nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒08‒07
ten papers chosen by
Martin Berka
University of Auckland

  1. Exchange Rate Targeting in the Presence of Foreign Debt Obligations By James Staveley-O'Carroll; Olena M. Staveley-O'Carroll
  2. Self-Fulfilling Sovereign Debt Crises By Zachary Stangebye; Satyajit Chatterjee; Harold Cole; Mark Aguiar
  3. The Inherent Benefit of Monetary Unions By Groll, Dominik; Monacelli, Tommaso
  4. The Holders and Issuers of International Portfolio Securities By Vahagn Galstyan; Philip R. Lane; Caroline Mehigan; Rogelio Mercado
  5. Monetary Policy and Sovereign Debt Vulnerability By Carlos Thomas; Galo Nuño
  6. Optimal adjustment paths in a monetary union By Belke, Ansgar; Gros, Daniel
  7. Are Aid and Remittances Similar in Generating the Dutch Disease? By Richard Chisik; Nazanin Behzadan; ;
  8. Information Globalization By Isaac Baley; Laura Veldkamp; Michael Waugh
  9. Exchange Rate Pass-Through in a Small Open Economy: A Structural VAR Approach By Tunc, Cengiz; Kılınç, Mustafa
  10. Globalization and the markups of European firms By Békés, Gábor; Hornok, Cecília; Muraközy, Balázs

  1. By: James Staveley-O'Carroll (Economics Division, Babson College); Olena M. Staveley-O'Carroll (Department of Economics, College of the Holy Cross)
    Abstract: We study the impact of foreign debt on the trade-off between the three open economy objectives of a central bank - international risk sharing, the need to facilitate expenditure-switching, and the incentive to tilt international prices to lower the labor effort of domestic households - in a two-country DSGE model with incomplete asset markets and deviations from the purchasing power parity. We fi?nd that at low debt levels, a Taylor rule outperforms simple targeting rules. However, the central bank can improve welfare by up to 0.25 percent of consumption via an exchange rate peg when debt-to-GDP ratio reaches 100 percent.
    Keywords: international risk sharing, foreign debt, exchange rate policy
    JEL: E52 F32 F41
    Date: 2016–07
  2. By: Zachary Stangebye (University of Notre Dame); Satyajit Chatterjee (Federal Reserve Bank of Philadelphia); Harold Cole (University of Pennsylvania); Mark Aguiar (Princeton University)
    Abstract: Sovereign debt spreads occasionally exhibit sharp, large spikes in spreads over risk-free bonds. We document that these movements are only weakly correlated with movements in domestic output and are frequently followed by reductions in the face value of debt outstanding. Motivated by this evidence, we propose a quantitative model with long-term bonds and three sources of risk: fluctuations in the growth of domestic income; movements in the risk premia associated with default risk; and shifts in creditor ``beliefs'' regarding the actions of other creditors. We show that the shifts in creditor beliefs directly play an important role in generating default risk, but also amplify the impact of shocks to fundamentals. Interestingly, persistent changes to risk premia have a negligible impact on spreads, and an increase in risk premium may even lead to a decline in spreads. The latter reflects that a higher risk premium provides discipline regarding future debt issuances. More generally, the sovereign borrowing decisions are quantitatively sensitive to equilibrium bond prices. Even large, relatively unexpected shocks to creditor beliefs have only a modest effect on spreads as the government responds by aggressively deleveraging.
    Date: 2016
  3. By: Groll, Dominik; Monacelli, Tommaso
    Abstract: The desirability of flexible exchange rates is a central tenet in international macroeconomics. We show that, with forward-looking staggered pricing, this result crucially depends on the monetary authority's ability to commit. Under full commitment, flexible exchange rates generally dominate a monetary union (or fixed exchange rate) regime. Under discretion, this result is overturned: a monetary union dominates flexible exchange rates. By fixing the nominal exchange rate, a benevolent monetary authority finds it welfare improving to tradeoff flexibility in the adjustment of the terms of trade in order to improve on its ability to manage the private sector's expectations. Thus, inertia in the terms of trade (induced by a fixed exchange rate) is a cost under commitment, whereas it is a benefit under discretion, for it acts like a commitment device.
    Keywords: commitment; discretion; flexible exchange rates; monetary union; nominal rigidities.; welfare losses
    JEL: E52 F33 F41
    Date: 2016–07
  4. By: Vahagn Galstyan (Trinity College Dublin); Philip R. Lane (Central Bank of Ireland and Trinity College Dublin); Caroline Mehigan (OECD); Rogelio Mercado (Trinity College Dublin)
    Abstract: Research on the geographical distribution of international portfolios has mainly focused on data aggregated to the country level. We exploit newly-available data that disaggregates the holders and issuers of international securities along sectoral lines. We find that patterns evident in the aggregate data do not uniformly apply across the various holding and issuing sectors, such that a full understanding of cross-border portfolio positions requires granular-level analysis.
    Keywords: International portfolios, International capital flows, Gravity models
    JEL: F30 F41 G15
    Date: 2016–07
  5. By: Carlos Thomas (Banco de España); Galo Nuño (Banco de España)
    Abstract: We investigate the trade-o¤s between price stability and sovereign debt sustainability, in a small-open-economy model where the government issues nominal debt without committing not to default or inflate. Inflation allows to absorb the e¤ect of aggregate shocks on the debt ratio, which improves sovereign debt sustainability. But the government incurs an ‘inflationary bias’: it creates (costly) inflation even when default is distant. For plausible calibrations, we find that abandoning the ability to inflate debt away raises welfare, even when the economy is close to default: the benefits from eliminating the inflationary bias dominate the costs from losing inflation’s debt-stabilizing role.
    Date: 2016
  6. By: Belke, Ansgar; Gros, Daniel
    Abstract: Adjustment to an external imbalance is more diffi cult within a monetary union if wages are sticky. Periods of high unemployment are usually necessary to achieve the required real depreciation (internal devaluation). Gradual adjustment is usually recommended to distribute the output and employment cost over time. This paper takes into account that gradual adjustment also has a cost in terms of higher current account defi cits and thus a higher debt, and ultimately higher debt service costs. We calculate the optimal path/speed of price and wage adjustment in terms of deeper parameters like the slope of the Phillips curve, the degree of openness, etc. Gradual adjustment is not always optimal.
    Abstract: Anpassung an ein externes Ungleichgewicht ist innerhalb einer Währungsunion schwieriger, wenn die Löhne träge sind. Perioden hoher Arbeitslosigkeit sind in der Regel notwendig, um die erforderliche reale Abwertung (interne Abwertung) zu erreichen. Graduelle Adjustierung wird in der Regel empfohlen, um die Produktions- und Beschäftigungskosten über die Zeit zu verteilen. Dieses Paper berücksichtigt, dass die schrittweise Adjustierung auch Kosten in Form von höheren Leistungsbilanzdefiziten mit sich bringt und damit eine höhere Verschuldung und letztlich höhere Schuldendienstkosten hat. Wir berechnen den optimalen Weg bzw. die optimale Geschwindigkeit der Preis- und Lohnanpassung in Bezug auf die zugrunde liegenden Parameter, wie die Steigung der Phillips-Kurve, den Grad der Offenheit, usw. Graduelle Adjustierung ist nicht immer optimal.
    Keywords: speed of adjustment,price and wage adjustment,internal devaluation,policy complementarities
    JEL: F41 F45 P11
    Date: 2016
  7. By: Richard Chisik (Department of Economics, Ryerson University, Toronto, Canada); Nazanin Behzadan (Department of Economics, Ryerson University, Toronto, Canada); ;
    Abstract: Abstract In this paper we show that an important determinant of a foreign transfer generating a Dutch disease effect is the income of the recipient. The marginal propensity to consume luxury services is larger for wealthier recipients who are more likely to receive the benefits of foreign aid than they are to receive remittances. In a three good model of international trade with production we show that foreign aid can generate a Dutch disease and remittances can foster economic growth. We empirically verify these hypotheses with data from a panel of data covering the years 1991-2009 while dealing with the issues of omitted variable bias and possible endogeneity of remittances.
    Date: 2016–07
  8. By: Isaac Baley; Laura Veldkamp; Michael Waugh
    Abstract: How do information frictions affect international prices and trade? In a standard, two-country Armingtonmodel of trade, information frictions impede the coordination of exporting behavior across countries. Because the terms of trade depend on relative exports, less coordination leads to more volatile terms of trade. Volatility in the terms of trade has the potential to reduce the level of trade by making trade more risky, but it also has the potential to increase the level of trade by increasing the expected terms of trade. We derive general conditions on preferences as to which of these forces—the increase in risk or increase in return—dominate. With CES preferences, as long as goods are not too substitutable, information frictions impede trade. With empirically plausible elasticities of substitution, information frictions facilitate trade.
    Keywords: information asymmetry, globalization, risk sharing, international trade
    JEL: D5 D8 D9 F4 F6
    Date: 2016–07
  9. By: Tunc, Cengiz; Kılınç, Mustafa
    Abstract: Pass through from the exchange rate developments to consumer prices could be an important dimension of inflationary dynamics in small open economies. In such economies, the proper identification of exchange rate pass through (ERPT) is crucial for monetary policy analysis. In this paper, we study ERPT in Turkey for the period of 2006m1-2015m6, which starts with the launch of explicit inflation-targeting regime. We first show that commonly used recursive VAR model generates unrealistic dynamics like effects of domestic variables on external variables in small open economies and as result ERPT estimate is biased. This bias comes from the unrealistic decline in energy prices in response to depreciation of currency for the given period in Turkey. We then use a structural VAR model with block exogeneity assumption. This model generates more realistic dynamics and suggests that ERPT is around 18 percent in Turkey. Overall, the analysis demonstrates the importance of using realistic model setup and checking the relationships across variables when estimating ERPT in small open economies.
    Keywords: Inflation, Exchange Rates, Pass-through, Turkey
    JEL: E31 E52 F31
    Date: 2016–02–02
  10. By: Békés, Gábor; Hornok, Cecília; Muraközy, Balázs
    Abstract: We use a unique cross-section survey of manufacturing firms from four European countries (France, Germany, Italy, Spain) linked with balance sheet data to study the relationship between key aspects of globalization and firm-level markups. The main results are: (i) Exporting is positively correlated with markups; (ii) Importing intermediate inputs and outsourcing are also positively correlated with markups; (iii) Firms with affiliates have higher markups than other firms, while simply membership in a group or being foreign-owned seems to be less important; (iv) Perceived competition from low-cost markets is negatively correlated with markups; (v) Higher quality production and innovation, especially if it results in IP, has a strong positive relationship with markups; (vi) While these variables are correlated, they are significant in a joint model including all four groups, and 'fully globalized' firms tend to charge around 100% higher markups than non-globalized firms.
    Keywords: markups,exporting,importing,FDI,innovation
    JEL: D22 D24 F14 L11 L60
    Date: 2016

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