nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒01‒03
eleven papers chosen by
Martin Berka
University of Auckland

  1. The Role of International Reserves Holding in Buffering External Shocks By Jean-Pierre Allegret; Audrey Sallenave
  2. The U.S. Debt Restructuring of 1933: Consequences and Lessons By Sebastian Edwards; Francis A. Longstaff; Alvaro Garcia Marin
  3. Financial Integration and Growth in a Risky World By Coeurdacier, Nicolas; Rey, Hélène; Winant, Pablo
  4. Managing Capital Flows in Asia: An Overview of Key Issues By Villafuerte , James; Yap, Josef T.
  5. The International Monetary Fund: 70 Years of Reinvention By Reinhart, Carmen M.; Trebesch, Christoph
  6. Cross-border finance, trade imbalances and competitiveness in the euro area By Gabrisch, Hubert
  7. Global Imbalances Revisited: The Transfer Problem and Transport Costs in Monopolistic Competition By Epifani, Paolo; Gancia, Gino A
  8. Deleveraging, deflation and depreciation in the euro area By Kuvshinov, Dmitry; Müller, Gernot; Wolf, Martin
  9. A Darwinian Perspective on “Exchange Rate Undervaluation” By Du , Qingyuan; Wei , Shang-Jin
  10. International Transmission of Bubble Crashes in a Two-Country Overlapping Generations By Lise Clain-Chamosset-Yvrard; Takashi Kamihigashi
  11. Cross-border banking and business cycles in asymmetric currency unions By Dräger, Lena; Proaño, Christian R.

  1. By: Jean-Pierre Allegret; Audrey Sallenave
    Abstract: IAn extended literature analyzes the accumulation foreign exchange holding observed in many developing and emerging countries since the 2000s. Empirical studies on the self-insurance motive suggest that high-reserves economies are more resilient to financial crises and to international capital inflows volatility. They show also that pre-crisis foreign reserve accumulation explains post-crisis growth. However, some papers suggest that the relationship between international reserves holding and reduced vulnerability is nonlinear, meaning that reserve holding is subject to diminishing returns. This paper deserves more attention to the potential nonlinear relationship between the foreign reserves holding and macroeconomic resilience to shocks. For a sample of 9 emerging economies, we assess to what extent the accumulation of international reserves allows to mitigate negative impacts of external shocks on the output gap. While a major part of the literature focuses on the global financial crisis, we investigate this question by considering two sub-periods: 1995-2003 and 2004-2013. We implement threshold VAR (TVAR) model in which the structure is allow to change if the threshold variable crosses a certain estimated threshold. We find that the effectiveness of reserve holding to improve the resilience of domestic economies to shocks has increased over time. Hence, the diminishing returns of foreign reserve holding stressed in the previous literature must be qualified.
    Keywords: Reserve accumulation, Threshold VAR model, Output gap, External shocks, Emerging countries.
    JEL: E52 F30 F41
    Date: 2015
  2. By: Sebastian Edwards; Francis A. Longstaff; Alvaro Garcia Marin
    Abstract: In 1933, the U.S. unilaterally restructured its debt by declaring that it would no longer honor the gold clause in Treasury securities. We study the effects of the abrogation of the gold clause on sovereign debt markets, the Treasury's ability to issue new debt, investors' willingness to hold Treasury bonds, and on the Treasury's borrowing costs. We find that the restructuring was followed by a flight to quality in the sovereign market. Despite this, there was little effect on the Treasury's ability to sell new debt or the willingness of investors to roll over restructured debt. The Treasury incurred a marginally higher cost of capital by issuing new bonds without the gold clause.
    JEL: E43 E44 E65
    Date: 2015–11
  3. By: Coeurdacier, Nicolas; Rey, Hélène; Winant, Pablo
    Abstract: We revisit the debate on the benefits of financial integration in a two-country neoclassical growth model with aggregate uncertainty. Our framework accounts simultaneously for gains from a more efficient capital allocation and gains from risk sharing---together with their interaction. In our general equilibrium model, risk sharing brought by financial integration has an effect on the steady-state itself, altering convergence gains from capital accumulation. Because we use global numerical methods, we are able to do meaningful welfare comparisons along the transition paths. Allowing for country asymmetries in terms of risk, capital scarcity and size, we find important differences in the effect of financial integration on output, direction of capital flows, consumption and welfare over time and across countries. This opens the door to a richer set of empirical implications than previously considered in the literature.
    Keywords: Growth; International capital flows; Risk sharing
    JEL: F21 F3 F43
    Date: 2015–12
  4. By: Villafuerte , James (Asian Development Bank); Yap, Josef T. (University of the Philippines)
    Abstract: Global capital flows into emerging markets, including those in Asia, continue to be volatile. These capital flows generate both benefits and costs. The latter are associated with episodes of currency and banking crises like the 1997 Asian financial crisis and the 2008 global financial and economic crisis. Policy responses can be implemented to minimize the costs. At the same time, policy responses should vary depending on whether “pull” factors or “push” factors dominate the capital flows. Data show that the main impact of capital flows on economies of East Asia is reflected in real effective exchange rates, equity prices, and accumulation of foreign exchange reserves. If “pull” factors are dominant, policy makers should allow real exchange rates to appreciate in the long-term. Three broad categories of macroeconomic measures are available to countries facing surges of capital inflows, if they are not willing to allow the nominal exchange rate to appreciate: (i) sterilized intervention, (ii) greater exchange rate flexibility, and (iii) fiscal tightening (preferably through expenditure cuts). However, all of them have major drawbacks. Instead, capital controls or, more generally, macroprudential policy can be considered. Other policy recommendations include measures to encourage foreign direct investment, as this type of capital flow is more stable and beneficial; exchange rate coordination to reduce the adverse impacts of currency appreciation on the global competitiveness of domestic firms; and regional financial cooperation, particularly in the development of local bond markets. Recent data show the adverse impact of Quantitative Easing tapering on Asian economies. This is verified by econometric results showing the strong linkages between the United States bond markets and those in Asia. These findings enhance the role of macroprudential policy, which can be implemented in the context of regional cooperation in order to reduce negative spillovers across economies in Asia.
    Keywords: capital flows; exchange rates; regional cooperation; volatility
    JEL: F31 F32 F36
    Date: 2015–11–25
  5. By: Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: A sketch of the International Monetary Fund’s 70-year history reveals an institution that has reinvented itself over time along multiple dimensions. This history is primarily consistent with a “demand driven” theory of institutional change, as the needs of its clients and the type of crisis changed substantially over time. Some deceptively “new” IMF activities are not entirely new. Before emerging market economies dominated IMF programs, advanced economies were its earliest (and largest) clients through the 1970s. While currency problems were the dominant trigger of IMF involvement in the earlier decades, banking crises and sovereign defaults became they key focus since the 1980s. Around this time, the IMF shifted from providing relatively brief (and comparatively modest) balance-of-payments support in the era of fixed exchange rates to coping with more chronic debt sustainability problems that emerged with force in the developing nations and now migrated to advanced ones. As a consequence, the IMF has engaged in “serial lending”, with programs often spanning decades. Moreover, the institution faces a growing risk of lending into insolvency, most widespread among low income countries in chronic arrears to the official sector, but most evident in the case of Greece since 2010. We conclude that these practices impair the IMF’s role as an international lender of last resort.
    Keywords: currency crashes; financial crashes; IMF; international borrowing; lender of last resort; sovereign default
    JEL: E5 F33 F4 F55 G01 G15 G2 N0
    Date: 2015–12
  6. By: Gabrisch, Hubert
    Abstract: The nearly exclusive explanation for current account imbalances in the euro area blames real economy differences between countries, prominently the competitiveness of the participating states. This essay questions the common opinion that wage policy is crucial for rebalancing the European economies. This essay attempts to unfurl the real economy processes from the perspective of money and finance. This essay identifies an interregional asset-price-interest mechanism at work in the monetary union: A general change in the state of confidence provokes asset prices and the effective long-run interest rate to change and to affect aggregate demand and trade flows. A change in competitive positions of countries follows as the second-round effect. The policy implications prefer a downscaling of the financial sector against government interventions into wage formation.
    Keywords: Financial flows, liquidity-preference, trade imbalances, competitiveness, euro area
    JEL: E1 E4 F1 F3 G1
    Date: 2015–12–15
  7. By: Epifani, Paolo; Gancia, Gino A
    Abstract: We study the welfare effects of trade imbalances in a two-sector model of monopolistic competition. As in perfect competition, a trade surplus involves an income transfer to the deficit country and possibly a terms-of-trade deterioration. Unlike the conventional wisdom, however, trade imbalances do not impose any double burden on surplus countries. This is because of a production-delocation effect, which leads to a reduction in the local price index. In the presence of intermediate goods, new results arise: A trade surplus may lead to an appreciation of the exchange rate, to a terms-of-trade improvement and to a welfare increase under standard parameter configurations. In addition, policies that stabilize the exchange rate can make the balanced-trade equilibrium unstable. These results can explain why the manufacturing sector may agglomerate in countries that resist the real appreciation of their currency and suggest that a fixed exchange rate and nominal rigidities may generate short-run instability.
    Keywords: intermediate goods; monopolistic competition; trade costs; trade imbalances
    JEL: F1
    Date: 2015–12
  8. By: Kuvshinov, Dmitry; Müller, Gernot; Wolf, Martin
    Abstract: During the post-crisis period, economic performance has been highly heterogenous across the euro area. While some economies rebounded quickly after the 2009 output collapse, others are undergoing a protracted further decline as part of an extensive deleveraging process. At the same time, inflation has been subdued throughout the whole of the euro area and intra-euro-area exchange rates have hardly moved. We interpret these facts through the lens of a two-country model of a currency union. We find that deleveraging in one country generates deflationary spillovers which cannot be contained by monetary policy, as it becomes constrained by the zero lower bound. As a result, the real exchange rate response becomes muted, and the output collapse---concentrated in the deleveraging economies.
    Keywords: currency union; deflationary spillovers; deleveraging; downward wage rigidity; paradox of flexibility; real exchange rate; zero lower bound
    JEL: E42 F41
    Date: 2015–12
  9. By: Du , Qingyuan (Monash University); Wei , Shang-Jin (Asian Development Bank)
    Abstract: This paper studies how status competition for marriage partners can generate surprising effects on the real exchange rate (RER). In theory, a rise in the sex ratio(increasing relative surplus of men) can generate a decline in the RER. The effect can be quantitatively large if the biological desire for a marriage partner is strong. We also provide within-the People’s Republic of China and cross country empirical evidence to support the theory. As an application, our cross-country estimation suggests that sex ratio as well as other factors in the existing literature can account for the recent evolution in Chinese RER almost completely.
    Keywords: currency manipulation; equilibrium real exchange rate; surplus men
    JEL: F31 F42 J10 J70
    Date: 2015–10–07
  10. By: Lise Clain-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 analyzing stationary sunspot equilibria in a two-country overlapping generations exchange economy with stochastic bubbles. We consider two cases of sunspot shocks. In the first case, we assume that only the foreign country receives a sunspot shock, while in the second, we assume that both countries independently receive sunspot shocks. In the first case, a bubble crash in the foreign country is always accompanied by a bubble crash in the home country. In the second case, a bubble crash in the foreign country can have a positive or negative effect on the home bubble. We also show that there exists a unique locally isolated stationary sunspot equilibrium, and that it is locally unstable.
    Keywords: International transmission, Stochastic bubbles, Stationary sunspot equilibria, Financial integration
    JEL: D91 E44 F30
    Date: 2015–12
  11. By: Dräger, Lena; Proaño, Christian R.
    Abstract: Against the background of the emergence of macroeconomic imbalances within the European Monetary Union (EMU), we investigate in this paper the macroeconomic consequences of cross-border banking in monetary unions such as the euro area. For this purpose, we incorporate in an otherwise standard two-region monetary union DSGE model a global banking sector along the lines of Gerali et al. (2010), accounting for borrowing constraints of entrepreneurs and an internal constraint on the bank's leverage ratio. We illustrate in particular how rule-of-thumb lending standards based on the macroeconomic performance of the dominating region within the monetary union can translate into destabilizing spill-over effects into the other region, resulting in an overall higher macroeconomic volatility. Thereby, we demonstrate a channel through which the financial sector may have exacerbated the emergence of macroeconomic imbalances within the EMU. This effect may be partly mitigated if the central bank reacts to loan rate spreads, at least relative to the case with constant lending standards.
    Keywords: cross-border banking,euro area,monetary unions,DSGE,monetary policy
    JEL: F41 F34 E52
    Date: 2015

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