nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2014‒12‒24
fourteen papers chosen by
Martin Berka
University of Auckland

  1. Skill-Biased Technological Change and the Real Exchange Rate By Matthias Gubler; Christoph Sax
  2. Liberalised Capital Accounts and Volatility of Capital Flows and Foreign Exchange Rates By Bogdan Bogdanov
  3. The "imbalanced balance" and its unravelling: current accounts and bilateral financial flows in the euro area By Alexandr Hobza; Stefan Zeugner
  4. A Nonparametric Study of Real Exchange Rate Persistence over a Century By Hyeongwoo Kim; Deockhyun Ryu
  5. Large capital inflows, sectoral allocation, and economic performance By Gianluca Benigno; Nathan Converse; Luca Fornaro
  6. Capital Controls and Recovery from the Financial Crisis of the 1930s By Mitchener, Kris; Wandschneider, Kirsten
  7. The Global Financial Crisis—What Drove The Build-Up? By Merrouche, Ouarda; Nier, Erlend
  8. The Transmission of Real Estate Shocks Through Multinational Banks By Bertay, A.C.
  9. Trends and Cycles in Small Open Economies: Making The Case For A General Equilibrium Approach By Kan Chen; Mario J. Crucini
  10. The City as a Small Open Economy By John Hartwick
  11. Analyzing the Effect of Real Exchange Rate on Petrochemicals Exporting By Delavari, Majid; Baranpour, Naghmeh; Abdeshahi, Abbas
  12. On the Optimal Degree Of Funding Of Public Sector Pension Plans By Meijdam, A.C.; Ponds, E.H.M.
  13. Deglobalization of Banking: The World is Getting Smaller By Van Rijckeghem, Caroline; Weder di Mauro, Beatrice
  14. The Role of Oil Price Shocks in Causing U.S. Recessions By Kilian, Lutz; Vigfusson, Robert J.

  1. By: Matthias Gubler; Christoph Sax
    Abstract: We sketch a model that shows how skill-biased technological change may reverse the classic Balassa-Samuelson effect, leading to a negative relationship between productivity in the tradable sector and the real exchange rate. In a small open economy, export goods are produced with high-skilled labor, in conjunction with capital and low-skilled labor, and are traded for imported consumption goods. Non-tradable services are produced with low-skilled labor only. A rise in the productivity of capital has two effects: (1) It may reduce the demand for labor in the tradable sector if the substitutability of low-skilled labor and capital in the tradable sector is high; and (2) it increases the demand for non-tradables and associated labor input. Overall demand for low-skilled labor declines if the labor force of the tradable sector is large relative to the labor force of the non-tradable sector. This leads to lower wages and thus to lower prices and real exchange rate depreciation.
    Keywords: Real Exchange Rate, Balassa-Samuelson Hypothesis, Skill-Biased Technological Change, General Equilibrium
    JEL: F16 F31 F41 J24
    Date: 2014
  2. By: Bogdan Bogdanov
    Abstract: Whether free movement of international capital induces greater risk of foreign exchange rate and balance-of-payments volatility, or not, is an important question in international finance and economic policy making. The paper employs propensity score matching methodologies to estimate the impact of maintaining open capital accounts on the volatility of international capital flows and foreign exchange rates using data for 69 countries, in the sample period 1980-2011. The findings of the study suggest that maintaining an open capital account could contribute to lower foreign exchange rate volatility. It also finds that capital flow management measures may not have an effect on the volatility of short- and long-term capital flows.
    JEL: C21 F30
    Date: 2014–07
  3. By: Alexandr Hobza; Stefan Zeugner
    Abstract: Based on a new database of bilateral financial flows among euro area countries and their major world partners, this paper explores the role of financial links in the accumulation and then adjustment of current account imbalances in the euro area. The data show that the geography of financial flows can differ quite markedly from trade flow patterns and suggest that the nexus between surpluses in the 'core' with deficits in the periphery went along financial rather than trade interlinkages. In particular, the data document the dominant role of 'core' countries in financing the euro area periphery's current account deficits before the financial crisis. In addition to direct financing, France and the UK acted as important intermediaries of financial flows from elsewhere, particularly outside of the euro area. Most of this financing took the form of debt instruments and increased the vulnerability of the recipient countries. In 2009/10, gross flows in the euro area contracted, while the net flows remained broadly unchanged. France became the periphery's main financier in 2009 and substituted the withdrawn flows from surplus countries, mainly Germany. Only when France reduced its exposure in a hasty asset withdrawal during 2011, the periphery had to rely on large ECB-mediated liabilities in order to refinance its liabilities.
    JEL: F32 F34 F36 F41
    Date: 2014–07
  4. By: Hyeongwoo Kim; Deockhyun Ryu
    Abstract: This paper estimates the degree of persistence of 16 long-horizon real exchange rates relative to the US dollar. We use nonparametric operational algorithms by El-Gamal and Ryu (2006) for general nonlinear models based on two statistical notions: the short memory in mean (SMM) and the short memory in distribution (SMD). We found substantially shorter maximum half-life (MHL) estimates than the counterpart from linear models. Our results are robust to the choice of bandwidth with a few exceptions.
    Keywords: Real Exchange Rate; Purchasing Power Parity; Short Memory in Mean; Short-Memory in Distribution; Mixing; Max Half-Life; Max Quarter-Life
    JEL: C14 C15 C22 F31 F41
    Date: 2014–12
  5. By: Gianluca Benigno; Nathan Converse; Luca Fornaro
    Abstract: This paper describes the stylized facts characterizing periods of exceptionally large capital inflows in a sample of 70 middle- and high-income countries over the last 35 years. We identify 155 episodes of large capital inflows, and we find that these events are typically accompanied by an economic boom, and followed by a slump. Moreover, during episodes of large capital inflows capital and labor shift out of the manufacturing sector, especially if the inflows begin during a period of low international interest rates. However, accumulating reserves during the period in which capital inflows are unusually large appears to limit the extent of labor reallocation. Larger credit booms and capital inflows during the episodes we identify increase the probability of a sudden stop occurring during or immediately after the episode. In addition, the severity of the post-inflows recession is significantly related to the extent of labor reallocation during the boom, with a stronger shift of labor out of manufacturing during the inflows episode associated with a sharper contraction in the aftermath of the episode.
    Keywords: Capital Flows, Surges, Sectoral Allocation, Sudden Stops
    JEL: F31 F32 F41 O41
    Date: 2014–11
  6. By: Mitchener, Kris; Wandschneider, Kirsten
    Abstract: We examine the first widespread use of capital controls in response to a global or regional financial crisis. In particular, we analyze whether capital controls mitigated capital flight in the 1930s and assess their causal effects on macroeconomic recovery from the Great Depression. We find evidence that they stemmed gold outflows in the year following their imposition; however, time-shifted, difference-in-differences (DD) estimates of industrial production, prices, and exports suggest that exchange controls did not accelerate macroeconomic recovery relative to countries that went off gold and floated. Countries imposing capital controls also appear to perform similar to the gold bloc countries once the latter group of countries finally abandoned gold. Time series analysis suggests that countries imposing capital controls refrained from fully utilizing their newly acquired monetary policy autonomy.
    Keywords: capital controls; financial crises; Great Depression; interwar gold standard
    JEL: E44 E61 F32 F33 F41 G15 N1 N2
    Date: 2014–06
  7. By: Merrouche, Ouarda; Nier, Erlend
    Abstract: This paper investigates empirically three potential drivers of financial imbalances ahead of the global financial crisis: rising global imbalances (capital flows); loose monetary policy; and inadequate supervision and regulation. We perform panel data regressions for OECD countries from 1999 to 2007 to explore the relative importance of these factors, as well as the extent to which they might have interacted in fuelling the build-up. We find that the build-up of financial imbalances was driven by capital inflows and an associated compression of the spread between long and short rates. The effect of capital inflows on the build-up was amplified where the supervisory and regulatory environment was relatively weak. In contrast, differences in monetary policy did not significantly affect differences across countries in the build-up of financial imbalances ahead of the crisis.
    Keywords: global imbalances; monetary policy; supervision and regulation
    JEL: E5 F3 G28
    Date: 2014–06
  8. By: Bertay, A.C. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: This paper investigates the credit supply of banks in response to domestic and foreign real estate price changes. Using a large international dataset of multinational banks, we find evidence of a significant transmission of domestic real estate shocks into lending abroad. A 1% decrease in real estate prices in home country, in particular, leads to a 0.2-0.3% decrease in credit growth in the foreign subsidiary. This response, however, is asymmetric: only negative house price changes are transmitted. Stricter regulation of activities of parent banks can reduce this effect, indicating a role for regulation in alleviating the transmission of real estate shocks. Further, the analysis of the impact of real estate shocks on foreign subsidiary funding indicates that shocks are transmitted through changes in long-term debt funding and equity.
    Keywords: Internal capital markets; multinational banking; transmission of real estate shocks
    JEL: F23 F36 G21
    Date: 2014
  9. By: Kan Chen; Mario J. Crucini
    Abstract: Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modelling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach.
    Date: 2014–12
  10. By: John Hartwick
    Abstract: We set out a small, open economy model of a city, one with local housing, government production and a non-traded good. We observe that a positive shift in labor productivity in the export sector generally results in a larger, higher-wage and more densely settled city. Production of the local public good increases for the special case of the public good 'counting' small in the utility function of the representative resident. Similar results obtain for the case of a city experiencing an exogenous improvement in a local climate amenity.
    Keywords: small open city; urban public sector; law of urban growth.
    JEL: R23 H40 F43
    Date: 2014–11
  11. By: Delavari, Majid; Baranpour, Naghmeh; Abdeshahi, Abbas
    Abstract: The export of petrochemical products -as a type of non-oil export- plays a key role in the economic development of our country. This is of special importance in light of the structure of Iran's economy that is oil-based. Identifying the factors affecting the export of petrochemical products can improve their export. Using Johansen-Juselius co-integration method and the error correction model, the present study purports to investigate the effects of the real foreign exchange rate and the total value of petrochemical products on the export of these products in Iran. This research used data from 1989 to 2012. It was found that the real foreign exchange rate and the real value of total petrochemical products positively affect their export in the long run, and the effect of the former is greater than that of the latter. However, in the short run the effect of the foreign exchange rate on the export of petrochemical products is more significant.
    Keywords: Real Exchange Rate, Non-Oil Exporting, Petrochemicals, Johansen-Juselius Method, ECM Model.
    JEL: C22 C65 Q42 Q43
    Date: 2014–11–30
  12. By: Meijdam, A.C. (Tilburg University, Center For Economic Research); Ponds, E.H.M. (Tilburg University, Center For Economic Research)
    Abstract: Abstract: This paper explores the optimal degree of funding of public sector pension plans. It is assumed that a benevolent social planner decides on the contribution of current taxpayers to the funding of public sector pensions next period, weighing the interests of current and future tax payers. Two elements play a role in the optimal funding decision: the optimal-portfolio choice (i.e. the tradeoff between the expected excess return and the additional risk of funding vis-à-vis pay-as-you-go) and intergenerational redistribution (i.e. whether the current generation of tax payers is willing and capable to prefund the pension obligations of current public sector workers or shifts the burden to future generations via a pay-as-you-go scheme). The optimal degree of funding appears to vary over time, depending not only on the relative weight given to the current generation, risk aversion, and the distribution of financial risk and human capital risk, but also on the actual state of the economy, i.e. on wage income, funding in the past and the realization of the excess return on this funding.
    Keywords: public sector pension plans; funding; implicit debt; portfolio approach
    JEL: H55 H75
    Date: 2013
  13. By: Van Rijckeghem, Caroline; Weder di Mauro, Beatrice
    Abstract: Banks have been running for home. We investigate the pattern of this increasing home bias in the wake of the financial crisis and explore possible explanations. We estimate the strength of the flight home effect as the change in domestic credit extended by domestic banks that cannot be accounted for by recipient or lender effects. We find evidence of flight home for almost all banking systems with the notable exception of the US and Japan. In periods of calm, reversals of the home bias are small. The result is cumulative renationalization, with domestic lending growing on average 25% more than foreign lending during 2008-12. Sales and acquisitions of banks contributed to the home bias and the flight home was strong at the intensive margin as well. Deterioration of bank soundness explains some but not all of the effect, e.g. Germany and Switzerland had a strong flight home notwithstanding improving bank soundness during the eurocrisis. We also find evidence of the vicious circle between banks and sovereign balance sheets: sovereign stress paired with banking stress contributed to the renationalization of banking.
    Keywords: deglobalization; financial protectionism; international banking system
    JEL: E52 F34 G21
    Date: 2014–09
  14. By: Kilian, Lutz; Vigfusson, Robert J.
    Abstract: Although oil price shocks have long been viewed as one of the leading candidates for explaining U.S. recessions, surprisingly little is known about the extent to which oil price shocks explain recessions. We provide the first formal analysis of this question with special attention to the possible role of net oil price increases in amplifying the transmission of oil price shocks. We quantify the conditional recessionary effect of oil price shocks in the net oil price increase model for all episodes of net oil price increases since the mid-1970s. Compared to the linear model, the cumulative effect of oil price shocks over course of the next two years is much larger in the net oil price increase model. For example, oil price shocks explain a 3% cumulative reduction in U.S. real GDP in the late 1970s and early 1980s and a 5% cumulative reduction during the financial crisis. An obvious concern is that some of these estimates are an artifact of net oil price increases being correlated with other variables that explain recessions. We show that the explanatory power of oil price shocks largely persists even after augmenting the nonlinear model with a measure of credit supply conditions, of the monetary policy stance and of consumer confidence. There is evidence, however, that the conditional fit of the net oil price increase model is worse on average than the fit of the corresponding linear model, suggesting much smaller cumulative effects of oil price shocks for these episodes of at most 1%.
    Keywords: asymmetry; conditional response; nonlinearity; oil price; real GDP; recession; time variation
    JEL: E32 E37 E51 Q43
    Date: 2014–06

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