nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2014‒10‒13
eight papers chosen by
Martin Berka
University of Auckland

  1. Capital Flows During Quantitative Easing and Aftermath: Experiences of Asian Countries By Park, Donghyun; Ramayandi, Arief; Shin, Kwanho
  2. Real Exchange Rate Dynamics: Evidence from India By Natalie D. Hegwood; Hiranya K. Nath
  3. A global value chain analysis of macroeconomic imbalances in Europe By Stefan Ederer; Peter Reschenhofer
  4. External constraint and economic growth in Italy: 1861-2000 By Barbara Pistoresi; Alberto Rinaldi
  5. Finance, Foreign (Direct) Investment and Dutch Disease: The Case of Colombia By Alberto Botta; Antoine Godin; Marco Missaglia
  6. Network Effects in Currency Internationalisation: Insights from BIS Triennial Surveys and Implications for the Renminbi By Dong He; Xiangrong Yu
  7. Connecting the Markets? Recent Evidence on China's Capital Account Liberalization By Chan, Mark K.; Kwok, Simon
  8. Currency Mismatch: New Database and Indicators for Latin America and the Caribbean By Martín Tobal

  1. By: Park, Donghyun (Asian Development Bank); Ramayandi, Arief (Asian Development Bank); Shin, Kwanho (Korea University)
    Abstract: A potentially important side effect of quantitative easing(QE) by the United States (US) Federal Reserve System (the Fed) is the expansion of capital flows into developing countries. As a result, there is widespread concern that QE tapering may trigger financial instability in those countries. The central objective of our paper is to empirically investigate this important issue by (1)examining the effect of QE on capital flows into developing Asia, and (2) analyzing the different factors which influence the effect of QE tapering on financial instability in order to identify the most significant factors. We find that QE1 had a bigger impact on capital flows than QE2 and QE3, and credit expansion and capital inflows magnified the effect of QE tapering on financial instability. While there is no evidence that macroprudential policies directly reduced the effect of QE tapering, they can nevertheless be useful preemptive measures.
    Keywords: Asia; capital flows; financial stability; global financial crisis; macroprudential measures; quantitative easing; tapering
    JEL: F32 F44 G01
    Date: 2014–09–01
  2. By: Natalie D. Hegwood (Department of Economics and International Business, Sam Houston State University); Hiranya K. Nath (Department of Economics and International Business, Sam Houston State University)
    Abstract: This paper examines the dynamic behavior of bilateral real exchange rates between India and 16 of its trading partner countries using annual data from 1960 to 2010. We use panel unit root test procedures, with and without structural breaks, to investigate if there is any evidence in India’s bilateral real exchange rates data to support the Purchasing Power Parity (PPP) hypothesis. While the unit root null is rejected in all three cases - with no structural break, one structural break, and two structural breaks - at least at the 5% level of significance, the evidence is much stronger in the cases with structural breaks. Furthermore, we correct for small sample bias and time aggregation bias to obtain unbiased estimates of half-life. However, in the case with no structural break, although we find evidence of mean reversion, an unbiased half-life estimate of about 8 years implies an extremely slow speed of mean-reversion. When we consider the cases with structural breaks, the unbiased half-life estimates are greatly reduced. With two structural breaks, the unbiased half-life estimate is about one year.
    Date: 2014–09
  3. By: Stefan Ederer; Peter Reschenhofer
    Abstract: This paper assesses whether or to what extent the macroeconomic imbalances, which emerged in the ‘North’ and ‘South’ of the European Monetary Union before the financial and economic crisis of 2008/09, are symmetric. Firstly, we calculate bilateral exports and imports between all EU member states, applying the concept of ’trade in value added’, and discuss their role in the emergence of trade surpluses and deficits. Secondly, we decompose the changes in the trade balances into the effects of shifts in final demand on the one side and changes in the global production patterns on the other. Thirdly, we quantify to what extent an increase in domestic demand in the North and a decrease in the South would support the elimination of these imbalances. Finally, we calculate a hypothetical scenario in which final demand would expand similarly in all EMU member states. Thereby we evaluate how the macroeconomic imbalances would have evolved in the case of more balanced demand developments in the EMU in the past, as well as how adjustment could possibly happen in the future.
    Keywords: European Monetary Union, macroeconomic imbalances, global value chains, input-output analysis
    JEL: C67 E60 F14 F15
    Date: 2014–09
  4. By: Barbara Pistoresi; Alberto Rinaldi
    Abstract: This paper analyzes the relationship between external constraint and economic growth in Italy from 1861 to 2000. In particular, it investigates whether the persistent current account deficits in the 1861-1913 years constrained output growth. To this aim it studies the genesis of the current account fluctuations, that is whether these were generated by the dynamics of the GDP or by variations in capital inflows. Using integration and co-integration analysis and the Granger causality testing, it shows that in the long run Italy’s external position is sustainable: the Italian economy seems to have used the external deficits (surpluses) to smooth its aggregate consumption. Moreover in the shorter 1861-1913 sub-period, the persistent current account deficits, financed by foreign capital inflows, do not seem to have curbed economic growth.
    Keywords: Current account, economic growth, Italy, Granger causality
    JEL: F43 O11 N1 N7
    Date: 2013–05
  5. By: Alberto Botta (Department of Political and Social Sciences, University of Pavia and Department of Law and Economics, Mediterranean University of Reggio Calabria); Antoine Godin (University of Limerick); Marco Missaglia (Universidad Nacional de Colombia)
    Abstract: In the recent years the Colombian economy grew relatively rapidly, but it was a biased growth. The energy sector (the locomotora minero-energetica, to use the rhetorical expression of President Juan Manuel Santos) grew much faster than the rest of the economy. The manufacturing sector registered a negative rate of growth. These are the symptoms of the well-known “Dutch disease” and the case of Colombia has been already widely analyzed in the literature. In this paper, we investigate a different reason why an economy may suffer from an expansion of the mining sector. In particular, we want to shed some light on the financial side of the economy and its links with a resource-boom. We can observe several unsustainable dynamics: (i) a traditional Dutch Disease due to a large increase in mining exports and a significant exchange rate appreciation, (ii) a massive increase in foreign direct investment (FDI), particularly in the mining sector (iii) a rather passive monetary policy, aiming at increasing purchasing power via exchange rate appreciation, (iv) recently, a large dividends distribution from Colombia to the rest of the world and the accumulation of mounting financial liabilities. The paper shows why these dynamics may be interpreted as a case of financial Dutch disease and constitute a potential danger for the stability of the Colombian economy. Some policy recommendations are discussed.
    Keywords: Colombia, Dutch Disease, Balance of Payments
    JEL: F40 F21 F32
    Date: 2014–09
  6. By: Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Xiangrong Yu (Hong Kong Institute for Monetary Research)
    Abstract: The dominance of the US dollar in foreign exchange (FX) markets appears to reflect very strong network effects in the use of international currencies. What we observe today is the result of a slow-moving process that has witnessed a switch from the dominance of the pound sterling to the US dollar, perhaps during the interwar period in the early part of the 20th century. This paper presents a discrete choice model of FX trading that explicitly allows for this type of critical transitions in order to understand the dynamics of currency turnover in FX markets. We estimate the model using the Bank for International Settlements' data from triennial surveys of FX markets and also examine the factors that could potentially shift the dynamic path and lead to an earlier critical transition. We then discuss the implications for the renminbi, a budding international currency. If the renminbi were to become a dominant international currency, it would require China to attain a much higher level of financial development and openness. It is important to note that our model does not address the possibility of a gradual weakening of the network effects in FX markets due to, for example, the advancement of trading technologies, which would allow the co-existence of a few equally dominant major currencies.
    Keywords: Foreign Exchange, International Currency, Network Effects, Financial Development, Renminbi, Critical Transition
    JEL: F31 F33 G12 O53
    Date: 2014–09
  7. By: Chan, Mark K.; Kwok, Simon
    Abstract: We use longitudinal data on stock prices of cross-listed firms to investigate abnormal systematic changes in the price disparity of cross-listed stocks between the Hong Kong and Shanghai exchanges from 2002 to 2014. We identify a liberalization policy that generated an unprecedented abrupt convergence in price disparity. The policy, known as Shanghai-Hong Kong Stock Connect, serves to lower the capital control barrier of cross-market investment between both markets. In a quasi-experimental setup, we find that the announcement of the policy caused the price disparity between cross-listed shares in both markets to reduce by one-sixth. The magnitude of the effect was the largest since 2002, and was seven standard deviations away from the historical average. We also find that the convergence was asymmetric, and the convergence was driven by an upward revaluation of share prices.
    Keywords: Capital account liberalization, Chinese financial market, law of one price, cross-listed shares, natural experiment
    Date: 2014–09
  8. By: Martín Tobal (Centro de Estudios Monetarios Latinoamericanos)
    Abstract: I construct a database on currency mismatch in the private banking sector that offers several advantages over existing data sources. The data are broken down by currency and, therefore, are better suited for calculating currency mismatches than the data based on the residence principle that are used in the literature. The data are comparable at the highest possible level across countries because the collection process is based on accounting manuals. The database is suitable for policy analysis and cross-country comparative studies since the data are collected quarterly, cover a wide range of economies and yield straight-forward measures of the success in implementing prudential policies. Employing the two indicators that I constructed, I show that the degree of currency mismatch differs across exchange rate regimes and is lower in countries that follow de-dollarization policies. I also demonstrate that the banking sector took short foreign currency positions in Latin America and the Caribbean for the first time in two decades beginning in the late 2000s.
    Keywords: currenyc mismatch, partial dollarization, financial stability.
    JEL: F30
    Date: 2013–11

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