nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒11‒07
twelve papers chosen by
Martin Berka
University of Auckland

  1. Credit constraints and growth in a global economy By Nicolas Coeurdacier; Stéphane Guibaud; Keyu Jin
  2. Global Imbalances and Currency Wars at the ZLB. By Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas
  3. The International Price System By Gita Gopinath
  4. Exchange Market Pressure in OECD and Emerging Economies: Domestic vs. External Factors and Capital Flows in the Old and New Normal By Joshua Aizenman; Mahir Binici
  5. Optimal monetary policy in a currency union with labour market heterogeneity By Nikolas Kontogiannis
  6. Do debt and growth dance together? A DSGE model of a small open economy with sovereign debt By Zixi Liu
  7. The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis By Ben Cheikh, Nidhaleddine; Rault, Christophe
  8. Empirical Relation between Real Exchange Rate and Current Account Deficit J Curve Analyses for Turkey By Ahmet İkiz
  9. Current account and REER misalignments in Central Eastern EU countries: an update using the macroeconomic balance approach By Comunale , Mariarosaria
  10. How Important Are Nominal Shocks For Real Exchange Rate Fluctuations? Evidence From Inflation Targeting Emerging Market Economies By M. Fatih Ekinci; Fatma Pınar Erdem; Zübeyir Kılınç
  11. Macroeconomic Imbalances and the Eurozone Crisis: The Impact of Credit Expansion on Asset Prices By Gökçer Özgür; Emel Memiş
  12. Beyond Balassa and Samuelson: Real convergence, capital flows, and competitiveness in Greece By Belke, Ansgar; Haskamp, Ulrich; Schnabl, Gunther; Zemanek, Holger

  1. By: Nicolas Coeurdacier; Stéphane Guibaud; Keyu Jin
    Abstract: We show that in an open-economy OLG model, the interaction between growth differentials and household credit constraints—more severe in fast-growing countries— can explain three prominent global trends: a divergence in private saving rates between advanced and emerging economies, large net capital outflows from the latter, and a sustained decline in the world interest rate. Micro-level evidence on the evolution of age-saving profiles in the U.S. and China corroborates our mechanism. Quantitatively, our model explains about a third of the divergence in aggregate saving rates, and a significant portion of the variations in age-saving profiles across countries and over time.
    Keywords: household credit constraints; age-saving profiles; international capital flows; allocation puzzle.
    JEL: F21 F32 F41
    Date: 2015
  2. By: Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas
    Abstract: This paper explores the consequences of extremely low equilibrium real interest rates in a world with integrated but heterogenous capital markets, and nominal rigidities. In this context, we establish five main results: (i) Economies experiencing liquidity traps pull others into a similar situation by running current account surpluses; (ii) Reserve currencies have a tendency to bear a disproportionate share of the global liquidity trap—a phenomenon we dub the “reserve currency paradox;” (iii) Beggar-thy-neighbor exchange rate devaluations stimulate the domestic economy at the expense of other economies; (iv) While more price and wage flexibility exacerbates the risk of a deflationary global liquidity trap, it is the more rigid economies that bear the brunt of the recession; (v) (Safe) Public debt issuances and increases in government spending anywhere are expansionary everywhere, and more so when there is some degree of price or wage flexibility. We use our model to shed light on the evolution of global imbalances, interest rates, and exchange rates since the beginning of the global financial crisis.
    JEL: E0 F3 F4 G01
    Date: 2015–10
  3. By: Gita Gopinath
    Abstract: I define and provide empirical evidence for an "International Price System" in global trade, employing data for thirty-five developed and developing countries. This price system is characterized by two features. First, the overwhelming share of world trade is invoiced in very few currencies, with the dollar the dominant currency. Second, international prices, in their currency of invoicing, are not very sensitive to exchange rates at horizons of up to two years. In this system, a good proxy for a country's inflation sensitivity to exchange rate fluctuations is the fraction of its imports invoiced in a foreign currency. U.S. inflation is consequently more insulated from exchange rate shocks, while other countries are highly sensitive to it. Exchange rate depreciations (appreciations) make U.S. exports cheaper (expensive), while for other countries they mainly raise (lower) mark-ups and hence profits. U.S. monetary policy has spillover effects on inflation in other countries, while spillovers from other countries monetary policies on to U.S. inflation are more muted.
    JEL: E31 F0 F41
    Date: 2015–10
  4. By: Joshua Aizenman; Mahir Binici
    Abstract: We study the ways domestic and external global factors (such as risk appetite, global liquidity, U.S. monetary policy, and commodity prices) affected the exchange market pressure before and after the global financial crisis as well as the role of these factors during the Federal Reserve’s tapering episode. Utilizing a comprehensive database on capital controls, we investigate whether control measures have a significant impact on mitigating exchange market pressure associated with capital flows [net and gross]. Using quarterly data over the 2000–2014 period and a dynamic panel model estimation, we find that external factors played a significant role in driving exchange market pressure for both OECD countries and emerging market countries, with a larger impact on the latter. While the effect of net capital flows on exchange market pressure is muted, short-term gross portfolio inflows and outflows comprise important factors that account for exchange market pressure. Short-term portfolio flows and long-term foreign direct investment flows have a significant impact on exchange market pressure for emerging market economies and no significant effect for OECD countries. Capital controls seem to significantly reduce the exchange market pressure although the economic size of this impact is highly dependent on the institutional quality.
    JEL: F3 F31 F33
    Date: 2015–10
  5. By: Nikolas Kontogiannis (University of Leicester)
    Abstract: I construct a New Keynesian, two-country model with labour market frictions in the search and matching process and real wage rigidity. Following a linear-quadratic approach, I analyse quantitatively the welfare-based optimal monetary policy in a currency union. I allow for labour market heterogeneity among the member states captured by an index based on the real wage rigidity differential. I show that when the optimal monetary policy is conducted, in the presence of productivity shocks, thewelfare loss in the currency union increasesmonotonically with the value of the labour market heterogeneity index. That is based on the key role of the terms of trade which intensify the effects of the shocks. I also draw the implications of labour market heterogeneity for the optimal regime choice by the central bank.
    Keywords: Currency union; Optimal monetary policy; Labour market heterogeneity.
    JEL: E24 E31 E52 F41
    Date: 2015
  6. By: Zixi Liu (Goethe University Frankfurt)
    Abstract: Regarding the financial crisis since 2008, one heated debate lies in the relationships between public debt and economic growth. The present paper develops a theoretical model in a small open economy with sovereign risk based on Galí  and Monacelli (2005, 2008). A country- specific sovereign risk parameter is inserted into the sovereign interest rate equation to analyze its influence to the links between debt and growth. This paper shows that there is no single threshold and additionally, the relationship between debt and growth is country-specific and it varies depending on the degree of sovereign risk. Three scenarios are considered conditional on one set of randomly drawn simulated exogenous shocks. In a country with a high sovereign risk, there is a negative relationship between debt and growth whereby debt- GDP ratio is above 90%. With an extremely high sovereign risk, the relationship turns out to be rather negative and the turning point is quite low. In some countries that sovereign risk is not that high, fiscal stimulus could be effective to improve the economic growth. Moreover, the relationships between debt and growth under the three scenarios are all hump-shaped.
    Keywords: Growth, Sovereign Debt, DSGE, Fiscal Policy.
    JEL: E62 F41 H30 H60
    Date: 2015
  7. By: Ben Cheikh, Nidhaleddine (ESSCA School of Management); Rault, Christophe (University of Orléans)
    Abstract: This paper investigates whether exchange rate pass-through (ERPT) into import prices is a nonlinear phenomenon for five heavily indebted Euro area countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus the German bund) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed a given threshold. For almost all the GIIPS countries, we reveal that the increase in macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed higher sensitivity of import prices to exchange rate movements. For instance, the rate of pass-through in Greece is equal to 0.66% when the yield differential is below 2.13%, but beyond this threshold level, the sensitivity of import prices becomes higher and reaches full ERPT. Our findings raise the serious question of whether the exchange rate could be an effective tool to boost the trade balance and prevent deflationary threats when financial crisis hits.
    Keywords: exchange rate pass-through, import prices, sovereign spreads, smooth transition models
    JEL: C22 E31 F31
    Date: 2015–10
  8. By: Ahmet İkiz (Mugla Sıtkı Kocman University)
    Abstract: The positive impacts of devaluation of national currency on current account deficit are one of the main arguments in international economic theory. Basic idea is that countries easily increase their exports and have current account surplus by simply reduce the international value of home currency. The success of this policy heavily depends upon response time process of export promotion and import reduction. Due to the shape of the curve for the relation between time and current account balance this analyses is called J curve. If the response of current account deficit is quite slow to the home currency devaluation in time process, the cure of this policy will be quite limited and the shape of the curve will be flat. Alternatively if the time response of current account balance is fast the success of the policy will be quite high. The notion of johansen method analyses would be very good method for the estimation of this relation between two macroeconomic variables. In this paper I do discuss the feasibility of J curve analyses under the framework of those models. That will enable policy makers about the success of devaluation policy of home currency for current account deficit problem of Turkish economy. There are a lot of academic studies on current account deficit problem of Turkish economy. Main derive behind that is high current account deficits are accompanied by high growth rates which is basically unsustainable in long term. The high market interest rate and low exchange rate policy create fiscal problems during the economic crisis that foreign capital flows out from Turkey in a very short time period. Nominal exchange rates can be misleading in explaining those capital movements and their reasons. So some economists like Krugman proposed real exchange rate parity in order to get much more reliable explanations.
    Keywords: NA
    Date: 2015
  9. By: Comunale , Mariarosaria (BOFIT)
    Abstract: Using the IMF CGER methodology, we make an assessment of the current account and price competitiveness of the Central Eastern European Countries (CEEC) that joined the EU between 2004 and 2014. We present results for the “Macroeconomic Balance (MB)” approach, which provides a measure of current account equilibrium based on its determinants together with mis-alignments in real effective exchange rates. We believe that a more refined analysis of the mis-alignments may useful for the Macroeconomic Imbalance Procedure (MIP). This is especially the case for these countries, which have gone through a transition phase and boom/bust periods since their independence. Because such a history may have influenced a country’s performance, any evaluation must take account of each country’s particular characteristics. We use a panel setup of 11 EU new member states (incl. Croatia) for the period 1994-2012 in static and dy-namic frameworks, also controlling for the presence of cross-sectional dependence and check-ing specifically for the role of exchange rate regimes, capital flows and global factors. <p> We find that the estimated coefficients of the determinants meet with expectations. Moreover, the foreign capital flows, the oil balance, and relative output growth seem to play a crucial role in explaining the current account balance. Some global factors such as shocks in oil prices or supply might have played a role in worsening the current account balances of the CEECs. Having a pegged exchange rate regime (or being part of the euro zone) affects the current account positively. The real effective exchange rates behave in accord with the current account gaps, which clearly display cyclical behaviour. The CAs and REERs come close to equilibria in 2012 in most of the countries andthe rebalancing is completed for some countries that were less misaligned in the past, such as Poland and Czech Republic, but also for Lithuania. When Foreign Direct Investment (FDI) is introduced as a determinant for these countries, the misalignments are larger in the boom periods (positive misalignments) whereas the negative misalignments are smaller in magnitude.
    Keywords: real effective exchange rate; Central Eastern European Countries; EU new member states; fundamental effective exchange rate; current account
    JEL: C23 F31 F32
    Date: 2015–10–14
  10. By: M. Fatih Ekinci (Central Bank of Turkey); Fatma Pınar Erdem (Central Bank of Turkey); Zübeyir Kılınç (Central Bank of Turkey)
    Abstract: This study compares the importance of the nominal shocks in explaining the real exchange rate fluctuations before and after the adoption of inflation targeting regime in emerging market economies. We follow the structural VAR methodology proposed by Clarida and Gali (1994) to identify the macroeconomic shocks that determine fluctuations in relative output growth, relative inflation and the real exchange rate. The structural decomposition shows that real shocks account for most of the variation in the real exchange rate. Furthermore, findings indicate that the explanatory power of the nominal shocks in the real exchange rate fluctuations have increased after the implementation of the inflation targeting regime.
    Keywords: Okun Kanunu, İşsizlik, Büyüme, Dinamik Panel Veri
    JEL: C32 F31 F41
    Date: 2015
  11. By: Gökçer Özgür (Hacettepe University, Department of Economics); Emel Memiş (Ankara University, Department of Economics)
    Abstract: The economic crisis of the Eurozone emerged after the subprime mortgage crisis of the U.S. and since then fiscal profligacy of some member countries primarily Greece at the outset, were seen as the root of the crisis. However, alternative approaches pointed to the current account imbalances within the Eurozone; the flaws in the architecture of the Eurozone system. In this study, we aim to analyze these structural problems behind the macroeconomic imbalances and trace their consequences in terms of credit expansion and asset price speculation. More specifically we examine the impacts of credit expansion (the change in new loans relative to GDP) on asset prices using dynamic panel estimations for 11 countries in the Eurozone over the period 1990-2011. We provide the estimates for the pooled sample and for the subsample countries separately regrouped based on Hein (2013) as: i) the debt-led consumption (Greece, Ireland and Spain); ii) export-led mercantilist (Austria, Belgium, Finland, Germany and Netherlands) and iii) domestic demand-led countries (France, Italy and Portugal). We find that the credit expansion and asset prices are closely associated in the first and third group of countries whereas no significant correlation is observed in the second group. In addition we also provide evidence on the relationship between the growth of GDP and credit expansion supporting previous findings in the literature.
    Keywords: Credit expansion; Asset prices; Eurozone crisis; Macroeconomic imbalances
    JEL: E42 E65 F36 F34
    Date: 2015
  12. By: Belke, Ansgar; Haskamp, Ulrich; Schnabl, Gunther; Zemanek, Holger
    Abstract: We scrutinize the role of capital flows in competitiveness in a set of seven euroarea member countries (Estonia, Greece, Latvia, Lithuania, Portugal, Slovenia, and the Slovak Republic) in the context of real convergence and crisis. A specific focus is on Greece. The paper extends the seminal Balassa-Samuelson model to include international capital markets, placing a particular focus on their impact on national wage policies. Capital flows are assumed to be able to invert the traditional direction of transmission of real wage increases from the tradable sector to the non-tradable sector and to cause real wages to increase beyond productivity increases. The augmented Balassa-Samuelson model is extended to trace cyclical deviations of real exchange rates from the productivity-driven equilibrium path. Panel estimations for the period from 1995 to 2013 show evidence of the Balassa-Samuelson effect if Greece is excluded from the panel. For Greece, this in turn provides evidence in favour of capital inflow-driven real wage increases in excess of productivity increases.
    Abstract: Dieser Beitrag untersucht die Bedeutung von Kapitalflüssen für die internationale Wettbewerbsfähigkeit einer Gruppe von sieben Mitgliedsländern der Eurozone (Griechenland, Portugal, Estland, Lettland, Litauen, Slowenien und die Slowakei) im Kontext realer Konvergenz und der Finanzkrise. Ein besonderer Fokus wird aber auf Griechenland gelegt. Wir erweitern für diese Zwecke das klassische Balassa-Samuelson Modell durch die Einbeziehung internationaler Kapitalmärkte - mit einem besonderen Fokus auf deren Einfluss auf nationale Lohnpolitiken. Wir nehmen an, dass Kapitalflüsse die traditionelle Richtung der Transmission von Reallohnerhöhungen vom Sektor der handelbaren Güter zum Sektor der nicht handelbaren Güter umkehren und Reallöhne über Produktionszuwächse ansteigen lassen können. Das so erweiterte Balassa-Samuelson Modell kann zyklische Abweichungen realer Wechselkurse vom produktivitätsgetriebenen Gleichgewichtspfad gut erklären. Unsere Panelschätzungen für die Periode von 1995 bis 2013 liefern immer dann Evidenz für den klassischen Balassa-Samuelson-Effekt, wenn Griechenland aus dem untersuchten Ländersample ausgeschlossen wird. Für Griechenland implizieren unsere Panelschätzungen im Umkehrschluss Evidenz für durch Kapitalzustrom induzierte Reallohnanstiege, die über das Produktivitätswachstum hinausgehen.
    Keywords: Balassa-Samuelson effect,capital inflows,exchange rate regime,inflation,Greece,Latvia,Portugal,panel model,productivity differential,wages
    JEL: E24 F16 F31 F32
    Date: 2015

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