nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒05‒28
six papers chosen by
Martin Berka
University of Auckland

  1. East Asian Economies and Financial Globalization In the Post-Crisis World By Joshua Aizenman; Hiro Ito
  2. The Imbalanced Catch-up to Rational Expectations: Capital Flows during Convergence By Cozzi, Guido; Davenport, Margaret
  3. Large Depreciations: Recent Experience in Historical Perspective By José De Gregorio
  4. Boom goes the price: Giant resource discoveries and real exchange rate appreciation By Torfinn Harding; Radoslaw Stefanski; Gerhard Toews
  5. Fertility, Longevity, and Capital Flows By Bárány, Zsófia; Coeurdacier, Nicolas; Guibaud, Stéphane
  6. Full Employment, Open Economy Macroeconomics, and Keynes’ General Theory: Does the Swan Diagram Suffice? By Paul Davidson

  1. By: Joshua Aizenman; Hiro Ito
    Abstract: This paper assesses the East Asian Economies’ openness to cross-border capital flows and exchange rate arrangements in the past decades, with the main focus on emerging market economies. Using Mundell’s trilemma indexes, we note that the convergence of the three policy goals in East Asia toward a “middle ground” pre-dates the convergence of these indices in other regions. Another more recent development involves the high level of international reserve (IR) holdings–a feature that is known as the most distinct characteristic of Asian EMEs. Financial globalization made asset prices and interest rates in Asian EMEs more vulnerable to global movements of capital, and to the monetary policy of the center country, the United-States. The U.S. presence in trade ties with Asian economies has been declining over the last two decades, whereas China’s has been on a rising trend. Yet, the share of trade among Asian economies with the dollar zone economies has been quite stable. China has been recently making efforts to “internationalize” its currency, the yuan (RMB). Hence, if China succeeds in its internationalization efforts and creates the RMB zone, the dynamics between the U.S. and Asia will most likely change. Recently, Chinese authorities have become more interventionist because of the slowdown of the economy and financial markets. For now, the Asian region’s international finance continues to be dollar-centric.
    JEL: F31 F36 F41 O24
    Date: 2016–05
  2. By: Cozzi, Guido; Davenport, Margaret
    Abstract: How long shall a country take to learn the world technological frontier? What would happen if that country found the same difficulties in learning the true model of its economy? After all, countries catching up often experience life-changing transformations during the catch-up to a balanced growth path. We show that an open economy, learning rational expectations alongside foreign technology, may be characterized by excessive saving and current account surpluses, as often observed in the data and at odds with the standard open economy theoretical predictions, and not fully explained by standard adaptations such as habit formation. Moreover, such a learning process in a large developing country can upset the savings behavior of a fully rational expectations advanced country. In a US-China calibration, we show that this effect can be so strong as to explain important current account imbalances, the savings glut hypothesis, as well as the distribution of factor income.
    Keywords: Capital flows, convergence, learning, rational expectations, productivity growth
    JEL: E03 F21 F41
    Date: 2015–08
  3. By: José De Gregorio (Peterson Institute for International Economics)
    Abstract: Data for a large sample of countries dating back to the early 1970s reveal that the large depreciations against the dollar that are occurring in many countries are not unprecedented in magnitude or duration. The pass-through to inflation from exchange rate depreciation has been slightly more muted than in previous occasions, but it is not out of line with experience since the mid-1990s. The current account adjustment has been more limited than in the past, possibly suggesting that the period of weak currencies may be prolonged.
    Keywords: Current account adjustment, depreciation, exchange rate pass-through, inflation
    JEL: E31 F31 F32 F41
    Date: 2016–05
  4. By: Torfinn Harding (NHH Norwegian School of Economics); Radoslaw Stefanski (University of St Andrews); Gerhard Toews (University of Oxford)
    Abstract: We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. The size and plausibly exogenous timing of such discoveries make them ideal for identifying the effects of an anticipated resource boom on prices. We find that a giant discovery with the value of a country's GDP increases the real exchange rate by 14% within 10 years following the discovery. The appreciation is nearly exclusively driven by an appreciation of the prices of non-tradable goods. We show that these empirical results are qualitatively and quantitatively in line with a calibrated model with forward looking behaviour and Dutch disease dynamics.
    Keywords: Carbon Subsidies; Subsidies; Fossil Fuels; Pollution; Energy; Carbon
    JEL: O44 O41 Q53 Q54 H23
    Date: 2016–05–21
  5. By: Bárány, Zsófia (SciencesPo Paris); Coeurdacier, Nicolas (SciencesPo Paris and CEPR); Guibaud, Stéphane (SciencesPo Paris)
    Abstract: The neoclassical growth model predicts large capital flows towards fast-growing emerging countries. We show that incorporating fertility and longevity into a lifecycle model of savings changes the standard predictions when countries differ in their ability to borrow inter-temporally and across generations through social security. In this environment, global aging triggers capital flows from emerging to developed countries, and countries’ current account positions respond to growth adjusted by current and expected demographic composition. Data on international capital flows are broadly supportive of the theory. The fact that fast-growing emerging countries are also aging faster, while having less developed credit markets and pension systems, explains why they are more likely to export capital. Our quantitative multi-country overlapping-generations model explains a significant fraction of the patterns of capital flows, across time and across developed and emerging countries.
    Date: 2016–05
  6. By: Paul Davidson (University of Tennessee.)
    Abstract: This paper provides critical comments on the Peter Temin - David Vines promotion of the basic Swan Diagram as (1) a policy tool to encourage any individual debtor nation experiencing balance of payment deficits to reduce its exchange rate in order to expand exports and reduce imports and (2) the Swan Diagram as a simple model for understanding Keynes's General Theory for an Open Economy. This paper explains that the Swan Diagram is completely incompatible with Keynes's analysis. Instead Keynes advocated that the onus should be placed on creditor nations to correct international payments imbalances and thereby promote economic expansion internationally. Keynes warned against any deficit nation adopting a policy that tries to achieve a balance in its international payments by following any policy designed to reduce imports and increase exports. Such a policy sends a contractionary force onto the international economy and tends to injure all trading partners.
    Keywords: Swan Diagram, balance of payments, fiscal policy, neoclassical Synthesis Keynesianism, Post Keynesianism.
    JEL: B3 E12 E42 E61 F33 F41

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