nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒06‒14
eleven papers chosen by
Martin Berka
University of Auckland

  1. Multiple Equilibria in Open Economy Models with Collateral Constraints: Overborrowing Revisited By Stephanie Schmitt-Grohé; Martín Uribe
  2. A Model of the International Monetary System By Farhi, Emmanuel; Maggiori, Matteo
  3. The 'Real' Explanation of the PPP Puzzle By Nicholas Ford; Charles Yuji Horioka
  4. Stabilisation and rebalancing with fiscal or monetary devaluation: a model-based comparison By Lukas Vogel
  5. Long-Run Drivers of Current Account Imbalances in the EU: the Role of Trade Openness By Giuseppe Caivano; Nicola D. Coniglio
  6. Leverage constraints and real interest rates By Isohätälä, Jukka; Kusmartsev, Feo; Milne, Alistair; Robertson, Donald
  7. Discovering the signs of Dutch disease in Russia By Mironov, V.V.; Petronevich, A.V.
  8. Fiscal Consolidation Under Imperfect Credibility By M. Lemoine; J. Lindé
  9. A European Disease?Non-tradable inflation and real interest rate divergence By Sophie Piton
  10. Commodity prices and fiscal policy design: Procyclical despite a rule By Hilde C. Bjornland; Leif Anders Thorsrud
  11. Global Commodity Prices and Inflation in a Small Open Economy By Muhammad Nadeem Hanif; Javed Iqbal; Imran Naveed Khan

  1. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper establishes the existence of multiple equilibria in infinite-horizon open- economy models in which the value of tradable and nontradable endowments serves as collateral. In this environment, the economy displays self-fulfilling financial crises in which pessimistic views about the value of collateral induces agents to deleverage. The paper shows that under plausible calibrations, there exist equilibria with underborrowing. This result stands in contrast to the overborrowing result stressed in the related literature. Underborrowing emerges in the present context because in economies that are prone to self-fulfilling financial crises, individual agents engage in excessive precautionary savings as a way to self-insure.
    JEL: E44 F41 G01 H23
    Date: 2016–05
  2. By: Farhi, Emmanuel; Maggiori, Matteo
    Abstract: We propose a simple model of the international monetary system. We study the world supply and demand for reserve assets denominated in different currencies under a variety of scenarios: a Hegemon vs. a multipolar world; abundant vs. scarce reserve assets; a gold exchange standard vs. a floating rate system; away from vs. at the zero lower bound (ZLB). We rationalize the Triffin dilemma, which posits the fundamental instability of the system, as well as the common prediction regarding the natural and beneficial emergence of a multipolar world, the Nurkse warning that a multipolar world is more unstable than a Hegemon world, and the Keynesian argument that a scarcity of reserve assets under a gold standard or at the ZLB is recessive. We show that competition among few countries in the issuance of reserve assets can have perverse effects on the total supply of reserve assets. We analyze forces that lead to the endogenous emergence of a Hegemon. Our analysis is both positive and normative.
    Date: 2016–05
  3. By: Nicholas Ford; Charles Yuji Horioka
    Abstract: This article shows that global financial markets cannot, by themselves, achieve net transfers of financial capital and real interest rate equalisation across countries and that the integration of both global financial markets and global goods markets is needed to achieve net transfers of capital and real interest rate equalisation across countries. Thus, frictions (barriers to mobility) in one or both of these markets can impede the net transfer of capital between countries, produce the Feldstein and Horioka (1980) finding of high saving-investment correlations, and prevent real interest rates from being equalised across countries. Moreover, frictions in global goods markets can explain why real exchange rates deviate from PPP (purchasing power parity) for extended periods of time and can therefore also explain the PPP puzzle. Thus, we are able to resolve 2 of Obstfeld and Rogoff’s (2000) “6 major puzzles in macroeconomics” with essentially the same explanation.
    JEL: E40 F21 F31 F32 F36 G15
    Date: 2016–04
  4. By: Lukas Vogel
    Abstract: The paper uses a small open economy general-equilibrium model to compare fiscal and nominal exchange rate devaluation with respect to their impact on economic activity and the current account. In particular, it investigates the extent to which fiscal devaluation mimics nominal exchange rate adjustment and mitigates the output loss associated with demand rebalancing and external adjustment. The results suggest that internal or external devaluation can support external adjustment and mitigate its impact on economic activity, without leading to lasting adjustment themselves. However, the quantitative contribution of a tax shift from labour to consumption, the standard example of fiscal devaluation, remains moderate.
    JEL: E52 F41 F47
    Date: 2015–12
  5. By: Giuseppe Caivano (Università degli Studi di Bari "Aldo Moro"); Nicola D. Coniglio (Università degli Studi di Bari "Aldo Moro")
    Abstract: This paper investigates, using panel cointegration methods, the long-run drivers of current account imbalances in 15 EU member States during the period 1974-2011. We argue that the degree of trade openness greatly affects the relative strength of the different long-term drivers of current account imbalances. Our empirical results indicate that competitiveness factors strongly affect imbalances in countries with a low trade openness, while the effects weakens as trade openness increases. Similarly, we find evidence of a positive effects of government debt on current account deficits for high openness countries and a negative impact for medium and low openness countries. Our results suggest that the structural heterogeneity in the degree of openness across EU countries might be an important contributor to the diverging patterns in current account balances experienced in the last decades.
    Keywords: Current account imbalances; panel cointegration; trade openness
    JEL: D63 E24 O15 O40
    Date: 2016–05
  6. By: Isohätälä, Jukka; Kusmartsev, Feo; Milne, Alistair; Robertson, Donald
    Abstract: This paper investigates the macroconomics of real interest rates when there are constraints on debt finance, used both for insurance against income shocks and transferability of resources over time. We amend a standard continuous-time deterministic model of international exchange, with patient and impatient countries, introducing country level shocks fully diversifiable at the global level. A series of shocks that push one country towards its leverage limit induces substantial pre-cautionary saving and a collapse of real interest rate relative to the deterministic benchmark. We discuss the resulting dynamics of interest rates and the broader implications for macroeconomic modelling. Keywords: borrowing constraints, debt management, incomplete financial markets, international macroeconomics, finance and macroeconomics, macroeconomic propagation, precautionary saving, systemic risk
    JEL: E44
    Date: 2014–11–17
  7. By: Mironov, V.V.; Petronevich, A.V.
    Abstract: ​This paper examines the problem of Dutch disease in Russia during the oil boom of the 2000s, from both the theoretical and empirical points of view. Our analysis is based on the classical model of Dutch disease by Corden and Neary (1982). We examine the relationship between changes in the real effective exchange rate of the ruble and the evolution of the Russian economic structure during the period 2002 – 2013. We empirically test the main effects of Dutch disease, controlling for specific features of the Russian economy, namely the large role of state-owned organizations. We estimate the resource movement and spending effects as determined by the theoretical model and find the presence of several signs of Dutch disease: the negative impact of the real effective exchange rate on growth in the manufacturing sector, the growth of total income of workers, and the positive link between the real effective exchange rate and returns on capital in all three sectors. Although also predicted by the model and clearly observable, the shift of labor from manufacturing to services cannot be explained by ruble appreciation alone. Publication keywords: Dutch disease, resource curse, real effective exchange rate, cointegration model, economic policy, Russia
    JEL: F41 F43 C32
    Date: 2015–01–19
  8. By: M. Lemoine; J. Lindé
    Abstract: This paper examines the effects of expenditure-based fiscal consolidation when credibility as to whether the cuts will be long-lasting is imperfect. We contrast the impact limited credibility has when the consolidating country has the means to tailor monetary policy to its own needs, with the impact when the country is a small member of a currency union with a negligible effect on interest rates and on nominal exchange rates of the currency union. We find two key results. First, in the case of an independent monetary policy, the adverse impact of limited credibility is relatively small, and consolidation can be expected to reduce government debt at a relatively low output cost given that monetary policy provides more accommodation than it would under perfect credibility. Second, the lack of monetary accommodation under currency union membership implies that the output cost may be significantly larger, and that progress in reducing government debt in the short and medium term may be limited under imperfect credibility.
    Keywords: monetary and fiscal policy, front-loaded vs. gradual consolidation, DSGE model, sticky prices and wages, currency union.
    JEL: E32 F41
    Date: 2016
  9. By: Sophie Piton (PSE - Paris School of Economics, CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique)
    Abstract: This paper studies the contribution of real interest rate divergence to the dynamics of the relative price of non-tradables within Europe. Based on a model by De Gregorio et al. (1994), it shows that the real interest rate fall in the Euro Area (EA) periphery following the single currency's inception induced an increase in the relative price of non-tradable goods. using a new dataset, it documents the dynamics of the tradable and the non-tradable sectors over 1995-2013 and the expansion of the non-tradable sector in the periphery before the euro crisis. it then carries out an econometric estimation for 11 EA countries over 1995-2013 and quantifies the contribution of the pure Balassa-Samuelson effect and the impact of the interest rate on non-tradable relative prices. Diverging evolution in the interest rate impacted greatly the evolution of non-tradable relative prices within the euro area over the period. In Greece, the fall in the real interest rate over 1995-2008 could explain almost half of the non-tradable price increase relative to the EA average, while in Germany the increase in the real interest rate might have contributed up to 7% of the decrease of the non-tradable price relative to the average of the EA.
    Abstract: Cet article étudie dans quelle mesure la divergence des taux d'intérêt réels a contribué à la dynamique du prix des biens non échangeables en zone euro. Partant d'un modèle proposé par De Gregorio et al. (1994), il montre que la baisse du taux d'intérêt réel dans les pays périphériques de la zone euro (ZE) après l'adoption de la monnaie unique a induit une augmentation du prix relatif des biens non échangeables. L'utilisation d'une nouvelle base de données permet de documenter la dynamique des secteurs abrités et ouverts sur la période 1995-2013 et de montrer l'expansion du secteur abrité dans les pays périphériques avant la crise de l'euro. Une estimation économétrique est menée pour 11 pays de la ZE sur la période 1995-2013 pour quantifier la contribution de l'effet Balassa-Samuelson et l'impact du taux d'intérêt sur les prix relatifs des biens non échangeables. Il semble que la divergence dans l'évolution des taux d'intérêt a fortement impacté l'évolution des prix des biens non échangeables dans la zone euro sur la période. En Grèce, la baisse du taux d'intérêt réel sur la période 1995-2008 pourrait expliquer près de la moitié de l'augmentation des prix des biens non échangeables par rapport à la moyenne de la ZE, alors qu'en Allemagne, l'augmentation du taux d'intérêt réel pourrait expliquer 7 % de la diminution du prix des biens non échangeables par rapport à la moyenne de la ZE.
    Keywords: Non-tradable prices,Balassa-Samuelson effect,Real interest rate,Secteur abrité,effet Balassa-Samuelson,taux d'intérêt réel
    Date: 2016–05
  10. By: Hilde C. Bjornland; Leif Anders Thorsrud
    Abstract: We analyse if the adoption of a fiscal rule insulates the domestic economy from commodity price fluctuations in a resource-rich economy. To do so we develop a timevarying Dynamic Factor Model, in which both the volatility of structural shocks and the systematic fiscal policy responses are allowed to change over time. We focus on a particular country, Norway, that is put forward as exemplary with its handling of resource wealth; income from the sale of petroleum is first saved in a sovereign wealth fund for then to be spent following a fiscal rule. We find that, contrary to common perception, fiscal policy has been more (not less) procyclical with commodity prices since the adoption of the rule. Fiscal policy has thereby exacerbated the commodity price fluctuations on the domestic economy. Still, compared to many other resource-rich economies practising a more spend-as-you-go strategy the responses are modest, as also documented in our counterfactual analysis. From a policy point of view, the implications of our findings are therefore of general interest since they highlight strengths and weaknesses of fiscal rules adopted in resource rich countries.
    Keywords: Time-varying Dynamic Factor Model, commodity prices, fiscal policy, sovereign wealth fund
    JEL: C32 E32 E62 F41 Q33
    Date: 2016–05
  11. By: Muhammad Nadeem Hanif (State Bank of Pakistan); Javed Iqbal (State Bank of Pakistan); Imran Naveed Khan (State Bank of Pakistan)
    Abstract: Global commodity prices surge of 2007-08 sent an inflationary shock across the countries. 2014 global prices descend resulted in significant disinflation in many countries and even deflation in some economies. We have explored the linkages between global commodity prices fluctuations and inflation in small open economy, Pakistan. Global price fluctuations are found to be dominant sources of inflation dynamics in Pakistan during July 1992 to June 2014. Food inflation and overall inflation in Pakistan is linked to international food prices changes. Non-food and administered prices’ inflation are result of global oil price increases. For core inflation, global prices of metal and cotton matter most. Global commodity prices changes impact overall inflation in Pakistan rather quickly compared to monetary policy actions. Core inflation takes longer to respond to all type of shocks including global price fluctuations. Monetary and exchange rate policies do have role in influencing inflation outcome in Pakistan (barring administrated prices’ inflation).
    Keywords: Global Commodity Prices, Exchange Rate, Money Supply, Inflation
    JEL: E31 E51 F62
    Date: 2016–04

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