nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒05‒02
eight papers chosen by
Martin Berka
University of Auckland

  1. The Valuation Channel of International Adjustment By Ghironi, Fabio; Lee, Jaewoo; Rebucci, Alessandro
  2. Large Capital Inflows, Sectoral Allocation and Economic Performance By Benigno, Gianluca; Converse, Nathan; Fornaro, Luca
  3. Long-run Determinants of the Real Exchange Rate: Brazil – 1947/95 By Antonio Fiorencio; Ajax R. B. Moreira
  4. What Drives Capital Flows to Emerging Markets? A Survey of the Empirical Literature By Koepke, Robin
  5. Capital Flows, Credit Crunch and Deleveraging Dynamics: The Case of Slovenia, Croatia and Hungary in Comparison By Vidakovic, Neven; Zbašnik, Dušan
  6. A Wake-Up-Call Theory of Contagion By Toni Ahnert; Christoph Bertsch
  7. The euro as an international currency By Agnès Bénassy-Quéré
  8. The International Transmission of U.S. Monetary Policy: New Evidence from Trade Data By Shu Lin; Haichun Ye

  1. By: Ghironi, Fabio; Lee, Jaewoo; Rebucci, Alessandro
    Abstract: International financial integration has greatly increased the scope for changes in a country’s net foreign asset position through the “valuation channel” of external adjustment, namely capital gains and losses on the country’s external assets and liabilities. We examine this valuation channel theoretically in a dynamic equilibrium portfolio model with international trade in equity that encompasses complete and incomplete asset market scenarios. By separating asset prices and quantities in the definition of net foreign assets, we can characterize the first-order dynamics of both valuation effects and net foreign equity holdings. First-order excess returns are unanticipated and i.i.d. in our model, but capital gains and losses on equity positions feature persistent, anticipated dynamics in response to productivity shocks. The separation of prices and quantities in net foreign assets also enables us to characterize fully the role of capital gains and losses versus the current account in the dynamics of macroeconomic aggregates. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete, showing how these different channels contribute to dampening (or amplifying) the impact response of the cross-country consumption differential to shocks and to keeping it constant in subsequent periods.
    Keywords: current account; equity; net foreign assets; risk sharing; valuation
    JEL: F32 F41 G11 G15
    Date: 2015–04
  2. By: Benigno, Gianluca; Converse, Nathan; Fornaro, Luca
    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 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; Sectoral Allocation; Sudden Stop
    JEL: F31 F32 F41
    Date: 2015–04
  3. By: Antonio Fiorencio; Ajax R. B. Moreira
    Abstract: This paper presents a model for the long-run determinants of the Brazilian real exchange rate for the period 1947/95. This is a simple representative agent model that links the exchange rate, external debt and net exports. It is assumed that: a) the country pays an interest rate on its debt which is an increasing function of the debt/GDP ratio; b) the real exchange rate is a control variable. The transitional dynamics of the model following different shocks is analysed. The model suggests that the relevant variables are the real exchange rate, external debt and net exports. A VEC model using these variables shows that the Brazilian data support the existence of one cointegrating relation among the three variables, which we interpret as the empirical counterpart of the long-run conditions of the theoretical model. Finally, we impose restrictions to identify shocks that could be interpreted as the non-observable exogenous variables of the theoretical model. The dynamics of the empirical model is estimated.
    Date: 2015–01
  4. By: Koepke, Robin
    Abstract: This paper reviews the rapidly growing empirical literature on the drivers of capital flows to emerging markets. The empirical evidence is structured based on the recognition that the drivers of capital flows vary over time and across different types of capital flows. The drivers are classified using the traditional “push vs. pull” framework, which is augmented by a distinction between cyclical and structural factors. Push factors are found to matter most for portfolio flows, somewhat less for banking flows, and least for FDI. Pull factors matter for all three components, but most for banking flows. A historical perspective suggests that the recent literature may have overemphasized the importance of cyclical factors at the expense of longer-term structural trends.
    Keywords: Determinants of EM Capital Flows, Push and Pull, FDI, Portfolio Flows, Bank Lending
    JEL: F21 F32 F34 F41 F42 G1
    Date: 2015–04–23
  5. By: Vidakovic, Neven; Zbašnik, Dušan
    Abstract: This paper investigates the deleveraging process in three neighboring countries: Slovenia, Croatia and Hungary. Prior to the economic crisis of 2008 all three countries have experienced solid rates of economic growth, economic stability, but also fast rise of foreign debt. After 2008 all three countries are faced with a prolonged recession and without long term sustainable sources of growth. This paper looks at the effects of capital flow into three economies, determines the reasons for the increase in foreign debt and investigates the policy response. Paper finds that each of the three countries had different reason for the increase in foreign debt, but the economic effects are the same: prolonged macroeconomic instability and recession. In order to cover both economic theory and real economic effects authors use a modified version of the RBC model with soft budget constraint and free capital flows. The model does to some extent explain the effects leveraging process has had on the three economies. In the end paper investigates what was the role of the central bank in controlling the increase in foreign debt and concludes the role of central bank has to be augmented for control of capital flows in order to avoid crisis like the one started in 2008.
    Keywords: deleveraging, monetary policy, real business cycle, capital flows
    JEL: E58 F34 F44
    Date: 2014–02
  6. By: Toni Ahnert; Christoph Bertsch
    Abstract: We propose a novel theory of financial contagion. We study global coordination games of regime change in two regions with an initially uncertain correlation of regional fundamentals. A crisis in region 1 is a wake-up call to investors in region 2 that induces a reassessment of local fundamentals. Contagion after a wake-up call can occur even if investors learn that fundamentals are uncorrelated and common lender effects or balancesheet linkages are absent. Applicable to currency attacks, bank runs and debt crises, our theory of contagion is supported by existing evidence and generates a new testable implication for empirical work.
    Keywords: Exchange rates; Financial stability; International financial markets
    JEL: D82 F3 G01
    Date: 2015
  7. By: Agnès Bénassy-Quéré (Paris School of Economics - Centre d'Economie de la Sorbonne)
    Abstract: The euro, in spite of having many of the required attributes put forward by the theoretical literature and past experience, has failed to fulfill all the criteria that would enable it to rival the dollar as an international currency. This does not mean that the euro cannot achieve a status similar to that of the dollar; however, the window of opportunity may not last much more than a decade before the renminbi overtakes the euro. European monetary unification has never explicity sought for its currency to gain an international status. This makes sense insofar as the key elements required for the euro to expand internationally are also those to be pursued internally: GDP growth; a fiscal backing to the single currency; a deep, liquid and resilient capital market; and a unified external representation of the euro area
    Keywords: Currency internationalization; euro
    JEL: F36
    Date: 2015–03
  8. By: Shu Lin (Fudan University and Hong Kong Institute for Monetary Research); Haichun Ye (Shanghai University of Finance and Economics)
    Abstract: We make the first attempt in the literature to empirically examine the spillover effects of U.S. monetary policy on trade in other countries. In a large sector-level bilateral trade dataset of 137 countries for the years 1970-2000, we find strong and robust evidence supporting an international credit channel of U.S. monetary policy transmission. We show that: 1) financially more constrained sectors have a more negative exposure of their trade to a tight U.S. monetary policy; 2) this international credit channel works mainly during significant U.S. monetary tightening periods (e.g., a large increase in interest rates); 3) the negative impact of a tight U.S. policy is significantly stronger in financially less developed countries or countries with no monetary autonomy.
    Keywords: International Transmission of U.S. Monetary Policy, Trade, Credit Constraints, Credit Channel
    JEL: E52 E44 F14 F33 F42
    Date: 2015–04

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