nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒11‒20
seven papers chosen by
Martin Berka
University of Auckland

  1. “Conditional PPP” and Real Exchange Rate Convergence in the Euro Area By Bergin, Paul R.; Glick, Reuven; Wu, Jyh-Lin
  2. The Growth of Multinational Firms in the Great Recession By Vanessa Alviarez; Andrei A. Levchenko; Javier Cravino
  3. Explaining the Euro crisis: Current account imbalances, credit booms and economic policy in different economic paradigms By Engelbert Stockhammer; collin constantine; Severin Reissl
  4. International Transmission of Growth Shocks and the World Business Cycle By Shen Yifan; Tilak Abeysinghe
  5. The behaviour of the real effective exchange rate of South Africa: is there a misalignment? By Melvin M Khomo; Meshach J Aziakpono
  6. Post-Brexit FEER. By Jamel Saadaoui
  7. Crisis severity and the international trade network By Endrész, Marianna; Skudelny, Frauke

  1. By: Bergin, Paul R. (University of California at Davis); Glick, Reuven (Federal Reserve Bank of San Francisco); Wu, Jyh-Lin (National Sun Yat-Sen University)
    Abstract: While economic theory highlights the usefulness of flexible exchange rates in promoting adjustment in international relative prices, flexible exchange rates also can be a source of destabilizing shocks. We find that when countries joining the euro currency union abandoned their national exchange rates, the adjustment of real exchange rates toward their long-run equilibrium surprisingly became faster. To investigate, we distinguish between differing rates of purchasing power parity (PPP) convergence conditional on alternative shocks, which we refer to as “conditional PPP.” We find that the loss of the exchange rate as an adjustment mechanism after the introduction of the euro was more than compensated by the elimination of the exchange rate as a source of shocks, in combination with faster adjustment in national prices. These findings support claims that flexible exchange rates are not necessary to promote long-run international relative price adjustment.
    JEL: F00 F15 F31
    Date: 2016–10–18
  2. By: Vanessa Alviarez (University of British Columbia, Sauder); Andrei A. Levchenko (University of Michigan and NBER); Javier Cravino (University of Michigan and NBER)
    Abstract: Using a large firm-level dataset, this paper studies multinational firmsÕ performance during the Great Recession. Foreign multinationals grew faster than local firms outside of the crisis, but slower during the crisis. Industry and size differences between domestic and foreign-owned firms account for much of this slowdown. However, multinationals from different countries performed differently during the crisis. The paper then assesses the role of multinationals in the global recession using a quantitative model. Had multinationalsÕ relative performance remained unchanged during the crisis, the median countryÕs aggregate growth would have been 0.12% higher, with a range of -0.13 to 0.5% across countries.
    Keywords: Great Recession, multinational firms
    JEL: F23 F44
    Date: 2016–11–11
  3. By: Engelbert Stockhammer (Kingston University); collin constantine; Severin Reissl
    Abstract: The paper proposes a post-Keynesian analysis of the Eurozone crisis and contrasts interpretations inspired by New Keynesian, New Classical, and Marxist theories. The origin of the crisis is the emergence of a debt-driven and an export-driven growth model, which resulted in a rapid increase in private debt ratios and current account imbalances. The reason the crisis escalated in southern Europe, but not in other parts of the world, lies in the unique dysfunctional economic policy regime of the Euro area. European fiscal rules and the Troika impose fiscal austerity on countries in crisis and the separation of fiscal and monetary spaces has made countries vulnerable to sovereign debt crises and forced them to comply. We analyse the role different paradigms attribute to current account imbalances, fiscal policy and monetary policy. Remarkably, opposing views on the relative importance of cost and demand developments in explaining current account imbalances can be found in both heterodox and orthodox economics. Regarding the assessment of fiscal and monetary policy there is a clearer polarisation, with heterodox analysis regarding austerity as unhelpful and large parts of orthodox economics endorsing it. We conclude that there is a weak mapping between post-Keynesian, New Classical, New Keynesian and Marxist theories and different economic policy strategies for the Euro area, which we label Keynesian New Deal, European Orthodoxy, Moderate Reform and Progressive Exit respectively.
    Keywords: Euro crisis, European economic policy, sovereign debt crisis, current account balance, fiscal policy, quantitative easing
    JEL: B00 E00 E50 E63 F53 G01
    Date: 2016–11
  4. By: Shen Yifan (Department of Economics, National University of Singapore); Tilak Abeysinghe (Department of Economics, National University of Singapore)
    Abstract: It is a stylized fact that growth shocks in major economies generate the world business cycle, which is usually extracted from dynamic factor models. We utilize a trade-linked SVAR model with a realistic identification scheme to capture the transmission mechanism, covering 60 major economies and the rest of the world. We show that the SVAR structure provides a meaningful economic foundation to factor-modelbased statistical analyses. In addition, the SVAR model shows the important role played by indirect multiplier channels in the transmission mechanism and how these effects change over time. Specific attention is paid to the transmission of US and China growth shocks.
    Keywords: Trade-linked SVAR; Dynamic Factor Model; International Transmission Mechanism; World Business Cycle; Indirect Multiplier Effect
    JEL: F41 F44 O19
  5. By: Melvin M Khomo; Meshach J Aziakpono
    Abstract: The paper uses Behavioural Equilibrium Exchange Rate methodology to estimate the equilibrium real effective exchange rate of the rand and to establish whether the observed exchange rate is misaligned with this level. The exchange rate’s misalignment behaviour is further explored using a regime switching method. Results endorse the existence of a co-integrating relationship between the exchange rate and terms of trade, external openness, capital flows and government expenditure. The study confirms that the exchange rate is from time to time misaligned with the Markov regime switching model, correctly capturing the misalignment as alternative shifts between over- and undervaluation episodes.
    Keywords: equilibrium exchange rate, misalignment, cointegration, regime switching
    JEL: F31 F41
    Date: 2016–10
  6. By: Jamel Saadaoui
    Abstract: From the onset of the euro crisis to the Brexit vote, we have assisted to impressive reductions of current account imbalances in peripheral countries of the euro area. These reductions can be the result of either a compression of internal demand or an improvement of external competitiveness. In this paper, we provide new estimates of exchange rate misalignments within the euro area to assess whether peripheral countries have managed to improve their external competitiveness. In order to take into account that business cycles are desynchronized in the euro area, we include the correction of Isard and Faruqee (1998) in the FEER methodology of Jeong et al. (2010a). This approach allows to detect reduction of exchange rate misalignments due to improvement of external competitiveness. Besides, it offers a solution to the problem of over-determination in exchange rate models inspired by the SMIM of Cline (2008). Overall, peripheral countries have managed to reduce their exchange rate misalignments thanks to internal devaluations.
    Keywords: Equilibrium Exchange Rate, Brexit, Internal Devaluation.
    JEL: F31 F32 F44 F45
    Date: 2016
  7. By: Endrész, Marianna; Skudelny, Frauke
    Abstract: In this paper we analyse the role of the international trade network for the strength of the global recession across countries. The novelty of our paper is the use of value-added trade data to capture the importance of trade network structure. We estimate with BMA techniques how far network indicators measuring interlinkages in terms of value added trade has explanatory power both for the length and the depth of the recent crisis once we control for pre-crisis macroeconomic fundamentals. Our main findings are that the macroeconomic control variables with the strongest explanatory power for the length and the depth of the crisis are the growth rates of credit and of the real effective exchange rate in the pre-crisis period and, though to a lesser extent, GDP and inflation growth over the same period and pre-crisis foreign exchange reserves. Government debt, the GVC participation index and net foreign assets have very little explanatory power in the BMA estimations. The models’ performance increases when we introduce interaction terms of credit growth with other vulnerability measures. The results demonstrate that the coincidence of vulnerabilities matters a lot. Credit growth deepens the crisis mainly if accompanied with pre-crisis GDP growth or low reserves, while the crisis tends to be longer if credit growth has led to large leverage or the accumulation of net foreign liabilities. Finally, we find evidence that value added trade linkages have an impact on the severity of the crisis. While the increasing connectivity or openness of the country makes the crisis longer, the same characteristics of the neighbours makes it also deeper. The tendency to interact with already connected countries lowers or increases the impact of the crisis depending on the position of the country. Altogether we have mixed results on the direct trade channel, but we demonstrate the importance of network structure beyond the countries’ own openness. In addition, we are also able to improve results by using gross value added instead of gross trade data. JEL Classification: F14, C45, C52, C67
    Keywords: Bayesian model averaging, crisis indicators, network indicators, value added trade, WIOD
    Date: 2016–10

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