nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒08‒21
twelve papers chosen by
Martin Berka
University of Auckland

  1. Price-Setting and Exchange Rate Pass-Through in the Mexican Economy: Evidence from CPI Micro Data By Kochen Federico; Sámano Daniel
  2. The Case for Flexible Exchange Rates in a Great Recession By Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot
  3. On What States Do Prices Depend? Answers From Ecuador By Craig Benedict; Mario J. Crucini; Anthony Landry
  4. Optimal Macroprudential and Monetary Policy in a Currency Union By Dmitriy Sergeyev
  5. A Closer Look at EU Current Accounts By Mariarosaria Comunale
  6. International banking and cross-border effects of regulation: Lessons from Germany By Ohls, Jana; Pramor, Marcus; Tonzer, Lena
  7. Optimal Domestic (and External) Sovereign Default By Pablo D'Erasmo; Enrique G. Mendoza
  8. Trends and cycles in small open economies: Making the case for a general equilibrium approach By Kan Chen; Mario Crucini
  9. Fertility, Longevity, and Capital Flows By Nicolas Coeurdacier
  10. Competing Gains From Trade By Clemens Struck; Adnan Velic
  11. Unemployment, Sovereign Debt, and Fiscal Policy in a Currency Union By Pablo Ottonello; Ignacio Presno; Javier Bianchi
  12. Inequality, Costly Redistribution and Welfare in an Open Economy By Pol Antràs; Alonso de Gortari; Oleg Itskhoki

  1. By: Kochen Federico; Sámano Daniel
    Abstract: As a consequence of the international environment, the currencies of many emerging market economies have experienced important depreciations in a context of high volatility in financial markets. The Mexican peso has not been the exception to the above situation. In this setting, the exchange rate pass-through into consumer prices deserves special attention as it allows us to evaluate the anchoring of inflation expectations in the Mexican economy. To address this issue, in this paper we use non-public micro data from the Mexican Consumer Price Index (CPI) to analyze the relation between exchange rate and price-setting in Mexico for the period between January 2011 and April 2016. Our estimates suggest that the exchange rate pass-through into consumer prices is low.
    Keywords: Exchange Rate Pass-Through;Price Micro Data;Nominal Stickiness
    JEL: E31 F31 F41
    Date: 2016–08
  2. By: Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot
    Abstract: We analyze macroeconomic stabilization in a small open economy which faces a large recession in the rest of the world. We show that for the economy to remain isolated from the shock, the exchange rate must depreciate not only to offset the collapse in external demand, but also to decouple domestic prices from deflation in the rest of the world. If monetary policy becomes constrained by the zero lower bound, the scope of exchange rate depreciation is limited. Still, in this case there is a ``benign coincidence'': fiscal policy is particularly effective in stabilizing economic activity. Under fixed exchange rates, instead, the impact of the external shock is particularly severe and the effectiveness of fiscal policy reduced.
    Keywords: Benign coincidence; Exchange rate; external shock; External-demand multiplier; Fiscal Multiplier; great recession; zero lower bound
    JEL: E31 F41 F42
    Date: 2016–08
  3. By: Craig Benedict; Mario J. Crucini; Anthony Landry
    Abstract: In this paper, we argue that differences in the cost structure across sectors play an important role in the decision of firms to adjust their prices. We develop a menu-cost model of pricing in which retail firms intermediate trade between producers and consumers. An important facet of our analysis is that the labor-cost share of retail production differs across goods and services in the consumption basket. For example, the price of gasoline at the retail pump is predicted to adjust more frequently and by more than the price of a haircut due to the high volatility in wholesale gasoline prices relative to the wages of unskilled labor, even when both retailers face a common menu cost. This modeling approach allows us to account for some of the cross-sectional differences observed in the frequency of price adjustments across goods. We apply this model to Ecuador to take advantage of inflation variations and the rich panel of monthly retail prices.
    JEL: E3 E58 F3 F41
    Date: 2016–08
  4. By: Dmitriy Sergeyev (Bocconi University)
    Abstract: I solve for optimal macroprudential and monetary policies for members of a currency union in an open economy model with nominal price rigidities, demand for safe as- sets, and collateral constraints. Monetary policy is conducted by a single central bank, which sets a common interest rate. Macroprudential policy is set at a country level through the choice of reserve requirements. I emphasize two main results. First, with asymmetric countries and sticky prices, the optimal macroprudential policy has a country-specific stabilization role beyond optimal regulation of financial sectors. This result holds even if optimal fiscal transfers are allowed among the union members. Second, there is a role for global coordination of country-specific macroprudential policies. This is true even when countries have no monopoly power over prices of internationally traded goods or assets. These results build the case for coordinated macroprudential policies that go beyond achieving financial stability objectives.
    Date: 2016
  5. By: Mariarosaria Comunale (Economics Department, Bank of Lithuania)
    Abstract: In this paper, we look at the determinants of current accounts in twenty-seven EU countries over the period 1994-2014. The twenty-seven countries of interest are divided into three sub-groups, namely: core, periphery and CEE new member states. We also assess the current accounts based on computed equilibrium values, and we provide a measure of misalignment for the medium run. As determinants we include capital flows as well as demographic, fiscal and relative development factors. The initial Net Foreign Asset position and oil balance seem to matter more in the core countries than in the periphery and CEE new member states. In contrast, the periphery and CEE new member states seem to be more strongly affected by capital flows. Fiscal balance negatively affects only the periphery, while an increase in government spending is positive for the current account for CEE new member states. In the past twenty years these misalignments have shown a cyclical behaviour in most EU countries, and the magnitude of the cycles themselves are highly heterogeneous across groups. Lastly, we compute an adjusted current account equilibrium, which tries to correct the equilibrium value by the role of expectations (proxied by IMF projections). This factor has more of an impact in the UK than in the euro-area countries.
    Keywords: Current account misalignments; foreign capital ?ows; European Union.
    JEL: F32 F31 C33
    Date: 2016–08–11
  6. By: Ohls, Jana; Pramor, Marcus; Tonzer, Lena
    Abstract: We analyze the inward and outward transmission of regulatory changes through German banks' (international) loan portfolio. Overall, our results provide evidence for international spillovers of prudential instruments, these spillovers are however quite heterogeneous between types of banks and can only be observed for some instruments. For instance, foreign banks located in Germany reduce their loan growth to the German economy in response to a tightening of sector-specific capital buffers, local reserve requirements and loan to value ratios in their home country. Furthermore, from the point of view of foreign countries, tightening reserve requirements was effective in reducing lending inflows from German banks. Finally, we find that business and financial cycles matter for lending decisions.
    Keywords: cross-border spillovers,prudential regulation,loan supply,German banks
    JEL: F30 G01 G21 G28
    Date: 2016
  7. By: Pablo D'Erasmo; Enrique G. Mendoza
    Abstract: Infrequent but turbulent episodes of outright sovereign default on domestic creditors are considered a “forgotten history” in Macroeconomics. We propose a heterogeneous-agents model in which optimal debt and default on domestic and foreign creditors are driven by distributional incentives and endogenous default costs due to the value of debt for self-insurance, liquidity and risk-sharing. The government's aim to redistribute resources across agents and through time in response to uninsurable shocks produces a rich dynamic feedback mechanism linking debt issuance, the distribution of government bond holdings, the default decision, and risk premia. Calibrated to Spanish data, the model is consistent with key cyclical co-movements and features of debt-crisis dynamics. Debt exhibits protracted fluctuations. Defaults have a low frequency of 0.93 percent, are preceded by surging debt and spreads, and occur with relatively low external debt. Default risk limits the sustainable debt and yet spreads are zero most of the time.
    JEL: E6 E62 F34 G01 H63
    Date: 2016–08
  8. By: Kan Chen; Mario Crucini
    Abstract: Economic research into the causes of business cycles in small open economies is almost always undertaken using a partial equilibrium model. This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices. We demonstrate the failure of the second assumption by contrasting general and partial equilibrium approaches to the study of a cross-section of small open economies. In doing so, we provide a method for modeling small open economies in general equilibrium that is no more technically demanding than the small open economy approach while preserving much of the value of the general equilibrium approach.
    Date: 2016–08
  9. By: Nicolas Coeurdacier (SciencesPo)
    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
  10. By: Clemens Struck (Trinity College Dublin); Adnan Velic (Dublin Institute of Technology)
    Abstract: Differences in growth rates across countries imply a strong relation between factor-proportions-based trade and key aggregate economic outcomes. We construct two macro-trade datasets and illustrate that this relation is rather weak empirically. Employing a dynamic two-country model, we propose a simple explanation for this finding. By limiting the substitutability between domestic and foreign tradable varieties, the presence of intra-industry trade implies that pronounced trade specialization patterns culminate in a loss of varieties. Accordingly, intra-industry trade acts to suppress inter-industry trade dynamics, thus realigning the behavior of standard models with the empirical evidence.
    Keywords: factor-proportions-based trade, inter- and intra-industry trade dynamics, comparative advantage, dynamic two-country general equilibrium models, Feldstein-Horioka
    JEL: F11 F12 F32 F41 F43
    Date: 2016–08
  11. By: Pablo Ottonello (University of Michigan); Ignacio Presno (Universidad de Montevideo); Javier Bianchi (Federal Reserve Bank of Minneapolis)
    Abstract: Is fiscal stimulus desirable when financing the government spending might imply a surge in borrowing costs and potentially lead to a sovereign debt crisis? This paper studies the optimal fiscal policy for a small open economy in a currency union in which the government cannot commit. In our two-sector dynamic model, the presence of downward nominal wage rigidity coupled with financial frictions may give rise to the welfare-improving effects of an expansionary fiscal policy. The government is confronted with a trade-off between the benefits of reducing unemployment and the financial costs of increasing external borrowing. A quantitative analysis is conducted to assess the desirability of austerity plans and stimulus programs in the context of the ongoing European debt crisis. In our theoretical framework, the response of the economic activity to government expenditures is highly nonlinear in the stock of external debt and the magnitude of the shocks.
    Date: 2016
  12. By: Pol Antràs; Alonso de Gortari; Oleg Itskhoki
    Date: 2016–01

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