nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒07‒18
nine papers chosen by
Martin Berka
University of Auckland

  1. Cross-border Banking, Spillover Effects and International Business Cycles By Kopoin, Alexandre
  2. Forward-Looking Exporters and Exchange Rate Pass-Through: A Micro-Level Investigation By Yao Amber Li; Carol Zhao Chen
  3. Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage By Paul Bergin; Giancarlo Corsetti
  4. Agnecy Costs, Risk Shocks and International Cycles By Marc-Andre Letendre; Joel Wagner
  5. Fiscal Rules and Twin Deficits: The Link between Fiscal and External Balances By Harald Badinger; Aurélien Fichet de Clairfontaine; Wolf Heinrich Reuter
  6. Bank Capital, Credit Market Frictions and International Shocks Transmission By Kopoin, Alexandre; Moran, Kevin; Paré, Jean-Pierre
  7. Revisiting the Balassa-Samuelson Model with Markup Variations By Romain RESTOUT
  8. Experiencing financialisation in small open economies: An empirical investigation of Ireland and Iceland By Hamid Raza; Bjorn Gudmundsson; Stephen Kinsella; Gylfi Zoega
  9. EU policies addressing current account imbalances in the EMU: an assessment By Nina Dodig; Hansjorg Herr

  1. By: Kopoin, Alexandre
    Abstract: This paper studies the link between cross-border banking activities and the international propagation of real and financial shocks. We develop a two-country DSGE model with a bank capital channel and a financial accelerator, in which banks grant loans to domestic as well as to foreign firms. The model economy is calibrated to data from the U.S. and Canada. Our results suggest that following a positive technology shock and a tightening of home monetary policy, the existence of cross-border banking activities tends to amplify the transmission channel in both the domestic and the foreign country. However, cross-border banking activities tend to weaken the impact of shocks on foreign and home consumption because of the cross-border saving possibility between the two countries. Finally, our simulations suggest that under cross-border banking, correlations between macroeconomic variables of both countries become greater than in the absence of international banking activities. Overall, our results show sizable spillover effects of cross-border banking on macroeconomic dynamics and suggest cross border banking is an important source of the synchronization of business cycles between the U.S. and Canada.
    Keywords: Cross-border banking; bank capital, interest rate and exchange rate channels; business cycle synchronization.
    JEL: E44 E52 G21
    Date: 2015–02–06
  2. By: Yao Amber Li (Department of Economics, Hong Kong University of Science and Technology; Institute for Emerging Market Studies, Hong Kong University of Science and Technology); Carol Zhao Chen (Department of Economics, Hong Kong University of Science and Technology)
    Abstract: This paper shows that the pricing behavior of exporting firms exhibits a "forward-looking" nature under sticky prices. It offers a channel by which the expectations of future exchange rates affect current prices. To seek the micro-level evidence, we adopt detailed product-level import data of the United States and firm-product-level export data of China combined with forward premiums to study the exchange rate pass-through. We find that not only current (and past) exchange rate fluctuations but also anticipated future exchange rate changes effectively pass through into current prices, suggesting a potentially important factor in help explaining incomplete exchange rate pass-through.
    Keywords: Forward-looking, Price adjustment, Exchange rate pass-through, Sticky price
    JEL: F31 F14 F4
    Date: 2015–07
  3. By: Paul Bergin (Economics Department University of California-Davis); Giancarlo Corsetti (Faculty of Economics University of Cambridge)
    Abstract: Motivated by the long-standing debate on the pros and cons of competitive devaluation, we propose a new perspective on how monetary and exchange rate policies can contribute to a country’s international competitiveness. We refocus the analysis on the implications of monetary stabilization for a country’s comparative advantage. We develop a two-country New-Keynesian model allowing for two tradable sectors in each country: while one sector is perfectly competitive, firms in the other sector produce differentiated goods under monopolistic competition subject to sunk entry costs and nominal rigidities, hence their performance is more sensitive to macroeconomic uncertainty. We show that, by stabilizing markups, monetary policy can foster the competitiveness of these firms, encouraging investment and entry in the differentiated goods sector, and ultimately affecting the composition of domestic output and exports. Panel regressions based on worldwide exports to the U.S. by sector lend empirical support to the theory. Constraining monetary policy with an exchange rate peg lowers a country’s share of differentiated goods in exports between 4 and 12 percent.
    Keywords: monetary policy, production location externality, firm entry, optimal tariff
    JEL: F41
    Date: 2015–06
  4. By: Marc-Andre Letendre; Joel Wagner
    Abstract: We add agency costs as in Carlstrom and Fuerst (1997) into a two-country, two-good international business cycle model. In our model changes in the relative price of investment arise endogenously. Despite the fact that technology shocks are uncorrelated across countries the relative price of investment is positively correlated across countries in our model, much as it is in detrended US-Europe data. We also find that financial frictions tend to increase the volatility of the terms of trade and the international correlations of consumption, hours worked, output and investment. We then compare this model to an alternative model that also includes risk shocks a la Christiano et al. (2014). We use credit spread data (for the US) to calibrate the AR(1) process for risk shocks. We find that risk shocks are too small to significantly impact the model's dynamics.
    Date: 2015–07
  5. By: Harald Badinger (Department of Economics, WU Vienna); Aurélien Fichet de Clairfontaine (Department of Economics, WU Vienna); Wolf Heinrich Reuter (Department of Economics, WU Vienna)
    Abstract: This paper investigates the relationship between countries' fiscal balances and current accounts with an emphasis on the role of fiscal rules. The direct effect of fiscal policy on the current account via aggregate (import) demand is potentially amplified by indirect effects, materializing through interest rate effects and inter-generational transfers that reduce savings. On the other hand, the implied positive relation between fiscal and external balances is potentially attenuated by offsetting changes in savings through Ricardian equivalence considerations. We expect this attenuation effect to be stronger in countries with more stringent fiscal rules and test this hypothesis using a panel of 73 countries over the period 1985-2012. As previous studies we find a positive effect of fiscal balances on the current account, supporting the twin deficit hypothesis. However, the effect of fiscal balances on the current account depends on the stringency of fiscal (budget balance or debt) rules in place; it is reduced by one third on average and virtually eliminated for countries with the most stringent fiscal rules.
    Keywords: Twin Deficits, Fiscal Policy, Fiscal Rules, Current Account
    JEL: E62 F32 F41
  6. By: Kopoin, Alexandre; Moran, Kevin; Paré, Jean-Pierre
    Abstract: Recent empirical evidence suggests that the state of banks’ balance sheets plays an important role in the transmission of monetary policy and other shocks. This paper presents an open-economy DSGE framework with credit market frictions and an active bank capital channel to assess issues regarding the transmission of domestic and foreign shocks. The theoretical framework includes the financial accelerator mechanism developed by Bernanke et al. (1999), the bank capital channel and the exchange rate channel. Our simulations show that the exchange rate channel plays an amplification role in the propagation of shocks. Furthermore, with these three channels present, domestic and foreign shocks have an important quantitative role in explaining domestic aggregates like output, consumption, inflation and total bank’s lending. In addition, results suggest that economies whose banks remain well-capitalized when affected by adverse shock experience less severe downturns. Our results highlight the importance of bank capital in an international framework and can be used to inform the worldwide debate over banking regulation.
    Keywords: Bank capital; credit channel; exchange rate channel; monetary policy.
    JEL: E44 E52 G21
    Date: 2014–07–15
  7. By: Romain RESTOUT (Université de Lorraine, BETA)
    Abstract: This paper addresses the role of markup variations in the transmission process of cross-sectoral productivity differential shocks and government spending shocks to the relative price of non-tradables. The Balassa-Samuelson model based on frictionless goods markets predicts that a rise of 1% in the sectoral productivity ratio raises the relative price by 1% while changes in government spending leave the relative price unaffected. Using panel co-integration and unit root tests applied to a panel of 15 OECD economies, our empirical evidence does not support these implications. We find that a rise of 1% in relative productivity raises the relative price of non-tradables by only 0.7% and that an increase in government spending of 1% of GDP drives up the relative price by around 1%. This evidence can be successfully explained by a two-sector open economy model in which variations in the composition of demand for non-tradables give rise to endogenous changes in the markups.
    Keywords: Balassa-Samuelson model, Markups, Productivity, Government expenditure
    JEL: E20 E62 F31 F41
    Date: 2013–09–01
  8. By: Hamid Raza (University of Limerick); Bjorn Gudmundsson (University of Iceland); Stephen Kinsella (University of Limerick); Gylfi Zoega (University of Iceland)
    Abstract: We examine the macroeconomic factors associated with financialisation in Ireland and Iceland from the perspective of international capital flows. To understand financialisation in the two countries we construct three ARDL models using three aspects of financialisation: financial depth, credit growth and deposit liabilities of the financial sector. Focusing on the current account, we find that financialisation is associated with an increase in foreign rentiers’ profit due to excessive international borrowing. Our measures of financialisation indicate that trade openness, also a measure of globalisation, has a negative relationship with financialisation in Iceland, while in Ireland the relationship is positive. Our results also suggest that both countries experienced an increase in the wage share along with rapidly increasing household debt in Ireland and increasing non financial corporate debt in Iceland. We conclude that institutional differences played a vital role in the solutions to the crises which destabilised the economies of Ireland and Iceland. We use the institutional differences between the two economies and suggest policy prescriptions to limit the scale and scope of similar crises in small open economies.
    Keywords: Ireland, Iceland, Financialisation.
    JEL: G32
    Date: 2015–01–01
  9. By: Nina Dodig (Berlin School of Economics and Law and Institute for International Political Economy (IPE) Berlin, Germany); Hansjorg Herr (Berlin School of Economics and Law and Institute for International Political Economy (IPE) Berlin, Germany)
    Abstract: To handle the sovereign debt crisis in general and macroeconomic imbalances in particular the leading EU institutions (the Troika) adopted two broad approaches; The short-term approach is based on enhancing the Stability and Growth Pact and to impose fiscal austerity on crisis countries. The medium- to long-term strategy consists of internal devaluation via reducing wage costs. Both approaches were combined with structural adjustment programs in the spirit of the Washington Consensus. The Troika’s policy implies an asymmetric adjustment process burdening only crisis countries. They led to the shrinking of demand and output in crisis countries comparable to the Great Depression and brought the European Monetary Union to the edge of deflation. These polices must be judged as mislead increasing the risk of Japanese disease with more than one lost decade
    Keywords: current account imbalances, Euro area economic policies, internal devaluation, austerity
    JEL: E60 E62 F41
    Date: 2015–01–01

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