nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒06‒05
twelve papers chosen by
Martin Berka
Massey University

  1. Currency Unions and Trade: A Post-EMU Mea Culpa By Glick, Reuven; Rose, Andrew K
  2. The Great Leveraging in the GIIPS Countries: Domestic Credit and Net Foreign Liabilities By Juan Carlos Cuestas; Karsten Staehr
  3. Self-Fulfilling Debt Crises: Can Monetary Policy Really Help? By Bacchetta, Philippe; Perazzi, Elena; van Wincoop, Eric
  4. Financal frictions and policy cooperation: a case with monopolistic banking and staggered loan contracts By Fujiwara, Ippei; Teranishi, Yuki
  5. Interest rates, eurobonds and intra-European exchange rate misalignments: the challenge of sustainable adjustments in the eurozone By Vincent Duwicquet; Jacques Mazier; Jamel Saadaoui
  6. Sustainable international monetary policy cooperation By Fujiwara, Ippei; Kam, Timothy; Sunakawa, Takeki
  7. Factor Analysis of the Dynamics of the Real Exchange Rate of the Ruble By Bozhechkova, Alexandra; Trunin, Pavel
  8. Regional heterogeneity and monetary policy By Beraja, Martin; Fuster, Andreas; Hurst, Erik; Vavra, Joseph
  9. Monetary and macroprudential policy with foreign currency loans By Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
  10. The euro as an international currency By Agnès Benassy-Quere
  11. Country-specific oil supply shocks and the global economy: a counterfactual analysis By Mohaddes, Kamiar; Pesaran, M. Hashem
  12. Real exchange rate forecasting and ppp: this time the random walk loses By Ca'Zorzi, Michele; Muck, Jakub; Rubaszek, Michal

  1. By: Glick, Reuven; Rose, Andrew K
    Abstract: In our European Economic Review (2002) paper, we used pre-1998 data on countries participating in and leaving currency unions to estimate the effect of currency unions on trade using (then-) conventional gravity models. In this paper, we use a variety of empirical gravity models to estimate the currency union effect on trade and exports, using recent data which includes the European Economic and Monetary Union (EMU). We have three findings. First, our assumption of symmetry between the effects of entering and leaving a currency union seems reasonable in the data but is uninteresting. Second, EMU typically has a smaller trade effect than other currency unions, often estimated to be negligible or negative. Third and most importantly, estimates of the currency union effect on trade are sensitive to the exact econometric methodology; we find no substantive reliable and robust effect of currency union on trade.
    Keywords: bilateral; common; country; exports; fixed; gravity; Poisson; specific; time-varying
    JEL: F15 F33
    Date: 2015–05
  2. By: Juan Carlos Cuestas (Department of Economics, University of Sheffield); Karsten Staehr (Tallinn University of Technology, Estonia)
    Abstract: This paper analyses the relationship between domestic credit and foreign capital flows in the GIIPS countries during the Great Moderation before the global financial crisis. Cointegration analyses on the pre-crisis sample reveal that domestic credit and net foreign liabilities are cointegrated for Greece, Italy, Portugal and Spain, but not for Ireland. For the first four countries the long-run coefficient is in all cases around one, suggesting a close relationship between domestic leveraging and foreign capital inflows. Estimation of VECMs shows that the adjustment to deviations from the long-run relationship takes place through changes in domestic credit for Greece and Italy, while the adjustment is bidirectional for Spain and possibly also Portugal. These results suggest that “push” factors related to foreign capital inflows were important in the pre-crisis leveraging. The deleveraging after the crisis was largely unrelated to developments in foreign capital flows.
    Keywords: leveraging, capital flows, financial crisis, cointegration
    JEL: F32 E51 E44 C32
    Date: 2015–05
  3. By: Bacchetta, Philippe; Perazzi, Elena; van Wincoop, Eric
    Abstract: This paper examines quantitatively the potential for monetary policy to avoid self-fulfilling sovereign debt crises. We combine a version of the slow-moving debt crisis model proposed by Lorenzoni and Werning (2014) with a standard New Keynesian model. We consider both conventional and unconventional monetary policy. Under conventional policy the central bank can preclude a debt crisis through inflation, lowering the real interest rate and raising output. These reduce the real value of the outstanding debt and the cost of new borrowing, and increase tax revenues and seigniorage. Unconventional policies take the form of liquidity support or debt buyback policies that raise the monetary base beyond the satiation level. We find that generally the central bank cannot credibly avoid a self-fulfilling debt crisis. Conventional policies needed to avert a crisis require excessive inflation for a sustained period of time. Unconventional monetary policy can only be effective when the economy is at a structural ZLB for a sustained length of time.
    Keywords: long-term debt; Monetary policy; Sovereign debt crises
    JEL: E52 E60 F34
    Date: 2015–05
  4. By: Fujiwara, Ippei (Keio University and Australian National University); Teranishi, Yuki (Keio University)
    Abstract: Do financial frictions call for policy cooperation? This paper investigates the implications of simple financial frictions, monopolistic banking together with staggered loan contracts, for monetary policy in open economies in the linear quadratic (LQ) framework. Welfare analysis shows that policy cooperation improves social welfare in the presence of such financial frictions. There also exist long-run gains from cooperation in addition to these by jointly stabilizing inefficient fluctuations over the business cycle, that are usually found in models with price rigidities. The Ramsey optimal steady states differ between cooperation and noncooperation. Such gains from cooperation arise irrespective of the existence of international lending or borrowing.
    JEL: E50 F41
    Date: 2015–04–01
  5. By: Vincent Duwicquet (CLERSE - Centre lillois d'études et de recherches sociologiques et économiques - CNRS - Université Lille 1 - Sciences et technologies); Jacques Mazier (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris 13 - Université Sorbonne Paris Cité (USPC) - CNRS); Jamel Saadaoui (BETA - Bureau d'économie théorique et appliquée - CNRS - Université Louis Pasteur - Strasbourg I)
    Abstract: The euro zone crisis illustrates the deficiencies of adjustment mechanisms in a monetary union characterized by a large heterogeneity. Exchange rate adjustments being impossible, they are very few alternative mechanisms. At the level of the whole euro zone the euro is close to its equilibrium parity. But the euro is strongly overvalued for Southern European countries, France included, and largely undervalued for Northern European countries, especially Germany. The paper gives a new evaluation of these exchange rate misalignments inside the euro zone, using a FEER approach, and examines the evolution of competitiveness. In a second step, we use a two-country SFC model of a monetary union with endogenous interest rates and eurobonds issuance. Three main results are obtained. Facing a competitiveness loss in southern countries due to exchange rates misalignments, increasing intra-European financing by banks of northern countries or other institutions could contribute to reduce the debt burden and induce a partial recovery but public debt would increase. Implementation of eurobonds as a tool to partly mutualize European sovereign debt would have a rather similar positive impact, but with a public debt limited to 60% of GDP. Furthermore, eurobonds could also be used to finance large European projects which could impulse a stronger recovery in the entire euro zone with stabilized current account imbalances. However, the settlement of a European Debt Agency in charge of the issuance of the eurobonds would face strong political obstacles.
    Date: 2014–05–31
  6. By: Fujiwara, Ippei (Keio University and Australian National University); Kam, Timothy (Australian National University); Sunakawa, Takeki (University of Tokyo)
    JEL: E52 F41 F42
    Date: 2015–04–01
  7. By: Bozhechkova, Alexandra (Russian Presidential Academy of National Economy and Public Administration (RANEPA)); Trunin, Pavel (Russian Presidential Academy of National Economy and Public Administration (RANEPA))
    Abstract: The purpose of this paper is to conduct a comprehensive analysis of the influence of factors on the dynamics of the real exchange rate. Firstly, we studied the basic theoretical and empirical models of the real exchange rate-tion, identified the key factors of its short and long-Din omy, including differential productivity, terms of trade, net foreign assets, government investment, import tariffs, etc. Second, analysis of the main trends of macroeconomic indicators that impact on the formation of the real exchange rate of the ruble in the pre- and post-crisis periods. The reasons for the differences in the degree of appreciation of the real exchange rate of a number of commodity-exporting countries in the 2000s. Thirdly, on the basis of a-vector autoregression model evaluated the long-term-elastic stey real effective exchange rate on such fundamental factors as the productivity differential, the real price of oil, the net outflow of private capital, the share of government spending in GDP for the period 1 sq. 1999 - 1Q. 2014 conducted by analysis of variance showed that more than 60% of the variance of the real effective exchange rate is due to innovations in the real price of oil, and the differential productivity. Fourthly, as a result of the structure of the pulse-response functions were significant effects of shocks on the dynamics of the fundamental factors of the real exchange rate.
    Keywords: real exchange rate, russian ruble
    Date: 2015–03
  8. By: Beraja, Martin (University of Chicago); Fuster, Andreas (Federal Reserve Bank of New York); Hurst, Erik (University of Chicago); Vavra, Joseph (University of Chicago)
    Abstract: We study the implications of regional heterogeneity within a currency union for monetary policy. We ask, first, does monetary policy mitigate or exacerbate ex-post regional dispersion over the business cycle? And second, does ex-ante regional heterogeneity increase or dampen the aggregate effects of a given monetary policy? To help answer these questions, we use detailed U.S. micro data to explore the extent to which mortgage activity differed across local areas in response to the first round of Quantitative Easing (QE1), announced in November 2008. We document that QE1 increased both mortgage activity and real spending but that its effects were smaller in parts of the country with the largest employment declines. This heterogeneous regional effect is driven by the fact that collateral values were most depressed in the regions with the largest employment declines, reducing the extent to which borrowers were able to benefit from rate decreases. We explore the implications of our empirical results for theoretical monetary policymaking using an incomplete-markets, heterogeneous-agent model of a monetary union whereby monetary policy influences local spending through collateralized lending. Preliminary results suggest that both the distributional and aggregate consequences of monetary policy depend on the joint distribution of local shocks. We find that if regions with low relative income also have depressed collateral values (as in 2008), then expansionary mon
    Keywords: monetary policy; regional inequality; quantitative easing; mortgage refinancing
    JEL: E21 E52 G21
    Date: 2015–06–01
  9. By: Brzoza-Brzezina, Michał; Kolasa, Marcin; Makarski, Krzysztof
    Abstract: In a number of countries a substantial proportion of mortgage loans is denominated in foreign currency. In this paper we demonstrate how their presence affects economic policy and agents' welfare. To this end we construct a small open economy model with housing loans denominated in domestic or foreign currency. The model is calibrated for Poland - a typical small open economy with a large share of foreign currency loans (FCL). We show that FCLs negatively affect the transmission of monetary policy. In contrast, their impact on the effectiveness of macroprudential policy is much weaker but positive. We also demonstrate that FCLs increase welfare when domestic interest rate shocks prevail and decrease it when risk premium (exchange rate) shocks dominate. Under a realistic calibration of the stochastic environment FCLs are welfare reducing. Finally, we show that regulatory policies that correct the share of FCLs may cause a short term slowdown. JEL Classification: E32, E44, E58
    Keywords: DSGE models with banking sector, foreign currency loans, monetary and macroprudential policy
    Date: 2015–04
  10. By: Agnès Benassy-Quere (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS)
    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 explicitly 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.
    Date: 2015–04
  11. By: Mohaddes, Kamiar (University of Cambridge); Pesaran, M. Hashem (University of Southern California)
    Abstract: This paper investigates the global macroeconomic consequences of country-specific oilsupply shocks. Our contribution is both theoretical and empirical. On the theoretical side, we develop a model for the global oil market and integrate this within a compact quarterly model of the global economy to illustrate how our multi-country approach to modelling oil markets can be used to identify country-specific oil-supply shocks. On the empirical side, estimating the GVAR-Oil model for 27 countries/regions over the period 1979Q2 to 2013Q1, we show that the global economic implications of oil-supply shocks (due to, for instance, sanctions, wars, or natural disasters) vary considerably depending on which country is subject to the shock. In particular, we find that adverse shocks to Iranian oil output are neutralized in terms of their effects on the global economy (real outputs and financial markets) mainly due to an increase in Saudi Arabian oil production. In contrast, a negative shock to oil supply in Saudi Arabia leads to an immediate and permanent increase in oil prices, given that the loss in Saudi Arabian production is not compensated for by the other oil producers. As a result, a Saudi Arabian oil supply shock has significant adverse effects for the global economy with real GDP falling in both advanced and emerging economies, and large losses in real equity prices worldwide.
    JEL: C32 E17 F44 F47 O53 Q43
    Date: 2015–05–01
  12. By: Ca'Zorzi, Michele (European Central Bank); Muck, Jakub (National Bank of Poland and Warsaw School of Economics); Rubaszek, Michal (National Bank of Poland and Warsaw School of Economics)
    Abstract: This paper brings four new insights into the Purchasing Power Parity (PPP) debate. First, we show that a half-life PPP (HL) model is able to forecast real exchange rates better than the random walk (RW) model at both short and long-term horizons. Second, we find that this result holds if the speed of adjustment to the sample mean is calibrated at reasonable values rather than estimated. Third, we find that it is preferable to calibrate, rather than to elicit as a prior, the parameter determining the speed of adjustment to PPP. Fourth, for most currencies in our sample, the HL model outperforms the RW also in terms of nominal effective exchange rate forecasting.
    JEL: C32 F31 F37
    Date: 2015–03–01

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