nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒10‒10
ten papers chosen by
Martin Berka
University of Auckland

  1. Currency unions and trade: a post-EMU mea culpa By Glick, Reuven; Rose, Andrew K.
  2. Self-Fulfilling Debt Crises: Can Monetary Policy Really Help? By Eric van Wincoop; Philippe Bacchetta
  3. A Pecking Order Theory of Sovereign Default By Mark Wright; Christoph Trebesch; Matthias Schlegl
  4. International reserves and gross capital flow dynamics By Enrique Alberola-Ila; Aitor Erce; José María Serena
  5. Real exchange rate and industrial employment: Un análisis empírico para Colombia, 2000-2010 By Jose Tomas Pelaez Soto; Lya Paola Sierra Suarez
  6. Macroeconomic Imbalance Procedure in the EU: a Welfare Evaluation By Torój, Andrzej
  7. Purchasing Power Parity in selected Latin American Countries By Bal Harun; Ball Esra; Manga Müge
  8. Inequality, Financial Deepening and Current Account Impact By Jorge Carrera; Esteban Rodríguez; Mariano Sardi
  9. An SVAR Approach to Evaluation of Monetary Policy in India: Solution to the Exchange Rate Puzzles in an Open Economy By William Barnett; Soumya Liting Su
  10. Portfolio Flows in a two-country RBC model with financial intermediaries By Haakon Kavli and NIcola Viegi

  1. By: Glick, Reuven (Federal Reserve Bank of San Francisco); Rose, Andrew K. (Federal Reserve Bank of San Francisco)
    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; it has a mildly stimulating effect at best. Third and most importantly, estimates of the currency union effect on trade are sensitive to the exact econometric methodology; the lack of consistent and robust evidence undermines confidence in our ability to reliably estimate the effect of currency union on trade.
    Date: 2015–07–17
  2. By: Eric van Wincoop (University of Virginia); Philippe Bacchetta (University of Lausanne)
    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. With price rigidity, the real cost of debt can be reduced through lower real interest rates. On the other hand, deflation of long-term debt is less effective and requires higher inflation rates. In general, we show that crisis equilibria can only be avoided with steep inflation rates for a sustained period of time, the cost of which is likely to be much larger than government default.
    Date: 2015
  3. By: Mark Wright (Federal Reserve Bank of Chicago); Christoph Trebesch (University of Munich); Matthias Schlegl (University of Munich)
    Abstract: Do sovereign debtors discriminate between debtors in the event of a default? If so, how will this affect the character of future defaults? And, what does this mean for policymakers? In this paper we exploit a unique database of arrears accumulation by debtor country and creditor to characterize the level of creditor discrimination during a sovereign default. We find, as expected, that the IMF and bondholders are the beneficiaries of discrimination. Unexpectedly, we find that trade creditors are most discriminated against. We then present a theoretical framework within which these findings can be rationalized and use it to assess how policymakers can influence a debtors decision to default.
    Date: 2015
  4. By: Enrique Alberola-Ila; Aitor Erce; José María Serena
    Abstract: This paper explores the role of international reserves as a stabiliser of international capital flows, in particular during periods of global financial stress. In contrast with previous contributions, aimed at explaining net capital flows, we focus on the behaviour of gross capital flows. We analyse an extensive cross-country quarterly database, comprising 63 countries for the period 1991-2010, using standard panel regressions. We document significant heterogeneity in the response of resident investors to financial stress and relate it to a previously undocumented channel through which reserves act as a buffer during financial stress. A robust result of the analysis is that international reserves facilitate financial disinvestment overseas by residents - a fall in capital outflows. This partially offsets the drop in foreign capital inflows observed in such periods. For the whole sample, we also find that larger stocks of international reserves are linked to higher gross inflows and lower gross outflows. These results, which challenge current approaches to measuring reserve adequacy, call for refining such tools to better account for the role of resident investors.
    Keywords: Gross capital flows, international reserves, systemic crises, capital retrenchment
    Date: 2015–10
  5. By: Jose Tomas Pelaez Soto; Lya Paola Sierra Suarez (Faculty of Economics and Management, Pontificia Universidad Javeriana Cali)
    Abstract: This paper aims to determine the effect of real exchange rate on industrial employment in Colombia and 60 of their industrial sectors for the period 2000- 2010. To do this, a review of the relevant literature is made and using the Generalized Method suggested by Arellano and Bond (1991) Moments and information from the Annual Manufacturing Survey by the National Bureau of Statistics, the effect is set the real exchange rate on manufacturing employment. The different specifications indicate that an appreciation of the real exchange rate contract manufacturing employment in the country. Timely manner, it was found that an appreciation of 1.0% reduces manufacturing employment between 0.49% and 0.59%. As for the effect on industries, the base regression warns that an appreciation of the real exchange rate leads to declines in employment in ten industrial sectors and increases in seven of them.
    Keywords: Real exchange rate, Industrial employment, Colombia
    JEL: F31 F41 J23
    Date: 2015–05
  6. By: Torój, Andrzej (Warsaw School of Economics)
    Abstract: We develop a framework for assessing the welfare implications of the new European Union's (EU) Macroeconomic Imbalance Procedure (MIP) implemented in 2012, with a special focus on the current account (CA) constraint, real effective exchange rate (REER) constraint and nominal unit labour cost (ULC) constraint. For this purpose, we apply a New Keynesian 2-region, 2-sector DSGE model, using the second order Taylor approximation of the households' utility around the steady state as a measure of welfare. The compliance with the CA criterion is ensured by modifying the policymakers' loss function in line with Woodford's (2003) treatment of the zero lower bound of nominal interest rates. The introduction of MIP threshold on CA balance results in a welfare loss equivalent to steady-state decrease in consumption of 0.0274% after the euro adoption or 0.0152% before that. If we consider the 4% threshold on current plus capital account (rather than current account alone), this cost decreases to equivalent to 0.0117% steady-state consumption under the euro and approximately a half of that without the euro. The welfare cost for the converging economies is higher due to persistent, but equilibrium-consistent CA deficits, as well as REER appreciation. MIP can also be seen as a factor augmenting the cost of euro adoption. This working paper is an updated version of the working paper Excessive Imbalance Procedure in the EU: a Welfare Evaluation.
    Keywords: Macroeconomic Imbalance Procedure; EMU; DSGE; welfare; constrained optimum policy
    JEL: C54 D60 E42 F32
    Date: 2015–10–01
  7. By: Bal Harun (Çukurova University); Ball Esra (Çukurova University); Manga Müge (Çukurova University)
    Abstract: The Purchasing Power Parity hypothesis has important policy implications for countries. Therefore it is important to determine the validity of the Purchasing Power Parity. This study investigates the validity of the long run Purchasing Power Parity for selected Latin American countries, in a sample of 4 countries, namely, Brazil, Colombia, Chili and Mexico utilizing Panel unit root tests using monthly data from the period of January 2000 to December 2014. The results show Purchasing Power Parity holds for the selected Latin American Countries. The results show that PPP can be used to determine the equilibrium exchange rate for Brazil, Colombia, Chili and Mexico under this study.
    Keywords: Purchasing Power Parity, Panel unit root tests, Latin American Countries
    JEL: C23 F31
  8. By: Jorge Carrera (Central Bank of Argentina, UNLP); Esteban Rodríguez (Central Bank of Argentina); Mariano Sardi (Central Bank of Argentina)
    Abstract: In this paper we analyze if changes in levels of inequality are associated, ceteris paribus, with changes in the balance of the current account, taking in consideration the role of the development stage of the economy in the interaction between these variables. In this sense, the financial system emerges as a key intermediary, which may affect the sign and intensity of these relationships. Using panel data from 29 countries for the 1970-2011 periods, our results confirm the need to distinguish between functional and personal income distribution. Greater participation of wages in total income is related with a deterioration of the current account. This result is robust to different specifications and estimation methodologies. On the other hand, while we find evidence that deterioration in personal income distribution is associated with a lower current account balance, our results shows that the relationship is stronger in emerging economies than in advanced, unlike what is suggested by the recent literature, which has focused mainly on the case of the US. The existence of differences between groups of countries confirms that the relationship between income concentration and external sector is mediated by various structural and idiosyncratic factors and, as a result, the net effect will vary depending on the sample used. Given the complexity of these relationships, we warn about the risks of generalizing to emerging countries results based only in the study of advanced economies.
    Keywords: inequality, current account, financial intermediation, global imbalances, financial crisis
    JEL: C23 D31 D33 E44 F32 F41
    Date: 2015–09
  9. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Soumya Liting Su (Department of Economics, The University of Kansas;)
    Abstract: One of the hottest topics in monetary policy research has been the revival of the proposal for “nominal GDP targeting.” Recent research has emphasized the potential importance of the Divisia monetary aggregates in implementing that policy. We investigate bivariate time series properties of Divisia money and nominal GDP to investigate the viability of recent proposals by authors who advocate a role for a Divisia monetary aggregate in nominal GDP targeting. There are two particularly relevant proposals: (1) the proposal by Barnett, Chauvet, and Leiva-Leon (2015) to use a Divisia monetary aggregate as an indicator in the monthly Nowcasting of nominal GDP, as needed in implementation of any nominal GDP targeting policy; and (2) the proposal by Belongia and Ireland (2015) to use a Divisia monetary aggregate as an intermediate target, with nominal GDP being the final target of policy. We run well known diagnostic tests of bivariate time series properties of the Divisia M2 and nominal GDP stochastic processes. Those tests are for properties that are necessary, but not sufficient, for the conclusions of Belongia and Ireland (2014) and Barnett, Chauvet, and Leiva-Leon (2015). We find no time series properties that would contradict those implied by either of those two approaches.
    Keywords: money, aggregation theory, index number theory, Divisia index, Divisia monetary aggregates, nominal GDP targeting.
    JEL: C43 E01 E3 E40 E41 E51 E52 E58
    Date: 2015–10
  10. By: Haakon Kavli and NIcola Viegi
    Abstract: The paper presents a two-country real business cycle model with a financial sector that intermediates portfolio flows. It is changes in demand for nancial assets from foreign investors relative to domestic investors that gives rise to portfolio flows. The simulations show that portfolio flows to emerging markets respond negatively to global risk in line with findings from the empirical literature. The transmission channel that links portfolio flows to credit in emerging markets is the financial intermediary's demand for deposit liabilities (demand for savings).One can avoid the transmission by absorbing the shock before it affects the intermediary's demand for savings. The results show that financial shocks (eg: risk) can be absorbed by optimal changes in the supply of risk free assets. Real shocks (eg: income) can be absorbed by keeping the supply of financial assets fixed and instead allowing the prices to adjust to demand. Macroprudential regulation that limits the total risk exposure of the financial sector increases the volatility of portfolio flows, but reduces the volatility of consumption and labour and therefore increases welfare. Volatility in the composition of the balance sheet (portfolio flows), does not necessarily increase volatility in the aggregate size of the balance sheet (savings). The model uses a risk-constraint on bank balance sheets as a tool to ensure less-than-perfect elasticity of demand for financial assets. The elasticity of demand is important because it determines the size and direction of portfolio flows.
    Keywords: Portfolio Flows, RBC model, Financial Intermediaries, macroprudential regulation
    Date: 2015

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