role of cross-border capital flows and investor type to UK commercial property investment. The significance of these UK commercial property capital flows is also assessed in a European and international context.
    Date: 2013

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