nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒07‒30
six papers chosen by
Martin Berka
University of Auckland

  1. Corporate Saving in Global Rebalancing By Philippe BACCHETTA; Kenza BENHIMA
  2. Optimal Unemployment Insurance and International Risk Sharing By Moyen, Stephane; Stähler, Nikolai; Winkler, Fabian
  3. Fiscal Consolidation Under Imperfect Credibility By Lemoine, Matthieu; Lindé, Jesper
  4. Deep habits and exchange rate pass-through By Punnoose Jacob; Lenno Uusküla
  5. Transmission of global financial shocks to EMU member states: The role of monetary policy and national factors By Gelman, Maria; Jochem, Axel; Reitz, Stefan
  6. Monetary Policy Effectiveness, Net Foreign Currency Exposure and Financial Globalisation By Josip Tica; Tomislav Globan; Vladimir Arčabić

  1. By: Philippe BACCHETTA (University of Lausanne and Swiss Finance Institute); Kenza BENHIMA (University of Lausanne and CEPR)
    Abstract: In this paper, we examine theoretically how corporate saving in emerging markets is contributing to global rebalancing. We consider a two-country dynamic general equilibrium model, based on Bacchetta and Benhima (2014), with a Developed and an Emerging country. Firms need to save in liquid assets to finance their production projects, especially in the Emerging country. In this context, we examine the impact of a credit crunch in the Developed country and of a growth slowdown in both countries. These three shocks imply smaller global imbalances and a positive output comovement, but have a different impact on interest rates. Contrary to common wisdom, a slowdown in the Emerging market implies a trade balance improvement in the Developed country.
  2. By: Moyen, Stephane; Stähler, Nikolai; Winkler, Fabian
    Abstract: We discuss how cross-country unemployment insurance can be used to improve international risk sharing. We use a two-country business cycle model with incomplete financial markets and frictional labor markets where the unemployment insurance scheme operates across both countries. Cross-country insurance through the unemployment insurance system can be achieved without affecting unemployment outcomes. The Ramsey-optimal policy however prescribes a more countercyclical replacement rate when international risk sharing concerns enter the unemployment insurance trade-off. We calibrate our model to Eurozone data and find that optimal stabilizing transfers through the unemployment insurance system are sizable and mainly stabilize consumption in the periphery countries, while optimal replacement rates are countercyclical overall. Moreover, we find that debt-financed national policies are a poor substitute for fiscal transfers.
    Keywords: Fiscal Union ; International Business Cycles ; International Risk Sharing ; Unemployment Insurance
    JEL: E32 E62 H21 J64
    Date: 2016–07
  3. By: Lemoine, Matthieu; Lindé, Jesper
    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: Currency Union.; DSGE model; Front-Loaded vs. Gradual Consolidation; Monetary and Fiscal Policy; Sticky Prices and Wages
    JEL: E32 F41
    Date: 2016–07
  4. By: Punnoose Jacob; Lenno Uusküla
    Abstract: Habit persistence at the level of individual goods varieties can explain incomplete exchange rate pass-through to international prices. Deep habits give rise to a dynamic import demand function that leads to import price markup adjustments, independently of nominal pricing frictions. Augmenting a standard New Keynesian two-country model with deep habits, we obtain low exchange rate pass-through to import prices even when local currency prices are relatively flexible. As prices become more rigid, the presence of deep habits further reduces the pass-through of exchange rate fluctuations. Without deep habits, the model requires implausibly high degrees of price stickiness to match the pass-through dynamics triggered by an exchange rate shock in a vector autoregression
    Keywords: Exchange Rate Pass-through, Deep Habits, Sticky Prices, Price Markups, Local Currency Pricing
    JEL: F41 E31
    Date: 2016–07–19
  5. By: Gelman, Maria; Jochem, Axel; Reitz, Stefan
    Abstract: The paper analyses the transmission of global financial shocks to individual member states of the European Monetary Union (EMU), in which monetary policy is delegated to the ECB and financial markets are fully integrated. Using a panel VAR model, we show that the asymmetric effects of global shocks on member states are partly offset by the uniform access of commercial banks to the Eurosystem's open market operations in conjunction with the redistribution of liquidity via the TARGET mechanism. However, an appropriate policy mix of sound public finances, solid financial regulation and targeted macroprudential measures is necessary in order to safeguard macroeconomic sustainability without needing to manage capital flows.
    Keywords: monetary union,capital flows,global financial cycle,macroeconomic imbalances
    JEL: F32 F36 F45
    Date: 2016
  6. By: Josip Tica (Faculty of Economics and Business, University of Zagreb); Tomislav Globan (Faculty of Economics and Business, University of Zagreb); Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb)
    Abstract: In this paper we use an innovative methodological approach to investigate how the classic Mundell-Flemming trilemma monetary policy mix is affected by global financial integration ("dilemma" hypothesis), accumulation of international reserves ("quadrilemma" hypothesis) and foreign exchange rate exposure of developing, emerging and transition countries. In order to compare competing policy mix hypotheses within the single methodological framework we use two threshold variables simultaneously in a dynamic panel threshold model. Thresholds values are endogenously estimated using a grid search. Exchange rate stability index is used as a primary threshold variable and international reserves, financial openness and foreign currency exposure are rotated as secondary threshold variables. Results imply that there are significant differences between fixed and flexible exchange rate regimes even at the high levels of financial integration and that transmission of international business cycle might be a consequence of an exchange rate regime choice (due to foreign currency exposure) of developing and emerging countries and not a consequence of inability to implement counter-cyclical monetary policy.
    Keywords: Mundell-Fleming, Dillemma vs. trilemma, Foreign currency exposure, Qaudrilemma, Panel threshold model
    JEL: F15 F31 F41 E42
    Date: 2016–07–01

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