nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒04‒19
thirteen papers chosen by
Martin Berka
University of Auckland

  1. Capital Control Measures: A New Dataset By Andrés Fernández Martín; Michael W. Klein; Alessandro Rebucci; Martin Schindler; Martin Uribe
  2. Global Liquidity, House Prices and the Macroeconomy: Evidence from Advanced and Emerging Economies By Ambrogio Cesa-Bianchi; Luis Felipe Céspedes; Alessandro Rebucci
  3. Exchange rate policy and export performance in a landlocked developing country: The case of Nepal By Ramesh C Paudel; Paul J Burke
  4. Nominal Exchange Rates and Net Foreign Assets' Dynamics: the Stabilization Role of Valuation Effects By Eugeni, Sara
  5. The Sources of Business Cycles in a Low Income Country By Romain Houssa; Jolan Mohimont; Christopher Otrok
  6. Cross-Border Banking and Business Cycles in Asymmetric Currency Unions By Lena Dräger; Christian R. Proaño
  7. Fed Policy Expectations and Portfolio Flows to Emerging Markets By Koepke, Robin
  8. Mercantilism and China’s hunger for international reserves By Marcel Schroder
  9. International Financial Shocks in Emerging Markets By Michael Brei; Almira Buzaushina
  10. Soft Power and Exchange Rate Volatility By Serhan Cevik; Richard Harris; Fatih Yilmaz
  11. Investment in Emerging Markets We Are Not in Kansas Anymore…Or Are We? By Nicolas E. Magud; Sebastian Sosa
  12. A Global Projection Model for Euro Area Large Economies By Zoltan Jakab; Pavel Lukyantsau; Shengzu Wang
  13. Valuation effects, risk sharing, and consumption smoothing By Marcel Schroder

  1. By: Andrés Fernández Martín; Michael W. Klein; Alessandro Rebucci; Martin Schindler; Martin Uribe
    Abstract: This paper presents and describes a new dataset of capital control restrictions on both inflows and outflows of 10 categories of assets for 100 countries over the period 1995 to 2013. Building on the data first presented in Schindler (2009) and other datasets based on the analysis of the IMF's Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER), this dataset includes additional asset categories, more countries, and a longer time period. The paper discusses the manner in which information in the AREAER is translated into a usable dataset. The paper additionally characterizes the data with respect to the prevalence of controls across asset categories, the correlation of controls across asset categories and between controls on inflows and controls on outflows, the aggregation of the separate categories into broader indicators, and the comparison of this dataset with other indicators of capital controls.
    Keywords: Financial management, Capital flows, Financial integration, Capital flows, Financial integration, Capital control measures
    Date: 2015–02
  2. By: Ambrogio Cesa-Bianchi; Luis Felipe Céspedes; Alessandro Rebucci
    Abstract: This paper first compares house price cycles in advanced and emerging economies using a new quarterly house price dataset covering the period 1990- 2012. It is found that that house prices in emerging economies grow faster, are more volatile, less persistent and less synchronized across countries than in advanced economies. They also correlate more closely with capital flows than in advanced economies. The analysis is then conditioned on an exogenous change to global liquidity, broadly understood as a proxy for the international supply of credit. It is found that in emerging markets a global liquidity shock has a much stronger impact on house prices and consumption than in advanced economies. Finally, holding house prices constant in response to this shock tends to dampen its effects on consumption in both advanced and emerging economies, but possibly through different channels: in advanced economies by boosting the value of housing collateral and hence supporting domestic borrowing, and in emerging markets by appreciating the exchange rate and hence supporting the international borrowing capacity of the economy.
    Keywords: Capital flows, Housing finance, Exchange rates, Monetary Policy, Capital flows, Emerging markets, Global liquidity, House prices, External instrumental variables
    Date: 2015–03
  3. By: Ramesh C Paudel; Paul J Burke
    Abstract: This paper examines the implications of Nepal’s exchange rate policy for its export performance over the period 1980–2010. We first document Nepal’s long-standing currency peg against the Indian rupee and that Nepal’s real exchange rate appreciated substantially from the late 1990s. We then employ a gravity modeling approach to confirm that this real exchange rate appreciation has adversely affected Nepal’s exports, especially to third-country markets. Nepal’s exchange rate-related export competitiveness trap provides a motivation to reconsider the current peg.
    Keywords: export performance, real exchange rate, gravity model, Nepal, landlocked
    JEL: F13 F14 O50
    Date: 2015
  4. By: Eugeni, Sara
    Abstract: Recent empirical studies have highlighted that valuation effects associated with fluctuations of nominal exchange rates are one of the key components that drive the behaviour of the net foreign assets position of a country. In this paper, we propose a two-country overlapping-generations model of nominal exchange rate determination with endogenous portfolio choice in line with this evidence. We show that a country runs a current account deficit when its share of world GDP decreases. As the domestic currency depreciates in equilibrium, a positive wealth effect partially offsets the current deficit and therefore has a stabilizing impact on the net external position of the country. The model rationalizes the deterioration of the US external position over the past 20 years as a consequence of the rise of emerging market countries in the world economy, while being consistent with the fact the US have experienced positive valuation effects. Numerical results indicate that valuation effects are quantitatively relevant as they account for more than half of the cumulated US current account deficits, consistently with the data.
    Keywords: portfolio choice; nominal exchange rates; valuation effects; incomplete markets; two-country OLG model
    JEL: F30 F31 F32 F40 F41
    Date: 2015–04
  5. By: Romain Houssa; Jolan Mohimont; Christopher Otrok
    Abstract: We examine the role of global and domestic shocks in driving macroeconomic fluctuations for Ghana. We are able to study the impact of exogenous shocks including productivity, credit supply, and commodity price shocks. We identify the shocks with a combination of sign and recursive restrictions within Bayesian VAR models. As a benchmark we provide results for South Africa to document the difference between two economies with similar structures but different levels of development. We find that global shocks play a more dominant role in South Africa than in Ghana. These shocks operate through three channels: trade, credit and commodity prices.
    Keywords: Business cycles;Ghana;South Africa;External shocks;Commodity price shocks;Regional shocks;Low-income developing countries;Cross country analysis;Vector autoregression;Econometric models;Credit Shocks, Developing Countries, Macroeconomic Stabilization Policies, Sign Restrictions, Bayesian VAR.
    Date: 2015–02–25
  6. By: Lena Dräger (Universität Hamburg (University of Hamburg)); Christian R. Proaño (The New School for Social Research)
    Abstract: Against the background of the recent housing boom and bust in countries such as Spain and Ireland, we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the euro area. For this purpose, we incorporate in an otherwise standard two-region monetary union DSGE model a banking sector module along the lines of Gerali et al. (2010), accounting for borrowing constraints of entrepreneurs and an internal con- straint on the bank’s leverage ratio. We illustrate in particular how different lending standards within the monetary union can translate into destabilizing spill-over effects between the regions, which can in turn result in a higher macroeconomic volatility. This mechanism is modelled by letting the loan-to-value (LTV) ratio that banks demand of entrepreneurs depend on either re- gional productivity shocks or on the productivity shock from one dominating region. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the euro area. Additionally, we show the effects of a monetary policy rule augmented by the loan rate spread as in Cúrdia and Woodford (2010) in a two-country monetary union context.
    Keywords: Cross-border banking, euro area, monetary unions, DSGE
    JEL: F41 F34 E52
    Date: 2015–03
  7. By: Koepke, Robin
    Abstract: The empirical literature has long established that U.S. interest rates are an important driver of international portfolio flows, with lower rates “pushing” capital to emerging markets. On the basis of this literature, it is often argued that the Federal Reserve’s imminent policy tightening cycle is likely to weigh on portfolio flows to emerging markets in coming years. The analysis presented in this paper offers a different interpretation of the literature, suggesting that it is the surprise element of monetary policy that affects EM portfolio inflows. A shift in market expectations towards easier future U.S. monetary policy leads to greater foreign portfolio inflows and vice versa. Given current market expectations of sustained increases in the federal funds rate in coming years, EM portfolio flows could be boosted by a slower pace of Fed tightening than currently expected or could be reduced by a faster pace of Fed tightening.
    Keywords: Capital Flows, Portfolio Flows, Emerging Markets, Monetary Policy, Market Expectations, Fed Funds Futures, Push and Pull
    JEL: E43 F32 F4 G11
    Date: 2014–05–25
  8. By: Marcel Schroder
    Abstract: This paper is motivated by the popular view that the surge in China’s foreign exchange reserves is due to a distortionary exchange rate policy aimed at keeping the real exchange rate undervalued to support export-led growth. It undertakes an in-depth empirical investigation to quantify how much "mercantilist" and "precautionary" motives have contributed to the reserve build-up in China during 1998Q4-2011Q4. A substantial problem is that theory is consistent with employing two vastly differing approaches to defining and estimating the role of mercantilist reserve accumulation. A priori, either method could generate misleading results. The study shows, however, that the distinction between the two approaches is immaterial in China’s case. The results suggest that mercantilism accounts for less than 10 percent of reserve accumulation. Precautionary motives and other factors seem to be the dominant determinants of the surge in China’s international reserves.
    Keywords: international reserves, precautionary demand, mercantilism, China
    JEL: E58 F31 F36
    Date: 2015
  9. By: Michael Brei; Almira Buzaushina
    Abstract: The present paper investigates how an emerging market economy is affected when it suddenly faces a higher risk premium on international capital markets. We study this question empirically for five Latin American economies over the period 1994-2007 within a structural panel vector autoregression and analyze theoretically the transmission mechanism using a dynamic stochastic general equilibrium model (DSGE) of a small open economy. The financial shock is modeled by an unexpected increase in the risk premium of firms’ foreign-currency debt. In response, the adverse shock is amplified by a feedback mechanism between currency depreciation, adverse balance sheet and risk premium effects. The theoretical model is used to study different monetary policy responses. We find that an exchange rate targeting rule that strikes a balance between exchange rate and inflation targeting allows the monetary authority to stabilize inflation and output more effectively than under a pure inflation targeting rule.
    Keywords: CGEM, EPA, Gender inequalities, Trade opening, SenEmerging Markets, Financial Crises, International Capital Markets.
    JEL: F34 F36 G21
    Date: 2015
  10. By: Serhan Cevik; Richard Harris; Fatih Yilmaz
    Abstract: Standard models—based exclusively on macro-financial variables—have made little progress in explaining the behavior of exchange rates. In this paper, we introduce a neglected set of “soft power†factors capturing a country’s demographic, institutional, political and social underpinnings to uncover the “missing†determinants of exchange rate volatility over time and across countries. Based on a balanced panel dataset comprising 115 countries during the period 1996–2011, the empirical results are generally robust across different estimation methodologies and show a high degree of persistence in exchange rate volatility, especially in emerging market economies. After controlling for standard macroeconomic factors, we find that the “soft power†variables—such as an index of voice and accountability, life expectancy, educational attainment, the z-score of banks, and the share of agriculture relative to services—have a statistically significant influence on the level of exchange rate volatility across countries.
    Keywords: Exchange rates;Foreign exchange market volatility;Econometric models;Exchange rate volatility
    Date: 2015–03–20
  11. By: Nicolas E. Magud; Sebastian Sosa
    Abstract: We document that (i) although private investment growth in emerging markets has decelerated in recent years, it came down from cyclical highs and remains close to pre-crisis trends; and (ii) investment-to-output ratios generally remain close to or above historical averages. We show that investment is positively related to expect future profitability, cash flows and debt flows, and negatively associated with leverage. Critically, it is also positively related to (country-specific) commodity export prices and capital inflows. Lower commodity export prices and expected profitability, a moderation in capital inflows, and increased leverage account for the bulk of the recent investment deceleration.
    Keywords: Private investments;Emerging markets;Commodities;Export prices;Capital inflows;Econometric models;Investment, emerging markets, financial constraints, commodity prices, capital inflows.
    Date: 2015–04–03
  12. By: Zoltan Jakab; Pavel Lukyantsau; Shengzu Wang
    Abstract: The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. This paper creates a special version of GPM that includes the four largest Euro Area (EA) countries. The EA countries are more vulnerable to domestic and external demand shocks because adjustments in the real exchange rate between EA countries occur more gradually through inflation differentials. Spillovers from tight credit conditions in each EA country are limited by direct trade channels and small confidence spillovers, but we also consider scenarios where banks in all EU countries tighten credit conditions simultaneously.
    Keywords: Economic forecasting;Germany;France;Italy;Spain;Euro Area;Spillovers;General equilibrium models;Global projection model; Euro area; Forecasting
    Date: 2015–03–02
  13. By: Marcel Schroder
    Abstract: In theory, valuation effects (changes in net external assets of a country arising from movements in exchange rates or asset returns) are an important channel of international risk sharing as they facilitate external adjustment. However, the effects can also be economically destabilizing in the presence of frictions in the international financial system. Despite the growing significance of valuation effects in an era of financial globalization, the nature and extent of their macroeconomic effect has not yet been systematically examined, especially in relation to emerging market economies (EMEs). The study examines the macroeconomic impact of valuation effects for 53 countries from 1980–2010. Valuation effects seem to operate as a risk sharing channel in high income countries. For EMEs the results depend on how valuation effects correlate with domestic consumption growth. There is weak evidence that valuation effects act as a risk sharing channel only if the correlation is negative, and are destabilizing otherwise.
    Keywords: valuation effects, net foreign assets, risk sharing, financial globalization
    JEL: E21 E32 F32 F36
    Date: 2015

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