nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒11‒06
ten papers chosen by
Martin Berka
University of Auckland

  1. Real Exchange Rate Persistence and Country Characteristics By Michael Curran; Adnan Velic
  2. Currency Manipulation By Tarek A. Hassan; Thomas M. Mertens; Tony Zhang
  3. Optimal policy rules at home, crisis and quantitative easing abroad By McNelis, Paul D.
  4. Macrofinancial History and the New Business Cycle Facts By Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
  5. Co-movement of Exchange Rates with Interest Rate Differential, Risk Premium and FED Policy in “Fragile Economies” By M. Utku Ozmen; Erdal Yilmaz
  6. Lithuania in the Euro Area: Monetary Transmission and Macroprudential Policies By Margarita Rubio; Mariarosaria Comunale
  7. Business Cycles in Small, Open Economies: Evidence from Panel Data Between 1900 and 2013 By Wataru Miyamoto; Thuy Lan Nguyen
  8. Capital inflows — the good, the bad and the bubbly By Hoggarth, Glen; Jung, Carsten; Reinhardt, Dennis
  9. On the Geography of Global Value Chains By Alonso de Gortari; Pol Antras
  10. Currency Unions and Regional Trade Agreements: EMU and EU Effects on Trade By Glick, Reuven

  1. By: Michael Curran (Department of Economics, Villanova School of Business, Villanova University); Adnan Velic (Dublin Institute of Technology)
    Abstract: This paper examines the persistence of real exchange rates across the world post Bretton Woods. We employ univariate time series techniques on a country-by-country basis allowing for deterministic structural breaks and nonlinearities in the adjustment process. Our findings suggest that bilateral exchange rates and industrial countries display the highest rates of persistence. Analyzing the variation in cross-country persistence estimates, we retrieve evidence indicating that higher in ation, nominal exchange rate volatility, trade openness and proximity to reference country are associated with faster rates of real exchange rate convergence. Conversely, international nancial integration is only found to be a significant factor at the country group level, with differential effects across cohorts.
    Keywords: Real Exchange Rate; Parity Deviations; Cross-Country Persistence Differences; Structural Determinants
    JEL: F31 F41
    Date: 2016–10
  2. By: Tarek A. Hassan; Thomas M. Mertens; Tony Zhang
    Abstract: We propose a novel, risk-based transmission mechanism for the effects of currency manipulation: policies that systematically induce a country's currency to appreciate in bad times, lower its risk premium in international markets and, as a result, lower the country's risk-free interest rate and increase domestic capital accumulation and wages. Currency manipulations by large countries also have external effects on foreign interest rates and capital accumulation. Applying this logic to policies that lower the variance of the bilateral exchange rate relative to some target country (``currency stabilization''), we find that a small economy stabilizing its exchange rate relative to a large economy increases domestic capital accumulation and wages. The size of this effect increases with the size of the target economy, offering a potential explanation why the vast majority of currency stabilizations in the data are to the US dollar, the currency of the largest economy in the world. A large economy (such as China) stabilizing its exchange rate relative to a larger economy (such as the US) diverts capital accumulation from the target country to itself, increasing domestic wages, while decreasing wages in the target country.
    JEL: E4 E5 F3 F4 G11 G15
    Date: 2016–10
  3. By: McNelis, Paul D.
    Abstract: This paper examines the international transmission of financial shocks which originate in, and are partially offset by, quantitative easing in a large financially-stressed country. Using a two-country model, we evaluate the adjustment in the non-stressed home country, following recurring negative shocks to productivity and banking-sector balance-sheet/terminal wealth ratios. We first examine the application of QE policies in the stressed foreign country. Coupling quantitative easing with crisis events abroad magnifies the financial instability transmitted to the rest of the world. Our results show that the non-stressed home country can make effective use of tax-rate rules for consumption, or taxes to stabilize financial-sector net worth in times of prolonged crisis abroad.
    Keywords: quantitative easing, financial frictions, unconventional monetary policy
    JEL: E44 E58 F38 F41
    Date: 2016–10–26
  4. By: Jordà, Òscar; Schularick, Moritz; Taylor, Alan M.
    Abstract: In advanced economies, a century-long near-stable ratio of credit to GDP gave way to rapid financialization and surging leverage in the last forty years. This "financial hockey stick" coincides with shifts in foundational macroeconomic relationships be- yond the widely-noted return of macroeconomic fragility and crisis risk. Leverage is correlated with central business cycle moments, which we can document thanks to a decade-long international and historical data collection effort. More financialized economies exhibit somewhat less real volatility, but also lower growth, more tail risk, as well as tighter real-real and real-financial correlations. International real and finan- cial cycles also cohere more strongly. The new stylized facts that we discover should prove fertile ground for the development of a new generation of macroeconomic models with a prominent role for financial factors.
    Keywords: credit; financial hockey stick; leverage; Macroeconomics; moments
    JEL: E01 E13 E30 E32 E44 E51 F42 F44 G12
    Date: 2016–10
  5. By: M. Utku Ozmen; Erdal Yilmaz
    Abstract: In this study, we use the wavelet coherency analysis in order to investigate the relationship between the exchange rate changes and its major financial determinants for selected emerging economies. Our analysis shows that the changes in exchange rate are correlated with interest rate differentials, risk premium, the FED’s monetary policy implementation and its policy uncertainty. Our findings reveal that the co-movement between the exchange rate changes and its financial determinants substantially changes across frequencies and over time: it becomes stronger/weaker or disappears completely at times. Also, although grouped together as “fragile economies”, the co-movement patterns of the exchange rate with major determinants vary to a large extent across these countries. Finally, the strongest co-movement of exchange rate changes is with the risk premium in all countries.
    Keywords: Exchange rate, FED policy, Uncertainty, Country risk, Fragile economies, Wavelet coherency
    JEL: E43 F31 F41
    Date: 2016
  6. By: Margarita Rubio (University of Nottingham); Mariarosaria Comunale (Bank of Lithuania)
    Abstract: In this paper, we develop a two-country monetary union new Keynesian general equilibrium model with housing and collateral constraints, to be calibrated for Lithuania and the rest of the euro area. Within this setting, and following the recent entrance of Lithuania in the EMU, the aim of this paper is twofold. First, we study how shocks are transmitted differently in the two regions, considering the recent common monetary policy. Then, we analyze how macroprudential policies should be conducted in Lithuania, in the context of the EMU. As a macroprudential tool, we propose a decentralized Taylor-type rule for the LTV which responds to national deviations in output and house prices. We find that, given the housing market features in Lithuania, common shocks are transmitted more strongly in this country than in the rest of the euro area. In terms of macroprudential policies, results show that the optimal policy in Lithuania with respect to the euro area may have a different intensity and that it delivers substantial benefits in terms of financial stability.
    Keywords: Macroprudential policy, housing market, LTV, monetary union, financial stability
    JEL: E32 F44 F36
    Date: 2016–10–27
  7. By: Wataru Miyamoto; Thuy Lan Nguyen
    Abstract: Using a novel data set for 17 countries dating from 1900 to 2013, we characterize business cycles in both small developed and developing countries in a model with financial frictions and a common shock structure. We estimate the model jointly for these 17 countries using Bayesian methods. We find that financial frictions are an important feature for not only developing countries but also small developed countries. Furthermore, business cycles in both groups of countries are marked with trend productivity shocks. Common disturbances explain one-third of the fluctuations in small, open economies (both developed and developing), especially during important worldwide phenomena.
    Keywords: Business fluctuations and cycles, Economic models, International topics
    JEL: F41 F44 E13 E32
    Date: 2016
  8. By: Hoggarth, Glen (Bank of England); Jung, Carsten (Bank of England); Reinhardt, Dennis (Bank of England)
    Abstract: Capital inflows come in all shapes and sizes. This paper highlights that equity flows, especially foreign direct investment, are the most stable forms of capital inflows. In contrast, debt inflows from banks particularly in foreign currency are most prone to booms and busts. These flows also seem most sensitive to external factors, especially changes in global risk, and also to changes in domestic credit growth. Although portfolio debt flows are somewhat more stable particularly to advanced countries, granular data highlight that (open-ended) emerging market mutual funds in foreign currency and aimed at retail investors are also prone to inflow ‘surges’ and ‘stops’. The share of external debt denominated in foreign currency is significantly higher in emerging market economies (EMEs) than in advanced countries. EMEs also usually have shallower and narrower financial markets. This suggests these countries are more prone to risks from capital inflow booms and busts.
    Keywords: capital flows; international monetary and financial system; macro-prudential policy; banking flows; portfolio flows; bank and non-bank creditors
    JEL: F21 F32 F34 G21 G28
    Date: 2016–10–26
  9. By: Alonso de Gortari (Harvard University); Pol Antras (Harvard University)
    Abstract: This paper studies the optimal location of production for the different stages in a sequential global value chain. We develop a general-equilibrium model featuring a proximity-concentration tradeoff: slicing global value chains across countries allows to better exploit agglomeration economies, but such fragmentation comes at the cost of increased transportation costs. We show that, other things equal, it is optimal to locate relatively downstream stages of production in relatively central or well-connected locations, while upstream stages of production are optimally assigned to more remote locations. We illustrate this result by working out the optimal location of production for a few basic topologies featuring a low number of countries and stages. Exact solutions to the problem for a larger number of countries and stages are computationally complex, but can be obtained using combinatorial optimization tools. We apply the model to study the optimal specialization within chains in eleven countries in Factory Asia.
    Date: 2016
  10. By: Glick, Reuven (Federal Reserve Bank of San Francisco)
    Abstract: The effects of the European Economic and Monetary Union (EMU) and European Union (EU) on trade are separately estimated using an empirical gravity model. Employing a panel approach with both time-varying country and dyadic fixed effects on a large span of data (across both countries and time), it is found that EMU and EU each significantly boosted exports. EMU expanded European trade by 40% for the original members, while the EU increased trade by almost 70%. Newer members have experienced even higher trade as a result of joining the EU, but more time is necessary to see the effects of their joining EMU.
    JEL: F15 F33
    Date: 2016–10–28

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