nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒04‒11
nine papers chosen by
Martin Berka
University of Auckland

  1. Adjustments of Capital Account Restrictions and Exchange Rate Regimes in East Asia By Yoshino, Naoyuki; Kaji, Sahoko; Asonuma, Tamon
  2. Exchange rate misalignments and the external balance under a pegged currency system By Blaise Gnimassoun
  3. Demand for Value Added and Value-Added Exchange Rates By Rudolfs Bems; Robert C. Johnson
  4. Bubbles and Central Banks: Historical Perspectives By Brunnermeier, Markus K; Schnabel, Isabel
  5. What Drives International Portfolio Flows? By Lucio Sarno; Ilias Tsiakas; Barbara Ulloa
  6. Testing Black Market vs. Official PPP: A Pooled Mean Group Estimation Approach By Goswami, Gour Gobinda; Hossain, Mohammad Zariab
  7. Invoice Currency: puzzling evidence and new questions from Brazil By Daniel Gersten Reiss
  8. Assessing Asian Equilibrium Exchange Rates as Policy Instruments By MASUJIMA Yuki

  1. By: Yoshino, Naoyuki (Asian Development Bank Institute); Kaji, Sahoko (Asian Development Bank Institute); Asonuma, Tamon (Asian Development Bank Institute)
    Abstract: This paper discusses adjustments of capital account restrictions and exchange rate regimes in East Asia. Monetary authorities have two options for these adjustments: gradual adjustments or rapid adjustments. We analyze the costs and benefits for both adjustment options in each area, i.e., capital account restrictions and exchange rate regime. The paper provides prominent country cases for each adjustment option to emphasize the benefits for policymakers. We then propose four transition policy options for East Asian countries aiming to relax capital account restrictions and increase flexibility in exchange rates from fixed regimes with capital account controls.
    Keywords: exchange rate transition; east asia; capital account controls; exchange rate transition policies
    JEL: F33 F41 F42
    Date: 2015–04–03
  2. By: Blaise Gnimassoun
    Abstract: This paper analyzes the link between the exchange rate misalignments and the external balance under a pegged currency system focusing on the CFA zone. Having discussed and chosen an appropriate analytical framework, it addresses the issue of model uncertainty regarding the equilibrium exchange rate model before estimating currency misalignments. The results show that misalignments have a negative and asymmetric impact on the current account. While overvaluation of the CFA franc deteriorates the current account in the CFA zone, undervaluation does not improve it. Finally, our results highlight that the export concentration tends to exacerbate the overall negative impact of currency misalignments on the external balance. Thus, greater economic diversification is needed in an environment in which countries face both uncertainty in the terms of trade and uncertainty in the nominal exchange rate to conduct a proactive exchange rate policy.
    Keywords: Currency peg, Exchange rate misalignments, Current account, concentration of exports, Bayesian model averaging.
    JEL: F31 F32 C11
    Date: 2015
  3. By: Rudolfs Bems; Robert C. Johnson
    Abstract: We examine the role of cross-border input linkages in governing how international relative price changes influence demand for domestic value added. We define a novel value-added real effective exchange rate (REER), which aggregates bilateral value-added price changes, and link this REER to demand for value added. Input linkages enable countries to gain competitiveness following depreciations by supply chain partners, and hence counterbalance beggar-thy-neighbor effects. Cross-country differences in input linkages also imply that the elasticity of demand for value added is country specific. Using global input-output data, we demonstrate these conceptual insights are quantitatively important and compute historical value-added REERs.
    JEL: F1 F4
    Date: 2015–04
  4. By: Brunnermeier, Markus K; Schnabel, Isabel
    Abstract: This paper reviews some of the most prominent asset price bubbles from the past 400 years and documents how central banks (or other institutions) reacted to those bubbles. The historical evidence suggests that the emergence of bubbles is often preceded or accompanied by an expansionary monetary policy, lending booms, capital inflows, and financial innovation or deregulation. We find that the severity of the economic crisis following the bursting of a bubble is less linked to the type of asset than to the financing of the bubble—crises are most severe when accompanied by a lending boom and high leverage of market players, and when financial institutions themselves are participating in the buying frenzy. Past experience also suggests that a purely passive “cleaning up the mess” stance toward the buildup of bubbles is, in many cases, costly. Monetary policy and macroprudential measures that lean against inflating bubbles can and sometimes have helped deflate bubbles and mitigate the associated economic crises. However, the correct implementation of such proactive policy approaches remains fraught with difficulties.
    Keywords: bubbles; capital flows; credit; macroprudential policy; monetary policy
    JEL: E44 E52 F34 G01 N10
    Date: 2015–04
  5. By: Lucio Sarno (Faculty of Finance, Cass Business School, UK; The Rimini Centre for Economic Analysis, Italy); Ilias Tsiakas (University of Guelph, Canada; The Rimini Centre for Economic Analysis, Italy); Barbara Ulloa (Central Bank of Chile)
    Abstract: Understanding what drives international portfolio flows has important policy implications for countries wishing to exert some control on the size, direction and volatility of the flows. This paper empirically assesses the relative contribution of common (push) and country-specific (pull) factors to the variation of bond and equity flows from the US to 55 other countries. Using a Bayesian dynamic latent factor model, we find that more than 80% of the variation in bond and equity flows is due to push factors from the US to other countries. Hence global economic forces seem to prevail over domestic economic forces in explaining movements in international portfolio flows. The dynamics of push and pull factors can be partially explained by US and foreign economic fundamentals.
    Date: 2015–03
  6. By: Goswami, Gour Gobinda; Hossain, Mohammad Zariab
    Abstract: Testing purchasing power parity (PPP) using black market exchange rate data has gained popularity in recent times. It is claimed that black market exchange rate data more often support the PPP than the official exchange rate data. In this study, to assess both the long run stability of exchange rate and the short run dynamics, we employ Pooled Mean Group (PMG) Estimation developed by Pesaran et al. (1999) on eight groups of countries based on different criteria. Using the famous Reinhart and Rogoff (2002) dataset on black market exchange rate in the framework of Bahmani-Oskooee and Goswami (2005), the results are in sharp contrast with the most recent studies. We find very weak and insufficient support for the PPP using both the black market and the official exchange rate data. The assumption of long run homogeneity is also invalidated for some groups. Therefore, the results of PPP testing are not conclusive even though we switch from the official rate to the black market rate for a global data set. The finding holds even though we swap static panel for dynamic heterogeneous panel in the light of PMG estimation.
    Keywords: Purchasing Power Parity (PPP), Pooled Mean Group (PMG) Estimator, Panel Data, Black Market Exchange Rate
    JEL: C23 F3
    Date: 2013–12
  7. By: Daniel Gersten Reiss
    Abstract: This article for the first time uses Brazilian trade data to draw conclusions about the invoice currency choice—both in general and as it pertains to the Brazilian real (BRL). We find that the Brazil-Argentina policy of providing payment orders associated to an exchange transaction between their currencies has had a significant impact on the currency chosen for invoicing, establishing a link between the availability of financial instruments and the invoice currency choice. Moreover, the evidence does not confirm some previous international results. We identify that in Brazil there is no coincidence regarding the use of BRL for invoicing and its use for making payments. Yet we find that the main exports denominated in BRL are homogenous goods—sugar and tobacco—suggesting that some bargaining power might remain even if goods are traded in international markets. From the BRL-specific perspective, we categorically move away from the idea that the BRL is not used in Brazilian international trade. Although it is used at a limited absolute volume, an exceptional ninefold growth between 2007 and 2011 is observed. New intriguing questions about Brazilian currency usage can therefore be proposed
    Date: 2015–03
  8. By: MASUJIMA Yuki
    Abstract: This paper attempts to estimate the quarterly equilibrium exchange rates (EER) of nine Asian currencies (Japan, China, Korea, Hong Kong, Singapore, Thailand, Indonesia, Malaysia, and Philippines) with the Behavioral Equilibrium Exchange Rates (BEER) from 2006 to 2014. The BEER was compared with the Fundamental Equilibrium Exchange Rates (FEER) published biannually by the Peterson Institute for International Economics. While four Asian currencies tend to be undervalued in the Peterson's FEER approach, the assessment of Asian currencies changed over time in this paper's BEER approach, which captures the Crowther's theory about the development of balance of payments over the long term. Results imply that the BEER approach is imperative for the assessment of Asian currencies, while the equilibrium level of BEER is sometimes sensible for the change of a sample period. Lessons from the results indicate that the EER of countries that shift to a more matured stage, such as Japan and emerging Asia, needs to be frequently assessed by a multi-method so that policy makers can implement appropriate coordination of exchange rate policies for the integration of Asian economies.
    Date: 2015–03
  9. By: Pami Dua (Departments of Economics, Delhi School of Economics, University of Delhi, India); Divya Tuteja (Departments of Economics, Delhi School of Economics, University of Delhi, India)
    Abstract: We study the impact of recent crisis episodes viz. the global recession of 2008-09 and the Eurozone debt crisis of 2010-12 on the Emerging Market Economies (EMEs) of China and India. Macroeconomic indicators suggest that both China and India were impacted by the crises. We focus on the trade channel of transmission of the crises i.e. on exports from China and India to the U.S. and Euro Area respectively. This study finds that the exports from China and India to both the destinations were affected as a result of the crisis episodes with major exporting sectors of the two economies displaying negative rates of growth. Further, Markovswitching autoregressive models are utilized to examine the regimes in the growth rate of total value of exports to the U.S. and Eurozone. We find presence of slowdown and pickup regimes in the export growth rates. Furthermore, Markov-switching regression results suggest that the economic activity levels in the U.S. and the Eurozone significantly and positively affect the exports to these destinations from China and India across high as well as low export growth rate regimes. As a result, a dampening of the economic activity in the U.S. and Eurozone in the wake of the crises led to a reduction in the rate of growth of exports from China and India due to a fall in the demand for exports.
    Keywords: Global Recession, Eurozone Debt crisis, China, India, Exports, Trade Channel
    JEL: C22 F14 G01
    Date: 2015–04

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