nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2014‒08‒20
seventeen papers chosen by
Martin Berka
University of Auckland

  1. Japan's Exorbitant Privilege By Kenneth Rogoff; Takeshi Tashiro
  2. Real Financial Market Exchange Rates and Capital Flows By Maria Gelman; Axel Jochem; Stefan Reitz; Mark P. Taylor
  3. The Rise of the “Redback†and the People’s Republic of China’s Capital Account Liberalization : An Empirical Analysis of the Determinants of Invoicing Currencies By Hiro Ito; Menzie Chinn
  4. Indebtedness and macroeconomic imbalances in a monetary-union DSGE model By Florina-Cristina Badarau; Florence Huart; Ibrahima Sangaré
  5. A Simple General Equilibrium Model of Large Excess Reserves By Ennis, Huberto M.
  6. The Power of International Reserves: the impossible trinity becomes possible By Layal Mansour
  7. Progress Towards External Adjustment in the Euro Area Periphery and the Baltics By Joong Shik Kang; Jay C. Shambaugh
  8. Increase in Home Bias and the Eurozone Sovereign Debt Crisis By Camille Cornand; Pauline Gandré; Céline Gimet
  9. Preference Shocks, International Frictions, and International Business Cycles By Hideaki Hirata
  10. Credit Growth, Current Account and Financial Depth By M. Fatih Ekinci; F. Pinar Erdem; Zübeyir Kilinc
  11. Gravity model of trade flows between European Union countries in the era of globalization By Natalia Drzewoszewska; Michal Bernard Pietrzak; Justyna Wilk; Stanislaw Matusik
  12. Natural Resources, Decentralization, and Risk Sharing: Can resource booms unify nations? By Fidel Perez-Sebastian; Ohad Raveh
  13. US Long Term Interest Rates and Capital Flows to Emerging Economies By Eduardo Olaberria
  14. The Euro effects on intermediate and final exports. By Lavinia Rotili
  15. Quantifying Informational Linkages in a Global Model of Currency Spot Markets By Matthew Greenwood-Nimmo; Viet Hoang Nguyen; Yongcheol Shin
  16. Optimal Monetary Responses to Oil Discoveries By Samuel Wills
  17. 'Sudden Floods, Macroprudential Regulation and Stability in an Open Economy' By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva

  1. By: Kenneth Rogoff; Takeshi Tashiro
    Date: 2014–01
  2. By: Maria Gelman; Axel Jochem; Stefan Reitz; Mark P. Taylor
    Abstract: Foreign exchange rates, asset prices and capital movements are expected to be closely related to each other as international capital markets become more and more integrated. This paper provides new empirical evidence from an index of exchange-rate adjusted cross-country asset price ratios, which may be interpreted as a real effective financial exchange rate. The integrated stock-flow approach reveals that a county’s real effective financial exchange rate is co-integrated with international investors’ net foreign holding of its assets. The associated error correction equations have useful interpretations against the backdrop of uncovered return parity and investor portfolio rebalancing behavior
    Keywords: Real Effective Exchange Rate, Capital Flows, Financial Markets
    JEL: F31 G15 E58
    Date: 2014–07
  3. By: Hiro Ito (Asian Development Bank Institute (ADBI)); Menzie Chinn
    Abstract: We investigate the determinants of currency choice for trade invoicing in a cross-country context while focusing on the link between capital account liberalization and its impact on the use of the renminbi (RMB). We find that while countries with more developed financial markets tend to invoice less in the US dollar, countries with more open capital accounts tend to invoice in either the euro or their home currency. These results indicate that financial development and financial openness are among the keys to challenging the US dollar dominance in general, and to internationalizing the RMB for the People’s Republic of China (PRC). Our model also suggests that the share of the RMB in export invoicing should have been higher than the actually observed share of less than 10%. The underperformance of RMB export invoicing can be attributed to the inertia in the choice of currency for trade invoicing; once a currency is used for trade invoicing or settlements, it becomes difficult for traders to switch from one currency to another. This same phenomenon was also observed in the cases of the Japanese yen and the euro at their inceptions as international currencies. Our model predicts that the share of RMB invoicing for the PRC’s exports will rise to above 25% in 2015 and above 30% in 2018, whether or not the PRC implements drastic financial liberalization. As the near future path of RMB use is also expected to be inertial, these forecasts are probably at the upper end of the actual path of RMB export invoicing.
    Keywords: Capital account liberalization, renminbi (RMB), PRC, export invoicing currency
    JEL: F32 F41
    Date: 2014–04
  4. By: Florina-Cristina Badarau (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954); Florence Huart (EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université Lille I - Sciences et technologies - Université Lille II - Droit et santé - Université Lille III - Sciences humaines et sociales - PRES Université Lille Nord de France); Ibrahima Sangaré (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - Université Montesquieu - Bordeaux IV : EA2954)
    Abstract: We build a two-country open-economy monetary union DSGE model in order to explain some macroeconomic imbalances in the euro area. We fo cus on the role of cyclic al behaviour of public spending and sovereign risk premium. Pro-cyclical primary public expenditures in one country do not lead to higher interest rates on domestic public bonds in the short term as long as output growth helps financing public debt. Spillover effects on th e other country can be positive on output as long as a real effective depreciation of the common currency leads to higher exports to the rest of the world.
    Keywords: macroeconomic divergences ; euro area ; DSGE ; risk premium ; pro-cyclical fiscal policy ; spillover effects
    Date: 2013
  5. By: Ennis, Huberto M. (Federal Reserve Bank of Richmond)
    Abstract: I study a non-stochastic, perfect foresight, general equilibrium model with a banking system that may hold large excess reserves when the central bank pays interest on reserves. The banking system also faces a capital constraint that may or may not be binding. When the rate of interest on reserves equals the market rate, if the quantity of reserves is large and bank capital is not scarce, the price level is indeterminate. However, for a large enough level of reserves, the bank capital constraint becomes binding and the price level moves one to one with the quantity of reserves.
    JEL: G21
    Date: 2014–08–06
  6. By: Layal Mansour (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France)
    Abstract: This aim of the present paper is to measure first, the degree of trilemma indexes: exchange rate stability, monetary independence capital account openness while taking into account the increase of hording IR ratio over GDP, over External Debt and over Short Term External Debt. The evolution of the trilemma indexes shows that countries applying de facto flexible Exchange Rate Regime (ERR) take advantage of the IR and become able to adopt a managed ERR that consist of achieving the three trilemma indexes simultaneously without renouncing to anyone of them. We found that different IR ratio could have different interpretations and different directions of monetary policies, where external debt should be taken into consideration in such study while using the IR. As for country that is applying a de facto fixed exchange rate regime, the IR (different ratio) do not play any role in changing the patter of the Mundell trilemma and do not intervene in monetary authority policies. This paper treats as well the normative aspects of the trilemma, relating the policy choices to macroeconomic outcomes such as the volatility of output growth. We found different results from country to another, while taking different ratios of measuring IR, concluding that the impact of IR on the output volatility could change due to the level of external debt and adopted exchange rate regime.
    Keywords: Monetary policy, International Reserve, External Debts, Impossible Trinity, Managed Exchange Rate, Quadrilemma, Output Volatilily
    JEL: E52 E58 F31 F34
    Date: 2014
  7. By: Joong Shik Kang; Jay C. Shambaugh
    Abstract: The euro area periphery countries and the Baltic countries, which had large current account deficits in the run-up to the crisis, needed adjustment of relative prices to achieve both internal and external balances. Thus far, tangible progress has been made through lower wages and/or higher productivity relative to trading partners (“internal devaluationâ€), which contributed to narrowing current account deficits and shifting output towards the tradables sector. While some early adjusters cut wages more rapidly followed by productivity improvement, others have only slowly improved productivity largely through labor shedding. This adjustment for most countries has come along with a substantial recession as the unit labor cost improvement has largely come from falling employment and much of the current account improvement from import compression. Going forward, these countries still need to generate growing tradables sector employment and to continue adjustment to prevent imbalances from returning as output gaps close.
    Date: 2014–07–22
  8. By: Camille Cornand (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Pauline Gandré (Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France); Céline Gimet (, Institute of Political Studies, CHERPA, EA 4261, Aix-en-Provence, France and GATE Lyon Saint-Etienne, Ecully, F-69130, France)
    Abstract: One of the most striking consequences of the recent episode of sovereign debt market stress in the Eurozone has been the increase in the share of public debt held by the domestic sector in fragile economies. First, we identify the shocks that explain most of the variation in this share in an S-VAR model on a sample of 7 Eurozone countries between 2007 and 2012. Home bias in sovereign debt responds positively to fundamentals and expectations shocks but we find no evidence that the increase in home bias is destabilizing per se. Second, we theoretically model the impact of the previous shocks in a second-generation model of crisis with endogenous home bias in sovereign debt. We derive conditions under which a higher home bias is associated with a change in the government’s decision. Finally, we discuss which case of the model best applies to the distinct countries in our sample during the recent sovereign debt crisis in the Eurozone.
    Keywords: Eurozone, Sovereign debt crises, Home bias, Bayesian panel S-VAR, Second-generation model
    JEL: E4 E5 F3 G15
    Date: 2014
  9. By: Hideaki Hirata
    Abstract: AbstractReplicating the degree of cross-country comovements of macroeconomic aggregates, dynamics of prices and quantities of international trade, and the behavior of consumption and labor remains an important challenge in international business cycle literature. This paper incorporates preference shocks into a standard two-country model in which there exist international frictions, such as costs of transportation and restrictions to international asset trade. Country-specific preference shocks that generate fluctuations in each country's consumption and labor solve the puzzles, except for the discrepancy between theory and data regarding international trade variables. The presence or absence of international frictions plays a limited role in solving the puzzles.
    Keywords: Comovement; International Business Cycles; International frictions; Preference shocks
  10. By: M. Fatih Ekinci; F. Pinar Erdem; Zübeyir Kilinc
    Abstract: Exploring the determinants and dynamics of the current account balance is one of the priorities of academic literature and policy circles. Although the effects of structural variables are deeply analyzed, a lesser attention has been paid to the impact of financial variables. Drawing on standard empirical current account models and with a large sample of industrial and developing countries, we report a significant deterioration in the current account balance in case of an increase in the credit growth. Moreover, we find that this link is substantially stronger for the developing ones motivating a closer examination. Therefore, we further advance our analysis and show that credit growth causes a stronger impact on the current account balance for lower levels of financial depth. In other words, at the early stages of financial development, acceleration in the credit growth might cause a larger deterioration in the current account balance; thus, it might be suggested that monetary policy and macro-prudential measures aimed at preventing financial excess might be more effective to reduce the external imbalances at the early stages of financial deepening.
    Keywords: Credit Growth, Current Account Balance, Developing Countries, Financial Depth, Financial Excess, Global Imbalances, and Panel Data
    JEL: F31 F32 F37 F41
    Date: 2014
  11. By: Natalia Drzewoszewska (Nicolaus Copernicus University, Poland); Michal Bernard Pietrzak (Nicolaus Copernicus University, Poland); Justyna Wilk (Wroclaw University of Economics, Poland); Stanislaw Matusik (Wroclaw University of Economics, Poland)
    Abstract: The objective of the paper is to present the impact of globalization conditions on trade flows between states. These determinants were considered as alternative factors for the physical distance between countries in the gravity model performed by Tinbergen (1962). In the traditional gravity model a value of trade exchange between any of two countries is directly proportional to the product of their GNP and inversely proportional to the distance between them. In the current global economy geographical distance between regions is not identified as a factor of preventing a trade exchange; therefore the distance measure in gravity model may be interpreted as an economic dissimilarity of cooperating countries. In the paper the international trade flows between EU members in the period of 1999-2010 were examined. Panel gravity models presented in the literature prove that the globalization factors, apart from a geographical distance, perform a significant role for increasing international trade. The impact of improving transport infrastructure was confirmed in the study.
    Keywords: international trade, European Union, globalization, gravity model of trade flows, panel model
    JEL: C33 F14
    Date: 2013–05
  12. By: Fidel Perez-Sebastian; Ohad Raveh
    Abstract: Previous studies imply that a positive regional fiscal shock, such as a resource boom, strengthens the desire for separation. In this paper we present a new and opposite perspective. We construct a model of endogenous fiscal decentralization that builds on two key notions: a trade-off between risk sharing and heterogeneoity, and a positive association between resource booms and risk. The model shows that a resource windfall causes the nation to centralize as a mechanism to share risk. In addition, we provide cross country empirical evidence for the main hypotheses. Specifically, we find that resource booms: (i) decrease the level of fiscal decentralization, primarily through the risk sharing channel, and (ii) have no effect on political decentralization.
    Keywords: Natural Resources, decentralization, risk sharing
    JEL: H77 Q33
    Date: 2014
  13. By: Eduardo Olaberria
    Abstract: Following Chairman Ben Bernanke’s comments before Congress that the FOMC may ‘take a step down in the pace of asset purchases if economic improvement appears to be sustained’, US 10-year interest rates picked up sharply and gross capital flows to emerging market economies (EMEs) reversed. These events raised concerns that further increases in US interest rates could trigger sharp changes of capital flows that would be followed by financial crises in EMEs. To assess this possibility, this paper studies the association between US long term interest rates and cycles of capital flows to EMEs. It finds that, indeed, cycles in capital flows to EMEs are linked to global conditions, including global risk aversion and long term interest rates in the United States. In particular, higher US long term interest rates are associated with lower levels of gross capital flows to EMEs, and to a higher probability of observing sharp reversals in those flows. Episodes of net capital inflows, on the other hand, are mostly associated with domestic macroeconomic conditions. In particular, economies with relatively low levels of gross outflows, with a high ratio of short-term debt to international reserves or with weak domestic fundamentals are more vulnerable to the risk of a classic sudden stop à la Calvo. This Working Paper relates to the OECD Economic Survey of the United States 2014 ( htm) Taux d'intérêt à long-terme des États-Unis et flux de capitaux vers les pays émergents Après les commentaires de Ben Bernanke devant le Congrès que le FOMC pourrait "ralentir dans le rythme des achats d'actifs si l'amélioration économique semble se maintenir», les taux d'intérêt américains à 10 ans ont fortement remontés et les flux de capital brut vers les économies émergentes (EME) se sont inversés. Ces événements ont soulevé des préoccupations que de nouvelles hausses des taux d'intérêt américains pourraient déclencher des changements brusques de flux de capitaux qui seraient suivies par des crises financières dans les pays émergents. Pour évaluer cette possibilité, ce document étudie l'association entre les taux d'intérêt à long terme des États-Unis et les cycles de flux de capitaux vers les pays émergents. Il constate que, en effet, les cycles des flux de capitaux vers des pays émergents sont liés à la conjoncture mondiale, y compris l'aversion au risque global et les taux d'intérêt à long terme aux États-Unis. En particulier, la hausse des taux d'intérêt à long terme américains sont associés à des niveaux plus bas de capital flux bruts de pays émergents, et à une plus grande probabilité d'observer des inversions brutales des flux de capitaux. Cependant, cette association ne vaut que pour les flux de capitaux mesurées en termes bruts. En outre, l’étude ne trouve aucune preuve d'un lien entre les taux d'intérêt à long terme des États-Unis et les flux de capitaux, mesurée en termes nets. Les principaux facteurs associés aux flux nets de capitaux sont les conditions macro-économiques nationales. Ce Document de travail se rapporte à l’Étude économique de l’OCDE des Etats-Unis 2014 ( tm).
    Keywords: capital inflows, asset prices, exchange rate regimes, sudden stops, interest rate, taux d'intérêt, prix d’actifs, déséquilibres financiers, régime de taux de change, flux de capitaux
    JEL: E32 F32 F41 G10 G12 G15
    Date: 2014–07–24
  14. By: Lavinia Rotili (Sapienza University of Rome)
    Abstract: This paper studies the euro effects on intermediate and final exports taking advantage of the world input-output dataset (WIOD). The originality of this empirical analysis is that it combines one of the most analyzed topics in international economics, the euro trade effects, with the theme of supply chain trade. The main findings are the following: i) the euro has positively affected Eurozone trade with a larger effect on intermediate flows relative to final exports; ii) the intra-area euro effect becomes either negative or not statistically significant when switching from a small sample of advanced economies to a larger group of emerging and developing economies. The paper provides some evidence that the heterogeneity of the euro effects between the small and the large sample can be explained by a missing variable related to the increasing relevance of supply chain connections between European countries.
    Keywords: Euro, supply chain, trade, gravity equation.
    JEL: F1 F15 F2 F33
    Date: 2014–07
  15. By: Matthew Greenwood-Nimmo (Department of Economics, The University of Melbourne); Viet Hoang Nguyen (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Yongcheol Shin (Department of Economic and Related Studies, University of York)
    Abstract: We develop a global vector autoregressive model to study the transmission of information between currency spot markets. Our model accounts for both simultaneous and dynamic interactions between exchange rates and order flows using historical data from the Reuters Dealing 2000–1 platform for the period May–August 1996. By analysing the network topography of the system, we find that currency markets are intricately linked and that the Deutsche Mark and the Yen exert a leading influence over the European currencies. Furthermore, using a novel technique we find that the Yen and Sterling act as safe haven currencies.
    Keywords: Exchange rates, order flows, global VAR, connectedness and spillovers, safe haven currency
    JEL: C32 C51 F31 G15
    Date: 2013–07
  16. By: Samuel Wills (Oxford Centre for the Analysis of Resource Rich Economies (OxCarre), Department of Economics, University of Oxford; Centre for Macroeconomics (CFM); Centre for Applied Macroeconomic Analysis, Australian National University.; Centre for Macroeconomics (CFM))
    Abstract: This paper studies how monetary policy should respond to news about an oil discovery, using a workhorse New Keynesian model. Good news about future production can create a recession today under exchange rate pegs and a simple Taylor rule, as seen in practice. This is explained by forward-looking inflation. Recession is avoided by a Taylor rule that accommodates changes in the natural level of output, which closely approximates optimal policy. Central banks have an incentive to exploit oil revenues by appreciating the terms of trade, creating “Dutch disease” and a deflationary bias which is overcome by committing to future policy.
    Keywords: Natural resources, oil, optimal monetary policy, small open economy, news shock
    JEL: E52 E62 F41 O13 Q30 Q33
    Date: 2012–10
  17. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: A dynamic stochastic model of a small open economy with a two-level banking intermediation structure, a risk-sensitive regulatory capital regime, and imperfect capital mobility is developed. Firms borrow from a domestic bank and the bank borrows on world capital markets, in both cases subject to a premium. A sudden flood in capital flows generates an expansion in credit and activity, as well as asset price pressures. Countercyclical capital regulation, in the form of a Basel III-type rule based on credit gaps, is effective at promoting macro stability (defined in terms of the volatility of a weighted average of inflation and the output gap) and financial stability (defined in terms of three measures based on asset prices, the credit-to-GDP ratio, and the ratio of bank foreign borrowing to GDP). However, because the gain in terms of reduced economic volatility exhibit diminishing returns, in practice a countercyclical regulatory capital rule may need to be supplemented by other, more targeted macroprudential instruments when shocks are large and persistent.
    Date: 2014

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