nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2014‒12‒19
twelve papers chosen by
Martin Berka
University of Auckland

  1. Euro area external imbalances and the burden of adjustment By di Mauro, Filippo; Pappadà, Francesco
  2. Official Financial Flows, Capital Mobility, and Global Imbalances By Tamim Bayoumi; Joseph E. Gagnon; Christian Saborowski
  3. Globalization and international business cycle dynamics: A conditional GVAR approach By Binder, Michael; Offermanns, Christian J.
  4. Commodity Price Cycles and Financial Stability By Carola Moreno; Carlos Saavedra; Bárbara Ulloa
  5. Bad Investments and Missed Opportunities? Capital Flows to Asia and Latin America, 1950-2007 By Ohanian, Lee E.; Restrepo-Echavarria, Paulina; Wright, Mark L. J.
  6. The Great Mortgaging: Housing Finance, Crises, and Business Cycles By Òscar Jordà; Moritz Schularick; Alan M. Taylor
  7. Phillips curve shocks and real exchange rate fluctuations: SVAR evidence By Gehrke, Britta; Yao, Fang
  8. House Prices, Capital Inflows and Macroprudential Policy By Mendicino, Caterina; Punzi, Maria Teresa
  9. The Impact of Market Regulations on Intra-European Real Exchange Rates By Agnès Bénassy-Quéré; Dramane COULIBALY
  10. Fiscal policy and the real exchange rate: Some evidence from Spain By Oscar Bajo-Rubio; Burcu Berke
  11. Financial Frictions and Optimal Monetary Policy in a Small Open Economy By Jesús A. Bejarano; Luisa F. Charry
  12. The effects of government spending in a small open economy within a monetary union By Clancy, Daragh; Jacquinot, Pascal; Lozej, Matija

  1. By: di Mauro, Filippo; Pappadà, Francesco
    Abstract: The objective of this paper is to explore the consequences of the correction of Euro area trade imbalances on real exchange rates. This analysis requires one additional dimension with respect to the standard Global Imbalances framework à la Obstfeld and Rogoff (2005), since the adjustment takes place within and outside the Euro area. Both types of adjustments are analysed in a three-country general equilibrium model with a tradable and a non-tradable sectors, and heterogeneous firms built upon Pappadà (2011). ECB (CompNet) data are used to measure the differences infirm size and productivity dispersion across Euro area countries. With respect to the surplus country (Germany), countries running a trade deficit (Spain, Italy) are characterised by a productivity distribution with a lower mean and a less fat right tail. This increases the relative price movement associated with the external adjustment because of the limited role played by the extensive margin. We show that the real exchange rate movements are underestimated when the cross-country differences in terms of productivity distributions are neglected. JEL Classification: F32, F41
    Keywords: firm heterogeneity, trade imbalances, transfer problem
    Date: 2014–05
  2. By: Tamim Bayoumi; Joseph E. Gagnon; Christian Saborowski
    Abstract: We use a cross-country panel framework to analyze the effect of net official flows (chiefly foreign exchange intervention) on current accounts. We find that net official flows have a large but plausible effect on current account balances. The estimated effects are larger with instrumental variables (42 cents to the dollar on average compared to 24 without instruments), reflecting a possible downward bias in regressions without instruments owing to an endogenous response of net official flows to private financial flows. We consistently find larger impacts of net official flows when international capital flows are restricted and smaller impacts when capital is highly mobile. A further result is that there is an important positive effect of lagged net official flows on current accounts that we believe operates through the portfolio balance channel.
    Keywords: Capital flows;Foreign exchange reserves;Current account balances;Foreign exchange intervention;Cross country analysis;Regression analysis;reserve accumulation, intervention, capital mobility
    Date: 2014–10–30
  3. By: Binder, Michael; Offermanns, Christian J.
    Abstract: We examine the effects of increased international integration of both goods and financial markets on business cycle dynamics. To do so, we develop a new econometric framework for modelling cross-country spillovers in which the magnitude of these spillovers is an empirically determined function of the degree of a country's integration with international goods and financial markets. Our results suggest that the magnitude of cross-country spillovers for most country pairs has been increasing with strengthened goods and financial markets integration.
    Keywords: business cycle dynamics,international goods and financial market integration,dynamic panel data models,global VAR model
    JEL: E32 F41 C33
    Date: 2014
  4. By: Carola Moreno; Carlos Saavedra; Bárbara Ulloa
    Abstract: Commodity exporter economies usually suffer when a boom in commodity prices ends, especially if the cycle ends abruptly. Furthermore, recent literature has highlighted the role of financial instability as either causing or aggravating financial and real crises. In this paper we look at these two aspects, and study the relationship between commodity prices, output growth and financial stability, the latter proxied by domestic credit growth. Given the asymmetry we observe in boom and bust cycles, we estimate the output cost of commodity price shocks on separate samples, with a special emphasis in emerging economies. In particular, we focus on the output cost of a commodity price reversal given the credit increase observed during a boom event. We find that, in line with previous literature, the correlation between commodity shocks and output growth decreases as economies are more open to financial markets. The novelty is that we also find that this correlation is higher when countries experience very rapid credit growth during the Upturn phase of a boom. That is, rapid credit growth –regardless of its initial level—exacerbates the cost of a commodity price reversal.
    Date: 2014–08
  5. By: Ohanian, Lee E. (Stanford University); Restrepo-Echavarria, Paulina (Federal Reserve Bank of St. Louis); Wright, Mark L. J. (Federal Reserve Bank of Chicago)
    Abstract: Theory predicts that capital should flow to countries where economic growth and the return to capital is highest. However, in the post-World War II period, per-capita GDP grew almost three times faster in East Asia than in Latin America, yet capital flowed in greater quantities into Latin America. In this paper we propose a 3-country 2-sector growth model, augmented by “wedges” to quantify and evaluate the importance of international capital market imperfections versus domestic imperfections in explaining this anomalous behavior of capital flows. We find that during the 1950’s capital controls where important, but domestic conditions dominate. And contrary to what has been thought, after 1960 capital controls in Asia encouraged borrowing.
    Keywords: Capital Flows; Return to Capital; East Asia; Latin America.
    JEL: F41 F42 F43 F44
    Date: 2013–11–25
  6. By: Òscar Jordà; Moritz Schularick; Alan M. Taylor
    Abstract: This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks' balance sheets doubled in the course of the 20th century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy.
    JEL: C14 C38 C52 E32 E37 E44 E51 G01 G21 N10 N20
    Date: 2014–09
  7. By: Gehrke, Britta; Yao, Fang
    Abstract: Steinsson (2008) shows that real shocks that affect the New Keynesian Phillips curve explain the behavior of the real exchange rate in a sticky-price business cycle model. This paper reveals that these shocks are important for the volatility of the real exchange rate in the data. In a structural VAR analysis, we identify productivity, labor supply, cost-push, government spending, risk premium, and monetary policy shocks using sign restrictions derived from Steinsson's model. We study different methods of variance decomposition. According to the forecast error variance decomposition, the real demand shocks are the most important source of real exchange rate volatility. At business cycle frequencies, however, three supply shocks account for up to 40 percent of real exchange rate fluctuations.
    Keywords: real exchange rate,supply shock,structural vector autoregression,sign restriction,business cycle variance decomposition
    JEL: C32 F31 F32 F41
    Date: 2014
  8. By: Mendicino, Caterina; Punzi, Maria Teresa
    Abstract: This paper evaluates the monetary and macroprudential policies that mitigate the procyclicality arising from the interlinkage4s between current account deficits and financial vulnerabilities. We develop a two-country dynamic stochastic general equilibrium (DSGE) model with heterogeneous households and collateralised debt. The model predicts that external shocks are important in driving current account deficits that are coupled with run-ups in house prices and household dept. In this context, optimal policy features an interestrate response to credit and a LTV ration that countercyclically responds to house price dynamics. By allowing an interest-rate response to changes in financial variables, the monetary policy authority improves social welfare, because of the large welfare gains accrued to the savers. The additional use of a countercyclical LTV ratio that responds to house prices, increases the ability of borrowers to smooth consumption over the cycle and is Pareto improving. Domestic and foreign shocks account for a similar fraction of the welfare gains delivered by such a policy.
    Keywords: house prices,financial frictions,global imbalances,saving glut,dynamic loan-to value ratios,monetary policy,optimized simple rules
    JEL: C33 E51 F32 G21
    Date: 2014
  9. By: Agnès Bénassy-Quéré (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CESifo - CESifo, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Dramane COULIBALY (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense)
    Abstract: We study the contribution of market regulations in the dynamics of the real exchange rate within the European Union. Based on a model proposed by De Gregorio et al. (1994a), we show that both product market regulations in nontradable sectors and employment protection tend to inflate the real exchange rate. We then carry out an econometric estimation for European countries over 1985-2006 to quantify the contributions of the pure Balassa-Samuelson effect and those of market regulations in real exchange-rate variations. Based on this evidence and on a counter-factual experiment, we conclude that the relative evolution of product market regulations and employment protection across countries play a very significant role in real exchange-rate variations within the European Union and especially within the Euro area, through theirs impacts on the relative price of nontradable goods.
    Keywords: Real exchange rate ; Balassa-Samuelson effect ; Product market regulations ; Employment protection
    Date: 2014–01
  10. By: Oscar Bajo-Rubio (Universidad de Castilla-La Mancha); Burcu Berke (Nigde University, Nigde, Turkey)
    Abstract: The factors influencing the real exchange rate are an important issue for a country’s price competitiveness, which is especially relevant to those countries belonging to a monetary union. In this paper, we analyse the relationship between fiscal policy and the real exchange rate for the case of Spain. In particular, we explore how changes in government spending, differentiating between consumption and investment, can affect the long-run evolution of the real exchange rate vis-à-vis the euro area. The distinction between two alternative definitions of the real exchange rate, based on consumption price indices and export prices, respectively, will also prove to be crucial for the results.
    Keywords: Real exchange rate, Government consumption, Government investment
    JEL: E62 F31 F41
    Date: 2014–11
  11. By: Jesús A. Bejarano; Luisa F. Charry
    Abstract: In this paper we set up a small open economy model with financial frictions, following Curdia and Woodford (2010)’s model. Unlike other results in the literature such as Curdia and Woodford (2010), McCulley and Ramin (2008) and Taylor (2008), we find that optimal monetary policy should not respond to changes in domestic interest rate spreads when the source of fluctuations are exogenous financial shocks. A novel result here is that the optimal size of policy responses to changes in the credit spread is large when the disturbance source are shocks to the foreign interest rate. Our results suggest that such a response is welfare enhancing. Classification JEL: E44, E50, E52, E58, F41.
    Date: 2014–11
  12. By: Clancy, Daragh; Jacquinot, Pascal; Lozej, Matija
    Abstract: Small open economies within a monetary union have a limited range of stabilisation tools, as area-wide nominal interest and exchange rates do not respond to country-specific shocks. Such limitations imply that imbalances can be difficult to resolve. We assess the role that government spending can play in mitigating this issue using a global DSGE model, with an extensive fiscal sector allowing for a rich set of transmission channels. We find that complementarities between government and private consumption can substantially increase spending multipliers. Government investment, by raising productive public capital, improves external competitiveness and counteracts external imbalances. An ex-ante budget-neutral switch of government expenditure towards investment has beneficial effects in the medium run, while short-run effects depend on the degree of co-movement between private and government consumption. Finally, spillovers from a fiscal stimulus in one region of a monetary union depend on trade linkages and can be sizeable. JEL Classification: E22, E62, H54
    Keywords: fiscal policy, imbalances, public capital, trade
    Date: 2014–08

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