nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒01‒29
thirteen papers chosen by
Martin Berka
University of Auckland

  1. Exchange rates and the yield curve By Stavrakeva, Vania; Tang, Jenny
  2. Inequality, fiscal policy, and business cycle anomalies in emerging markets By Amanda Michaud; Jacek Rothert
  3. Do Democracies Have Higher Current Account Deficits? By Adam, Antonis; Tsarsitalidou, Sofia
  4. Trade Invoicing Currency and First-stage Exchange Rate Pass-through By Christian Gillitzer; Angus Moore
  5. Sovereign Debt Effects and Composition: Evidence from Time-Varying Estimates By António Afonso; João Tovar Jalles
  6. The Missing Bretton Woods Debate over Flexible Exchange Rates By Douglas A. Irwin
  7. Foreign Banks and International Transmission of Monetary Policy: Evidence from the Syndicated Loan Market By Demirguc-Kunt, Asli; Horvath, Balint; Huizinga, Harry
  8. Impact of the Degree of Relative Risk Aversion, the Interest Rate and the Exchange Rate Depreciation on Economic Welfare in a Small Open Economy By Soriano-Morales, Yazmín Viridiana; Vallejo-Jiménez, Benjamín; Venegas-Martínez, Francisco
  9. Misallocation, Selection and Productivity: A Quantitative Analysis with Panel Data from China By Tasso Adamopoulos; Loren Brandt; Jessica Leight; Diego Restuccia
  10. Sudden stops of capital flows: the role of outflows as a mechanism to offset sudden stops of inflows By Manuel R. Agosin; Juan Díaz-Maureira; Mohit Karnani
  11. Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory By Works, Richard Floyd
  12. Trade in value added: Do we need new measures of competitiveness? By Lommatzsch, Kirsten; Silgoner, Maria A.; Ramskogler, Paul
  13. Debt Overhang and the Macroeconomics of Carry Trade By Jakucionyte, Egle; van Wijnbergen, Sweder

  1. By: Stavrakeva, Vania (London Business School); Tang, Jenny (Federal Reserve Bank of Boston)
    Abstract: In this paper, we confront the data with the financial markets folk wisdom that an increase in a yield or forward rate of country i relative to j is associated with a contemporaneous appreciation of currency i. We find that while the folk wisdom prior to 2009:Q1 holds fairly well for all maturities and three major currency bases, the “coefficient curve” twisted during the zero-lower-bound period so that the relationship became stronger at the short end but weaker and even of the opposite sign at the long end of the curve. We attribute the structural breaks at the short end of the curve to a change in the relationship between expected excess currency returns and changes in relative yields/forwards. The breaks at the long end of the curve can be explained by changing relationships between yields/forwards and the part of exchange rate fluctuations due to changes in expectations over future short-term rates and long-run relative price levels. Alternatively, the twist of the coefficient curve can be attributed to the changing relationship between the exchange rate and the expectation hypothesis component of yields/forwards at the short end and the term premium component at the long end.
    JEL: G15
    Date: 2016–04–14
  2. By: Amanda Michaud; Jacek Rothert
    Abstract: Government expenditures are procyclical in emerging markets and countercyclical in developed economies. We show this pattern is driven by differences in social transfers: transfers are more countercyclical and make up a larger portion of spending in developed economies. We use a small open economy model to study how much these differences in fiscal policies can account for differences in business cycle characteristics of emerging economies, particularly excess volatility of private consumption. We find that ignoring disparate fiscal policy results in an overestimation of the persistence of technology shocks in emerging markets relative to developed by 52%. We study how this conclusion depends on differences in the extent and sources of inequality across countries.
    Keywords: fiscal policy, emerging markets, trasnfers, inequality
    JEL: E21 E32 E62 F41
    Date: 2016
  3. By: Adam, Antonis; Tsarsitalidou, Sofia
    Abstract: In this paper we argue that democracies tend to run (larger)current account deficits than autocracies. Our argument is based on the different incentives faced by democratic and autocratic leaders. The main theoretical hypothesis are tested on a dataset that consists of 121 countries over the period 1980-2012, using five year averages and a fixed effects panel data model. The empirical findings suggest that autocracies run lower current account deficits than democracies. Special focus is given in the issue of endogeneity by estimating an IV Fixed Effects model, using as instruments of Democracy the share of Christian adherents in each country and also the level of democracy in neighboring countries. These results are found to be robust across alternative empirical specifications.
    Keywords: Current Account; Democracy; Αutocracy
    JEL: F32 H11
    Date: 2017–01–25
  4. By: Christian Gillitzer (Reserve Bank of Australia); Angus Moore (Reserve Bank of Australia)
    Abstract: We use disaggregated trade data to estimate whether the currency in which imports are invoiced affects the pass-through of exchange rate changes to import prices. We estimate first-stage pass-through to be only around 14 per cent after two years for imports invoiced in Australian dollars, which is quantitatively important given that this accounts for about 30 per cent of imports. In contrast, first-stage pass-through for foreign currency-invoiced imports is immediate and complete. These results are likely to reflect foreign exporters with low desired pass-through choosing to invoice in Australian dollars. Our results have several important implications. First, Australian dollar invoicing dampens the response of importers' costs to exchange rate changes and so may make consumer price inflation less responsive to exchange rate changes, increasingly so if Australian dollar invoicing becomes more prevalent. Second, import price models that impose the law of one price are likely to be unsuitable, at least over relatively short-run periods. Third, invoice-share-weighted exchange rate indices should be preferable to trade-share-weighted exchange rate indices for modelling import price changes, although the empirical evidence on this is weak. Finally, exogenous changes in the exchange rate might have persistent effects on the goods terms of trade.
    Keywords: exchange rates; import prices; pass-through; invoicing currency
    JEL: E31 F14 F31
    Date: 2016–06
  5. By: António Afonso; João Tovar Jalles
    Abstract: We compute time-varying responses of the sovereign debt ratio to primary budget balances for 13 advanced economies between 1980 and 2012, and assess how fiscal sustainability reacts to different characteristics of government debt. We find that the fiscal sustainability time-varying coefficient increases the higher the share of public debt denominated in foreign currency. Moreover, the countries become more sustainable if they contract a higher share of long-term public debt, if it is held by the central bank or if it is easily marketable. Key Words : sovereign debt, fiscal sustainability, time-varying coefficients, debt composition
    JEL: C23 E62 F34 H63
    Date: 2017–01
  6. By: Douglas A. Irwin
    Abstract: The collapse of the gold standard in the 1930s sparked a debate about the merits of fixed versus floating exchange rates. Yet the debate quickly vanished: there was almost no discussion about the exchange rate regime at the Bretton Woods conference in 1944 because John Maynard Keynes and Harry Dexter White agreed that exchange rate stability through fixed but adjustable pegs was the right approach. In light of the difficult macroeconomic tradeoffs experienced under the gold standard a decade earlier, the outright rejection of floating exchange rates seems surprising. This paper explores the views of leading economists about the exchange rate provisions in the Bretton Woods agreement and examines why arguments for floating exchange rates were so quickly dismissed.
    JEL: B22 F31 F33
    Date: 2017–01
  7. By: Demirguc-Kunt, Asli; Horvath, Balint; Huizinga, Harry
    Abstract: This paper uses loan-level data from 124 countries over 1995–2015 to examine the transmission of monetary policy through the cross-border syndicated loan market. The results show that the expansion of monetary policy increases cross-border credit supply especially to weaker firms. However, greater foreign bank presence in the borrower country appears to reduce the potentially destabilizing impact of lower policy interest rates on cross-border lending, as it attenuates increases in loan volume and maturity while magnifying increases in collateralization and covenant use. The mitigating effect of foreign banking presence in the borrowing country on the transmission of monetary policy is robust to controlling for borrower-country economic and financial development, and a range of borrower and lender country policies and institutions, including the strength of bank regulation and supervision, exchange rate flexibility, and restrictions on capital flows. The findings qualify the characterization of international banks as sources of credit instability, and suggest that foreign bank entry can improve the stability of cross-border credit in the face of international monetary policy shocks.
    Keywords: Bank Regulation; Banking FDI; capital controls; Cross-border lending; Monetary Transmission
    JEL: E44 E52 F34 F38 F42 G15 G20
    Date: 2017–01
  8. By: Soriano-Morales, Yazmín Viridiana; Vallejo-Jiménez, Benjamín; Venegas-Martínez, Francisco
    Abstract: This paper is aimed at assessing the impact of the degree of relative risk aversion on economic welfare for different levels of the interest rate and the exchange rate depreciation in a small open economy. To do this, a representative consumer-producer makes decisions on consumption, money balances, and leisure. In order to find a closed-form solution of the household’s economic welfare, it is assumed that individual’s preferences belong to the family of Constant Relative Risk Aversion (CRRA) utility functions. Several comparative statics graphical experiments about the effects of the degree of relative risk aversion on economic welfare for different levels of nominal variables are carried out. Finally, we find that, under the stated assumptions, household’s economic welfare seen as a function of the degree of relative risk aversion is responsive to different values of nominal variables.
    Keywords: Consumer-producer economics, economic welfare, degree of relative risk aversion, small open economy, interest rate, foreign exchange.
    JEL: E43 F31
    Date: 2017–01–26
  9. By: Tasso Adamopoulos; Loren Brandt; Jessica Leight; Diego Restuccia
    Abstract: We use household-level panel data from China and a quantitative framework to document the extent and consequences of factor misallocation in agriculture. We find that there are substantial frictions in both the land and capital markets linked to land institutions in rural China that disproportionately constrain the more productive farmers. These frictions reduce aggregate agricultural productivity in China by affecting two key margins: (1) the allocation of resources across farmers (misallocation) and (2) the allocation of workers across sectors, in particular the type of farmers who operate in agriculture (selection). We show that selection can substantially amplify the static misallocation effect of distortionary policies by affecting occupational choices that worsen the distribution of productive units in agriculture.
    JEL: O11 O14 O4
    Date: 2017–01
  10. By: Manuel R. Agosin; Juan Díaz-Maureira; Mohit Karnani
    Abstract: We study the determinants of sudden stops in capital fl ows to emerging markets. Using gross international asset and liability flows (from the point of view of domestic residents), we identify three types of situations: (1) countries that do not experience any type of sudden stops; (2) those who experience a sudden stop in infl ows (liabilities), but no sudden stop in their net financial account of the balance of pay- ments; and (3) countries who suffer a sudden stop in in flows and in their net financial account. With these three events and a series of control variables, we estimate a multinomial logit model. The most important results are two. In the first place, we find that developed countries have about the same probability of experiencing sudden stops in gross capital in flows as emerging economies. Secondly, the probability of experiencing a sudden stop in gross infl ows that winds up becoming a sudden stop in the financial account is affected by the behavior of a country's international assets: countries whose agents possess as- sets abroad tend to repatriate them during periods of sudden stops in in flows, while countries whose agents invest domestically are much more sensitive to the behavior of foreign investors and their humors. In particular, the novel explanatory variable we use is the correlation between changes in in flows and outfl ows, which can be interpreted as a proxy for financial development.
    Date: 2016–12
  11. By: Works, Richard Floyd
    Abstract: Numerous researchers have studied the connection between exchange rate fluctuations and macroeconomic variables for various market economies. Few studies, however, have addressed whether these relationships may differ based on the market classification of the given economy. This study examined the impact on exchange rates for Japan (a proxy for developed economies) and South Korea (a proxy for emerging economies) yielding from the macroeconomic variables of the sticky-price monetary model between February 1, 1989 and February 1, 2015. The results show that money supply and inflation constituted a significant, but small, influence on South Korean exchange rate movements, whereas no macroeconomic variable within the model had a significant impact on Japanese exchange rates fluctuations. The results of the autoregressive error analyses suggest small variances in the affect that macroeconomic variables may have on developed versus emerging market economies. This may provide evidence that firms may use similar forecasting techniques for emerging market currencies as used with developed market currencies.
    Keywords: Developed economies, Emerging economies, Exchange rates, Sticky-price
    JEL: F31 F37
    Date: 2016–12–31
  12. By: Lommatzsch, Kirsten; Silgoner, Maria A.; Ramskogler, Paul
    Abstract: It has been argued that the increasing importance of global value chains necessitates a modification of conventional competitiveness measures. We compile a broad dataset including value added trade, gross exports and conventional and value added based real exchange rates. To sharply focus on external competitiveness, a new price competitiveness indicator is introduced, the TWULC (Trade Weighted Unit Labour Cost indicator). It weights sectorspecific cost trends according to sector shares in exports. Econometric tests for a panel of 38 countries show that the focus on value added trade generally improves the explanatory power of export equations. Value added exports' sensitivity towards real exchange rates is up to four times higher than that of gross exports. Real effective exchange rates focusing on exporting industries and on value added weights yield more robust results across the specifications, but do not systematically outperform the more conventional measures of price or cost competitiveness.
    Keywords: competitiveness,external trade,labour costs
    JEL: F14 J30
    Date: 2016
  13. By: Jakucionyte, Egle; van Wijnbergen, Sweder
    Abstract: Abstract The depreciation of the Hungarian forint in 2009 left Hungarian borrowers with a skyrocketing value of foreign currency debt. The resulting losses worsened debt overhang in to debt-ridden firms and eroded bank capital. Therefore, although Hungarian banks had partially isolated their balance sheets from exchange rate risk by extending FX-denominated loans, the ensuing debt overhang in borrowing firms exposed the banks to elevated credit risk. Firms, households and banks had run up the open FX-positions hoping to profit from low foreign rates in the run-up to Euro adoption. This example of carry trade in emerging Europe motivates our analysis of currency mismatch losses in different sectors in the economy, and the macroconsequences of reallocating losses from the corporate to the banking sector ex post. We develop a small open economy New Keynesian DSGE model that accounts for the implications of domestic currency depreciation for corporate debt overhang and incorporates an active banking sector with financial frictions. The model, calibrated to the Hungarian economy, shows that, in periods of unanticipated depreciation, allocating currency mismatch losses to the banking sector generates a milder recession than if currency mismatch is placed at credit constrained firms. The government can intervene to reduce aggregate losses even further by recapitalizing banks and thus mitigating the effects of currency mismatch losses on credit supply.
    Keywords: Debt overhang; foreign currency debt; Hungary; leveraged banks; small open economy
    JEL: E44 F41 P2
    Date: 2017–01

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