nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒07‒16
seven papers chosen by
Martin Berka
University of Auckland

  1. EAGLE-FLI. A macroeconomic model of banking and financial interdependence in the euro area By Bokan, Nikola; Gerali, Andrea; Gomes, Sandra; Jacquinot, Pascal; Pisani, Massimiliano
  2. Self-fulfilling Prophecies in Sovereign Debt Markets By Nicolini, Juan Pablo
  3. South Africa's real business cycles: The cycle is the trend By Hilary Patroba; Leroi Raputsoane
  4. Does the Exchange rate regime shape currency misalignments in emerging and developing countries? By Carl Grekou
  5. “Debt-growth linkages in EMU across countries and time horizons” By Simón Sosvilla-Rivero; Marta Gómez-Puig
  6. Risk sharing among economic sectors By Faruk, Balli; Eleonora, Pierucci
  7. Financialisation, Debt and Inequality – scenarios based on a stock flow consistent model By Daniel Detzer

  1. By: Bokan, Nikola; Gerali, Andrea; Gomes, Sandra; Jacquinot, Pascal; Pisani, Massimiliano
    Abstract: We incorporate financial linkages in EAGLE, a New Keynesian multi-country dynamic general equilibrium model of the euro area (EA) by including financial frictions and country-specific banking sectors. In this new version of the model, termed EAGLE-FLI (Euro Area and GLobal Economy with Financial LInkages), banks collect deposits from domestic households and cross- country interbank market and raise capital to finance loans issued to domestic households and firms. In order to borrow from local (regional) banks, households use domestic real estate as collateral whereas firms use both domestic real estate and physical capital. These features – together with the full characterization of trade balance and real exchange rate dynamics and with a rich array of financial shocks – allow to properly assess domestic and cross-country macroeconomic effects of financial shocks. Our results support the views that (1) the business cycles in the EA can be driven not only by real shocks, but also by financial shocks, (2) the financial sector can amplify the transmission of (real) shocks, and (3) the financial/banking shocks and the banking sectors can be sources of business cycle asymmetries and spillovers across countries in a monetary union. JEL Classification: E51, E32, E44, F45, F47
    Keywords: banks, DSGE models, econometric models, financial frictions, open-economy macroeconomics, policy analysis
    Date: 2016–06
  2. By: Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: In this paper, we discuss conditions under which adverse expectations can trigger abrupt and large changes in the interest rate at which a sovereign country can borrow in international financial markets. We argue that such changes are caused by self-fulfilling expectations outcomes, in which interest rates are high because the perceptions of future defaults are high, but those perceptions are high precisely because the interest rates are high. {{p}} A model based on these elements successfully simulates the near-default experience of Greece, Italy, Spain and Portugal, among other countries. We show that self-fulfilling traps can occur when two conditions are met: First, the existing level of government debt must be relatively high; second, the probability that the country faces a long period of economic stagnation must be substantial. {{p}} We also show that if a sufficiently large institution is willing to lend to the country, these self-fulfilling traps can be eliminated. Our model thus suggests that the Outright Monetary Transactions (OMT) program adopted by the European Central Bank in the summer of 2012 saved southern European countries from a massive sovereign debt crisis.
    Date: 2016–06–28
  3. By: Hilary Patroba (Department of Economics, University of Stellenbosch); Leroi Raputsoane (Department of Economics, Tshwane University of Technology)
    Abstract: This paper tests the `cycle is the trend' hypothesis. We investigate how far permanent and transitory productivity shocks can account for the dynamics observed in the South African business cycle over the period 1946--2014. By estimating a standard small open economy real business cycle model and its financial frictions augmented counterpart, we show that permanent productivity shocks are more important than transitory ones in explaining this country's business cycle fluctuations. This finding supports the `cycle is the trend' hypothesis in the South African business cycle. The model with financial frictions successfully mimics the downward-sloping high autocorrelation of trade balance to output ratio observed in the data, whereas the benchmark model produces a flat autocorrelation function. Financial frictions such as country risk premium shocks help to explain the fluctuations in investment and in the trade balance to output ratio.
    Keywords: Small open economy, real business cycle, permanent shock, transitory shock, financial frictions, Bayesian
    JEL: E13 E32 F41 F44
    Date: 2016
  4. By: Carl Grekou
    Abstract: Relying on a panel of 73 emerging and developing countries and on de facto exchange rate regimes’ classification —over the 1980-2012 period, we re-examine empirically the relationship between exchange rate regimes and currency misalignments. Overall our results suggest that no exchange rate regime performs better than the others as currency misalignments do not substantially and significantly differ across exchange rate regimes. This finding is in contrast to the different arguments (both theoretical and empirical) in favor or against any particular regime and instead supports the exchange regime neutrality view.
    Keywords: Currency misalignments; Exchange rate regimes; Emerging and developing countries
    JEL: C23 F31 F33
    Date: 2016
  5. By: Simón Sosvilla-Rivero (AQR Research Group-IREA. University of Barcelona); Marta Gómez-Puig (Complutense Institute for International Studies, University Complutense of Madrid)
    Abstract: This paper contributes to the literature by empirically examining whether the influence of public debt on economic growth differs between the short and the long run and presents different patterns across euro-area countries. To this end, we use annual data from both central and peripheral countries of the European Economic and Monetary Union (EMU) for the 1960-2012 period and estimate a growth model augmented for public debt using the Autoregressive Distributed Lag (ARDL) bounds testing approach. Our findings tend to support the view that public debt always has a negative impact on the long-run performance of EMU countries, whilst its short-run effect may be positive depending on the country.
    Keywords: Public debt, economic growth, bounds testing, euro area, peripheral EMU countries, central EMU countries. JEL classification: C22; F33; H63; O40; O52
    Date: 2016–04
  6. By: Faruk, Balli; Eleonora, Pierucci
    Abstract: We investigate risk sharing channels across different economic sectors to quantify to what extent they contribute offsetting idiosyncratic shocks. We examine the two most relevant channels of smoothing among OECD and EU countries: the international investment income and the savings channels. We find that the households' share in net foreign asset income has a significant role in risk sharing. This surprising result is strictly related to the accumulation of households' foreign asset holdings. On the contrary, governments' cross-border holdings produce a dis-smoothing effect and this might be imputable to the holding of EU countries' assets. This outcome is reversed for the new EU countries in the post Global Financial Crisis (GFC) period. With regard to the savings channel, we find that governments significantly contribute to risk sharing, and more significantly after the inception of the GFC. Moreover, the dividend smoothing theory reconciles with the risk-sharing findings since corporations (in particular non financial) significantly smooth shocks through their savings, however their contribution to risk sharing is weak in the post-GFC era.
    Keywords: Risk sharing, savings, net factor income, economic sectors.
    JEL: F2 F21 F24 F41 F42
    Date: 2016–06
  7. By: Daniel Detzer (Berlin School of Economics and Law)
    Abstract: In the era of financialisation, increasing income inequality could be observed in most developed and many developing countries. Despite these similar developments in inequality, the growth performance and drivers for growth differed markedly among countries, allowing clusters of different growth regimes to be identified. Among them two extreme types: the debt-led private-demand boom type and the export-led mercantilist type. Whereas the former relies mainly on credit-financed household consumption in order to compensate for the potential lack of demand (associated with the depressing effect of financialisation), the latter relies on net exports as the main driver of aggregate demand. After a short review of the different channels through which financialisation is expected to affect a countries development, a theoretical discussion on the conditions that tend to support the occurrence of either of the two regimes will build the base for the following model exercise. With the help of a stock-flow consistent model it will be demonstrated then how increasing inequality, depending on a countries institutional structure and regulatory framework, affects growth differently, explaining the occurrence of both regime types. Based on the insights of the theoretical discussion and the model results, a foresight exercise will be performed examining how further increase in inequality might affect development of economies around the world but particularly of the Euro area.
    Keywords: Euro area, finance-dominate capitalism, financialisation, foresight, household debt, international imbalances, consumption emulation
    JEL: E02 E12 E21 E25 E44 E65 F40 F41 F43
    Date: 2016–01–30

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