nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒11‒13
six papers chosen by
Martin Berka
University of Auckland

  1. Interest rates parity and no arbitrage as equivalent equilibrium conditions in the international financial assets and goods markets By Stefano Bosi; Patrice Fontaine; Cuong Le Van
  2. The Pass-Through to Consumer Prices in CIS Economies: the Role of Exchange Rates, Commodities and Other Common Factors By Mariarosaria Comunale; Heli Simola
  3. Do Remittances Cause Dutch Disease in Resource Poor Countries of Central Asia? By Eromenko, Igor
  4. International Reserves and Rollover Risk By Bianchi, Javier; Hatchondo, Juan Carlos; Martinez, Leonardo
  5. International Portfolio Optimisation with Integrated Currency Overlay Costs and Constraints By Nonthachote Chatsanga; Andrew J. Parkes
  6. Exchange Rate Regimes and Growth Collapses By Michael Bleaney; Sweta Saxena; Lin Yin

  1. By: Stefano Bosi (EPEE - Centre d'Etudes des Politiques Economiques - UEVE - Université d'Évry-Val-d'Essonne); Patrice Fontaine (EUROFIDAI); Cuong Le Van (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics, IPAG - IPAG Business School - Ipag, VCREME - VanXuan Center of Research in Economics, Management and Environment - VanXuan Center of Research in Economics, Management and Environment)
    Abstract: In this paper, we consider a two-period consumption model with many financial assets. In the spirit of Hart, consumers purchase financial assets in period 0 and consume in period 1. We differ from Hart by considering that each agent is a country. We provide conditions for the existence of an equilibrium in both international financial assets and goods markets. First, we introduce a weaker notion of Uncovered Interest (rate) Parity (UIP) called Weak Uncovered Interest (rate) Parity (WUIP), and we show its equivalence to the no-arbitrage condition in the international financial markets. Second, we introduce the concept of common no arbitrage and we show its equivalence to UIP. These results bridge concepts of no arbitrage in general equilibrium theory and financial microeconomics and of interest parity in international financial macroeconomics. In a multi-country model with many currencies and only one good, we introduce a country-specific conversion rate which transforms the returns on assets valued in local currency into units of physical good. We the define also the exchange rates between currencies of different countries. The UIP condition is required for the existence of an equilibrium in both international financial assets and goods markets and for the existence of the Law of One Price.
    Keywords: general equilibrium,no-arbitrage,returns on financial assets,exchange rates,Law of One Price,Uncovered Interest rate Parity
    Date: 2016–04
  2. By: Mariarosaria Comunale (Bank of Lithuania); Heli Simola (Bank of Finland)
    Abstract: This empirical study considers the pass-through of key nominal exchange rates and commodity prices to consumer prices in the Commonwealth of Independent States (CIS), taking into account the effect of idiosyncratic and common factors influencing prices. In order to do that, given the relatively short window of available quarterly observations (1999–2014), we choose heterogeneous panel frameworks and control for cross-sectional dependence. The exchange rate pass-through is found to be relatively high and rapid for CIS countries in the case of the nominal effective exchange rate, but not significant for the bilateral rate with the US dollar. We also show that global factors in combination with financial gaps and commodity prices are important. In the case of large rate swings, the exchange rate pass-through of the bilateral rate with the US dollar becomes significant and similar to that of the nominal effective exchange rate.
    Keywords: Commonwealth of Independent States, Exchange Rate Pass-Through, Commodity prices, Dynamic Panel Data, Inflation, Exchange Rates, Cross-sectional dependence, Financial cycle.
    JEL: C38 E31 F31
    Date: 2016–11–02
  3. By: Eromenko, Igor
    Abstract: Dutch disease or resource curse is an adverse effect of high dependence on exports of natural resources, such as oil and gas, or other inflows, such as remittances or foreign aid. Dutch disease is known to lead to appreciation of the real exchange rate, decline in tradable sectors (mostly industry and agriculture) and surge in non-tradable sectors (services). This means unfavourable development of an economy where retail trade or construction would grow, but production sectors would be atrophied. Such economies become vulnerable and may suffer if inflow of currency from natural resources or remittances dries out. This study tests whether large inflow of foreign currency coming to Kyrgyzstan and Tajikistan from labour migrants has caused Dutch disease as described by Corden (1984) and Corden and Neary (1982): appreciation of the real exchange rate, decline in tradable sectors and surge in non-tradable sectors. Furthermore, the paper takes one step further and looks at this phenomenon from the point of view of importing Dutch disease from resource-rich countries to resource-poor countries. Results show that symptoms of Dutch disease are present in Kyrgyzstan and Tajikistan. There is an evidence of deindustrialisation, higher growth rates and larger share of service sector in GDP. In addition, high oil prices showed strong appreciation effect on local currencies of Kyrgyzstan and Tajikistan indicating the transfer of Dutch disease from resource-rich Russia.
    Keywords: Dutch disease, labour remittances, migration, natural resources, exchange rate
    JEL: F22 F24 F31
    Date: 2016–01
  4. By: Bianchi, Javier (Federal Reserve Bank of Minneapolis); Hatchondo, Juan Carlos (Indiana University); Martinez, Leonardo (International Monetary Fund)
    Abstract: We study the optimal accumulation of international reserves in a quantitative model of sovereign default with long-term debt and a risk-free asset. Keeping higher levels of reserves provides a hedge against rollover risk, but this is costly because using reserves to pay down debt allows the government to reduce sovereign spreads. Our model, parameterized to mimic salient features of a typical emerging economy, can account for a significant fraction of the holdings of international reserves, and the larger accumulation of both debt and reserves in periods of low spreads and high income. We also show that income windfalls, improved policy frameworks, larger contingent liabilities, and an increase in the importance of rollover risk imply increases in the optimal holdings of reserves that are consistent with the upward trend in reserves in emerging economies. It is essential for our results that debt maturity exceeds one period.
    Keywords: Sovereign default; international reserves; rollover risk; safe assets
    JEL: F32 F34 F41
    Date: 2016–11–03
  5. By: Nonthachote Chatsanga; Andrew J. Parkes
    Abstract: Portfolio optimisation typically aims to provide an optimal allocation that minimises risk, at a given return target, by diversifying over different investments. However, the potential scope of such risk diversification can be limited if investments are concentrated in only one country, or more specifically one currency. Multi-currency portfolio is an alternative to achieve higher returns and more diversified portfolios but it requires a careful management of the entailed risks from changes in exchange rates. The deviation between asset and currency exposures in a portfolio is defined as the "currency overlay". This paper addresses risk mitigation by allowing currency overlay and asset allocation be optimised together. We propose a model of the international portfolio optimisation problem in which the currency overlay is constructed by holding foreign exchange rate forward contracts. Crucially, the cost of carry, transaction costs, and margin requirement of forward contracts are also taken into account in portfolio return calculation. This novel extension of previous overlay models improves the accuracy of risk and return calculation of portfolios; furthermore, our experimental results show that inclusion of such costs significantly changes the optimal decisions. Effects of constraints imposed to reduce transaction costs associated are examined and the empirical results show that risk-return compensation of portfolios varies significantly with different return targets.
    Date: 2016–11
  6. By: Michael Bleaney; Sweta Saxena; Lin Yin
    Abstract: The loss of output in major recessions tends to be permanent. Using IMF de facto exchange rate regime classifications over the period 1980 to 2012 for up to 193 countries, it is shown that growth collapses are more frequent under less flexible exchange rate regimes, and particularly hard pegs. Our findings are robust to the marked shift in the pattern of growth collapses after the global financial crisis.
    Keywords: exchange rate regimes, growth collapses, global financial crisis
    Date: 2016

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