nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒02‒16
fifteen papers chosen by
Martin Berka
University of Auckland

  1. Winners and Losers from the euro By Pedro Gomis-Porqueras; Laura Puzzello
  2. Housing markets and current account dynamics By Gete, Pedro
  3. The macroeconomic effects of debt- and equity-based capital inflows By Davis, J. Scott
  4. Fiscal Devaluation in a Monetary Union By Engler, Philipp; Tervala, Juha; Ganelli, Giovanni; Voigts, Simon
  5. Japan’s financial crises and lost decades By Hirakata, Naohisa; Sudo, Nao; Takei, Ikuo; Ueda, Kozo
  6. Are Capital Controls Prudential? An Empirical Investigation By Martin Uribe; Alessandro Rebucci; Andres Fernandez
  7. The emerging market economies in times of taper-talk and actual tapering By Diez, Federico J.
  8. Searching for the source of macroeconomic integration across advanced economies By Uluc Aysun
  9. Discovering the signs of Dutch disease in Russia By Mironov, V.V.; Petronevich , A.V.
  10. Determinants of the Choice of Exchange Rate Regime in Resource-Rich Countries By Ruslan Aliyev
  11. Reforms, Finance, and Current Accounts. By Giuseppe, Bertola; Anna, Lo Prete
  12. Income Distribution and Current Account Imbalances By Theobald, Thomas; Belabed, Christian A.
  13. State-of-play in implementing macroeconomic adjustment programmes in the euro area By Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro
  14. Sovereign Credit Risk Co-movements in the Eurozone: Simple Interdependence or Contagion? By Tonzer, Lena; Buchholz, Manuel
  15. Trade and Uncertainty By Novy, Dennis; Taylor, Alan

  1. By: Pedro Gomis-Porqueras; Laura Puzzello
    Abstract: This paper estimates the effect of having joined the monetary union on the income per capita of six early adopters of the euro using the synthetic control method. Our estimates suggest that while the income per capita of Belgium, France, Germany and Italy would have been higher without the euro, that of Ireland would have been considerably lower. The Netherlands is estimated would have been as well off without the euro. In addition, we use the insights from the literature on the economic determinants of the costs and benefits of monetary unions to explain these income effects. We find that early euro adopters with a business cycle more synchronized to that of the union, and more open to intra-union trade and migration lost less or gained more from the euro. A key role in the transmission of post-euro income losses across union members has been played by the integration of capital markets.
    Keywords: Monetary Union; Synthetic Control Method; Per Capita Income; euro
    JEL: C21 C23 E65 F33 N14
    Date: 2015–01–22
  2. By: Gete, Pedro (Georgetown University)
    Abstract: I document a strong negative correlation, both across and within countries, between housing and current account dynamics. I use two methodologies to analyze three potential drivers of housing markets. First, in a quantitative two-country model, I input the dynamics of population, loan-to-value and housing price expectations that have been observed in the OECD economies since the mid 1990s. The model generates housing and current account dynamics very similar to the data. Second, I derive sign restrictions to identify the previous shocks in a vector autoregression. The results confirrm the importance of housing demand shocks in driving both housing and current account dynamics.
    JEL: E32 F32 F44 G28 R21
    Date: 2015–01–01
  3. By: Davis, J. Scott (Federal Reserve Bank of Dallas)
    Abstract: This paper will consider whether debt- and equity-based capital inflows have different macroeconomic effects. Using external instruments in a structural VAR, we first identify the component of capital inflows that is driven not by domestic economic and financial conditions but by conditions in the rest of the world. We then estimate the response to an exogenous shock to debt or equity-based capital inflows in a structural VAR model that includes domestic variables like GDP, inflation, the exchange rate, stock prices, credit growth, and interest rates. An exogenous increase in debt inflows leads to a significant increase in GDP, inflation, stock prices and credit growth and an appreciation of the exchange rate. An exogenous increase in equity-based capital inflows has almost no effect on the same variables. Thus the macroeconomic effects of exogenous capital inflows are almost entirely due to changes in debt, not equity-based.
    JEL: F3 F4
    Date: 2014–11–01
  4. By: Engler, Philipp; Tervala, Juha; Ganelli, Giovanni; Voigts, Simon
    Abstract: Between 1999 and the onset of the economic crisis in 2008 real exchange rates in Greece, Ireland, Italy, Portugal and Spain appreciated relative to the rest of the euro area. This divergence in competitiveness was reflected in the emergence of current account imbalances. Given that exchange rate devaluations are no longer available in a monetary union, one potential way to address such imbalances is through a fiscal devaluation. We use a DSGE model calibrated to the euro area to investigate the impact of a fiscal devaluation, modeled as a revenue-neutral shift from employers social contributions to the Value Added Tax. We find that a fiscal devaluation carried out in Southern European countries has a strong positive effect on output, but a mild effect on the trade balance of these countries. In addition, the negative effect on Central-Northern countries output is weak.
    JEL: E32 E62 F32
    Date: 2014
  5. By: Hirakata, Naohisa (Bank of Japan); Sudo, Nao (Bank of Japan); Takei, Ikuo (Bank of Japan); Ueda, Kozo (Waseda University)
    Abstract: In this paper we explore the role of financial intermediation malfunction in macroeconomic fluctuations in Japan. To this end we estimate, using Japanese data, a financial accelerator model in which the balance sheet conditions of entrepreneurs in a goods-producing sector and those of a financial intermediary affect macroeconomic activity. We find that shocks to the balance sheets of the two sectors have been quantitatively playing important role in macroeconomic fluctuations by affecting lending rates and aggregate investments. Their impacts are prominent in particular during financial crises. Shocks to the entrepreneurs balance sheets have played a key role in lowering investment in the bubble burst during the early 1990s and in the global financial crisis during the late 2000s. Shocks to the financial intermediaries balance sheets have persistently lowered investment throughout the 1990s.
    JEL: E31 E44 E52
    Date: 2014–12–01
  6. By: Martin Uribe (Columbia University); Alessandro Rebucci (The Johns Hopkins Carey Business School); Andres Fernandez (Inter American Development Bank)
    Abstract: A growing recent theoretical literature advocates the use of prudential capital control policy, that is, the tightening of restrictions on cross-border capital flows during booms and the relaxation thereof during recessions. We examine the behavior of capital controls in a large number of countries over the period 1995-2011. We find that capital controls are remarkably acyclical. Boom-bust episodes in output, the current account, or the real exchange rate are associated with virtually no movements in capital controls. These results are robust to decomposing boom-bust episodes along a number of dimensions, including the level of development, the level of external indebtedness, or the exchange-rate regime. We also document a near complete acyclicality of capital controls during the Great Contraction of 2007-2009.
    Date: 2014
  7. By: Diez, Federico J. (Federal Reserve Bank of Boston)
    Abstract: The emerging market economies (EME) experienced financial distress during two recent periods, both linked to the prospect of the Federal Reserve starting to slow its asset purchases. This policy change was expected to reverse the capital flows directed to the EME. Despite this aggregate effect, a closer analysis shows that there were significant differences across the EME during the time when talk of the upcoming taper began and the period when the policy was implemented. The author makes use of the literature on currency crises to analyze the different cross-country responses and to identify a potential crisis period in the near future, defined as the next 24 months.
    Keywords: currency crises; exchange rates; emerging markets
    JEL: F31 F32 F41 F42
    Date: 2014–11–14
  8. By: Uluc Aysun (University of Central Florida, Orlando, FL)
    Abstract: This paper estimates a two-country open economy DSGE model by using U.S. and Euro Area data. The baseline model, where the two regions are linked only through the trade of goods and risk-free bonds, fails to replicate the high cross-regional macro-economic correlation in the data. I search for the determinants of this correlation by recon?guring the model?s shock processes in two ways. First, I include shocks that symmetrically a¤ect each region. Second I allow for the transmission of shocks between the two regions. While both of these changes considerably improve the model?s per-formance along the international dimension, common shocks appear to be the main drivers of cross-regional correlation. Under both speci?cations, comovements of variables are mostly determined by demand and ?nancial shocks. Productivity, cost-push and exchange rate shocks, by contrast, play a limited role.
    Keywords: Macroeconomic integration, DSGE, Bayesian estimation, U.S., Euro Area
    JEL: E32 F41 F42 F44
    Date: 2015–01
  9. By: Mironov, V.V. (BOFIT); Petronevich , A.V. (BOFIT)
    Abstract: This paper examines the problem of Dutch disease in Russia during the oil boom of the 2000s, from both the theoretical and empirical points of view. Our analysis is based on the classical model of Dutch disease by Corden and Neary (1982). We examine the relationship between changes in the real effective exchange rate of the ruble and the evolution of the Russian economic structure during the period 2002 – 2013. We empirically test the main effects of Dutch disease, controlling for specific features of the Russian economy, namely the large role of state-owned organizations. We estimate the resource movement and spending effects as determined by the theoretical model and find the presence of several signs of Dutch disease: the negative impact of the real effective exchange rate on growth in the manufacturing sector, the growth of total income of workers, and the positive link between the real effective exchange rate and returns on capital in all three sectors. Although also predicted by the model and clearly observable, the shift of labor from manufacturing to services cannot be explained by ruble appreciation alone.
    Keywords: Dutch disease; resource curse; real effective exchange rate; cointegration model; economic policy; Russia
    JEL: C32 F41 F43
    Date: 2015–01–19
  10. By: Ruslan Aliyev
    Abstract: This research studies the specific determinants of the choice of exchange rate regime in resource-rich countries. We run multinomial logit regressions for an unbalanced panel data set of 145 countries over the 1975-2004 period. We find that resource-rich countries are more likely to adopt a fixed exchange rate regime compared to resource-poor countries. Furthermore, we provide evidence that output volatility contributes to the likelihood of choosing a fixed exchange rate regime positively in resource-rich countries and negatively in resource-poor countries. We believe that in resource-rich countries a fixed exchange rate regime is mainly preferred due to its stabilization function in the face of turbulent foreign exchange inflows. Moreover, our results reveal that the role of democracy and independent central banks in choosing more flexible exchange rate regimes is stronger in resource-rich countries. In resource-rich countries that possess non-democratic institutions and non-independent central banks, the government is less accountable in spending natural resource revenues and fiscal dominance prevails. In this situation, fluctuations in natural resource revenues are more easily transmitted into the domestic economy and therefore a fixed exchange rate becomes a more favorable option.
    Keywords: monetary policy; exchange rate regime; natural resource-rich countries;
    JEL: E52 E58 Q3
    Date: 2014–12
  11. By: Giuseppe, Bertola; Anna, Lo Prete (University of Turin)
    Abstract: We analyze the implications of labor market reforms for an open economy’s human capital investment and future production. A stylize d model shows that labor market deregulation can imply more positive current account balances if financial markets are imperfect and labor market institutions not only distort labor allocation, but also smooth income. Empirically, in OECD country-level panel data, we find that labor market deregulation has been positively related to current account surpluses on average and more strongly so when and where financial market access was more limited. These results are robust to inclusion of standard determinants of current account imbalances, and do not appear to be driven by cyclical phenomena.
    Date: 2015–02
  12. By: Theobald, Thomas; Belabed, Christian A.
    Abstract: We develop a three-country, stock-fl ow consistent macroeconomic model to study the e ffects of changes in both personal and functional income distribution on national current account balances. Each country has a household sector and a non-household (corporate) sector. The household sector is divided into income deciles, and consumer demand is characterized by upward-looking status comparisons following the relative income hypothesis of consumption. The strength of consumption emulation depends on country-specifi c institutions. The model is calibrated for the United States, Germany and China. Simulations suggest that a substantial part of the increase in household debt and the decrease in the current account in the United States since the early 1980s can be explained by the interplay of rising (top-end) household income inequality and institutions. On the other hand, the weak domestic demand and increasing current account balances of Germany and China since the mid-1990s are strongly related to shifts in the functional income distribution at the expense of the household sector.
    JEL: D31 D33 F32
    Date: 2014
  13. By: Gros, Daniel; Alcidi, Cinzia; Belke, Ansgar; Coutinho, Leonor; Giovannini, Alessandro
    Abstract: Two of the four macroeconomic adjustment programmes, Portugal and Ireland s, can be considered a success in the sense that the initial expectations in terms of adjustment, both fiscal and external, were broadly fulfilled. A rebound based on exports has taken hold in these two countries, but a full recovery will take years. In Greece the initial plans were insufficient. While the strong impact of the fiscal adjustment on demand could have been partially anticipated at the time, the resistance to structural reforms was more surprising and remains difficult to cure. The fiscal adjustment is now almost completed, but the external adjustment has not proceeded well. Exports are stagnating despite impressive falls in wage costs. In Cyprus, the outcome has so far been less severe than initially feared. It is still too early to find robust evidence in any country that the programmes have increased the long-term growth potential. Survey-based evidence suggests that structural reforms have not yet taken hold. The EU-led macroeconomic adjustment programmes outside the euro area (e.g. Latvia) seem to have been much stricter, but the adjustment was quicker and followed by a stronger rebound.
    JEL: F32 E62 E22
    Date: 2014
  14. By: Tonzer, Lena; Buchholz, Manuel
    Abstract: Since the onset of the eurozone sovereign debt crisis, credit risk spreads in Europe have diverged. Despite this divergence, credit risk comoves strongly within certain country groups such as the eurozone periphery. We seek to answer what the determinants of the observed pattern of credit risk co-movements are and whether and during which periods sovereign debt markets have been subject to contagion. We proceed in three steps. First, we apply dynamic conditional correlations from a multivariate GARCH model to sovereign CDS spreads of 17 countries over the period 2008 to 2012. Second, we separate periods of simple interdependence from contagion. Third, we analyze the determinants behind credit risk co-movements and the role of contagion using regression analysis. Our results reveal a high degree of co-movements in sovereign credit risk, especially for eurozone countries during the sovereign debt crisis. We find strong evidence for both fundamentals and nonfundamentals based contagion. Similarities in economic fundamentals, cross-country linkages in banking and common market sentiment play a significant role.
    JEL: F30 G01 G15
    Date: 2014
  15. By: Novy, Dennis; Taylor, Alan
    Abstract: We offer a new explanation as to why international trade is so volatile in response to economic shocks. Our approach combines the uncertainty shock idea of Bloom (2009) with a model of trade, extending the idea to the open economy. Firms import intermediate inputs from home or foreign suppliers, but with higher costs in the latter case. Due to fixed costs of ordering firms hold an inventory of intermediates. In response to an uncertainty shock firms optimally adjust their inventory by cutting orders of foreign intermediates disproportionately strongly. In the aggregate, this leads to a bigger contraction in international trade flows than in domestic activity. We confront the model with newly-compiled U.S. import data and industrial production data going back to 1962, and also with disaggregated data back to 1989. Our results suggest a tight link between uncertainty and fluctuations in international trade.
    JEL: F10 E30 F40
    Date: 2014

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