nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒06‒25
twelve papers chosen by
Martin Berka
University of Auckland

  1. A Tie That Binds; Revisiting the Trilemma in Emerging Market Economies By Maurice Obstfeld; Jonathan David Ostry; Mahvash S Qureshi
  2. Can Countries Rely on Foreign Saving for Investment and Economic Development? By Eduardo A. Cavallo; Barry Eichengreen; Ugo Panizza
  3. The Currency-Plus-Commodity Basket: A Proposal for Exchange Rates in Oil-exporting Countries to Accommodate Trade Shocks Automatically By Jeffrey A. Frankel
  4. Financial Frictions and Export Dynamics in Large Devaluations By Kohn, David; Leibovici, Fernando; Szkup, Michal
  5. Reducing large net foreign liabilities By Fidora, Michael; Schmitz, Martin; Tcheng, Céline
  6. Do Term Premiums Matter? Transmission via Exchange Rate Dynamics By Mitsuru Katagiri; Koji Takahashi
  7. The Role of nominal wages in trade and current account surpluses By Gustav A. Horn; Fabian Lindner; Sabine Stephan
  8. A panel VAR analysis of macro-financial imbalances in the EU By Mariarosaria Comunale
  9. Fiscal- Monetary Interdependence and Exchange Rate Regimes in Oil Dependent Arab Economies By Ibrahim Elbadawi; Mohamed Goaied; Moez Ben Tahar
  10. Finance, foreign (direct) investment, and the Dutch disease: The case of Colombia By Botta, Alberto; Godin, Antoine; Missaglia, Marco
  11. Capital Controls and the Cost of Debt By Eugenia Andreasen; Martin Schindler; Patricio A Valenzuela
  12. Opportunities and limits of rebalancing the Eurozone via wage policies By Eckhard Hein; Eckhard Achim Truger

  1. By: Maurice Obstfeld; Jonathan David Ostry; Mahvash S Qureshi
    Abstract: This paper examines the claim that exchange rate regimes are of little salience in the transmission of global financial conditions to domestic financial and macroeconomic conditions by focusing on a sample of about 40 emerging market countries over 1986–2013. Our findings show that exchange rate regimes do matter. Countries with fixed exchange rate regimes are more likely to experience financial vulnerabilities—faster domestic credit and house price growth, and increases in bank leverage—than those with relatively flexible regimes. The transmission of global financial shocks is likewise magnified under fixed exchange rate regimes relative to more flexible (though not necessarily fully flexible) regimes. We attribute this to both reduced monetary policy autonomy and a greater sensitivity of capital flows to changes in global conditions under fixed rate regimes.
    Date: 2017–06–08
  2. By: Eduardo A. Cavallo; Barry Eichengreen; Ugo Panizza
    Abstract: A surprisingly large number of countries have been able to finance a significant fraction of domestic investment using foreign finance for extended periods. While many of these episodes are in low-income countries where official finance is more important than private finance, this paper also identifies a number of episodes where a substantial fraction of domestic investment was financed via private capital inflows. That said, foreign savings are not a good substitute for domestic savings, since more often than not episodes of large and persistent current account deficits do not end happily. Rather, they end abruptly with compression of the current account, real exchange rate depreciation, and a sharp slowdown in investment. Summing over the deficit episode and its aftermath, growth is slower than when countries rely on domestic savings. The paper concludes that financing growth and investment out of foreign savings, while not impossible, is risky.
    Keywords: Foreign Saving, Saving Rate, Investment, Emerging countries, Capital inflow, GDP Growth, Exports, Exchange rates, Human Capital, Capital Markets, Domestic Investment, Foreign Saving
    JEL: O16 F32
    Date: 2016–08
  3. By: Jeffrey A. Frankel (Harvard Kennedy School, Harvard University)
    Abstract: The paper proposes an exchange rate regime for oil-exporting countries. The goal is to achieve the best of both flexible and fixed exchange rates. The arrangement is designed to deliver monetary policy that counteracts rather than exacerbates the effects of swings in the oil market, while yet offering the day-to-day transparency and predictability of a currency peg. The proposal is to peg the national currency to a basket, but a basket that includes not only the currencies of major trading partners (in particular, the dollar and the euro), but also the export commodity (oil). The plan is called Currency-plus-Commodity Basket (CCB). The paper begins by fleshing out the need for an innovative arrangement that allows accommodation to trade shocks. The analysis provides evidence from six Gulf countries that periods when their currencies were “undervalued”, in the sense that the actual foreign exchange value lay below what it would have been under the CCB proposal, were periods of overheating as reflected in high inflation and of external imbalance as reflected in high balance of payments surpluses. Conversely, periods when the currencies were “overvalued,” in the sense that their foreign exchange value lay above what it would have been under CCB, featured unusually low inflation and low balance of payments. These results are suggestive of the implication that the economy would have been more stable under CCB. The last section of the paper offers a practical blueprint for detailed implementation of the proposal.
    Date: 2017–06–22
  4. By: Kohn, David (Universidad Cat´olica de Chile); Leibovici, Fernando (Federal Reserve Bank of St. Louis); Szkup, Michal (University of British Columbia)
    Abstract: We study the role of financial frictions and balance-sheet effects in accounting for the dynamics of aggregate exports in large devaluations. We investigate a small open economy with heterogeneous firms, where firms face financing constraints and debt can be denominated in foreign units. We find that these channels can explain only a small fraction of the dynamics of exports observed in the data. While these frictions distort production and investment decisions, they affect exports significantly less since firms reallocate sales across markets in response to real exchange rate changes. We document the importance of this mechanism using plant-level data.
    Keywords: Financial frictions; large devaluations; export dynamics; balance-sheet effects.
    JEL: F1 F4 G32
    Date: 2017–05–01
  5. By: Fidora, Michael; Schmitz, Martin; Tcheng, Céline
    Abstract: In light of persistently large net foreign liability NFL) positions in several euro area countries, we analyse 138 episodes of sizeable NFL reductions for a broad sample of advanced and emerging economies. We provide stylised facts on the channels through which NFLs were reduced and estimate factors which make episodes ‘stable’, i.e. sustained over the medium term. Our findings show that while GDP growth and valuation effects contribute most to NFL reductions overall, stable reduction episodes also require positive transaction effects (i.e. current account surpluses), in particular in advanced economies. Considering the different components of a country’s external balance sheet, we observe that reduction episodes were almost exclusively driven by a decline in gross external liabilities in emerging economies, while in advanced economies also gross external asset accumulation contributed significantly, in particular in stable episodes. Our econometric analysis shows that NFL reductions are more likely to be sustained if a country records strong average real GDP growth during an episode and exits the episode with a larger current account surplus. Moreover, we find evidence that nominal effective exchange rate depreciation during an episode is helpful for achieving episode stability in the short run, while IMF programmes and sovereign debt restructurings also contribute to longer term stability. JEL Classification: F21, F32, F34
    Keywords: external adjustment, external imbalances, net foreign assets, stock imbalances, valuation effects
    Date: 2017–06
  6. By: Mitsuru Katagiri (Bank of Japan); Koji Takahashi (Bank of Japan)
    Abstract: The macroeconomic effect of term premiums is a controversial issue both theoretically and quantitatively. In this paper, we explore the possibility that term premiums affect inflation and the real economy via exchange rate dynamics. For this purpose, we construct a small open economy model with limited asset market participation, focusing particularly on the empirical fact that uncovered interest parity (UIP) tends to hold for longer-term interest rate differentials. In a quantitative exercise, we estimate parameters using Japanese and U.S. data and show that changes in the term premiums of both Japanese and U.S. long-term yields have sizable effects on Japanese inflation rates via the yen-U.S. dollar exchange rate. This result implies that although decreasing domestic term premiums increased Japan's inflation rates via the exchange rate channel to some extent, it is almost equally influenced by foreign factors such as a rise in U.S. term premium.
    Keywords: Exchange Rate; Term Premium; Uncovered Interest Rate Parity
    JEL: E31 E52 E58
    Date: 2017–06–09
  7. By: Gustav A. Horn; Fabian Lindner; Sabine Stephan
    Abstract: A macroeconomically oriented wage policy in Germany in the years 2001 to 2015 would have led to a reduced growth of real net exports but would not have significantly reduced Germany's trade and current account surpluses. While real exports would have declined, higher export prices would have led to an increase in overall export receipts so that the current account surplus - denominated in euro terms - would scarcely have shrunk. Such a wage policy, however, would have increased domestic demand and would have influenced income distribution positively (an increase in the wage share). Such a policy would however, have improved the government's financial situation, thereby increasing its spending capacity. A combination of macroeconomic wage policy and a support by fiscal policy making use of the financial leeway created by higher wages would have decreased the nominal trade and current account balance to a greater degree than wage policy alone. Surpluses would mainly have been reduced through an increase in imports due to an improved domestic economic development. However, for the current account balance to be in line with EU rules, much stronger financial impulses would be needed.
    Date: 2017
  8. By: Mariarosaria Comunale (Bank of Lithuania)
    Abstract: We investigate the interactions across current account misalignments, Real Effective Exchange Rate misalignments and financial (or output) gaps within EU countries. We apply panel techniques, including a Bayesian panel VAR, to 27 EU members over the period 1994-2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the Real Effective Exchange Rate misalignments is the largest and the financial gap can influence the current account misalignments more than the output gap. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the Real Effective Exchange Rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, a raise in the rate or an expansion of the financial gap may help in rebalancing the current account. In the CEE members, an increase in the Real Effective Exchange Rate misalignments may bring larger current account deficits in the medium-long run.
    Keywords: Current account; real effective exchange rate; financial gaps; panel VAR; foreign capital flows
    JEL: F32 F31 C33
    Date: 2017–02–28
  9. By: Ibrahim Elbadawi; Mohamed Goaied (IHEC Carthage); Moez Ben Tahar
    Abstract: This paper contributes to the literature on the interdependence between fiscal and monetary policies in resource-dependent economies. In the context of this general theme we analyze the fiscal foundation of the choice of monetary regimes and the extent of pro-cyclicality of fiscal policy during the post mid-1990s oil boom in the relatively under-research oil-dependent Arab economies. We find preliminary evidence on the existence of a threshold effect for oil rents per capita, below which countries tend to be subject to fiscal dominance and pro-cyclical fiscal policy. This might explain the country experiences of low rents per capita and relatively populous Sudan and Yemen, compared to the GCC member countries of Oman, Saudi Arabia, the UAE as well as Algeria. The latter managed to sustain credible de facto pegged exchange rate regimes and convertible currencies (for the GCC) or graduate to flexible regime (for Algeria). Instead, the former had to abandon their pegged regimes as a result of their unsuccessful exchange rate-based stabilization programs. However, the contrast with resource-dependent Chile and Norway suggests that for the Arab oil economies to accommodate future oil busts they need to establish explicit fiscal rules and high technical capabilities for conducting monetary policy.
    Date: 2017–06–07
  10. By: Botta, Alberto; Godin, Antoine; Missaglia, Marco
    Abstract: In recent years Colombia has grown relatively rapidly, but it has been a biased growth. The energy sector (the locomotora minero-energetica, to use the rhetorical expression of President Juan Manuel Santos) grew much faster than the rest of the economy, while the manufacturing sector registered a negative rate of growth. These are classic symptoms of the well-known ‘Dutch disease’, but our purpose here is not to establish whether the Dutch disease exists or not, but rather to shed some light on the financial viability of several, simultaneous dynamics: (i) the existence of a traditional Dutch Disease being due to a large increase in mining exports and a significant exchange rate appreciation; (ii) a massive increase in foreign direct investment (FDI), particularly in the mining sector; (iii) a rather passive monetary policy, aimed at increasing purchasing power via exchange rate appreciation; (iv) more recently, a large distribution of dividends from Colombia to the rest of the world and the accumulation of mounting financial liabilities. The paper will show that these dynamics constitute a potential danger for the stability of the Colombian economy. Some policy recommendations are also discussed.
    Keywords: Colombia; Dutch Disease; Balance of Payments
    Date: 2016–05–24
  11. By: Eugenia Andreasen; Martin Schindler; Patricio A Valenzuela
    Abstract: Using a panel data set for international corporate bonds and capital account restrictions in advanced and emerging economies, we show that restrictions on capital inflows produce a substantial and economically meaningful increase in corporate bond spreads. A number of heterogeneities suggest that the effect of capital controls on inflows is particularly strong for more financially constrained firms, establishing a novel channel through which capital controls affect economic outcomes. By contrast, we do not find a robust significant effect of restrictions on outflows.
    Date: 2017–06–09
  12. By: Eckhard Hein; Eckhard Achim Truger
    Abstract: In this paper we discuss the relationship between the current account rebalancing in the Eu-rozone, income distribution and wage policies with a focus on the main surplus economy, Germany. We will illustrate how and to which extent German wage policies could be able to contribute to a more balanced development of the Eurozone and to overcome the export-led mercantilist German model. Our analysis and our scenarios will be based on stylized econo-metric results for Germany, as they have recently been obtained in the empirical literature estimating the German demand and growth regime based on post-Kaleckian models. We will focus in particular on the relationship between nominal wages and functional income distribu-tion, on the one hand, and between functional income distribution and domestic demand, on the other hand. We show that more expansionary wage policy can contribute to reducing the excessive German current account surplus, mainly through the domestic income-imports channel. However, wage policy alone will be overburdened with the task of rebalancing. For this, in particular more expansionary fiscal policies are required.
    Keywords: Current account imbalances in the Eurozone, wage policies, distribution, exports, imports
    JEL: E21 E25 E27 E62 E64 F45 F47 H62
    Date: 2017

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