nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒05‒09
eight papers chosen by
Martin Berka
University of Auckland

  1. Monetary Policy Spillovers and the Trilemma in the New Normal: Periphery Country Sensitivity to Core Country Conditions By Joshua Aizenman; Menzie D. Chinn; Hiro Ito
  2. For a Few Dollars More: Reserves and Growth in Times of Crises By M. Bussière, Gong Cheng, Menzie Chinn and Noëmie Lisack; G. Cheng; M. Chinn; N. Lisack
  3. Exchange Rate Pass-Through and Market Structure in a Multi-Country World By Kanda Naknoi
  4. Prolonged reserves accumulation, credit booms, asset prices and monetary policy in Asia By Andrew J Filardo; Pierre L Siklos
  5. A Liquidity-Based Resolution of the Uncovered Interest Parity Puzzle By Jung, Kuk Mo; Lee, Seungduck
  6. High versus Low Inflation: Implications for Price-Level Convergence By M. Ege Yazgan; Hakan Yilmazkuday
  7. Current account “Core-periphery dualism” in the EMU By Tatiana Cesaroni; Roberta De Santis
  8. Internal Trade, Productivity, and Interconnected Industries: A Quantitative Analysis By Trevor Tombe; Lukas Albrecht

  1. By: Joshua Aizenman; Menzie D. Chinn; Hiro Ito
    Abstract: We investigate why and how the financial conditions of developing and emerging market countries (peripheral countries) can be affected by the movements in the center economies - the U.S., Japan, the Eurozone, and China. We apply a two-step approach. First, we estimate the sensitivity of countries’ financial variables to the center economies, controlling for global and domestic factors. Next, we examine the association of the estimated sensitivity coefficients with the macroeconomic conditions, policies, real and financial linkages with the center economies, and the level of institutional development. In the last two decades, for most financial variables, the strength of the links with the center economies have been the dominant factor. While certain macroeconomic and institutional variables are important, the arrangement of open macro policies such as the exchange rate regime and financial openness are also found to have direct influence on the sensitivity to the center economies. We also find, among other results, that an economy that pursues greater exchange rate stability and financial openness faces a stronger link with the center economies. Nonetheless, exchange rate regimes have mostly indirect effects on the strength of financial linkages. We conclude the trilemma remains relevant.
    JEL: F33 F41
    Date: 2015–04
  2. By: M. Bussière, Gong Cheng, Menzie Chinn and Noëmie Lisack; G. Cheng; M. Chinn; N. Lisack
    Abstract: Based on a dataset of 112 emerging economies and developing countries, this paper addresses the question whether the accumulation of international reserves has effectively protected countries during the 2008-09 financial crisis. More specifically, the paper investigates the relation between international reserves and the existence of capital controls. We find that the level of reserves matters: countries with high reserves relative to short-term debt suffered less from the crisis, particularly when associated with a less open capital account. This suggests some degree of complementarity between reserve accumulation and capital controls.
    Keywords: Foreign reserves, capital controls, financial crises, economic growth.
    JEL: F31 G01
    Date: 2015
  3. By: Kanda Naknoi (University of Connecticut)
    Abstract: In a multi-country world, currencies do not move in isolation, and competitors’ exchange rate movements may help or hurt an exporting firm. Motivated by this fact, I construct a multi-country model to examine how export prices are affected by movements in own-currency and cross-currency exchange rates. Own-currency appreciations move firms along the demand curve while cross-currency appreciations shift the position of the demand curve. Both affect the price elasticity of demand and therefore the degree to which exchange rate movements affect prices. When own- and cross-currency appreciations are correlated, the exporter changes price in response to both. In the empirical section, I employ monthly data and provide estimates of own and cross exchange rate pass-through to the price of exports from Canada to the U.S. The cross exchange rate pass-through is found to exist in about one-third of sample sectors.
    Keywords: Exchange rate pass-through; Pricing to market; Exchange rate shocksLength: 35 pages
    JEL: F31 F41
    Date: 2015–04
  4. By: Andrew J Filardo; Pierre L Siklos
    Abstract: This paper examines past evidence of prolonged periods of foreign exchange reserves accumulation in the Asia-Pacific region. One empirical challenge is to identify periods of reserve accumulation that are sufficiently large and persistent to be categorised as prolonged. Several proxies for prolonged episodes are considered, including a newly proposed one based on a factor model. We then identify the key macrofinancial determinants of prolonged reserve accumulation. Two broad conclusions emerge from the stylised facts and the econometric evidence. First, the best protection against costly reserves accumulation is a more flexible exchange rate. Second, the necessity of accumulating reserves as a bulwark against goods price inflation is misplaced. Instead, there is a strong link between asset price movements and the likelihood of accumulating foreign exchange reserves that are costly. Policy implications are also drawn.
    Keywords: foreign exchange reserves accumulation, monetary and financial stability
    Date: 2015–04
  5. By: Jung, Kuk Mo; Lee, Seungduck
    Abstract: A new monetary theory is set out to resolve the “Uncovered Interest Parity Puzzle (UIP Puzzle)”. It explores the possibility that liquidity properties of money and nominal bonds can account for the puzzle. A key concept in our model is that nominal bonds carry liquidity premium due to their medium of exchange role as either collateral or means of payment. In this framework no-arbitrage condition ensures a positive comovement of real return on money and nominal bonds. Thus, when inflation in one country becomes relatively lower, i.e., real return on this currency is relatively higher, its nominal bonds should also yield higher real return. We show that their nominal returns can also become higher under the economic environment where collateral pledgeability and/or liquidity of nominal bonds and/or collateralized credit based transactions are relatively bigger. Since a currency with lower inflation is expected to appreciate, the high interest currency does indeed appreciate in this case, i.e., the UIP puzzle is no longer an anomaly in our model. Our liquidity based theory in fact has interesting implications on many empirical observations that risk based explanations find difficult to reconcile with.
    Keywords: uncovered interest parity puzzle, monetary search models, FOREX market
    JEL: E31 E4 E52 F31
    Date: 2015–05
  6. By: M. Ege Yazgan (Department of Economics, Kadir Has University); Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates the relationship between the level of inflation and regional price-level convergence utilizing micro-level price data from Turkey during two clearly distinguishable periods of high and low inflation. The results indicate that higher persistence and slower convergence of price levels are evident during the low-inflation period, which corresponds to the inflation-targeting (IT) regime that was successful in lowering and maintaining inflation at acceptable levels. During this low-inflation IT regime, it is also shown that inflation convergence across regions appears to occur more quickly and may be responsible for the slower pace of convergence in price levels.
    Keywords: Price Convergence, Inflation Convergence, Micro-level Prices, Turkey
    JEL: E31 F41
    Date: 2015–05
  7. By: Tatiana Cesaroni; Roberta De Santis
    Abstract: Current account (CA) dispersion within European Union (EU) member states has been increasing progressively since the 1990s. Interestingly, the persistent deficits in many peripheral countries have not been accompanied by a significant growth process able to stimulate a long run rebalancing as neoclassical theory predicts. To shed light on the issue this paper investigates the determinants of Eurozone CA imbalances, focusing on the role played by financial integration. The analysis considers two samples of 22 OECD and 15 EU countries, three time horizons corresponding to various steps in European integration, different control variables and several panel econometric methods. The results suggest that within the OECD and EU groups, financial integration contributed to explain CA deterioration in the peripheral countries especially in the post-EMU period. The business cycle seems to have played a growing role over time, whereas the role of competiveness seems to have diminished with respect to the past.
    Keywords: current account imbalances, financial integration, EMU, core-periphery countries, panel econometric models
    JEL: F36 F43
    Date: 2015–03
  8. By: Trevor Tombe (University of Calgary); Lukas Albrecht
    Abstract: Does trade within a country affect welfare and productivity? What are the magnitude and consequences of costs to such trade? To answer these questions, we exploit unique Canadian data to measure internal trade costs in a variety of ways – they are large, and vary across sectors and provinces. To quantify their consequences for welfare and productivity, we use a recent multi-sector trade model featuring rich input-output relationships. We find inter-provincial trade is an important contributor to Canada’s GDP and welfare, though there are significant costs to such trade. Reducing inter-provincial trade costs by 10% yields aggregate gains of 0.9%; eliminating our preferred estimates of costs, gains average between 3-7% – equivalent to real GDP gains between $50-$130 billion. Finally, as policy reforms are often sector-specific, we liberalize sectors one at a time and find gains are largest in highly interconnected industries.
    Keywords: Internal trade; gains from trade; input-output linkages
    JEL: F1 F4 R1
    Date: 2015–05–05

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