nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒01‒26
fifteen papers chosen by
Martin Berka
University of Auckland

  1. Tracking the Exchange Rate in Latin America By Carrera, César
  2. Cyclically Adjusted Current Account Balances By Haltmaier, Jane
  3. Domestic and Multilateral Effects of Capital Controls in Emerging Markets By Gurnain Pasricha; Matteo Falagiarda; Martin Bijsterbosch; Joshua Aizenman
  4. Capital flow waves to and from Switzerland before and after the financial crisis By Pinar Yesin
  5. The European crisis in the context of the history of previous financial crises By Michael Bordo; Harold James
  6. International Currency Exposures, Valuation Effects, and the Global Financial Crisis By Agustín S. Bénétrix; Philip R. Lane; Jay C. Shambaugh
  7. Exchange Rate Pass-Through, Domestic Competition, and Infl?ation: Evidence from the 2005/08 Revaluation of the Renminbi By Raphael A Auer
  8. Can Oil Prices Forecast Exchange Rates? By Domenico Ferraro; Ken Rogoff; Barbara Rossi
  9. Sovereign default and the choice of maturity By Horacio Sapriza; Emircan Yurdagul; Juan Sanchez
  10. Bitcoin: Technical Background and Data Analysis By Badev, Anton; Chen, Matthew
  11. The crisis in the euro area: an analytic overview By Heather D. Gibson; Theodore Palivos; George S. Tavlas
  12. Trilemmas and trade-offs: living with financial globalisation By Maurice Obstfeld
  13. The eurozone crisis: phoenix miracle or lost decade? By Barry Eichengreen; Naeun Jung; Stephen Moch; Ashoka Mody
  14. International Borrowing without Commitment and Informational Lags: Choice under Uncertainty By Giorgio Fabbri
  15. Capital Flow Management Measures: What Are They Good For? By Kristin Forbes; Marcel Fratzscher; Roland Straub

  1. By: Carrera, César (Banco Central de Reserva del Perú)
    Abstract: The exchange rate is one of the most important prices in any open economy. Tracking deviations from its long-run value may provide important information for policymakers. One way to track such deviations is to compute the distribution of exchange-rate observed values and compare them with those of Benford’s law. I document such cases for 15 Latin American countries, for the two most widely traded currencies. Latin American countries are small open economies that are characterized for having different degrees of dollarization and intervention in the forex market. This is an alternative view of how these characteristics play a role with respect to an implied equilibrium exchange rate.
    Keywords: Exchange rate, Forex, Benford’s law
    JEL: C16 F31 F41
    Date: 2014–12
  2. By: Haltmaier, Jane (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: The Great Financial Crisis coincided with a sizable reduction in global external imbalances, defined as the absolute value of the sum of individual country current account surpluses and deficits relative to global GDP. Although current account balances should not respond to a downturn that is uniform across countries, one that hits countries with current account deficits harder than those with surpluses might result in a decline in the global balance. This paper quantifies the cyclical portion of the current account balance for 35 countries using estimates of the severity of the cycle in each country relative to that of its trading partners in conjunction with three estimates of the sensitivity of the current account balance to changes in the output gap. Two of the estimates are derived from equations linking trade to income and the third is derived from the relationship between changes in current account balances and changes in output gap differentials. The main result is that the bulk of the reduction in the global current account imbalance since 2006 appears to have been structural. Cyclical forces are estimated to account for between 10 and 30 percent of the decline. In the aggregate, the cyclical effect is estimated to be currently holding down the global current account balance by about 1/2 percentage point. However, the size of the cyclical effect is more substantial for some countries. Both surplus and deficit countries have contributed to the decline in the absolute value of the global current account imbalance, but the contribution of the deficit countries is about twice as large as that of the surplus countries. Changes in oil prices have had largely offsetting effects on the global current account balance, but changes in real exchange rates in recent years have contributed to the reduction.
    Keywords: current account; cycles
    JEL: E32 F17
    Date: 2014–11–27
  3. By: Gurnain Pasricha; Matteo Falagiarda; Martin Bijsterbosch; Joshua Aizenman
    Abstract: This paper assesses the effects of capital controls in emerging market economies (EMEs) during 2001-2011, focusing on cross-country spillovers of changes in these controls. We use a novel dataset on weighted changes in capital controls (and currency-based measures) in 18 major EMEs. We first use panel VARs to test for effectiveness of own capital controls which take into account the endogeneity of such controls. Next, using near-VARs, we provide new evidence of multilateral effects of capital controls of the BRICS. Our results suggest a limited domestic impact of capital controls. Outflow easing measures do not have a significant impact on any of the variables in the model. Inflow tightening measures increase monetary policy autonomy (measured by the covered interest differential), but at the cost of a more appreciated exchange rate. These measures are therefore not effective in allowing EMEs to choose a trilemma configuration with a de-facto closed capital account, larger monetary policy autonomy and a weaker exchange rate. We do not find a clear difference between countries with extensive and long-standing capital controls (India and China) and other countries. Capital control actions in BRICS (Brazil, Russia, India, China and South Africa) had significant spillovers to other EMEs during the 2000s in particular via exchange rates. Multilateral effects were more important among the BRICS than between the BRICS and other, smaller EMEs, particularly in the pre-global financial crisis period. They were more significant in the aftermath of the global financial crisis than before the crisis. This change stems in particular from the fact that spillovers from capital flow policies in BRICS countries to non-BRICS became more significant in the post-global financial crisis period. These results are robust to various specifications of our models.
    JEL: F32 F41 F42
    Date: 2015–01
  4. By: Pinar Yesin
    Abstract: This paper first shows that capital inflows to and outflows from financial centres were disproportionately affected by the global financial crisis. Switzerland was no exception. The paper then identifies waves of capital flows to and from Switzerland from 2000:Q1 to 2014:Q2 by using a simple statistical method. The analysis shows that private capital inflows to and outflows from Switzerland have become exceptionally muted and less volatile since the crisis. Further, strong and long-lasting 'home bias' behaviour can be observed for both Swiss and foreign investors. By contrast, net private capital flows have shown significantly higher volatility since the financial crisis, frequently registering extreme movements driven by extreme movements in bank lending flows. These findings suggest that the financial crisis generated a breaking point for capital flows to and from Switzerland.
    Keywords: private capital flows, inflows, outflows, surges, stops, retrenchment, flight
    JEL: F21 F31 F32
    Date: 2015
  5. By: Michael Bordo (Rutgers University); Harold James (Princeton University)
    Abstract: There are some striking similarities between the pre 1914 gold standard and EMU today. Both arrangements are based on fixed exchange rates, monetary and fiscal orthodoxy. Each regime gave easy access by financially underdeveloped peripheral countries to capital from the core countries. But the gold standard was a contingent rule—in the case of an emergency like a major war or a serious financial crisis --a country could temporarily devalue its currency. The EMU has no such safety valve. Capital flows in both regimes fueled asset price booms via the banking system ending in major crises in the peripheral countries. But not having the escape clause has meant that present day Greece and other peripheral European countries have suffered much greater economic harm than did Argentina in the Baring Crisis of 1890.
    Keywords: Gold Standard; Gold Exchange Standard; Debt Crisis; Euro
    JEL: F33
    Date: 2013–07
  6. By: Agustín S. Bénétrix; Philip R. Lane; Jay C. Shambaugh
    Abstract: We examine the evolution of international currency exposures, with a particular focus on the 2002-12 period. During the run up to the global financial crisis, there was a widespread shift towards positive net foreign currency positions, such that relatively few countries exhibited the archetypal emerging-market \short foreign currency" position on the eve of the global financial crisis. During the crisis, the upheaval in currency markets generated substantial currency-generated valuation effects - much of which were not reversed. There is some evidence that the distribution of valuation effects was stabilizing in the sense of showing a negative covariation pattern with pre-crisis net foreign asset positions.
    JEL: F3 F31
    Date: 2015–01
  7. By: Raphael A Auer (Swiss National Bank)
    Abstract: Import competition from China is pervasive in the sense that for many good categories, the competitive environment that US fi?rms face in these markets is strongly driven by the prices of Chinese imports, and so is their pricing decision. This paper quanti?fies the effect of the government-controlled appreciation of the Chinese renminbi vis-à-vis the USD from 2005 to 2008 on the prices charged by US domestic producers. In a panel spanning the period from 1994 to 2010 and including up to 519 manufacturing sectors, import price changes of Chinese goods pass into US producer prices at an average rate of 0.7, while import price changes that can be traced back to exchange rate movements of other trade partners only have mild effects on US prices. Further analysis points to the importance of trade integration, variable markups, and demand complementarities on the one side, and to the importance of imported intermediate goods on the other side as drivers of these patterns. Simulations incorporating these microeconomic ?findings reveal that a substantial revaluation of the renminbi would result in a pronounced increase of aggregate US producer price infl?ation.
    Date: 2014–12
  8. By: Domenico Ferraro; Ken Rogoff; Barbara Rossi
    Abstract: We show the existence of a very short-term relationship at the daily frequency between changes in the price of a country's major commodity export price and changes in its nominal exchange rate. The relationship appears to be robust and to hold when we use contemporaneous (realized) commodity price changes in our regression. How- ever, when we use lagged commodity price changes, the predictive ability is ephemeral, mostly appearing after instabilities have been appropriately taken into account.
    Keywords: forecasting, oil prices, exchange rates
    JEL: F31 F37 C22 C53
    Date: 2015–01
  9. By: Horacio Sapriza (Board of Governors); Emircan Yurdagul (Washington University in Saint Louis); Juan Sanchez (Federal Reserve Bank of St. Louis)
    Abstract: This paper provides a new framework to study the term structure of interest rate spreads and the maturity composition of sovereign bonds. As observed in the literature, sovereign interest rate spreads increase during crises, with short term interest rate spreads rising more than long term spreads. The inversion of the yield curve is accompanied by lower debt issuance and a shortening of the maturity structure. In addition, sovereign debt restructurings may lead to a non-monotonic term structure of interest rate spreads, as evidenced during the recent sovereign debt crisis in Greece, when the yield curve developed a humped shape. To properly capture the observed variation of expected sovereign debt collection at different horizons and thus account for the dynamics in the maturity of debt issuances and its co-movement with the level of spreads across maturities found in the data, this paper introduces a new quantitative dynamic model of the term structure of interest rate spreads of government defaultable debt under incomplete markets.
    Date: 2014
  10. By: Badev, Anton (Board of Governors of the Federal Reserve System (U.S.)); Chen, Matthew (Board of Governors of the Federal Reserve System (U.S.))
    Abstract: This paper provides the necessary technical background to understand basic Bitcoin operations and documents a set of empirical regularities related to Bitcoin usage. We present the micro-structure of the Bitcoin transaction process and highlight the use of cryptography for the purposes of transaction security and distributed maintenance of a ledger. Using publicly available transaction-level data, we examine patterns of general usage together with usage by Satoshi Dice, the largest online gambling service using Bitcoin as the method of payment. Our analysis suggests that less than 50 percent of all bitcoins in circulation are used in transactions. About half of these transactions involve less than U.S.$100 equivalent, and for the period for which we have data for Satoshi Dice, most of these small-value transactions were related to the online gambling service. Relatively less frequent large value transactions drive the average transaction value to levels above U.S.$40,00 0 equivalent value, and are not likely to involve payments for goods and services. Bitcoin exchange rates exhibit somewhat complicated dynamics. In the past 24 months, the USD-BTC exchange rate increased more than 50-fold. The daily variance of the USD-BTC exchange rate remained remarkably stable for this same period, once the variance calculations account for the changing exchange rate level. We also document that the exchange rates between bitcoin and other major currencies are not well aligned. We interpret this as lack of depth of the exchange markets and as costly exchange rather than as unexploited arbitrage opportunities. Finally, we examine the economic incentives for the participants in the distributed implementation of the Bitcoin scheme.
    Keywords: Bitcoin; Payment systems; virtual currency
    Date: 2014–10–07
  11. By: Heather D. Gibson (Bank of Greece); Theodore Palivos (Athens University of Economics and Business); George S. Tavlas (Bank of Greece)
    Abstract: This paper provides an introduction to the special issue “The Crisis in the Euro Area”. We take stock of what the euro area crisis has taught us about monetary integration. At the inception of the euro area in 1999, the main parameters of the theory of monetary integration seemed to have been pretty well-settled. Although it was common knowledge that the euro area fell short of fully satisfying all the conditions needed for an optimallyfunctioning monetary union, most politicians and many economists thought that the euro area satisfied enough conditions so that it would not encounter major difficulties. This paper discusses several developments that came as surprises about the conditions needed for monetary unification as the euro crisis unfolded. These developments include the need of an adequate adjustment mechanism, the links between banking and sovereign crises, and the sharp costs of adjustment to adverse asymmetric shocks.
    Keywords: Financial crises; euro-area; monetary integration; optimum currency areas; adjustment mechanism
    JEL: E51 E52 F33 F41 G01
    Date: 2013–07
  12. By: Maurice Obstfeld
    Abstract: This paper evaluates the capacity of emerging market economies (EMEs) to moderate the domestic impact of global financial and monetary forces through their own monetary policies. Those EMEs that are able to exploit a flexible exchange rate are far better positioned than those that devote monetary policy to fixing the rate - a reflection of the classical monetary policy trilemma. However, exchange rate changes alone do not insulate economies from foreign financial and monetary shocks. While potentially a potent source of economic benefits, financial globalisation does have a downside for economic management. It worsens the trade-offs monetary policy faces in navigating among multiple domestic objectives. This drawback of globalisation raises the marginal value of additional tools of macroeconomic and financial policy. Unfortunately, the availability of such tools is constrained by a financial policy trilemma that is distinct from the monetary trilemma. This second trilemma posits the incompatibility of national responsibility for financial policy, international financial integration and financial stability.
    Keywords: policy trilemma, financial stability, financial globalisation, international policy transmission
    Date: 2015–01
  13. By: Barry Eichengreen (University of California); Naeun Jung (Princeton University); Stephen Moch (Princeton University); Ashoka Mody (Princeton University)
    Abstract: We analyze why the Eurozone crisis increasingly resembles Latin America’s lost decade instead of Asia’s phoenix miracle, emphasizing the roles of the real exchange rate, the external environment, and debt restructuring. In addition, we contrast the adjustment to housing bubbles in Ireland, Spain and the U.S. Here our explanation for the contrast departs from the conventional wisdom in placing less emphasis on labor mobility but more on participation rates and bank mergers and acquisitions in the adjustment process.
    Keywords: fiscal policy; phoenix miracle; housing bubble; banking crisis
    JEL: E44 E62 H63 G01
    Date: 2013–07
  14. By: Giorgio Fabbri (EPEE, Université d’Evry-Val d’Essonne (TEPP, FR-CNRS 3126))
    Abstract: A series of recent studies in economic growth theory have considered a class of models of international borrowing where, in the absence of a perfect investment commitment, the borrowing constraint depends on the historical performances of the country. Thus, a better level of past economic activity gives a higher reputation, thereby increasing the possibility of accessing the international credit market. This note considers this problem in a stochastic setting based on the volatility of the internal net capital. We study how the optimal consumption level and the maximal expected welfare depend on the combined influence of the trajectory of past economic variables and the volatile environment. In particular, we show how the strength of the history effect and the relative weight of the historical performance depend on the degree of risk.
    Keywords: Infinite dimensional dynamic programming, international borrowing, neutral stochastic differential equation, stochastic growth model
    JEL: C61 F34 F43
    Date: 2014
  15. By: Kristin Forbes; Marcel Fratzscher; Roland Straub
    Abstract: Are capital controls and macroprudential measures related to international exposures successful in achieving their objectives? Assessing their effectiveness is complicated by selection bias; countries which change their capital-flow management measures (CFMs) often share specific characteristics and are responding to changes in variables that the CFMs are intended to influence. This paper addresses these challenges by using a propensity-score matching methodology. We also create a new database with detailed information on weekly changes in controls on capital inflows, capital outflows, and macroprudential measures related to international transactions from 2009 to 2011 for 60 countries. Results show that these macroprudential measures can significantly reduce some measures of financial fragility. Most CFMs do not significantly affect other key targets, however, such as exchange rates, capital flows, interest-rate differentials, inflation, equity indices, and different volatilities. One exception is that removing controls on capital outflows may reduce real exchange rate appreciation. Therefore, certain CFMs can be effective in accomplishing specific goals—but most popular measures are not “good for” accomplishing their stated aims
    JEL: F3 F4 F5 G0 G1
    Date: 2015–01

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