nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒07‒02
nine papers chosen by
Martin Berka
University of Auckland

  1. A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies By Obstfeld, Maurice; Ostry, Jonathan D.; Qureshi, Mahvash S.
  2. The International Dimensions of Macroprudential Policies By Agénor, Pierre-Richard; Gambacorta, Leonardo; Kharroubi, Enisse; Lombardo, Giovanni; Pereira da Silva, Luiz A.
  3. Industrialisation and the big push in a global economy By Kreickemeier, Udo; Wrona, Jens
  4. Structural asymmetries and financial imbalances in the eurozone By Jaccard, Ivan; Smets, Frank
  5. Estimating the Natural Rate of Interest in an Open Economy By Wynne, Mark A.; Zhang, Ren
  6. Detecting Scapegoat Effects in the Relationship Between Exchange Rates and Macroeconomic Fundamentals By Lorenzo Pozzi; Barbara Sadaba
  7. Identifying Dornbusch's Exchange Rate Overshooting with Structural VECs: Evidence from Mexico By Capistrán Carlos; Chiquiar Daniel; Hernández Juan R.
  8. China’s Current Account : External Rebalancing or Capital Flight? By Anna Wong
  9. The fall in real long-term government bond yields: Disentangling different drivers By Łukasz Rawdanowicz; Mohamed Hammouch; Makoto Kasai

  1. By: Obstfeld, Maurice; Ostry, Jonathan D.; Qureshi, Mahvash S.
    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.
    Keywords: Capital Flows; emerging market economies; global financial cycle; trilemma
    JEL: F31 F36 F41
    Date: 2017–06
  2. By: Agénor, Pierre-Richard; Gambacorta, Leonardo; Kharroubi, Enisse; Lombardo, Giovanni; Pereira da Silva, Luiz A.
    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: Financial Frictions; international cooperation; International spillovers; macroprudential policies
    JEL: E3 E5 F3 F5 G1
    Date: 2017–06
  3. By: Kreickemeier, Udo; Wrona, Jens
    Abstract: In their famous paper on the "Big Push", Murphy, Shleifer, and Vishny (1989) show how the combination of increasing returns to scale at the firm level and pecuniary externalities can give rise to a poverty trap, thereby formalising an old idea due to Rosenstein-Rodan (1943). We develop in this paper an oligopoly model of the Big Push that is very close in spirit to the Murphy-Shleifer-Vishny (MSV) model, but in contrast to the MSV model it is easily extended to the case of an economy that is open to international trade. Having a workable open-economy framework allows us to address the question whether globalisation makes it easier or harder for a country to escape from a poverty trap. Our model gives a definite answer to this question: Globalisation makes it harder to escape from a poverty trap since the adoption of the modern technology at the firm level is impeded by tougher competition in the open economy.
    Keywords: Poverty Traps,Multiple Equilibria,International Trade,Technology Upgrading,General Oligopolistic Equilibrium
    JEL: F12 O14 F43
    Date: 2017
  4. By: Jaccard, Ivan; Smets, Frank
    Abstract: Almost two decades after the introduction of the common currency differences in institutional frameworks remain a major source of cross-country heterogeneity in the eurozone. We develop a two-country model with incomplete international markets in which the availability of credit depends on the country’s institutional environment. Our main finding is that structural differences in domestic credit environments provide an explanation for the procyclicality of net capital inflows observed in the South of Europe. We show that frictions in domestic credit markets generate asymmetries in the transmission mechanism of shocks that are common to both regions. JEL Classification: F32, F20, G17
    Keywords: cross-border financial markets, eurozone crisis, incomplete international asset markets, structural reforms
    Date: 2017–06
  5. By: Wynne, Mark A. (Federal Reserve Bank of Dallas); Zhang, Ren (Bowling Green State University)
    Abstract: The concept of the natural or equilibrium rate of interest has attracted a lot of attention from monetary policymakers in recent years. Most attempts to estimate the natural rate use a closed economy framework. We argue that in the face of greater integration of global product and capital markets, an open economy framework is more appropriate. We provide some initial estimates of the natural rate for the United States and Japan in a two-country framework. Our identifying assumptions include a close relationship between the time-varying natural rate of interest and the low-frequency fluctuations of potential output growth in both the home country and the foreign country. Our results suggest that the natural rates in both countries are mainly determined by their own trend growth rates of potential output. Nevertheless, the other country's trend growth plays an important role in several specific periods. The gap between the actual real interest rate and our estimated natural rate offers valuable insights into the recent stance of monetary policy in both of these two countries.
    JEL: C32 E32 E4 E52
    Date: 2017–06–20
  6. By: Lorenzo Pozzi; Barbara Sadaba
    Abstract: This paper presents a new testing method for the scapegoat model of exchange rates that aims to tighten the link between the theory on scapegoats and its empirical implementation. This new testing method consists of a number of steps. First, the exchange rate risk premium, the unobserved time-varying structural impact of the macro fundamentals on the exchange rate and the unobserved fundamental of the model are estimated. Next, the scapegoat terms in the model’s exchange rate equation are estimated under the restrictions implied by these first-step estimates. The scapegoat terms consist of macro fundamentals, i.e., potential scapegoats, interacted with parameter expectations, where the latter are proxied using survey data. We use a Bayesian Gibbs sampling approach to estimate the different steps of the methodology for eight countries (five developed, three emerging) versus the US over the period 2002Q1–2014Q4. The macro fundamentals we consider are real GDP growth, the inflation rate, the long-run nominal interest rate and the current account to GDP ratio. We calculate the posterior probabilities that these macro fundamentals are scapegoats. For the inflation rate, these probabilities are considerably higher than the imposed prior probabilities of 0.5 in five out of eight countries (including the Anglo-Saxon economies). We find little evidence to suggest that the other macro fundamentals we consider are scapegoats.
    Keywords: Econometric and statistical methods, Exchange rates, International financial markets
    JEL: G15 C32 F31
    Date: 2017
  7. By: Capistrán Carlos; Chiquiar Daniel; Hernández Juan R.
    Abstract: In this paper we use data from Mexico to identify Dornbusch's (1976) exchange rate overshooting hypothesis. We specify and estimate a structural cointegrated VAR that considers explicitly the presence of a set of long-run theoretical relations on macroeconomic variables (a purchasing power parity, an uncovered interest parity, a money demand, and a relation between domestic and U.S. output levels). We then impose a recursiveness assumption to identify the response of domestic variables to a monetary policy shock. The long-run restrictions embedded in the model are themselves identified, estimated, and tested using an ARDL methodology that is robust to the degree of persistence of the time series and, in particular, to whether they are trend- or first-difference stationary. With this approach, we are able to find that the response of the exchange rate to monetary policy shocks is consistent with Dornbusch's model.
    Keywords: Vector error correction models;exchange rate overshooting;monetary policy shock
    JEL: C32 C51 E10 E17
    Date: 2017–06
  8. By: Anna Wong
    Abstract: This paper examines an anomaly in China’s current account: its large and rapidly growing travel expenditure. Drawing evidence from counterparty data, Chinese international arrival statistics, and gravity equation models extended to travel trade, I find that a significant amount of China’s travel spending in the period 2014-2016 could not be explained by accounting factors or economic fundamentals. The unexplained travel imports are inversely associated with domestic growth and positively associated with renminbi depreciation expectations against the dollar, suggesting that they are less likely to be consumption of goods and services abroad than domestic residents’ acquisition of foreign financial assets. Adjusted for these potential disguised outflows, China’s current account balance could be higher than reported by around 1 percent of GDP in 2015 and 2016, a period when the Chinese economy slowed noticeably as it shifted away from investment-driven growth (i.e.“internal rebalancing”). These results suggest that Chinese households, through the travel channel, have in part replaced the official sector in directing domestic surplus savings abroad in recent years. While the official sector preferred liquid foreign government assets, Chinese households appear to prefer private foreign assets.
    Keywords: Capital flight ; Current account ; Trade mis-invoicing ; Services trade
    JEL: F32 F21 F14 G15
    Date: 2017–06–19
  9. By: Łukasz Rawdanowicz (OECD); Mohamed Hammouch; Makoto Kasai (OECD)
    Abstract: This paper contributes to the empirical literature investigating reasons for the fall in real interest rates in advanced economies. It focuses on selected drivers from three broad categories: demographic changes; imbalances between supply of and demand for safe assets; and monetary policy at home and abroad. Several country-specific error-correction models are estimated for the G7 countries, starting in the early 1970s. Results support the expected relationship with demographic variables. However, this is not corroborated by models with household saving, raising questions about transmission mechanisms of demography. For most countries, there is little robust evidence about the role of proxies of the supply of and demand for government bonds. However, real long-term government bond yields are closely linked with real policy interest rates, with little evidence that real policy interest rates followed secular declines in real potential GDP growth – a proxy of a neutral interest rate. Domestic real yields are also affected by foreign real rates, indicating the role of spillovers and common global trends.
    Keywords: Demand for safe assets, Demographic transition, Monetary policy, Real interest rate, Saving rate
    JEL: C22 E43 E52 E58 F31 J11
    Date: 2017–06–30

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.