nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒03‒05
seven papers chosen by
Martin Berka
University of Auckland

  1. Revisiting the Commodity Curse: A Financial Perspective By Enrique Alberola; Gianluca Benigno
  2. Persistence and Volatility of Real Exchange Rates: The Role of Supply Shocks Revisited By Gehrke, Britta; Yao, Fang
  3. Optimal Fiscal Substitutes For The Exchange Rate In A Monetary Union By Kaufmann, Christoph
  4. The Inherent Benefit of Monetary Unions By Groll, Dominik; Monacelli, Tommaso
  5. Exchange rate pass-through in the euro area By Comunale, Mariarosaria; Kunovac, Davor
  6. International Financial Market Integration, Asset Compositions, and the Falling Exchange Rate Pass-Through By Enders, Zeno; Buzaushina, Almira; Hoffmann, Mathias
  7. Characterizing Global and Regional Manufacturing Value Chains: Stable and Evolving Features By Zhi Wang; Shang-Jin Wei; Xinding Yu and Kunfu Zhu

  1. By: Enrique Alberola; Gianluca Benigno
    Abstract: We study the response of a three-sector commodity-exporter small open economy to a commodity price boom. When the economy has access to international borrowing and lending, a temporary commodity price boom brings about the standard wealth effect that stimulates demand and has long-run implications on the sectoral allocation of labour. If dynamic productivity gains are concentrated in the traded goods sector, the commodity boom crowds out the traded sector and delays convergence to the world technology frontier. Financial openness by stimulating current demand, amplifies the crowding out effect and may even lead to a growth trap, in which no resources are allocated to the traded sector. From a normative point of view, our analysis suggests that capital account management policies could be welfare improving in those circumstances.
    JEL: F32 F36 F41 F43 O16
    Date: 2017–02
  2. By: Gehrke, Britta; Yao, Fang
    Abstract: This paper re-examines the role of supply shocks for real exchange rate fluctuations. First, in a structural VAR analysis, we combine long run and sign restrictions to identify productivity and non-productivity supply shocks. Second, we show that a variance decomposition in the frequency domain generates quantitatively different results compared to the standard forecast error variance decomposition. In particular, productivity shocks emerge as the most important driver of US real effective exchange rate fluctuations at low frequencies, while real demand shocks are more salient at high frequencies. We use the spectrum at frequency zero to structurally decompose the persistence of the real exchange rate. Supply shocks explain more than half of the persistence of the exchange rate.
    JEL: C32 F31 F41
    Date: 2016
  3. By: Kaufmann, Christoph
    Abstract: This paper studies Ramsey-optimal monetary and fiscal policy in a New Keynesian 2-country open economy framework, which is used to assess how far fiscal policy can substitute for the role of nominal exchange rates within a monetary union. Giving up exchange rate flexibility can result in high welfare costs, which depend significantly on whether firms set prices in producer or in local currency. By using only one tax instrument per country and robust to changes in the calibration, the welfare costs can be reduced by 86% in case of producer currency pricing and by 68% in case of local currency pricing. Optimal policy in a monetary union can be described as a fiscal devaluation: if a nominal devaluation of the domestic currency is optimal under flexible exchange rates, optimal fiscal policy in a monetary union is a relative increase of the domestic VAT.
    JEL: F41 F45 E63
    Date: 2016
  4. By: Groll, Dominik; Monacelli, Tommaso
    Abstract: The desirability of flexible exchange rates is a central tenet in international macroeconomics. We show that, with forward-looking staggered pricing, this result crucially depends on the monetary authority's ability to commit. Under full commitment, flexible exchange rates generally dominate a monetary union (or fixed exchange rate) regime. Under discretion, this result is overturned: a monetary union dominates flexible exchange rates. By fixing the nominal exchange rate, a benevolent monetary authority finds it welfare improving to tradeoff efficiency in the adjustment of the terms of trade in order to improve on its ability to manage private sector's expectations. Thus, fixed exchange rate-induced inertia in the terms of trade is a cost under commitment, whereas it is a benefit under discretion, for it acts like a commitment device.
    JEL: F33 F41 E52
    Date: 2016
  5. By: Comunale, Mariarosaria; Kunovac, Davor
    Abstract: In this paper we analyse the exchange rate pass-through (ERPT) in the euro area as a whole and for four euro area members - Germany, France, Italy and Spain. For that purpose we use Bayesian VARs with identi?cation based on a combination of zero and sign restrictions. Our results emphasize that pass-through in the euro area is not constant over time - it may depend on a composition of economic shocks governing the exchange rate. Regarding the relative importance of individual shocks, it seems that pass-through is the strongest when the exchange rate movement is triggered by (relative) monetary policy shocks and the exchange rate shocks. Our shock-dependent measure of ERPT points to a large but volatile pass-through to import prices and overall very small pass-through to consumer in?ation in the euro area. JEL Classification: E31, F3, F41
    Keywords: Bayesian vector autoregression, consumer prices, exchange rate pass-through, import prices, inflation
    Date: 2017–01
  6. By: Enders, Zeno; Buzaushina, Almira; Hoffmann, Mathias
    Abstract: This paper provides an explanation for the observed decline of the exchange rate pass-through into import prices by modeling the effects of financial market integration on the optimal choice of the pricing currency in the context of rigid nominal goods prices. Contrary to previous literature, we take the interdependence of this choice with the optimal portfolio choice of internationally traded financial assets explicitly into account. In particular, price setters move towards more localcurrency pricing and portfolios include more foreign debt assets following increased financial integration. Both predictions are in line with novel empirical evidence.
    JEL: F41 F36 F31
    Date: 2016
  7. By: Zhi Wang (United States International Trade Commission); Shang-Jin Wei (Asia Development bank); Xinding Yu and Kunfu Zhu (University of International Business and Economics)
    Abstract: Since the extent of offshoring and production sharing varies by sector and country, we develop measures of GVCs in terms of length, intensity, and location of participation at the levels of country, country-sector, and bilateral sector, and distinguish among pure domestic, directly traded, and indirectly traded production activities. Using these measures, we characterize cross-country production sharing patterns and GVC related trade activities for 35 sectors and 40 countries over 17 years. We find that the production chain for the world as a whole has become longer. While the relative ranking of the length at the Sector level is stable across countries, the average length for a given country-sector, of both the domestic and international components, and their participation and position in GVCs in general, do evolve significantly over time. The results contribute to a better understanding of features of global value chains and patterns of participation by individual country-sectors.
    Keywords: Production length, Position and Participation in Global Value Chains
    JEL: F1 F6
    Date: 2017–02–23

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