nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒09‒04
seven papers chosen by
Martin Berka
Massey University

  1. Sustainable International Monetary Policy Cooperation By Ippei Fujiwara; Timothy Kam; Takeki Sunakawa
  2. The inherent benefit of monetary unions By Groll, Dominik; Monacelli, Tommaso
  3. Quadrilemma not Trilemma: Fiscal Policy Matters By Hao Jin
  4. Estimating the effects of global uncertainty in open economies By Silvia Delrio
  5. Low long-term interest rates as a global phenomenon By Peter Hördahl; Jhuvesh Sobrun; Philip Turner
  6. Step away from the zero lower bound: Small open economies in a world of secular stagnation By Corsetti, G.; Mavroeidi, E.; Thwaites, G.; Wolf, M.
  7. Can Countries Rely on Foreign Saving for Investment and Economic Development? By Cavallo, Eduardo; Eichengreen, Barry; Panizza, Ugo

  1. By: Ippei Fujiwara (Keio University and The Australian National University (E-mail:; Timothy Kam (The Australian National University (E-mail:; Takeki Sunakawa (The University of Tokyo (E-mail:
    Abstract: We provide new insight on international monetary policy cooperation using a two-country model based on Benigno and Benigno (2006). Assuming symmetry, save for the volatility of (markup) shocks, we show that an incentive feasibility problem exists between the policymakers across national borders: The country faced with a relatively more volatile markup shock has an incentive to deviate from an assumed Cooperation regime to a Non-cooperation regime. More generally, a similar result obtains if countries differ in size. This motivates our study of a history-dependent Sustainable Cooperation regime which is endogenously sustained by a cross-country, state-contingent contract between policymakers. Under the Sustainable Cooperation regime, the responses of inflation and the output gap in both countries are different from the ones under the Cooperation and Non-cooperation regimes reflecting the endogenous welfare redistribution between countries under the state- contingent contract. Such history-contingent welfare redistributions are supported by resource transfers effected through incentive-compatible variations in the terms of trade (or net exports). Such an endogenous cooperative solution may also provide a theoretical rationale for perceived occasional cooperation between national central banks in reality.
    Keywords: Monetary policy cooperation, Sustainable plans, Welfare
    JEL: E52 F41 F42
    Date: 2016–08
  2. 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 trade off 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: monetary union,flexible exchange rates,commitment,discretion,welfare losses,nominal rigidities
    JEL: E52 F33 F41
    Date: 2016
  3. By: Hao Jin (Wang Yanan Institute for Studies in Economics (WISE) and Department of International Economics and Trade, School of Economics, Xiamen University)
    Abstract: This paper examines the interactions between fiscal policy and the open economy macroeconomic policy trilemma in a small open economy dynamic stochastic general equilibrium model. I show that the trilemma policy regime choices require fiscal accommodation. Otherwise, when future budget fail to stabilize government liabilities, fiscal imbalance generates exchange rate depreciation, regardless of monetary and capital account policy regimes. In this active fiscal policy regime, fiscal and monetary policy interact to determine the magnitude of exchange rate depreciation, while monetary policy and capital controls manage the timing of the depreciation.
    Keywords: Trilemma, Fiscal Policy, Capital Account Policy, Exchange Rate Stability, Monetary Policy
    Date: 2016–08
  4. By: Silvia Delrio
    Abstract: This paper investigates the effects of a global uncertainty shock in open economies and the role of country relative risk exposure in the transmission of the shock. We employ an Interacted VAR model to take the time- varying dimension of country relative risk exposure into account. Evidence of nonlinearities in the real effects of a global uncertainty shock is found. The reduction in real activity is larger when the country is more exposed to aggregate risk. These findings support recent theoretical contributions on the role of risk exposure in the transmission of uncertainty shocks.
    Keywords: Global uncertainty shocks, Country relative riskiness, International analysis, Interacted VAR, Generalized Impulse Response Functions
    JEL: C32 E32 F41
    Date: 2016
  5. By: Peter Hördahl; Jhuvesh Sobrun; Philip Turner
    Abstract: International linkages between interest rates in different currencies are strong, and ultra-low rates have become a global phenomenon. This paper compares how interest rates in advanced economies and in emerging economies are conditioned by two global benchmarks - the Federal funds rate at the short end and the "world" real interest rate at the long end. Real equilibrium policy rates (the natural rate) have fallen in many countries, and short-term rates worldwide have been further depressed by many years of the US policy rate close to zero. Nevertheless, changes in the Federal funds rate have less effect on longer-term rates, and thus on financing conditions, than is often supposed. The decline in the world long-term rate since 2008 has been driven almost entirely by a fall in the world term premium (negative in nominal terms since mid-2014). The world short-term rate expected over the long run has fallen only modestly over the past seven years or so, and is now just over 2% (compared with around 4% pre-Lehman).
    Keywords: bond markets, financial globalization, natural rate of interest, term premium and shadow policy rate
    Date: 2016–08
  6. By: Corsetti, G.; Mavroeidi, E.; Thwaites, G.; Wolf, M.
    Abstract: We study how small open economies can engineer an escape from deflation and unemployment in a global secular stagnation. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment requires a dynamic depreciation of the exchange rate, without prejudice for domestic inflation targeting. However, if depreciation has strong income and valuation effects, the escape can be beggar thy self, raising employment but actually lowering welfare. We show that, while a relaxation in the Effective Lower Bound (ELB) can work as a means of raising employment and inflation in financially closed economies, it may have exactly the opposite effect when economies are financially open.
    Keywords: Small open economy, secular stagnation, capital controls, optimal policy, zero lower bound
    JEL: F41 E62
    Date: 2016–08–15
  7. By: Cavallo, Eduardo; Eichengreen, Barry; Panizza, Ugo
    Abstract: A surprisingly large number of countries have been able to finance a significant fraction of domestic investment using foreign finance for extended periods. While many of these episodes are in low-income countries where official finance is more important than private finance, this paper also identifies a number of episodes where a substantial fraction of domestic investment was financed via private capital inflows. That said, foreign savings are not a good substitute for domestic savings, since more often than not episodes of large and persistent current account deficits do not end happily. Rather, they end abruptly with compression of the current account, real exchange rate depreciation, and a sharp slowdown in investment. Summing over the deficit episode and its aftermath, growth is slower than when countries rely on domestic savings. The paper concludes that financing growth and investment out of foreign savings, while not impossible, is risky.
    Keywords: current account; growth; Savings; volatility
    JEL: F32 O16
    Date: 2016–08

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