nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒06‒13
eleven papers chosen by
Martin Berka
University of Auckland

  1. How Important Are Terms Of Trade Shocks? By Stephanie Schmitt-Grohé; Martín Uribe
  2. Large Capital Inflows, Sectoral Allocation, and Economic Performance By Gianluca Benigno; Nathan Converse; Luca Fornaro
  3. Sovereign debt and reserves with liquidity and productivity crises By Flavia Corneli; Emanuele Tarantino
  4. Financial Flows and the International Monetary System By Passari, Evgenia; Rey, Hélène
  6. The U.S. Dollar and Global Imbalances By Liu, Kai; Zhou, Xuan
  7. Labor market reforms and current account imbalances: Beggar-thy-neighbor policies in a currency union? By Baas, Timo; Belke, Ansgar
  8. Banking union as a shock absorber By Belke, Ansgar; Gros, Daniel
  9. Estimates of Fundamental Equilibrium Exchange Rates, May 2015 By William R. Cline
  10. International Transmission of Bubble Crashes: Stationary Sunspot Equilibria in a Two-Country Overlapping Generations Model By Lise CLAINl-CHAMOSSET-YVRARD; Takashi KAMIHIGASHI
  11. Measuring sovereign contagion in Europe By Caporin, Massimiliano; Pelizzon, Loriana; Ravazzolo, Francesco; Rigobon, Roberto

  1. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: According to conventional wisdom, terms of trade shocks represent a major source of business cycles in emerging and poor countries. This view is largely based on the analysis of calibrated business-cycle models. We argue that the view that emerges from empirical SVAR models is strikingly different. We estimate country-specific SVARs using data from 38 poor and emerging countries and find that terms-of-trade shocks explain only 10 percent of movements in aggregate activity. We then build a fully-fledged, open economy model with three sectors, importables, exportables, and nontradables, and use data from each of the 38 countries to obtain country-specific estimates of key structural parameters, including those defining the terms-of-trade process. In the estimated theoretical business-cycle models terms-of-trade shocks explain on average 30 percent of the variance of key macroeconomic indicators, three times as much as in SVAR models.
    JEL: E32 F41 F44
    Date: 2015–06
  2. By: Gianluca Benigno (London School of Economics (LSE); Centre for Macroeconomics (CFM)); Nathan Converse (International Finance Division, Federal Reserve Board); Luca Fornaro (Centre de Recerca en Economia Internacional (CREI) Barcelona Graduate School of Economics (Barcelona GSE))
    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, Surges, Sectoral Allocation, Sudden Stops
    JEL: F31 F32 F41 O41
    Date: 2015–06
  3. By: Flavia Corneli (Bank of Italy); Emanuele Tarantino (University of Mannheim)
    Abstract: During the recent financial crisis developing countries have continued to accumulate both sovereign reserves and debt. To account for this empirical fact, we model the optimal portfolio choice of a country that is subject to liquidity and productivity shocks. We determine the equilibrium level of debt and its cost through a contracting game between a country and international lenders. Although raising debt increases the sovereign exposure to liquidity and productivity crises, the simultaneous accumulation of reserves can mitigate the negative effects of such crises. This mechanism rationalizes the complementarity between debt and reserves.
    Keywords: sovereign debt, international reserves, liquidity shock, productivity shock, strategic default.
    JEL: F34 F40 G15 H63
    Date: 2015–06
  4. By: Passari, Evgenia; Rey, Hélène
    Abstract: We review the findings of the literature on the benefits of international financial flows and find that they are quantitatively elusive. We then present evidence on the existence of a global cycle in gross cross-border flows, asset prices and leverage and discuss its impact on monetary policy autonomy across different exchange rate regimes. We focus in particular on the effect of US monetary policy shocks on the UK's financial conditions.
    Keywords: Monetary policy autonomy; Financial Flows; International Monetary System;
    JEL: E42 E52 G15
    Date: 2015–05
  5. By: Yuzo Honda (Department of Informatics, Kansai University); Hitoshi Inoue (Faculty of Economics, Sapporo Gakuin University)
    Abstract: We empirically investigate the dynamic nature of three alternative hypotheses on the foreign exchange rate between the Japanese yen and US dollar in a multivariate context, using data from April 1985 to October 2014. The three hypotheses are the uncovered interest rate parity hypothesis, the current account hypothesis, and the quasi purchasing power parity hypothesis. Each hypothesis has significant influence on the yen-dollar exchange rate. Furthermore, it takes two to three years for the yield spread between the yen and dollar to have its largest impact on the exchange rate. In addition, the effects of unexpected shocks to the exchange rate on the export price ratio and current account are long lasting.
    Keywords: Quasi Purchasing Power Parity, Uncovered Interest Rate Parity, Soros Chart, Monetary Policy, Vector Autoregression
    JEL: E52 F31
    Date: 2015–06
  6. By: Liu, Kai; Zhou, Xuan
    Abstract: Global Imbalances are mainly featured by the massive and long-lasting U.S. trade deficit. Since the Breton Woods system collapsed and was replaced by the Jamaica Agreement, the U.S. trade deficit has been lasting for about 40 years. This paper proves that permanent global imbalances can be sustainable due to the special role of the U.S. dollar, by building a two-country cash-in-advance growth model with a dollar standard in the international trade. The permanent U.S. trade deficit is an increasing function of the strength of off-shore dollar demand, the long-run growth rate of global nominal GDP, the openness of the international trade, the elasticity of substitution between domestic and foreign goods, and the relative size of the U.S. economy to the rest of the world. The long-run non-neutrality of the U.S. dollar as the world currency exists. Structural global imbalances are accompanied by an unequal international trade with the terms of trade being beneficial to the U.S., and the welfare analysis indicates that: a weakened U.S. dollar in the international trade will reduce the welfare of the U.S. households, but increase the welfare of the whole world.
    Keywords: U.S. dollar, global imbalances, dollar standard, cash in advance
    JEL: E42 F32 F41
    Date: 2015–06–04
  7. By: Baas, Timo; Belke, Ansgar
    Abstract: Member countries of the European Monetary Union (EMU) initiated wideranging labor market reforms in the last decade. This process is ongoing as countries that are faced with serious labor market imbalances perceive reforms as the fastest way to restore competitiveness within a currency union. This fosters fears among observers about a beggar-thy-neighbor policy that leaves non-reforming countries with a loss in competitiveness and an increase in foreign debt. Using a two-country, two-sector search and matching DSGE model, we analyze the impact of labor market reforms on the transmission of macroeconomic shocks in both, non-reforming and reforming countries. By analyzing the impact of reforms on foreign debt, we contribute to the debate on whether labor market reforms increase or reduce current account imbalances.
    Abstract: In den letzten zehn Jahren begannen einzelne Mitgliedstaaten der EU, weitreichende Arbeitsmarktreformen durchzuführen. Dieser Prozess hält an, da Arbeitsmarktreformen als schnellster Weg wahrgenommen werden, die Wettbewerbsfähigkeit der Volkswirtschaft zu erhöhen und Arbeitsmarktungleichgewichte zu beseitigen. Von einigen Beobachtern wird diese Politik als "beggar-thy-neighbor" kritisiert, da die erhöhte Wettbewerbsfähigkeit zu Lasten der Handelspartner innerhalb der EU gehe, die Zahlungsbilanzungleichgewichte erhöhe und so die Auslandsverschuldung erhöhe. In diesem Artikel verwenden wir ein Zwei-Länder DSGE Modell mit Arbeitsmarktfriktionen, um die Wirkung von Arbeitsmarktreformen in dem Reform- wie auch dem Nichtreformland zu analysieren. Da wir insbesondere die Auswirkungen auf die Auslandsverschuldung berücksichtigen, tragen wir zur Debatte um die Wirkung von Arbeitsmarktreformen auf Zahlungsbilanzungleichgewichte innerhalb der Eurozone bei.
    Keywords: current account deficit,labor market reforms,DSGE models,search and matching labor market
    JEL: E24 E32 J64 F32
    Date: 2014
  8. By: Belke, Ansgar; Gros, Daniel
    Abstract: This study investigates the shock-absorbing properties of a banking union by providing a detailed comparison between the way regional financial shocks have been absorbed at the federal level in the US, but have led to severe regional (national) financial dislocation and tensions in the euro area. The extent to which the institutions of the banking union, which is now emerging in the euro area, should increase its capacity to deal with future regional boom and bust cycles is also discussed. Cross-border capital flows in the form of equity appear to be much more stable than those taking the form of credit, especially inter-bank credit. Moreover, credit booms and bust leave a debt overhang and losses can materialise only via insolvencies, whereas equity flows absorb automatically losses in case of a bust and provide the cross border owner with incentives to continue to provide financing. It follows that cross-border banks can absorb regional shocks. But large banks pose the 'too big to fail' problem and they would also propagate regional shocks, especially if they originate in large countries, to the entire area.
    Keywords: banking union,currency union,default,shock absorber,two-tier reinsurance system
    JEL: E42 E50 F3 G21
    Date: 2015
  9. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: Plummeting oil prices combined with asymmetric phasing of quantitative easing (QE) in the United States versus the euro area and Japan has prompted unusually large changes in major exchange rates over the past year. New estimates of fundamental equilibrium exchange rates (FEERs) find the major currencies are now misaligned, with the US dollar moderately overvalued and the euro and yen modestly undervalued. However, the Chinese yuan is no longer undervalued. Just over half of the 34 economies followed in this series experienced changes in real effective exchange rates (REERs) of about 6 percent or more from April 2014 to April 2015. The most important changes were the large effective appreciations by the US dollar (about 12 percent) and the Chinese yuan (about 12 percent), and the large effective depreciations of the euro (about 11 percent) and the yen (about 8 percent). Although the dollar has risen to about 8 percent above its FEER, it is too early to conclude that any adverse effects of the stronger dollar outweigh the benefits associated with stimulus to global growth from additional QE in the euro area and Japan. However, if the dollar were to continue along a path of further strengthening, the associated distortions could prove counterproductive for both the United States and the world economy at some point.
    Date: 2015–05
  10. By: Lise CLAINl-CHAMOSSET-YVRARD (Aix-Marseille University (Aix-Marseille School of Economics) and CNRS-GREQAM & EHESS, France); Takashi KAMIHIGASHI (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)
    Abstract: We study the international transmission of bubble crashes by ana- lyzing stationary sunspot equilibria in a two-country overlapping gen- erations exchange economy with stochastic bubbles. We consider two types of stationary sunspot equilibria. The rst type of equilibrium assumes that only the foreign country receives a sunspot shock, while the second type assumes that both countries independently receive sunspot shocks. In the rst type of equilibrium, a bubble crash due to a sunspot shock in the foreign country inevitably causes the home bubble to burst. In the second type of equilibrium, the e ect of a bub- ble crash in the foreign country on the home bubble can be positive or negative. In both types of equilibria, a bubble crash in the foreign country necessarily transmits to the home country.
    Keywords: Lobby, Theorisation, Competition policy, Publishing, Japan, Resale price maintenance, Neoliberalism
    Date: 2015–06
  11. By: Caporin, Massimiliano; Pelizzon, Loriana; Ravazzolo, Francesco; Rigobon, Roberto
    Abstract: This paper analyzes sovereign risk shift-contagion, i.e. positive and significant changes in the propagation mechanisms, using bond yield spreads for the major eurozone countries. By emphasizing the use of two econometric approaches based on quantile regressions (standard quantile regression and Bayesian quantile regression with heteroskedasticity) we find that the propagation of shocks in euro's bond yield spreads shows almost no presence of shift-contagion. All the increases in correlation we have witnessed over the last years come from larger shocks propagated with higher intensity across Europe.
    Keywords: Sovereign Risk,Contagion,Disintegration
    JEL: E58 F34 F36 G12 G15
    Date: 2015

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