nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2014‒10‒17
nine papers chosen by
Martin Berka
University of Auckland

  1. What Makes a Commodity Currency? By Dongwon Lee; Yu-chin Chen
  2. The Macroeconomics of a Financial Dutch Disease By Alberto Botta
  3. Imperfect mobility of labor across sectors: a reappraisal of the Balassa-Samuelson effect. By Olivier Cardi; Romain Restout
  4. Inflation Stabilization and Default Risk in a Currency Union By Okano Eiji; Masashige Hamano; Pierre Picard
  5. Explaining exchange rate anomalies in a model with Taylor-rule fundamentals and consistent expectations By Lansing, Kevin J.; Ma, Jun
  6. "Coping with Imbalances in the Euro Area: Policy Alternatives Addressing Divergences and Disparities between Member Countries" By Eckhard Hein; Daniel Detzer
  7. Drivers of Structural Change in Cross-Border Banking since the Global Financial Crisis By Franziska Bremus; Marcel Fratzscher
  8. On the Effectiveness of Exchange Rate Interventions in Emerging Markets By Christian Daude; Eduardo Levy Yeyati; Arne Nagengast
  9. The effectiveness of countercyclical capital requirements and contingent convertible capital: a dual approach to macroeconomic stability By Hylton Hollander

  1. By: Dongwon Lee (Department of Economics, University of California Riverside); Yu-chin Chen (Department of Economics, University of Washington)
    Abstract: The “commodity currency†literature highlights the robust exchange rate response to fluctuations in world commodity prices that occurs for major commodity exporters. The magnitude of this response, however, varies widely among countries. Our panel data analysis using 63 countries for 1980-2010 finds that, in accordance with theory, the long-run cointegrating relationship between the real exchange rate and commodity export prices depends on the nation’s export market structure, monetary policy choices and degree of trade and financial openness. We also show that the commodity price-exchange rate connection is much weaker in the short-run and for a group of oil-exporting countries. Given concerns for the Dutch disease or resource curse, our findings are of particular relevance for monetary policy-making and for globalization strategy in commodity-exporting developing economies.
    Keywords: Real exchange rate; Commodity prices; Panel cointegration; Commodity exports; Exchange rate regime; International reserves
    JEL: C32 C33 F31 F41 O13
    Date: 2014–09
  2. By: Alberto Botta (Department of Political and Social Sciences, University of Pavia and Department of Law and Economics, Mediterranean University of Reggio Calabria)
    Abstract: In this paper we describe the medium-run macroeconomic effects and long-run development consequences of a financial Dutch disease that may takes place in a small developing country with abundant natural resources. The first move of such a peculiar Dutch disease is on financial markets. An initial surge in FDI flows targeting domestic natural resources sets in motion a perverse cycle between exchange rate appreciation and mounting short-term capital flows. Such a spiral easily turns out to give rise to exchange rate volatility, foreign capital reversals, and sharp macroeconomic instability. In the long run, such acute macroeconomic instability as well as overdependence on natural resource exports all dampen the development of non-traditional tradable good sectors and curtail labor productivity dynamics. We advise the introduction of constraints to short-term capital inflows, in the form of taxes on exchange rate-based capital gains, to tame exchange rate/capital flows boom-and-bust cycles. We provide support to a developmentalist monetary policy that targets competitive nominal and real exchange rates in order to favor the process of production and export diversification. Such a policy stand can be particularly effective to counter-act the long-run negative effects of the financial Dutch disease we describe.
    Keywords: Financial Dutch Disease, exchange rate volatility, macroeconomic instability, developmentalist monetary policy
    JEL: O14 F32 O24
    Date: 2014–09
  3. By: Olivier Cardi; Romain Restout
    Abstract: This paper investigates the relative price and relative wage effects of a higher productivity in the traded sector compared with the non traded sector in a two-sector open economy model with imperfect substitutability in hours worked across sectors. The Balassa- Samuelson [1964] model predicts that a rise in the sectoral productivity ratio by 1% raises the relative price of non tradables by 1% while leaving unchanged the non traded wage-traded wage ratio. Applying cointegration methods to a panel of fourteen OECD countries over the period 1970-2007, our estimates show that the relative price rises by only 0.78% and the relative wage falls by 0.27%. While our first set of empirical findings cast doubt on the quantitative predictions of the Balassa-Samuelson model, our second set of evidence highlights the role of imperfect labor mobility: the relative price responds more to a productivity differential between tradables and non tradables while the reaction of the relative wage is more muted in countries with higher intersectoral reallocation of labor. We show that the ability of the two-sector model to account for our evidence quantitatively relies upon two ingredients: i) imperfect mobility of labor across sectors, and ii) physical capital accumulation. Finally, our numerical results reveal that the model predicts the relative price response pretty well, and to a lesser extent the relative wage response.
    Keywords: Relative price of non tradables; Sectoral wages; Productivity growth; Sectoral labor reallocation; Investment.
    JEL: E22 F11 F41 F43
    Date: 2014
  4. By: Okano Eiji (Nagoya City University,); Masashige Hamano (Sophia University); Pierre Picard (University of Luxembourg)
    Abstract: By developing a class of dynamic stochastic general equilibrium models with nominal rigidities and assuming a two-country currency union with sovereign risk, we show that there is not necessarily a trade-off between the prevention of default risk and stabilizing inflation. Under optimal monetary and fiscal policy, comprising a de facto inflation stabilization policy, the tax rate as an optimal fiscal policy tool plays an important role in stabilizing inflation, although not completely because of the distorted steady state. Changes in the tax rate to minimize welfare costs via stabilizing inflation then improve the fiscal surplus, and because of this and the incompletely stabilized inflation, the default rate does not increase as much.
    Keywords: Sovereign Risk; European Crisis; Optimal Monetary Policy; Fiscal Theory of the Price Level; Currency Union
    JEL: E52 E60 F41 F47
    Date: 2014–09
  5. By: Lansing, Kevin J. (Federal Reserve Bank of San Francisco); Ma, Jun (University of Alabama)
    Abstract: We introduce a form of boundedly-rational expectations into a standard asset-pricing model of the exchange rate, where cross-country interest rate differentials are governed by Taylor-type rules. We postulate that agents augment a lagged-information random walk forecast with a term that relates to news about Taylor-rule fundamentals. We solve for a “consistent expectations equilibrium,” in which the coefficient on fundamental news in the agent’s forecast rule is pinned down using the moments of observable data. The forecast errors observed by the agent are close to white noise, making it di¢ cult for the agent to detect any misspecification. We show that the model generates volatility and persistence that is remarkably similar to that observed in monthly bilateral exchange rate data (relative to the U.S.) for Canada, Japan, and the U.K. over the period 1974 to 2012. Moreover, we show that regressions performed on model-generated data can deliver the well-documented forward premium anomaly whereby a high interest rate currency tends to appreciate, thus violating the uncovered interest rate parity condition.
    JEL: D83 D84 E44 F31 G17
    Date: 2014–09
  6. By: Eckhard Hein; Daniel Detzer
    Abstract: In this paper we outline alternative policy recommendations addressing the problems of differential inflation, divergence in competitiveness, and associated current account imbalances within the euro area. The major purpose of these alternative policy proposals is to generate sustainably high demand and output growth in the euro area as a whole, providing high levels of noninflationary employment, as well as preventing "export-led mercantilist" and "debt-led consumption boom" types of development, both within the euro area and with respect to the role of the euro area in the world economy. We provide a basic framework in order to systematically address the related issues, making use of Anthony Thirlwall's model of a "balance-of-payments-constrained growth rate." Based on this framework, we outline the required stance for alternative economic policies and then discuss the implications for alternative monetary, wage/incomes, and fiscal policies in the euro area as a whole, as well as the consequences for structural and regional policies in the euro-area periphery in particular.
    Keywords: Competitiveness; Current Account Imbalances; Differential Inflation Rates; Euro Area Economic Policies
    JEL: E61 E62 E63 E64
    Date: 2014–09
  7. By: Franziska Bremus; Marcel Fratzscher
    Abstract: The paper analyzes the effects of changes to regulatory policy and to monetary policy on cross-border bank lending since the global financial crisis. Cross-border bank lending has decreased, and the home bias in the credit portfolio of banks has risen sharply, especially among banks in the euro area. Our results suggest that expansionary monetary policy in the source countries - as measured by the change in reserves held at central banks - has encouraged cross-border lending, both in euro area and non-euro area countries. Regarding regulatory policy, increases in financial supervisory power or independence of the supervisory authorities have encouraged credit outflows from source countries. The findings thus underline the importance of regulatory arbitrage as a driver of cross-border bank flows since the global financial crisis. However, in the euro area, arbitrage in capital stringency was linked to lower cross-border lending since the crisis.
    Keywords: Cross-border bank lending, financial integration, regulation, arbitrage, monetary policy, home bias
    JEL: F30 G11 G15 G28
    Date: 2014
  8. By: Christian Daude; Eduardo Levy Yeyati; Arne Nagengast
    Abstract: We analyse the effectiveness of exchange rate interventions for a panel of 18 emerging market economies during the period 2003-11. Using an error-correction model approach, we find that on average intervention is effective in moving the real exchange rate in the desired direction, controlling for deviations from the equilibrium and short-term changes in fundamentals and global financial variables. Our results are robust to different samples and estimation methods. We find little evidence of asymmetries in the effect of sales and purchases, but some evidence of more effective interventions for large deviations from the equilibrium. We also explore differences across countries according to the possible transmission channels and nature of some global shocks. Nous analysons l’efficacité des interventions sur le taux de change pour un panel de 18 économies de marché émergentes pendant la période 2003-11. À l’aide d’une approche basée sur un modèle à correction d’erreurs, nous trouvons que, en moyenne, l’intervention est efficace pour faire évoluer le taux de change réel dans la direction désirée, en contrôlant pour les écarts à l’équilibre et les variations à court-terme des fondamentaux et des variables financières globales. Nos résultats ressortent comme robustes à différents échantillons et méthodes d’estimation. Nous dégageons peu d’évidences d’asymétries dans la vente et l’achat, mais certains signes d’une plus grande efficacité d’interventions pour de grands écarts à l’équilibre. Nous explorons également les différences entre pays selon les canaux de transmission possibles et la nature de certains chocs globaux.
    Keywords: exchange rate, equilibrium exchange rate, FX intervention, intervention de change, taux de change d’équilibre, taux de change
    JEL: F31 F37
    Date: 2014–09–22
  9. By: Hylton Hollander (Department of Economics, University of Stellenbosch)
    Abstract: This paper studies the effectiveness of countercyclical capital requirements and contingent convertible capital (CoCos) in limiting financial instability, and its associated influence on the real economy. To do this, I augment both features into a standard real business cycle framework with an equity market and a banking sector. The model is calibrated to real U.S. data and used for simulations. The findings suggest that CoCos effectively re-capitalize the banking sector and foster the objectives of countercyclical capital requirements (i.e., Basel III). Under financial shocks, CoCos provide an effective automatic stabilization effect on the financial cycle and the real economy. Conversely, a countercyclical capital adequacy rule dominates CoCos in the stabilization of real shocks.
    Keywords: Contingent convertible debt, bank capital, bank regulation, Basel
    JEL: G28 G38 E44
    Date: 2014

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