nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2014‒11‒28
twelve papers chosen by
Martin Berka
University of Auckland

  1. Financial Frictions and Macroeconomic Fluctuations in Emerging Economies By Akinci, Ozge
  2. Stability or upheaval? The currency composition of international reserves in the long run By Eichengreen, Barry; Chiţu, Livia; Mehl, Arnaud
  3. U.S. Investment in Global Bonds: As the Fed Pushes, Some EMEs Pull By John D. Burger; Rajeswari Sengupta; Francis E. Warnock; Veronica Cacdac Warnock
  4. The Dutch Disease revisited: absorption constraint and learning by doing By Iacono, Roberto
  5. Procyclical and Countercyclical Fiscal Multipliers: Evidence from OECD Countries By Daniel Riera-Crichton; Carlos A. Vegh; Guillermo Vuletin
  6. Maturity and Repayment Structure of Sovereign Debt By Seon Tae Kim; Gabriel Mihalache; Yan Bai
  7. A Threshold Model of the US Current Account By Roberto Duncan
  8. Optimal Maturity Structure of Sovereign Debt in Situation of Near Default By Gabriel Desgranges; Céline Rochon
  9. On the degree of homogeneity in dynamic heterogeneous panel data models By Offermanns, Christian J.
  10. Investment Hangover and the Great Recession By Matthew Rognlie; Andrei Shleifer; Alp Simsek
  11. Gross Private Capital Flows to Emerging Markets: Can the Global Financial Cycle Be Tamed? By Erlend Nier; Tahsin Saadi Sedik; Tomas Mondino
  12. International capital flows and economic growth in CESEE: a structural break in the great recession By Željko Bogdan; Milan Deskar-Škrbić; Velimir Šonje

  1. By: Akinci, Ozge (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: Estimated dynamic models of business cycles in emerging markets deliver counterfactual predictions for the country risk premium. In particular, the country interest rate predicted by these models is acyclical or procyclical, whereas it is countercyclical in the data. This paper proposes and estimates a small open economy model of the emerging-market business cycle in which a time-varying country risk premium emerges endogenously. In the proposed model, a firm's borrowing rate adjusts countercyclically as the default threshold of the firm depends on the state of the macroeconomy. I econometrically estimate the proposed model and find that it can account for the volatility and the countercyclicality of country risk premium as well as for other key emerging market business cycle moments. Time varying uncertainty in firm specific productivity contributes to delivering a countercyclical default rate and explains 70 percent of the variances in the trade balance and in the country risk premium. Finally, I find the predicted contribution of nonstationary productivity shocks in explaining output variations falls between the extremely high and extremely low values reported in the literature.
    Keywords: Financial frictions; country risk premium; international business cycles; Bayesian estimation
    JEL: E32 E44 F44 G15
    Date: 2014–10–24
  2. By: Eichengreen, Barry; Chiţu, Livia; Mehl, Arnaud
    Abstract: We investigate whether the role of national currencies as international reserves was fundamentally altered by the shift from fixed to flexible exchange rates (what we call the “upheaval hypothesis”), a view that gained adherents following the collapse of the Bretton Woods System. We extend standard data on the currency composition of foreign reserves backward and forward in time to test whether there was a shift in the determinants of reserve currency shares around the breakdown of Bretton Woods. We find evidence in favor of this hypothesis. The effects of inertia and the credibility of policies on international reserve currency choice have become stronger post-Bretton Woods, while those associated with network effects have weakened. We also show that negative policy interventions designed to discourage international use of a currency have been easier to implement than positive interventions to encourage international use. These findings speak to current discussions of the prospects of currencies, like the euro and the renminbi, seen to be seeking to acquire international reserve status and others like the U.S. dollar seeking to preserve it. JEL Classification: F30, N20
    Keywords: currency composition, fixed vs. floating exchange rates, international reserves, structural change
    Date: 2014–08
  3. By: John D. Burger; Rajeswari Sengupta; Francis E. Warnock; Veronica Cacdac Warnock
    Abstract: We analyze reallocations within the international bond portfolios of US investors. The most striking empirical observation is a steady increase in US investors' allocations toward emerging market local currency bonds, unabated by the global financial crisis and accelerating in the post-crisis period. Part of the increase in EME allocations is associated with global "push" factors such as low US long-term interest rates and unconventional monetary policy as well as subdued risk aversion/expected volatility. But also evident is investor differentiation among EMEs, with the largest reallocations going to those EMEs with strong macroeconomic fundamentals such as more positive current account balances, less volatile inflation, and stronger economic growth. We also provide a descriptive analysis of global bond markets' structure and returns.
    JEL: F21 F31 G11
    Date: 2014–10
  4. By: Iacono, Roberto
    Abstract: This paper revisits the Dutch disease by analyzing the general equilibrium effects of a resource shock on a dependent economy, both in a static and dynamic setting. The novel aspect of this study is to incorporate two features of the Dutch disease literature that have only been analyzed in isolation from each other: capital accumulation with absorption constraint and productivity growth induced by learning by doing. The conventional result of long-run exchange rate appreciation is maintained in line with the Dutch Disease literature. In addition, a permanent change in the employment shares occurs after the resource windfall, in favor of the non-traded sector and away from the traded sector growth engine of the economy. In other words, in the long-run both of the classic symptoms of the Dutch Disease remain in place.
    Keywords: Dutch Disease. Foreign Exchange Gift. Endogenous Growth. Resource wealth.
    JEL: F43 O41
    Date: 2014–11–07
  5. By: Daniel Riera-Crichton; Carlos A. Vegh; Guillermo Vuletin
    Abstract: Using non-linear methods, we argue that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. In the case of OECD countries, the problem originates in the fact that, contrary to one's priors, it is not always the case that government spending is going up in recessions (i.e., acting countercyclically). In almost as many cases, government spending is actually going down (i.e., acting procyclically). Since the economy does not respond symmetrically to government spending increases or decreases, the "true" long-run multiplier for bad times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In extreme recessions, the long-run multiplier reaches 3.1.
    JEL: E62 F41
    Date: 2014–09
  6. By: Seon Tae Kim (Instituto Tecnológico Autónomo de México); Gabriel Mihalache (University of Rochester); Yan Bai (University of Rochester)
    Abstract: This paper studies the maturity, timing and relative size of repayments for sovereign debt. Using Bloomberg bond data for emerging economies, we document that sovereigns issue debt with shorter maturity but more back-loaded repayments during downturns. To account for this pattern, we study a sovereign-default model of a small open economy which issues a state-uncontingent bond, with a flexible choice of maturity and repayment schedule. In our model, as in the data, during recessions the country prefers its payments to be more back- loaded—delaying relatively larger payments—in order to smooth consumption. However, such back-loaded debt is expensive since payments scheduled later involve higher default risk. To reduce borrowing costs, the country optimally shortens its maturity. We calibrate the model to yearly Brazilian data. The model can rationalize the observed patterns of maturity and repayment structure, as an optimal trade-off between consumption smoothing and endogenous borrowing cost due to lack of enforcement.
    Date: 2014
  7. By: Roberto Duncan (Ohio University)
    Abstract: What drives US current account imbalances? Is there solid evidence that the behavior of the current account is different during deficits and surpluses or that the size of the imbalance matters? Is there a threshold relationship between the US current account and its main drivers? We estimate a threshold model to answer these questions using the instrumental variable estimation proposed by Caner and Hansen (2004). Rather than concluding that the size or the sign of (previous) external imbalances matters, we find that time is the most important threshold variable. One regime exists before and another one exists after the third quarter of 1997, a period that coincides with the onset of the Asian financial crisis and the Taxpayer Relief Act of 1997. Statistically significant determinants in the second regime are the fiscal surplus, productivity, productivity volatility, oil prices, the real exchange rate, and the real interest rate. Productivity has become a more important driver since 1997.
    Keywords: Global imbalances, saving glut, revived Bretton Woods system, Taxpayer relief Act of 1997, threshold model
    JEL: E32 E65 F32 F41
    Date: 2014–11
  8. By: Gabriel Desgranges; Céline Rochon
    Abstract: We study the relationship between default and the maturity structure of the debt portfolio of a Sovereign, under uncertainty. The Sovereign faces a trade-off between a future costly default and a high current fiscal effort. This results into a debt crisis in case a large initial issuance of long term debt is followed by a sequence of negative macro shocks. Prior uncertainty about future fundamentals is then a source of default through its effect on long term interest rates and the optimal debt issuance. Intuitively, the Sovereign chooses a portfolio implying a risk of default because this risk generates a correlation between the future value of long term debt and future fundamentals. Long term debt serves as a hedging instrument against the risk on fundamentals. When expected fundamentals are high, the Sovereign issues a large amount of long term debt, the expected default probability increases, and so does the long term interest rate.
    Keywords: Sovereign debt;Debt burden;Default;Financial institutions;Econometric models;Long Term Debt; Maturity Structure; Optimal Default; Rational Expectations; Sovereign Debt Crisis; Uncertainty
    Date: 2014–09–12
  9. By: Offermanns, Christian J.
    Abstract: We propose a semi-parametric approach to heterogeneous dynamic panel data modelling. The method generalizes existing approaches to model cross-section homogeneity within such panels. It allows for partial influence of other cross-section units on estimated coefficients, differentiating between short-run and long-run homogeneity, and determines the optimal degree of such homogeneity. The issue of cross-section homogeneity emerges as a special case of categorical conditioning. Applying our model to equilibrium exchange rate determination in a cross-country panel, we find evidence of largely heterogeneous adjustment and more homogeneous long-run coefficients across countries. The coefficient heterogeneity appears largely idiosyncratic and is not captured by simple categorizations like exchange rate regime classification.
    Keywords: dynamic panel data models,coefficient homogeneity,non-parametric estimation,equilibrium exchange rates
    JEL: C23 F31 C52
    Date: 2014
  10. By: Matthew Rognlie; Andrei Shleifer; Alp Simsek
    Abstract: We present a model of investment hangover motivated by the Great Recession. In our model, overbuilding of residential capital requires a reallocation of productive resources to nonresidential sectors, which is facilitated by a reduction in the real interest rate. If the fall in the interest rate is limited by the zero lower bound and nominal rigidities, then the economy enters a liquidity trap with limited reallocation and low output. The drop in output reduces nonresidential investment through a mechanism similar to the acceleration principle of investment. The burst in nonresidential investment is followed by an even greater boom due to low interest rates during the liquidity trap. The boom in nonresidential investment induces a partial and asymmetric recovery in which the residential sector is left behind, consistent with the broad trends of the Great Recession.
    JEL: E22 E32 E4
    Date: 2014–10
  11. By: Erlend Nier; Tahsin Saadi Sedik; Tomas Mondino
    Abstract: This paper assesses empirically the key drivers of private capital flows to a large sample of emerging market economies in the last decade. It analyzes the effect of the global financial cycle, measured by the VIX, on capital flows and investigates the role of fundamentals and country characteristics in mitigating or amplifying its effect. Using interaction models, we find the effect of the VIX to be non-linear. For low levels of the VIX, capital flows are driven by fundamental factors. During periods of stress, the VIX becomes the dominant driver of capital flows while other determinants, with the exception of interest rate differentials, lose statistical significance. Our results also suggest that the effect of global financial conditions on gross private capital flows increases with the host country’s level of financial sector development. Finally, our results imply that countries cannot fully insulate themselves from global financial shocks, unless creating a fragmented global financial system.
    Keywords: Private capital flows;Emerging markets;Procyclicality of financial system;Capital flows;Interest rates;Central bank policy;Econometric models;Capital flows, Global financial cycles, Emerging Market Economies
    Date: 2014–10–27
  12. By: Željko Bogdan (Faculty of Economics and Business, University of Zagreb); Milan Deskar-Škrbić (Erste&Steiermarkische bank d.d. Croatia); Velimir Šonje (Arhivanalitika and Zagreb School of Economics and Management)
    Abstract: This paper deals with real effects of bank-intermediated international capital flows to 11 CESEE coun-tries 1997-2012. The purpose is to check for structural breaks in the short-run relationship between bank-intermediated capital flows and output growth since 2008. The relationship is investigated in dynamic panel growth regression framework. Results show that there was no systematic relationship between international banks' exposures and countries' growth rates at normal times. The relationship turned negative at times of crisis, implying that international banks did not cause or propagate negative output shocks in the period of great recession. Moreover, banks may have alleviated intensity of nega-tive shocks by resisting reduction of country exposures in line with contracting GDP. Asset and liability side of local banks' balance sheets are separated by different kinds of capital and liquidity buffers. So, effects of lending in local credit markets on GDP growth should be looked at separately from international component on the liability side of banks’ balance sheets. When interna-tional banks' exposures are replaced by local credit portfolios in panel growth regressions, the results change: (1) there is a positive relationship between credit to households and output growth: moreover, strength of positive relationship is magnified at times of crisis; (2) positive relationship between cor-porate credit and output growth does not change at times of crisis. Thus, crisis-related household sec-tor deleveraging may be much more costly in terms of output loss, than corporate sector deleveraging. Key policy implication is that maintaining the flow of credit to households has higher importance in combating the crisis in the short run than stimulating the flow of credit to non-financial corporations. Also, crisis-related household sector deleveraging may be much more costly in terms of output loss, than corporate sector deleveraging.
    Keywords: capital flows, CESEE, economic growth, Great REcession, panel analysis
    JEL: C3 F3 F41
    Date: 2014–10–23

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