nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒06‒18
thirteen papers chosen by
Martin Berka
University of Auckland

  1. International Financial Integration in the Aftermath of the Global Financial Crisis By Philip R. Lane; Gian M Milesi-Ferretti
  2. The international dimensions of macroprudential policies By Pierre-Richard Agénor; Enisse Kharroubi; Leonardo Gambacorta; Giovanni Lombardo; Luiz Awazu Pereira da Silva
  3. Capital Flows and GDP in Emerging Economies and the Role of Global Spillovers By Joscha Beckmann; Robert Czudaj
  4. The exchange rate susceptibility of European core industries, 1995-2010 By Leuwer, David; Süßmuth, Bernd
  5. Macroeconomic Implications of Oil Price Fluctuations : A Regime-Switching Framework for the Euro Area By Fédéric Holm-Hadulla; Kirstin Hubrich
  6. Nominal exchange rate shocks and inflation in an open economy: towards a structuralist inflation targeting agenda By Eduardo F. Bastian; Mark Setterfield
  7. Monetary Polica and Currency Returns: the Foresight Saga By Borisenko, Dmitry; Pozdeev, Igor
  8. Portfolio Inflows and Real Effective Exchange Rates; Does the Sectorization Matter? By Rasmané Ouedraogo
  9. Why Have Interest Rates Fallen far Below the Return on Capital By M. Marx; B. Mojon; F. Velde
  10. Optimal Adjustment Paths in a Monetary Union By Ansgar Belke; Daniel Gros
  11. Dutch Disease Resistance: Evidence from Indonesian Firms By James Cust; Torfinn Harding; Pierre-Louis Vezina
  12. The shifting drivers of global liquidity By Stefan Avdjiev; Leonardo Gambacorta; Linda Goldberg; Stefano Schiaffi
  13. International spillovers in global asset markets By Ansgar Belke; Irina Dubova

  1. By: Philip R. Lane; Gian M Milesi-Ferretti
    Abstract: This paper documents the evolution of international financial integration since the global financial crisis using an updated dataset on external assets and liabilities, covering over 210 economies for the period 1970-2015. It finds that the growth in cross-border positions in relation to world GDP has come to a halt. This reflects much weaker capital flows to and from advanced economies, with diminished cross-border banking activity, and an increase in the weight of emerging economies in global GDP, as these economies have lower external assets and liabilities than advanced economies. Cross-border FDI positions have continued to expand, unlike positions in portfolio instruments and other investment. This expansion reflects primarily positions vis-à-vis financial centers, suggesting that the complexity of the corporate structure of large multinational corporations is playing an important role. The paper also explores the cross-country drivers of foreign ownership of domestic debt securities, highlighting in particular the role of the euro debt crisis in explaining its evolution.
    Keywords: Foreign exchange;International financial integration, financial globalization
    Date: 2017–05–10
  2. By: Pierre-Richard Agénor; Enisse Kharroubi; Leonardo Gambacorta; Giovanni Lombardo; Luiz Awazu Pereira da Silva
    Abstract: The large economic costs associated with the Global Financial Crisis have generated renewed interest in macroprudential policies and their international coordination. Based on a core-periphery model that emphasizes the role of international financial centers, we study the effects of coordinated and non-coordinated macroprudential policies when financial intermediation is subject to frictions. We find that even when the only frictions in the economy consist of financial frictions and financial dependency of periphery banks, the policy prescriptions under international policy coordination can differ quite markedly from those emerging from self-oriented policy decisions. Optimal macroprudential policies must address both short run and long run inefficiencies. In the short run, the policy instruments need to be adjusted to mitigate the adverse consequences of the financial accelerator, and its cross-country spillovers. In the long run, policymakers need to take into account the effects of the higher cost of capital, due to the presence of financial frictions. The gains from cooperation appear to be sizable. Nevertheless, their magnitude could be asymmetric, pointing to potential political-economy obstacles to the implementation of cooperative measures.
    Keywords: Macroprudential policies, international spillovers, financial frictions, international cooperation
    JEL: E3 E5 F3 F5 G1
    Date: 2017–06
  3. By: Joscha Beckmann (University of Duisburg-Essen, Department of Economics); Robert Czudaj (Chemnitz University of Technology, Department of Economics, Chair for Empirical Economics)
    Abstract: This paper provides a global analysis of capital flow impacts on GDP for selected emerging economies. As additional control variables, we also include currency reserves and effective exchange rates in our analysis. We distinguish between gross and net capital flows and also assess the impact of both FDI and portfolio flows. Accounting for the fact that common factors have been the main drivers of capital flows while country-specific determinants (‘pull’ factors) drive the response to such shocks, we analyze shocks to country groups but consider country-specific responses based on a Bayesian time-varying panel VAR framework in the spirit of Canova and Ciccarelli (2009). Based on a sample of 24 economies, our results show a robust positive effect of capital flows on GDP. Except for Korea, both gross and net capital flows display a positive impact for around two quarters. The impact of effective exchange rates on GDP hardly offers an explanation for a possible transmission of capital flow effects with effective depreciations both positively and negatively linked to GDP. We also find that the effect of net portfolio flows is even more positive compared to net FDI flows for emerging economies. Finally, we provide evidence that the importance of global factors increases in times of crises.
    Keywords: Gold, Bayesian econometrics, capital flows, exchange rates, FDI, Panel VAR
    JEL: C32 F31 F32
    Date: 2017–06
  4. By: Leuwer, David; Süßmuth, Bernd
    Abstract: This study investigates reactions to real exchange rate changes in the German, French and UK automobile and mechanical engineering sectors using monthly data from 1995 to 2010. Our findings indicate that EUR/USD appreciations hamper exports, but do not necessarily imply an aggravated business climate or export order-book assessment. This does not apply to the GBP/USD and corresponding time series for the UK. First and foremost, our fixed coefficient and time varying parameter VAR model estimates confirm the extraordinary role of the German key sectors, while currency union membership seems to play a minor role at best. Overall, the exchange rate susceptibility is less profound than claimed by lobbies and held as popular belief.
    Keywords: exporting sectors,confidence indicators,structural VAR
    JEL: C30 E42 F41
    Date: 2017
  5. By: Fédéric Holm-Hadulla; Kirstin Hubrich
    Abstract: We investigate whether the response of the macro-economy to oil price shocks undergoes episodic changes. Employing a regime-switching vector autoregressive model we identify two regimes that are characterized by qualitatively different patterns in economic activity and inflation following oil price shocks in the euro area. In the 'normal regime', oil price shocks trigger only limited and short-lived adjustments in these variables. In the 'adverse regime', by contrast, oil price shocks are followed by sizeable and sustained macroeconomic fluctuations, with inflation and economic activity moving in the same direction as the oil price. The responses of inflation expectations and wage growth point to second-round effects as a potential driver of the dynamics characterizing the adverse regime. The systematic response of monetary policy works against such second-round effects in the 'adverse regime' but is insufficient to fully offset them. The model also delivers (conditional) probabilities for being (staying) in either regime, which may help interpret oil price fluctuations -- and inform deliberations on the adequate policy response -- in real-time.
    Keywords: Regime Switching models ; Inflation ; Inflation expectations ; Oil prices ; Time-varying transition probabilities
    JEL: E31 E52 C32
    Date: 2017–06
  6. By: Eduardo F. Bastian (Institute of Economics, Federal University of Rio de Janeiro (IE-UFRJ)); Mark Setterfield
    Abstract: This paper develops a model of inflation in an open economy. The model permits analysis of the susceptibility of open economies to permanent inflationary consequences arising from transitory foreign exchange shocks. Sources of structural vulnerability to such events are identified, and means of addressing these structural vulnerabilities are discussed. Ultimately, the paper arrives at a “structuralist inflation targeting agenda”. Based on a proper conception of inflation dynamics, this involves “getting inflation targeting right” rather than either accepting mainstream inflation targeting prescriptions or simply neglecting inflation altogether.
    Keywords: Inflation, strato-inflation, nominal exchange rate shocks, conflicting claims, hysteresis, capital controls, industrial policy
    JEL: E12 E31 F31 F41
    Date: 2017–06
  7. By: Borisenko, Dmitry; Pozdeev, Igor
    Abstract: We document a drift in exchange rates before monetary policy changes across major economies. Currencies tend to depreciate by 0.7 percent over ten days before policy rate cuts and appreciate by 0.5 percent before policy rate increases. We show that available fixed income instruments allow to accurately forecast monetary policy decisions and thus that the drift is foreseeable and exploitable by investors. A simple trading strategy buying currencies against USD ten days ahead of predicted local interest rate hikes and selling currencies before predicted cuts earns on average a statistically significant return of 42 basis points per ten-day period. We further demonstrate that this return is robust to the choice of holding horizon and monetary policy forecast rule. Our results thus pose a major challenge for the risk-based explanations of the exchange rate dynamics.
    Keywords: Monetary Policy, Policy Expectations, Predictability, Overnight Index Swap, Foreign Exchange
    JEL: E43 E52 E58 F31 G12
    Date: 2017–05
  8. By: Rasmané Ouedraogo
    Abstract: It has been well-established in the literature that portfolio inflows appreciate the real effective exchange rate. However, the literature lacks a systematic empirical analysis of the impact of portfolio inflows by institutional sector or borrower type. This paper fills this gap by exploring the impact of the inflows of portfolio capital into three institutional sectors (government, banks and corporates) on the real effective exchange rate. Using a large sample of 73 countries, it shows that the effect of portfolio inflows on the real effective exchange rate depends on the sector the investment flows in. The findings are robust to different econometric methods, additional variables in the model, and various indicators of real effective exchange rates.
    Keywords: Foreign exchange;Portfolio inflows, real effective exchange rate, sector
    Date: 2017–05–22
  9. By: M. Marx; B. Mojon; F. Velde
    Abstract: Risk-free rates have been falling since the 1980s. The return on capital, defined here as the profits over the stock of capital, has not. We analyze these trends in a calibrated OLG model designed to encompass many of the "usual suspects" cited in the debate on secular stagnation. Declining labor force and productivity growth imply a limited decline in real interest rates and deleveraging cannot account for the joint decline in the risk free rate and increase in the risk premium. If we allow for a change in the (perceived) risk to productivity growth to fit the data, we find that the decline in the risk-free rate requires an increase in the borrowing capacity of the indebted agents in the model, consistent with the increase in the sum of public and private debt since the crisis but at odds with a deleveraging-based explanation put forth in Eggertsson and Krugman (2012).
    Keywords: secular stagnation, interest rates, risk, return on capital.
    JEL: E00 E40
    Date: 2017
  10. By: Ansgar Belke; Daniel Gros
    Abstract: What to do when a country experiences a sudden stop in capital inflows and has to adjust externally? Sticky wages make adjustment to an external imbalance more difficult within a monetary union. Periods of high unemployment are usually necessary to achieve the required real depreciation (internal devaluation). Gradual adjustment is usually recommended to distribute the output and employment cost over time. But a gradual adjustment also implies that current account deficits persist for longer, leading to higher debt, and higher debt-service costs. The optimal path of price and wage adjustment thus involves a trade-off between the pain (unemployment) and the gain (lower debt) from adjustment. A simple model shows the determinants of the optimal path in terms of deeper parameters, such as the slope of the Phillips curve and the degree of openness. The rules for the resolution of future crises within the euro area should take this into account. Gradual adjustment is not always the optimal choice, and sometimes the alternative path of introducing abrupt changes produces the desired results.
    Keywords: Speed of adjustment, openness, Phillips curve, price and wage adjustment, internal devaluation, policy complementarities
    JEL: F41 F45 P11
    Date: 2017–10
  11. By: James Cust; Torfinn Harding; Pierre-Louis Vezina
    Abstract: Oil and gas extraction may lead to the Dutch disease, i.e. the crowding ot of the manufacturing sector due to rising wages when labor is drawn to the expanding extraction and services sectors. In this paper we exploit the fact that oil and gas discoveries contain an element of chance as well as oil price fluctuations to capture random variation in oil and gas windfalls across Indonesia and identify their effects on manufacturing firms. We find that oil and gas windfalls cause wage growth but that the firm exit rate is unaffected. Firms’ output and labor productivity increase along with wages suggesting where firms are able to respond to booming local demand, and raise productivity in response to upward wage pressures, they can overcome the crowding-out effects from resource windfalls.
    Keywords: Dutch disease, firm level, Indonesia, manufacturing firms, oil and gas
    JEL: O13 O14 Q32
    Date: 2017
  12. By: Stefan Avdjiev; Leonardo Gambacorta; Linda Goldberg; Stefano Schiaffi
    Abstract: The post-crisis period has seen a considerable shift in the composition and drivers of international bank lending and international bond issuance, the two main components of global liquidity. The sensitivity of both types of flow to US monetary policy rose substantially in the immediate aftermath of the Global Financial Crisis, peaked around the time of the 2013 Fed "taper tantrum", and then partially reverted towards pre-crisis levels. Conversely, the responsiveness of international bank lending to global risk conditions declined considerably post-crisis and became similar to that of international debt securities. The increased sensitivity of international bank flows to US monetary policy has been driven mainly by post-crisis changes in the behaviour of national lending banking systems, especially those that ex ante had less well capitalized banks. By contrast, the post-crisis fall in the sensitivity of international bank lending to global risk was mainly due to a compositional effect, driven by increases in the lending market shares of better-capitalized national banking systems. The post-2013 reversal in the sensitivities to US monetary policy partially reflects the expected divergence of the monetary policy of the US and other advanced economies, highlighting the sensitivity of capital flows to the degree of commonality of cycles and the stance of policy. Moreover, global liquidity fluctuations have largely been driven by policy initiatives in creditor countries. Policies and prudential instruments that reinforced lending banks' capitalization and stable funding levels reduced the volatility of international lending flows.
    Keywords: Keywords: Global liquidity, international bank lending, international bond flows, capital flows
    JEL: G10 F34 G21
    Date: 2017–06
  13. By: Ansgar Belke; Irina Dubova
    Abstract: The paper empirically estimates the financial transmission between bond and equity markets within and across the four largest global financial markets - the United States, the Euro area, Japan, and the United Kingdom. We argue that international bond and equity markets are highly connected both within and across asset classes in a globalized world, where the complex transmission process across various financial assets is not restricted to just the domestic market. This paper employs identification through generalized forecast error variance decompositions to estimate spillovers across four systemic markets in a Vector Autoregression (VAR) framework. We find that asset prices react strongest to international shocks within the same asset class, but that there are also substantial international spillovers across asset classes. Rolling estimations analysis provides evidence that global asset markets have become more integrated and the bilateral relationships change over time. Our results are robust to specifications which take into account the monetary policy stance and include foreign exchange markets.
    Keywords: asset markets, financial transmission, financial market integration, rolling estimations, spillovers, Vector Autoregression
    JEL: E52 E58 F42
    Date: 2017–09

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.