nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒08‒19
twelve papers chosen by
Martin Berka
University of Auckland

  1. Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? By Olivier Blanchard; Gustavo Adler; Irineu de Carvalho Filho
  2. Not so Disconnected: Exchange Rates and the Capital Stock By Hassan, Tarek; Mertens, Thomas M.; Zhang, Tony
  3. Examining the Elasticity of New Zealand’s Current Account to the Real Exchange Rate By Kam Szeto; David Oxley
  4. External Shocks, Financial Volatility and Reserve Requirements in an Open Economy By Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
  5. Fertility, Longevity and International Capital Flows By Zsofia Barany; Nicolas Coeurdacier; Stéphane Guibaud
  6. A new technique for estimating currency premiums By Kei Imakubo; Koichiro Kamada; Kazutoshi Kan
  7. Current account dynamics and the housing boom and bust cycle in Spain By Maas, Daniel; Mayer, Eric; Rüth, Sebastian
  8. Systemic Risk, Aggregate Demand, and Commodity Prices By Javier G. Gómez-Pineda; Dominique Guillaume; Kadir Tanyeri
  9. Export dynamics since the Great Trade Collapse: a cross-country analysis By Lewis, John; De Schryder, Selien
  10. The interest rate pass-through in the euro area during the sovereign debt crisis By Leo Krippner; Sandra Eickmeier; Julia von Borstel
  11. The Optimal Tradeoff Between Consumption Smoothing and Macroprudential Regulation By Jean-Paul L'Huillier; Facundo Piguillem; Jean Flemming
  12. Systemic and Idiosyncratic Sovereign Debt Crises By Kaminsky, Graciela; Vega-Garcia, Pablo

  1. By: Olivier Blanchard; Gustavo Adler; Irineu de Carvalho Filho
    Abstract: Many emerging market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. In this paper, we study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, we find that larger FXI leads to less exchange rate appreciation in response to gross inflows.
    JEL: F31 F41
    Date: 2015–07
  2. By: Hassan, Tarek; Mertens, Thomas M.; Zhang, Tony
    Abstract: We investigate the link between stochastic properties of exchange rates and differences in capital-output ratios across industrialized countries. To this end, we endogenize capital accumulation within a standard model of exchange rate determination with nontraded goods. The model predicts that currencies of countries that are more systemic for the world economy (countries that face particularly volatile shocks or account for a large share of world GDP) appreciate when the price of traded goods in word markets is high. These currencies are better hedges against consumption risk faced by international investors because they appreciate in ``bad'' states of the world. As a consequence, more systemic countries face a lower cost of capital and accumulate more capital per worker. We estimate our model using data from seven industrialized countries with freely floating exchange rate regimes between 1984-2010 and show that cross-country variation in the stochastic properties of exchange rates accounts for 72% of the cross-country variation in capital-output ratios. In this sense, the stochastic properties of exchange rates map to fundamentals in the way predicted by the model.
    Keywords: capital accumulation; exchange rate disconnect; international capital flows
    JEL: F3 G0
    Date: 2015–07
  3. By: Kam Szeto; David Oxley (The Treasury)
    Abstract: The main purpose of this paper is to supplement the existing literature by quantifying the elasticity of New Zealand’s current account to changes in the real exchange rate. The unusual composition of New Zealand’s current account balance – particularly the large income deficit and the importance of the agricultural sector to the goods balance – suggests that this relationship for New Zealand may differ from that for other developed countries. As a result, we focus on modelling the relationship between New Zealand’s exchange rate and the current account stripped of four main components: the net investment income balance, dairy exports, the value of both oil exports and imports, and education services exports: what we call the ‘adjusted’ balance. We find that the responsiveness of New Zealand’s current account to the real exchange rate is towards the lower end of most estimates used in other studies. Given that the trade elasticity is a key variable in macro-balance models of exchange rate valuation, we conclude that some previous studies may have underestimated the magnitude of the real exchange rate adjustment needed to help achieve external equilibrium in the long run.
    Keywords: Current account elasticity; exchange rate
    JEL: F32 F41
    Date: 2014–11
  4. By: Pierre-Richard Agénor; K. Alper; L. Pereira da Silva
    Abstract: The performance of a countercyclical reserve requirement rule is studied in a dynamic stochastic model of a small open economy with financial frictions, imperfect capital mobility, a managed float regime, and sterilized foreign exchange market intervention. Bank funding sources, domestic and foreign, are imperfect substitutes. The model is calibrated and used to study the effects of a temporary drop in the world risk-free interest rate. Consistent with stylized facts, the shock triggers an expansion in domestic credit and activity, asset price pressures, and a real appreciation. A credit-based reserve requirement rule helps to mitigate both macroeconomic and financial volatility, with the latter defined both in terms of a narrow measure based on the credit-to-output ratio, the ratio of capital flows to output, and interest rate spreads, and a broader measure that includes real asset prices as well. An optimal rule, based on minimizing a composite loss function, is also derived. Sensitivity tests, related to the intensity of sterilization, the degree of exchange rate smoothing, and the rule used by the central bank to set the cost of bank borrowing, are also performed, both in terms of the transmission process and the optimal rule
    Date: 2015–08
  5. By: Zsofia Barany (ECON - Département d'économie - Sciences Po); Nicolas Coeurdacier (ECON - Département d'économie - Sciences Po); Stéphane Guibaud (ECON - Département d'économie - Sciences Po)
    Abstract: The neoclassical growth model predicts large capital flows towards fast-growing emerging countries. We show that incorporating fertility and longevity into a lifecycle model of savings changes the standard predictions when countries differ in their ability to borrow inter-temporally and across generations through social security. In this environment, global aging triggers capital flows from emerging to developed countries, and countries’ current account positions respond to growth adjusted by current and expected demographic composition. Data on international capital flows are broadly supportive of the theory. The fact that fast-growing emerging countries are also aging faster, while having less developed credit markets and pension systems, explains why they are more likely to export capital. Our quantitative multi-country overlapping generations model explains a significant fraction of the patterns of capital flows, across time and across developed and emerging countries.
    Date: 2015–06
  6. By: Kei Imakubo (Bank of Japan); Koichiro Kamada (Bank of Japan); Kazutoshi Kan (Bank of Japan)
    Abstract: This paper extends the model of currency premiums developed by Clarida (2012, 2013). In our extended model, a currency premium consists of two disequilibrium factors: One is the interest rate gap, i.e., the deviation of real interest rates, domestic and foreign, from their equilibrium values; the other is the exchange rate misalignment, i.e., the deviation of real exchange rates from their equilibrium values. This paper calculates these disequilibrium factors included in the dollar, euro, and yen, and shows empirically the developments of the currency premiums from the mid-2000s. The result indicates that the euro was growing to become a world currency next to the US dollar toward the late 2000s, and then the yen was preferred as a safe haven while the US and European capital markets were under stresses.
    Keywords: interest rate parity; purchasing power parity; currency premium; misalignment
    JEL: F31 F37
    Date: 2015–07–30
  7. By: Maas, Daniel; Mayer, Eric; Rüth, Sebastian
    Abstract: We investigate the drivers of the negative correlation between housing markets and the current account in Spain. By employing robust sign restrictions, which we derive from a DSGE model for a currency union, we analyze the effects of domestic pull and foreign push factors in the mixed frequency VAR framework. Savings glut, risk premium, and house price expectations shocks are capable of generating the negative co-movement of housing markets and the current account in the data. In contrast, and counter-factual to the Spanish housing boom, financial easing shocks predict a decline in residential investment. Among the four identified shocks, savings glut shocks have most explanatory power for real house prices, residential investment, and the current account. We also reveal an important role of risk premium and house price expectations shocks for housing markets, whereas financial easing shocks do not explain sizeable fluctuations in the key variables.
    Keywords: current account,housing markets,monetary union
    JEL: E32 F32
    Date: 2015
  8. By: Javier G. Gómez-Pineda; Dominique Guillaume; Kadir Tanyeri
    Abstract: The paper presents a global model for analysis and projections. The model features a handful of elements that make it suitable for analyzing three broad sets of topics; first, systemic risk and its transmission to country risk premiums; second, the transmission from country risk premiums to demand-related variables such as the output gap, the trade balance, and unemployment; and third, the transmission from commodity prices to country inflation. The model incorporates one systemic risk channel and two foreign channels, specifically, a foreign aggregate demand channel and a foreign exchange rate channel. The model is estimated with Bayesian methods. In addition, the effect of risk on aggregate demand is calibrated with the aid of a VAR. Among the results are that the episodes of surges in systemic risk identified in the paper were transmitted to country risk premiums and aggregate demand--related variables; that the effect of systemic risk shocks on world economic activity is large, and that the busts in the world output gap correspond with the major financial events identified by the estimated time series for the unobserved systemic risk. In addition, systemic risk shocks are important drivers of output gaps while country risk premium shocks can have important effects on the trade balance. Surprisingly, commodity prices, in particular the price of oil, are shown to be demand driven; hence, demand related factors may play a nontrivial role in explaining noncore inflation. The model performed well at one- and four-quarter horizons compared to a survey of analysts' forecasts. In addition, systemic risk shocks were important at explaining the forecast variance of the world output gap, country output gaps, the price of oil, and country risk premiums. The breath of reach of systemic risk shocks back the efforts for financial surveillance with a systemic focus.
    Keywords: Systemic risk, Financial linkages, Capital flows, Global imbalances Commodity prices
    JEL: F32 F37 F41 F31 F47 E58
    Date: 2015–07–23
  9. By: Lewis, John (Bank of England); De Schryder, Selien (University of Ghent)
    Abstract: Using a panel model of goods exports for 16 OECD economies, we quantify advanced economies’ export performance since the ‘Great Trade Collapse’ (GTC). We go beyond the traditional determinants of trade to include a variable measuring shifts in the sectoral composition of world trade and split the real exchange rate into its constituent parts to allow for a differential response to unit labour costs and the nominal exchange rate. We find that, a pre-crisis model based on average coefficients explains the recovery in aggregate exports since the GTC well. But at the country level, we do find substantial cross-country variation in export performance.
    Keywords: International trade; forecasting; cross-country panel
    JEL: C23 F14 F17
    Date: 2015–07–24
  10. By: Leo Krippner; Sandra Eickmeier; Julia von Borstel (Reserve Bank of New Zealand)
    Abstract: We investigate the pass-through of monetary policy to bank lending rates in the euro area during the sovereign debt crisis, in comparison to the pre-crisis period. We make the following contributions. First, we use a factor-augmented vector autoregression, which allows us to assess the responses of a large number of country-specifi…c interest rates and spreads. Second, we analyze the effects of monetary policy on the components of the interest rate pass-through, which reflect banks' funding risk (including sovereign risk) and markups charged by banks over funding costs. Third, we not only consider conventional but also unconventional monetary policy. We find that while the transmission of conventional monetary policy to bank lending rates has not changed with the crisis, the composition of the IP has changed. Specifically, expansionary conventional monetary policy lowered sovereign risk in peripheral countries and longer-term bank funding risk in peripheral and core countries during the crisis, but has been unable to lower banks' markups. This was not, or not as much, the case prior to the crisis. Unconventional monetary policy helped decreasing lending rates, mainly due to large shocks rather than a strong propagation.
    Date: 2015–05
  11. By: Jean-Paul L'Huillier (Einaudi Institute for Economics and Finance); Facundo Piguillem (EIEF); Jean Flemming (University of Rome, Tor Vergata)
    Abstract: We study the optimal determination of macroprudential regulation (Mendoza 2002, Bianchi 2011, Korinek 2014) in a macroeconomic model featuring advance information about future income ("news", cf. Beaudry and Portier 2006, or Schmitt-Grohe and Uribe 2012). We point out that the presence of news about the future in a standard model with systemic externalities introduces a tradeoff between consumption smoothing and macroprudential regulation. Indeed, favorable news call for lax regulation in order to allow for consumption smoothing, but this also increases the severity of welfare losses in systemic crises. We study this tradeoff first theoretically in a simple 3-period model, and then quantitatively in a fully dynamic model. We conclude that the possibility of news is an important consideration in the evaluation and of macroprudential regulation.
    Date: 2015
  12. By: Kaminsky, Graciela; Vega-Garcia, Pablo
    Abstract: The theoretical literature on sovereign defaults has focused on adverse shocks to debtors’ economies, suggesting that defaults are of an idiosyncratic nature. Still, sovereign debt crises are also of a systemic nature, clustered around panics in the financial center such as the European Sovereign Debt Crisis in the aftermath of the U.S. Subprime Crisis in 2008. Crises in the financial centers are rare disasters and thus, their effects on the periphery can only be captured by examining long episodes. This paper examines sovereign defaults from 1820 to the Great Depression, with a focus on Latin America. We find that 63% of the crises are of a systemic nature. These crises are different. Both the international collapse of liquidity and the growth slowdown in the financial centers are at their core. These global shocks trigger longer default spells and larger investors’ losses.
    Keywords: Sovereign debt crises, debt restructuring, defaults, default spells, debt reduction rates, debt sustainability, liquidity crises, systemic and idiosyncratic crises.
    JEL: F30 F34
    Date: 2015–07

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