nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒01‒15
ten papers chosen by
Martin Berka
University of Auckland

  1. Understanding the Sources of High Current Account Fluctuations in 5 Developed Economies By Ibhagui, Oyakhilome
  2. The Currency Dimension of the Bank Lending Channel in International Monetary Transmission By Elod Takats; Judit Temesvary
  3. The multiscale relationship between exchange rates and fundamentals differentials: Empirical evidence from Scandinavia By Habimana, Olivier
  4. Monetary Policy Credibility and Exchange Rate Pass-Through By Yan Carriere-Swallow; Bertrand Gruss; Nicolas E Magud; Fabian Valencia
  5. Spillovers of United States and People’s Republic of China Shocks on Small Open Economies: The Case of Indonesia By Harahap, Berry; Bary, Pakasa; Panjaitan, Linda; Satyanugroho, Redianto
  6. Fiscal Rules and Twin Deficits: The Link between Fiscal and External Balances By Badinger, Harald; Fichet de Clairfontaine, Aurélien; Reuter, Wolf Heinrich
  7. The globalisation of inflation: the growing importance of global value chains By Raphael Auer; Claudio Borio; Andrew Filardo
  8. Trend Fundamentals and Exchange Rate Dynamics By Huber, Florian; Kaufmann, Daniel
  9. Small open economies in the vast oceanof global high finance By Bjarni G. Einarsson; Kristófer Gunnlaugsson; Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson
  10. The Globalization Risk Premium By Barrot, Jean-Noël; Loualiche, Erik; Sauvagnat, Julien

  1. By: Ibhagui, Oyakhilome
    Abstract: The global economy has, in recent times, continued to face large and unprecedented external imbalances. Despite reductions recorded in aggregate current account (saving less investment) to global output ratio, the imbalances still remain. The main contributors to the imbalances have been the world’s developed economies. These developed economies have experienced fluctuating current account balances over the years and the fluctuation has contributed to a slow correction of the imbalances. This paper identifies 5 developed economies with the highest fluctuations in current account balances and analyses the sources of these fluctuations. The countries are Singapore, Latvia, Iceland, Norway and Estonia. Results obtained suggest that 1) temporary shocks account for most current account fluctuations, and the excess response to temporary shocks is as stable and pronounced as in previous studies; 2) permanent shocks drive current account fluctuations in Iceland and Latvia but not in Norway, Estonia, and Singapore; 3) Singapore demonstrates the most support for the two-good intertemporal model, since external supply and demand shocks account for its current account fluctuations
    Keywords: Current account fluctuations, two-good intertemporal model, VAR and impulse response, V5 Economies
    JEL: C1 F3 F4 F41
    Date: 2015–10–18
  2. By: Elod Takats; Judit Temesvary
    Abstract: We investigate how the use of a currency transmits monetary policy shocks in the global banking system. We use newly available unique data on the bilateral cross-border lending flows of 27 BIS-reporting lending banking systems to over 50 borrowing countries, broken down by currency denomination (USD, EUR and JPY). We have three main findings. First, monetary shocks in a currency significantly affect cross-border lending flows in that currency, even when neither the lending banking system nor the borrowing country uses that currency as their own. Second, this transmission works mainly through lending to non-banks. Third, this currency dimension of the bank lending channel works similarly across the three currencies suggesting that the cross-border bank lending channel of liquidity shock transmission may not be unique to lending in USD.
    Keywords: Bank lending channel ; Cross-border bank lending ; Currency denomination ; Monetary transmission
    JEL: E5 F42 G21
    Date: 2016–12
  3. By: Habimana, Olivier
    Abstract: This paper investigates the extent to which macroeconomic fundamentals explain movements in the Swedish Krona against the Danish Krone and the Norwegian Krone exchange rates; three currencies of neighboring countries that are main trade partners and with long-term economic similarities. Exchange rates and fundamentals are decomposed into wavelet scales to gauge the explanatory power of the monetary model at different frequencies. There is a significant relationship between interest rate, inflation, and to a lesser extent the stock of money and output differentials and in-sample exchange rates movements at horizons of eight months and above. Wavelet decomposition uncovers the time scale aspect of exchange rate determination, and suggests that the monetary model is still a useful framework at medium and long horizons.
    Keywords: Exchange rate disconnect puzzle, monetary model, Scandinavia, wavelets.
    JEL: E44 F3 F31
    Date: 2017–01–03
  4. By: Yan Carriere-Swallow; Bertrand Gruss; Nicolas E Magud; Fabian Valencia
    Abstract: A long-standing conjecture in macroeconomics is that recent declines in exchange rate pass-through are in part due to improved monetary policy performance. In a large sample of emerging and advanced economies, we find evidence of a strong link between exchange rate pass-through to consumer prices and the monetary policy regime’s performance in delivering price stability. Using input-output tables, we decompose exchange rate pass-through to consumer prices into a component that reflects the adjustment of imported goods at the border, and another that captures the response of all other prices. We find that price stability and central bank credibility have reduced the second component.
    Keywords: Monetary policy;Exchange rate pass-through;Consumer prices;Price stabilization;Developed countries;Emerging markets;Cross country analysis;Exchange rate pass-through, monetary policy credibility.
    Date: 2016–12–13
  5. By: Harahap, Berry (Asian Development Bank Institute); Bary, Pakasa (Asian Development Bank Institute); Panjaitan, Linda (Asian Development Bank Institute); Satyanugroho, Redianto (Asian Development Bank Institute)
    Abstract: This paper examines the impact of certain external shocks originating from the US and the PRC on Indonesia as a small open economy. The spillover effects of tapering off, an interest rate hike, exchange rate devaluation, and real gross domestic product (GDP) are analyzed. Two versions of the global vector autoregression model are employed, which covers 33 countries and considers both financial and trade relations among countries. Spillover assessments are conducted through impulse responses with 1,000 bootstrap replications, and compared to the responses of peer countries. The results suggest that the main risk for Indonesia’s real GDP is a shock to the PRC's real GDP, while a US interest rate hike is the greatest risk to Indonesia’s exchange rate depreciation in the short term, especially compared to the US tapering off. Moreover, the dominant transmission channel of US monetary tightening is through finance, dampening economic growth in small open economies.
    Keywords: Spillovers; small open economies; tapering off; interest rate hike; exchange rate devaluation; real GDP; US; PRC; Indonesia;
    JEL: C32 E17 F47
    Date: 2016–12–31
  6. By: Badinger, Harald; Fichet de Clairfontaine, Aurélien; Reuter, Wolf Heinrich
    Abstract: This paper investigates the relationship between countries' fiscal balances and current accounts with an emphasis on the role of fiscal rules. The direct effect of fiscal policy on the current account via aggregate (import) demand is potentially amplified by indirect effects, materializing through interest rate effects and inter-generational transfers that reduce savings. On the other hand, the implied positive relation between fiscal and external balances is potentially attenuated by offsetting changes in savings through Ricardian equivalence considerations. We expect this attenuation effect to be stronger in countries with more stringent fiscal rules and test this hypothesis using a panel of 73 countries over the period 1985-2012. As previous studies we find a positive effect of fiscal balances on the current account, supporting the twin deficit hypothesis. However, the effect of fiscal balances on the current account depends on the stringency of fiscal (budget balance or debt) rules in place; it is reduced by one third on average and virtually eliminated for countries with the most stringent fiscal rules. (authors' abstract)
    Keywords: Twin Deficits; Fiscal Policy; Fiscal Rules; Current Account
    Date: 2015–07
  7. By: Raphael Auer; Claudio Borio; Andrew Filardo
    Abstract: Greater international economic interconnectedness over recent decades has been changing inflation dynamics. This paper presents evidence that the expansion of global value chains (GVCs), ie cross-border trade in intermediate goods and services, is an important channel through which global economic slack influences domestic inflation. In particular, we document the extent to which the growth in GVCs explains the established empirical correlation between global economic slack and national inflation rates, both across countries and over time. Accounting for the role of GVCs, we also find that the conventional trade-based measures of openness used in previous studies are poor proxies for this transmission channel. The results support the hypothesis that as GVCs expand, direct and indirect competition among economies increases, making domestic inflation more sensitive to the global output gap. This can affect the trade-offs that central banks face when managing inflation.
    Keywords: globalisation, inflation, Phillips curve, monetary policy, global value chain, production structure, international inflation synchronisation, input-ouput linkages, supply chain
    Date: 2017–01
  8. By: Huber, Florian; Kaufmann, Daniel
    Abstract: We estimate a multivariate unobserved components stochastic volatility model to explain the dynamics of a panel of six exchange rates against the US Dollar. The empirical model is based on the assumption that both countries' monetary policy strategies may be well described by Taylor rules with a time-varying inflation target, a time-varying natural rate of unemployment, and interest rate smoothing. The estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered. The model generally outperforms a benchmark model that does not account for changes in trend inflation and trend unemployment. (authors' abstract)
    Keywords: Exchange rate models; trend inflation; natural rate of unemployment; Taylor rule; unobserved components stochastic volatility model
    Date: 2016–01
  9. By: Bjarni G. Einarsson; Kristófer Gunnlaugsson; Thorvardur Tjörvi Ólafsson; Thórarinn G. Pétursson
    Abstract: Iceland has a long history of violent cycles of economic exuberance and hardship, of which therecent financial tsunami is only the latest example. We show that this boom-bust pattern isdriven to an important extent by low-frequency co-movement of various financial variables; i.e., acommon “financial cycle”. This cycle is much longer than the typical business cycle, with significantdifferences in economic performance over its different phases. Indeed, almost all of the cycle’s peakscoincide with some type of financial crisis. We find that Iceland is no island in the vast ocean ofglobal high finance, as we uncover strikingly strong spillovers from fluctuations in global financialconditions.
    Date: 2016–10
  10. By: Barrot, Jean-Noël; Loualiche, Erik; Sauvagnat, Julien
    Abstract: We investigate how globalization is reflected in asset prices. We use shipping costs to measure firms' exposure to globalization. Firms in low shipping cost industries carry a 8 percent risk premium, suggesting that their cash-flows covary negatively with investors' marginal utility. We find that the premium emanates from the risk of displacement of least efficient firms triggered by import competition. These findings suggest that foreign productivity shocks are associated with times when consumption is dear for investors. We discuss conditions under which a standard model of trade with asset prices can rationalize this puzzle.
    JEL: F11 F4 G14
    Date: 2016–12

This nep-opm issue is ©2017 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.