nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒03‒23
eight papers chosen by
Martin Berka
University of Auckland

  1. Global Cycles: Capital Flows, Commodities, and Sovereign Defaults, 1815-2015 By Carmen M. Reinhart; Vincent Reinhart; Christoph Trebesch
  2. On the Desirability of Capital Controls By Jonathan Heathcote; Fabrizio Perri
  3. Are monetary unions more synchronous than non-monetary unions? By Crowley, Patrick M.; Trombley, Christopher
  4. Price Adjustment to the Exchange Rate Shock in World Commodity Markets By Hyeongwoo Kim; Jintae Kim
  5. International Channels of Transmission of Monetary Policy and the Mundellian Trilemma By Hélène Rey
  6. Cables, Sharks and Servers: Technology and the Geography of the Foreign Exchange Market By Barry Eichengreen; Romain Lafarguette; Arnaud Mehl
  7. Exchange Rates and Fundamentals: A General Equilibrium Exploration By KANO, Takashi
  8. The Sustainability of External Imbalances in the European Periphery By Vassilis Monastiriotis; Cigdem Borke Tunali

  1. By: Carmen M. Reinhart; Vincent Reinhart; Christoph Trebesch
    Abstract: Capital flow and commodity cycles have long been connected with economic crises. Sparse historical data, however, has made it difficult to connect their timing. We date turning points in global capital flows and commodity prices across two centuries and provide estimates from alternative data sources. We then document a strong overlap between the ebb and flow of financial capital, the commodity price super-cycle, and sovereign defaults since 1815. The results have implications for today, as many emerging markets are facing a double bust in capital inflows and commodity prices, making them vulnerable to crises.
    JEL: E30 E44 F44 G01 N10 N20
    Date: 2016–02
  2. By: Jonathan Heathcote; Fabrizio Perri
    Abstract: In a standard two country international macro model we ask whether imposing restrictions on international non-contingent borrowing and lending is ever desirable. The answer is yes. If one country imposes capital controls unilaterally, it can generate favorable changes in the dynamics of equilibrium interest rates and the terms of trade, and thereby benefit at the expense of its trading partner. If both countries simultaneously impose capital controls, the welfare effects are ambiguous. We identify calibrations in which symmetric capital controls improve terms of trade insurance against country specific shocks, and thereby increase welfare for both countries.
    JEL: F32 F41 F42
    Date: 2016–01
  3. By: Crowley, Patrick M.; Trombley, Christopher
    Abstract: Within currency unions, the conventional wisdom is that there should be a high degree of macroeconomic synchronicity between the constituent parts of the union. But this conjecture has never been formally tested by comparing sample of monetary unions with a control sample of countries that do not belong to a monetary union. In this paper we take euro area data, US State macro data, Canadian provincial data and Australian state data — namely real Gross Domestic Product (GDP) growth, the GDP deflator growth and unemployment rate data — and use techniques relating to recurrence plots to measure the degree of synchronicity in dynamics over time using a dissimilarity measure. The results show that for the most part monetary unions are more synchronous than non-monetary unions, but that this is not always the case and particularly in the case of real GDP growth. Furthermore, Australia is by far the most synchronous monetary union in our sample.
    Keywords: business cycles, growth cycles, frequency domain, optimal currency area, macroeconomic synchronization, monetary policy, single currency
    JEL: C49 E32 F44
    Date: 2015–07–31
  4. By: Hyeongwoo Kim; Jintae Kim
    Abstract: We empirically investigate dynamic responses of 49 IMF primary commodity prices to the US dollar exchange rate shock using recursively identified vector autoregressive models. Our major empirical findings are as follows. First, price adjustments toward the new equilibrium tend to be gradual with a few exceptions. We propose and estimate two measures of price-stickiness, which provide strong evidence of short-run price rigidity in most commodities. Second, our dynamic elasticity analysis implies that price responses are quite heterogeneous even in the long-run. Some commodity prices over-adjust to the exchange rate shock, which implies higher volatility of those prices than that of the exchange rate. Third, for those commodities that over-adjust, prices in the rest of the world would rise significantly when the US dollar depreciates unexpectedly, suggesting a role for price stabilization policies.
    Keywords: World Commodity Prices; Price Stickiness; Dynamic Elasticity; Vector Autoregression; Impulse-Response Function
    JEL: E31 F31 Q02
    Date: 2016–03
  5. By: Hélène Rey
    Abstract: This lecture argues that the Global Financial Cycle is a challenge for the validity of the Mundellian trilemma. I present evidence that US monetary policy shocks are transmitted internationally and affect financial conditions even in inflation targeting economies with large financial markets. Hence flexible exchange rates are not enough to guarantee monetary autonomy in a world of large capital flows.
    JEL: F3 F33 F41
    Date: 2016–01
  6. By: Barry Eichengreen; Romain Lafarguette; Arnaud Mehl
    Abstract: We analyze the impact of technology on production and trade in services, focusing on the foreign exchange market. We identify exogenous technological changes by the connection of countries to submarine fiber-optic cables used for electronic trading, but which were not laid for purposes related to the foreign exchange market. We estimate the impact of cable connections on the share of offshore foreign exchange transactions. Cable connections between local markets and matching servers in the major financial centers lower the fixed costs of trading currencies and increase the share of currency trades occurring onshore. At the same time, however, they attenuate the effect of standard spatial frictions such as distance, local market liquidity, and restrictive regulations that otherwise prevent transactions from moving to the major financial centers. Our estimates suggest that the second effect dominates. Technology dampens the impact of spatial frictions by up to 80 percent and increases, in net terms, the share of offshore trading by 21 percentage points. Technology also has economically important implications for the distribution of foreign exchange transactions across financial centers, boosting the share in global turnover of London, the world’s largest trading venue, by as much as one-third.
    JEL: F30
    Date: 2016–01
  7. By: KANO, Takashi
    Abstract: Engel and West (2005) claim that the observed near random-walk behavior of nominal exchange rates is an equilibrium outcome of a present-value model of a partial equilibrium asset approach when economic fundamentals follow exogenous first-order integrated processes and the discount factor approaches one. Subsequent empirical studies further confirm this proposition by estimating discount factors close to one under distinct identification schemes. In this paper, I argue that the unit market discount factor creates a theoretical trade-off within a neoclassical, two-country, incomplete-market monetary model; on the one hand, the unit discount factor generates near random-walk nominal exchange rates, while, on the other hand, it counterfactually implies perfect consumption risk sharing as well as flat money demand. Bayesian posterior simulation exercises based on post-Bretton Woods data from Canada and the United States reveal difficulties in reconciling the equilibrium random-walk proposition within the canonical model; in particular, the market discount factor is identified as being much smaller than one.
    Keywords: Exchange rate, Present-value model, Economic fundamental, Random walk, Two-country model, Incomplete market, Cointegrated TFPs, Perfect risk sharing
    JEL: E31 E37 F41
    Date: 2016–03–07
  8. By: Vassilis Monastiriotis; Cigdem Borke Tunali
    Abstract: High and persistent external imbalances have become a key concern in the global economy, particularly after the Global Financial Crisis. The issue is particularly pertinent in Europe, as it poses challenges not only for its economic cohesion but also for its political coherence and the viability of the European project at large. In this study we investigate the sustainability of external imbalances in 15 countries from what is increasingly seen as the European periphery over the period 2000-2012 using quartely data. We apply a range of methods and compare across them to obtain a comprehensive picture of the patterns characterising external imbalances in this area. We find that external imbalances are on the whole large and, despite some significant adjustments in the post-crisis period, they continue to follow paths that are possibly unsustainable. Our results show a higher likelihood of confirming sustainability when looking separately at the current account and the net foreign asset position than when looking jointly at the trade and capital accounts (and thus at the overall fiscal reaction function – Bohn, 2007). This suggests, albeit tentatively, problems and vulnerabilities that go beyond simple concerns about price competitiveness and the trade performance of the countries under study.
    Keywords: external imbalances, current account sustainability, European periphery, error correction
    Date: 2016–03

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