nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒01‒01
thirteen papers chosen by
Martin Berka
University of Auckland

  1. Trend inflation and exchange rate dynamics: A New Keynesian approach By Takashi Kano
  2. Sectoral allocation and macroeconomic imbalances in EMU By Niels Gilbert; Sebastiaan Pool
  3. Risk Sharing in Europe By Pilar Poncela; Filippo Pericoli; Anna Manca; Filippo Michela Nardo
  4. International Business Cycle and Financial Intermediation By Tamas Csabafi; Max Gillman; Ruthira Naraidoo
  5. Fewer but Better : Sudden Stops, Firm Entry, and Financial Selection By Sina T. Ates; Felipe Saffie
  6. Business cycle synchronization in the EMU: Core vs. periphery By Belke, Ansgar; Domnick, Clemens; Gros, Daniel
  7. Comparing budget repair measures for a small open economy with growing debt By George Kudrna; Chung Tran
  8. Currency devaluations, aggregate demand, and debt dynamics in an economy with foreign currency liabilities By Köhler, Karsten
  9. Dealing with Quantitative Easing Spillovers in East Asia: The Role of Institutions and Macroprudential Policy By Saiki, Ayako; Chantapacdepong, Pornpinun; Volz, Ulrich
  10. Price change dispersion and time-varying pass-through to consumer prices By Rita Fleer; Barbara Rudolf; Mathias Zurlinden
  11. Natural resources, tradable and non-tradable sector. An exemplification with Bolivia, a Boom-TNT model By Roger Alejandro Banegas-Rivero; Luis Fernando Escobar Caba; Marco Alberto Núñez Ramírez
  12. The Impact of Real Exchange Rate Shocks on Manufacturing Workers: An Autopsy from the MORG By Douglas L. Campbell; Lester Lusher
  13. Hysteresis and Fiscal Policy By Philipp Engler; Juha Tervala

  1. By: Takashi Kano
    Abstract: The paper studies exchange rate implications of trend inflation within a two-country New Keynesian (NK) model under incomplete international financial markets. A NK Phillips curve generalized by trend inflation with a positive long-run mean implies an expectational difference equation of inflation with higher-order leads of expected inflation. The resulting two-country inflation differential is smoother, more persistent, and more insensitive to a real exchange rate. General equilibrium then yields (i) a persistent real exchange rate with an autoregressive root close to one, (ii) a hump-shaped impulse response of a real exchange rate with a half-life longer than four years, (iii) a volatile real exchange rate relative to cross-country inflation differential, (iv) an almost perfect co-movement between real and nominal exchange rates and (v) a sharp rise in the volatility of a real exchange rate from a managed nominal exchange rate regime to a flexible one within an otherwise standard two-country NK model. Trend inflation, therefore, approaches empirical puzzles of exchange rates dynamics.
    Keywords: Real and Nominal Exchange Rates, Trend Inflation, New Keynesian Models
    JEL: E31 E52 F31 F41
    Date: 2016–12
  2. By: Niels Gilbert; Sebastiaan Pool
    Abstract: In the decade following the introduction of the euro, many Southern EMU members experienced sizeable capital inflows. We document how, instead of contributing to convergence, these flows mainly fueled growth of the nontradable sectors. We rationalize these developments using a tractable two-sector, two-region ('North' and 'South') model of a monetary union. We show how the sharp fall in Southern interest rates that occurred in the run-up to EMU, leads to a consumption boom, wage growth, growth of the nontradable sector, and a deteriorating external position. In the North, an opposite process occurs. As such, both real exchange rates and external positions of the two regions diverge. Including a third country with a flexible exchange rate vis-à-vis the euro amplifies the effects of monetary integration in the South, while dampening them in the North. Using a panel-BVAR, we confirm empirically that the euro area countries experiencing a fall in interest rates relative to the euro area average, experienced faster growth of the nontradable sector and a deteriorating current account balance. We investigate various policy reforms to speed up the necessary rebalancing process. A deepening of the European market shows most promise, boosting GDP growth while facilitating a rebalancing towards tradables.
    Keywords: EMU; monetary integration; current account imbalances; sectoral allocation
    JEL: F32 F34 F36 F45
    Date: 2016–12
  3. By: Pilar Poncela (European Commission - JRC); Filippo Pericoli (European Commission - JRC); Anna Manca (European Commission - JRC); Filippo Michela Nardo (European Commission - JRC)
    Abstract: We analyse if consumption can be internationally detached from GDP domestic shocks due to cross border risk sharing mechanisms. We update the measurement of risk sharing for industrialized OECD countries and for several subsets of European ones. We use panel VAR models to capture the dynamic behaviour of cross border consumption smoothing through the capital markets, government and credit market channels. We also check for the substitutability among channels. Finally, we track the evolution of risk sharing over time for each channel.
    Keywords: consumption smoothing, GDP shocks, panel VAR, risk sharing
    JEL: C3 E21 F00
    Date: 2016–12
  4. By: Tamas Csabafi (Office No. C58, Cardiff Business School, Colum Drive, Cardiff, CF10 3EU, UK); Max Gillman (Office N. 408 SSB, 1 University Boulevard, St. Louis, Missouri 63121, USA); Ruthira Naraidoo (Faculty of Economics and Management Sciences, Department of Economics, University of Pretoria, South Africa)
    Abstract: The world-wide financial crisis of 2007 to 2009 caused bankruptcy and bank failures in the US and many other parts such as Europe. Recent empirical evidence suggests that this simultaneous drop in output was strongest in countries with greater financial ties to the US economy with important cross border deposit and lending. This paper develops a two-country framework to allow for banking structures within an international real business cycle model. The banking structure across countries is modelled using the production approach to financial intermediation. We allow both countries. banks to be able to take deposits both locally and internationally. We analyze the transmission mechanism of both goods and banking sector productivity shocks. We show that goods total factor productivity (TFP) and bank TFP have different effects on the finance premium. Most countries have shown procyclic equity premium over their histories but with evidence that these are countercyclic during the Great Recession especially. The model has the ability to explain the countercyclical movements of credit spreads during major recession and financial crisis when goods TFP also affects banking productivity. This we model as a cross correlation of shocks to replicate the recent events during the crisis period. Importantly, the model can also explain business cycles facts and the countercyclical behaviour of the trade balance.
    Keywords: : International Business Cycles, Financial Intermediation, Credit Spread
    JEL: E13 E32 E44 F41
    Date: 2016–12
  5. By: Sina T. Ates; Felipe Saffie
    Abstract: We incorporate endogenous technical change into a real business cycle small open economy framework to study the productivity costs of sudden stops. In this economy, productivity growth is determined by the entry of new firms and the expansion decisions of incumbent firms. New firms are created after the implementation of business ideas, yet the quality of ideas is heterogeneous and good ideas are scarce. Selection of the most promising ideas gives rise to a trade-off between mass (quantity) and composition (quality) in the entrant cohort. Chilean plant-level data from the sudden stop triggered by the Russian sovereign default in 1998 confirm the main mechanism of the model, as firms born during the credit shortage are fewer, but better. The quantitative analysis shows that four years after the crisis, 12.5% of the output deviation from trend is due to permanent productivity losses. Distortions in the entry margin account for 40% of the loss, and the remainder is due to distortion in the expansion decisions of incumbents.
    Keywords: Selection ; Sudden Stop ; Endogenous Growth ; Firm Dynamics
    JEL: F40 F41 F43 O11 O16
    Date: 2016–11
  6. By: Belke, Ansgar; Domnick, Clemens; Gros, Daniel
    Abstract: This paper examines business cycle synchronization in the European Monetary Union with a special focus on the core-periphery pattern in the aftermath of the crisis. Using a quarterly index for business cycle synchronization by Cerqueira (2013), our panel data estimates suggest that it is countries belonging to the core that are faced with increased synchronization among themselves after 2007Q4, whereas peripheral countries decreased synchronization with regards to the core, non-EMU countries and among themselves. Correlation coefficients and nonparametric local polynomial regressions corroborate these findings. The usual focus on co-movements and correlations might be misleading, however, since we also find large differences in the amplitude of national cycles. A strong common cycle can thus lead to large differences in cyclical positions even if national cycles are strongly correlated.
    Keywords: business cycles,core-periphery,EMU,local polynomial regressions,synchronicity,common monetary policy
    JEL: E32 F15 R23
    Date: 2016
  7. By: George Kudrna; Chung Tran
    Abstract: In this study, we quantify the macroeconomic and welfare effects of alternative fiscal consolidation plans in the context of a small open economy. Using a computable overlapping generations model tailored to the Australian economy, we examine immediate and gradual eliminations of the existing fiscal deficit with (i) temporary income tax hikes, (ii) temporary consumption tax hikes and (iii) temporary transfer payment cuts. The simulation results indicate that all three examined fiscal measures result in favourable long-run macroeconomic and welfare outcomes, but have adverse consequences in the short run that are particularly severe under the immediate fiscal consolidation plan. Moreover, our results show that cutting transfer payments leads to the worst welfare outcome for all generations currently alive, and especially the poor. Increasing the consumption tax rate results in smaller welfare losses, but compared to raising income taxes, the current poor households pay much larger welfare costs. Overall, the welfare trade-offs between current and future generations, as well as between the rich and poor, highlight key political constraints and point to challenging policy choices for the wellbeing of future generations.
    Keywords: Fiscal Deficit, Public Debt, Fiscal Consolidation, Welfare, Dynamic General Equilibrium, Small Open Economy
    JEL: C68 E21 E63 H31 H60 J26
    Date: 2016–12
  8. By: Köhler, Karsten
    Abstract: The paper employs a post-Kaleckian model to address the question of how currency devaluations affect aggregate demand, capital accumulation, and debt in an economy with foreign currency liabilities. In benchmark post-Kaleckian open economy models currency devaluations have two key effects. First, they change international price competitiveness and thus affect net exports. Second, devaluations change income distribution and thereby affect consumption and investment demand. The overall effect on aggregate demand and investment is ambiguous and depends on parameter values. Existing models, however, disregard balance sheet effects that arise from foreign currency-denominated external debt. The paper develops a novel post-Kaleckian open economy model that introduces foreign currency-denominated external debt and balance sheet effects. The model is then used to analyse the effects of a currency devaluation on aggregate demand, growth, and debt dynamics in small open economies with a fixed exchange rate in the short- to medium-run. The main findings are that the existence of foreign currency-denominated debt means that devaluations are more likely to take a contractionary form, and that foreign interest rate hikes, and high illiquidity and risk premia compromise debt sustainability. Devaluations only stabilise debt ratios if they succeed in boosting domestic capital accumulation.
    Keywords: currency devaluation,external debt,balance sheet effects,original sin,currency mismatch,Kaleckian model
    JEL: E11 E12 F36 F41
    Date: 2016
  9. By: Saiki, Ayako (Asian Development Bank Institute); Chantapacdepong, Pornpinun (Asian Development Bank Institute); Volz, Ulrich (Asian Development Bank Institute)
    Abstract: This paper explores the impact of advanced countries’ quantitative easing on emerging market economies (EMEs) and how macroprudential policy and good governance play a role in preventing potential financial vulnerabilities. We used confidential locational bank statistics data from the Bank for International Settlements to examine whether quantitative easing has caused an appreciation of EMEs’ currencies and how it has done so, and whether this has in turn boosted foreign-currency borrowing, thus making EMEs vulnerable to balance sheet and maturity mismatch problems. While focusing our analysis on East Asian economies, we compare them with Latin American economies, which were also major recipients of quantitative easing capital inflows. We found that government effectiveness plays an important role in curbing excessive borrowing when the exchange rate is overvalued.
    Keywords: Quantitative easing; spillover effects; macroprudential policy; good governance; capital inflows; emerging market economies (EMEs); East Asia; Latin America
    JEL: E44 E58 F31 F32 F34
    Date: 2016–12–27
  10. By: Rita Fleer; Barbara Rudolf; Mathias Zurlinden
    Abstract: This paper examines the relationship between the dispersion of changes in prices and the medium-run exchange rate pass-through in Swiss data. The prices considered are the elementary indices that form the basic building blocks for the construction of the CPI. The results indicate that uctuations in the crosssectional dispersion of changes in these price indices inform about variation in aggregate pass-through at business cycle frequencies. Because these data are readily available at monthly frequencies, they can be used in real time to help gauge the pass-through of exchange rate changes to retail prices.
    Keywords: Exchange rate pass-through, heterogeneity, aggregate implications of price change dispersion
    JEL: E30 E31 F31
    Date: 2016
  11. By: Roger Alejandro Banegas-Rivero (Instituto de Investigaciones Económicas y Sociales 'José Ortiz Mercado' (IIES-JOM), Universidad Autónoma Gabriel René Moreno.); Luis Fernando Escobar Caba (Instituto de Investigaciones Económicas y Sociales 'José Ortiz Mercado' (IIES-JOM), Universidad Autónoma Gabriel René Moreno.); Marco Alberto Núñez Ramírez (Instituto tecnológico de Sonora)
    Abstract: In this document the transmission channel between natural resource dependence and its dynamic effects on growth is evaluated (Dutch disease hypothesis). An exemplification is done through a small open economy (Bolivia case) according to representative characteristics of high concentration in exports of hydrocarbon and minerals, and their implications in the productive sectors: boom (B), tradable (T), and non-tradable (NT) [Boom TNT model], plus the addition of domestic demand and relative prices (foreign and domestic) in alternative econometric specifications by structural restrictions (SVAR) for quarterly period from 2000 to 2015. The results show statistical predominance of long-terms responses over short-term specifications, and different magnitudes between positive and negative shocks.
    Keywords: Dutch disease, Growth, Resource booms, Dependence, Tradable, Non-tradable.
    JEL: O13 P28 Q33 O41
    Date: 2016–12
  12. By: Douglas L. Campbell (New Economic School (NES)); Lester Lusher (UC Davis)
    Abstract: We study the impact of large real exchange rate shocks on workers in sectors initially more exposed to international trade using the Current Population Survey’s (CPS) Merged Outgoing Rotation Group (MORG) from 1979 to 2010 combined with new annual measures of imported inputs, a proxy for offshoring. We find that in periods when US relative prices are high, and imports surge relative to exports, workers in sectors with greater initial exposure to international trade were more likely to be unemployed or exit the labor force a year later, but did not experience significant declines in wages conditional on being employed. Contrary to the usual narrative, we find negative wage effects for higher-wage, but not lower-wage workers, particularly for those who are lesseducated.
    Keywords: Real Exchange Rates, Labor Market Impact of Trade Shocks, Inequality, American Manufacturing
    JEL: F10 F16 F41 N60 L60
    Date: 2016–09
  13. By: Philipp Engler; Juha Tervala
    Abstract: Empirical studies support the hysteresis hypothesis that recessions have a permanent effect on the level of output. We analyze the implications of hysteresis for fiscal policy in a DSGE model. We assume a simple learning-by-doing mechanism where demand-driven changes in employment can affect the level of productivity permanently, leading to hysteresis in output. We show that the fiscal output multiplier is much larger in the presence of hysteresis and that the welfare multiplier of fiscal policy - the consumption equivalent change in welfare for one dollar change in public spending - is positive (negative) in the presence (absence) of hysteresis. The main bene.t of accommodative fiscal policy in the presence of hysteresis is to diminish the damage of a recession to the long-term level of productivity and, thus, output.
    Keywords: Fiscal policy, hysteresis, learning by doing, welfare
    JEL: E62 F41 F44
    Date: 2016

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