nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒01‒18
ten papers chosen by
Martin Berka
University of Auckland

  1. Quantitative Easing in an Open Economy : Prices, Exchange Rates and Risk Premia By Peiris, M.Udara; Polemarchakis, Herakles
  2. Catalytic IMF? A gross flows approach By Aitor Erce; Daniel Riera-Crichton
  3. Financial Intermediation, Resource Allocation, and Macroeconomic Interdependence By Galip Kemal Ozhan
  4. Commodity Price Changes and Economic Growth in Developing Countries By Emara, Noha; Simutowe, Amon; Jamison, Tricia
  5. Equilibrium Price Dispersion and the Border Effect By Ryan Chahrour; Luminita Stevens
  6. Real effective exchange rates comovements and the South African currency By Raputsoane, Leroi
  7. Filling the gap: open economy considerations for more reliable potential output estimates By Zsolt Darvas; Andras Simon
  8. What can Big Data tell us about the passthrough of big exchange rate changes? By Lewis, John
  9. European lending channel: differences in transmission mechanisms due to the global financial crisis By Tomáš Heryán; Panayiotis G. Tzeremes; Roman Matousek
  10. Global Liquidity and Monetary Policy Autonomy By Stefan Angrick

  1. By: Peiris, M.Udara (International College of Economics and Finance, National Research University-Higher School of Economics, Moscow, Russia and Department of Economics, University of Warwick); Polemarchakis, Herakles (Department of Economics, University of Warwick)
    Abstract: Explicit targets for the composition of assets traded by governments are necessary for fiscal-monetary policy to determine the stochastic paths of inflation or exchange rates; this is the case even if fiscal policy is non-Ricardian.Targets obtain with the traditional conduct of monetary policy and Credit Easing, but not with inconventional policy and Quantitative Easing. The composition of the portfolios traded by monetary-fiscal authorities determines premia in asset and currency markets
    JEL: E50 F41
    Date: 2015
  2. By: Aitor Erce (European Stability Mechanism); Daniel Riera-Crichton (Bates College)
    Abstract: The financial assistance the International Monetary Fund (IMF) provides is expected to catalyze private capital inflows. Such a catalytic effect has, however, proven empirically elusive. This paper deviates from the standard approach based on the net capital inflow to study instead the IMF’s catalytic role in the context of gross capital flows. Using fixed-effects regressions, instrumental variables and local projection methods, we document dynamics that are absent from existing models of IMF catalysis. Our results show significant differences in how resident and foreign investors react to IMF programs. While IMF lending does not catalyze foreign capital, it does affect the behavior of resident investors, who are both less likely to place their savings abroad and more likely to repatriate their foreign assets. As domestic banks’ flows drive this effect, we conclude that IMF catalysis is “a banking storyâ€. In comparing the effects across crisis types, we find that the effect of the IMF on resident investors is strongest during sovereign defaults, and that it exerts the least effect on foreign investors during bank crises.
    Keywords: IMF, catalysis, residence, capital flows
    JEL: F32 F33 F36 G01 G15
    Date: 2015–12
  3. By: Galip Kemal Ozhan
    Abstract: This paper studies the role of the financial sector in affecting domestic resource allocation and cross-border capital flows. I develop a quantitative, two-country, macroeconomic model in which banks face endogenous and occasionally binding leverage constraints. Banks lend funds to be invested in tradable or non-tradable sector capital and there is international financial integration in the market for bank liabilities. I focus on news about economic fundamentals as the key source of fluctuations. Specifically, in the case of positive news on the valuation of non-traded sector capital that turn out to be incorrect at a later date, the model generates an asymmetric, belief-driven boom-bust cycle that reproduces key features of the recent Eurozone crisis. Bank balance sheets amplify and propagate fluctuations through three channels when leverage constraints bind: First, amplified wealth effects induce jumps in import-demand (demand channel). Second, changes in the value of non-tradable sector assets alter bank lending to tradable sector firms (intra-national spillover channel). Third, domestic and foreign households re-adjust their savings in domestic banks, and capital flows further amplify fluctuations (international spillover channel). A common central bankâs unconventional policies of private asset purchases and liquidity facilities in response to unfulfilled expectations are successful at ameliorating the economic downturn.
    JEL: E44 F32 F41 G15
    Date: 2015–12–30
  4. By: Emara, Noha; Simutowe, Amon; Jamison, Tricia
    Abstract: Using panel data 43 developing countries over the period 1980-2010, the paper examines the impact of the Commodity Terms of Trade (CTOT) Index on the real GDP per capita growth in developing countries. The study finds that for all countries in the sample, an increase in the CTOT index instantaneously leads to a statistically positive impact on the GDP per capita growth rate. Furthermore, the study finds evidence of resource curse under the Commodity Terms of Trade Index in developing countries. This suggests the need for improved management in the natural resources of developing countries. The energy sector proves to independently account for a resource curse. Better management is needed in the energy sector to counter the resource curse that has been reflected in the regression estimates especially in countries with a low score on the governance index.
    Keywords: Commodity; Index; Trade; Developing; Governance
    JEL: C23 F10 O43
    Date: 2015
  5. By: Ryan Chahrour (Boston College); Luminita Stevens (University of Maryland)
    Abstract: We develop a model of equilibrium price dispersion via retailer search and show that the degree of market segmentation within and across countries cannot be separately identified by good-level price data alone. We augment a set of well-known empirical facts about the failure of the law of one price with data on aggregate intranational and international trade quantities, and calibrate the model to match price and quantity facts simultaneously. The calibrated model matches the data very well and implies that within-country markets are strongly segmented, while international borders contribute virtually no additional market segmentation.
    Keywords: Law of one price, Border effect, Real exchange rate
    JEL: F41 F30 E30
    Date: 2015–12–18
  6. By: Raputsoane, Leroi
    Abstract: The study analyses comovement between the real effective exchange rate of South Africa and those of a sample of countries that include the world’s major economies as well as emerging and developing economies. The comovement is examined over the short and long term as well as pre and post the recent global financial crisis. The results show that, although the real effective exchange rate of South Africa shows some comovement with those of the selected countries, such comovement is mixed and inconsistent. Currencies that belong to a similar grouping in terms of economic development and geographical location display both positive and negative comovement with the real effective exchange rate of South Africa. There is also no consistency in the comovement between the real effective exchange rate of South Africa and those of the selected countries pre and post the recent financial crisis. The results further show that the comovement between the real effective exchange rate of South Africa and those of some of the selected sample of countries is stronger between the trend component than it is between the cyclical component.
    Keywords: Comovements, Real effective exchange rate , Financial crisis
    JEL: C11 C22 F31 F4 F42
    Date: 2016–01–05
  7. By: Zsolt Darvas (Institute of Economics - Centre for Economic and Regional Studies - Hungarian Academy of Sciences and Bruegel and Corvinus University of Budapest); Andras Simon (retired Head of Research at the Central Bank of Hungary)
    Abstract: This paper argues that the Phillips curve relationship is not sufficient to trace back the output gap, because the effect of excess demand is not symmetric across tradeable and non-tradeable sectors. In the non-tradeable sector, excess demand creates excess employment and inflation via the Phillips curve, while in the tradeable sector much of the excess demand is absorbed by the trade balance. We set up an unobserved-components model including both a Phillips curve and a current account equation to estimate ‘sustainable output’ for 45 countries. Our estimates for many countries differ substantially from the potential output estimates of the European Commission, IMF and OECD. We assemble a comprehensive real-time dataset to estimate our model on data which was available in each year from 2004-15. Our model was able to identify correctly the sign of pre-crisis output gaps using real time data for countries such as the United States, Spain and Ireland, in contrast to the estimates of the three institutions, which estimated negative output gaps real-time, while their current estimates for the pre-crisis period suggest positive gaps. In the past five years the annual output gap estimate revisions of our model, the European Commission, IMF, OECD and the Hodrick-Prescott filter were broadly similar in the range of 0.5-1.0 percent of GDP for advanced countries. Such large revisions are worrisome, because the European fiscal framework can translate the imprecision in output gap estimates into poorly grounded fiscal policymaking in the EU.
    Keywords: equilibrium current account; international trade; Kalman-filter; open economy; Phillips-curve; potential output; real-time data; sustainable output; state-space models
    JEL: C32 E32 F41
    Date: 2015–12
  8. By: Lewis, John (Bank of England)
    Abstract: Using a large data set of import volumes and values for goods imports from around 50 trading partners, and 3,000 goods type, this paper finds that the micro level, passthrough is non-linear in the exchange rate. The passthrough of larger bilateral exchange rate movements (ie more than 5%) is around four times larger than that of smaller changes. However, regressions on aggregate data indicate that passthrough at the macro level is close to full. The resolution to this apparent puzzle lies in the fact that larger bilateral movements account for the vast majority of variation in the exchange rate index, and hence the non-linearity at the micro level largely disappears at the macro level.
    Keywords: Exchange rate passthrough; Big Data; non-linearity
    JEL: E31 F14 F41
    Date: 2016–01–08
  9. By: Tomáš Heryán (Department of Finance and Accounting, School of Business Administration, Silesian University); Panayiotis G. Tzeremes (Department of Economics, University of Thessaly); Roman Matousek (University of Kent, Kent Business School)
    Abstract: This study focuses on the bank lending channels and transmission mechanisms of monetary policy in European Union (EU) countries. In accordance with previous empirical studies, we deploy the generalized method of moments (GMM) with pooled annual data. We examine the period from 1999 to 2012. We extend the current research on the transmission mechanisms of monetary policy in the following way: first, we compare the differences between the ‘old’ Economic Monetary Union (EMU) and ‘new’ EU countries. Second, we examine the interaction terms between bank characteristics and both monetary policy indicators. In particular, we examine the impact of short-term interest rates and monetary aggregate M2 on bank behaviour. Assuming a more obvious transmission mechanism, we argue that, in the group of ‘old’ EMU countries, the lending channel is affected by smaller banks that are less liquid or are strongly capitalized. For ‘new’ EU countries, we find similar results, i.e., the lending channel affects smaller banks. However, in terms of liquidity and capital adequacy and assuming a more obvious transmission mechanism, we find an opposing result. Those countries’ lending channel is affected by smaller banks with higher levels of liquidity and lower bank capital. Third, we describe how transmission mechanisms changed during the crises period.
    Keywords: lending channel, transmission mechanism, crisis times, old EMU and new EU countries
    JEL: C58 G01 G21 G28
    Date: 2016–01–04
  10. By: Stefan Angrick
    Abstract: This paper examines the monetary policy constraints facing economies on a fixed peg or managed float regime, contrasting the Mundell-Fleming Trilemma view against the Compensation view commonly found at central banks. While the former holds that foreign exchange inflows and outflows affect the domestic money base, constraining monetary policy under non-floating regimes unless capital controls are adopted, the latter purports that endogenous sterilisation of foreign exchange flows invalidates this trade-off. The predictions of both theories are empirically evaluated for five East Asian economies using central bank balance sheets, vector error correction models and impulse response functions. The findings indicate that the dynamics for the economies studied correspond more closely to the Compensation view than the Trilemma view, suggesting that it is a sustained loss of foreign ex-change reserves that imposes a relevant constraint on autonomy rather than the adoption of a non-floating exchange rate regime.
    Keywords: central banking, balance sheets, monetary policy, exchange rates, policy autonomy
    JEL: E51 E58 F41
    Date: 2015

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