nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒07‒09
seven papers chosen by
Martin Berka
University of Auckland

  1. The shifting drivers of global liquidity By Avdjiev, Stefan; Gambacorta, Leonardo; Goldberg, Linda S.; Schiaffi, Stefano
  2. International Financial Spillovers to Emerging Market Economies: How Important Are Economic Fundamentals? By Ahmed, Shaghil; Coulibaly, Brahima; Zlate, Andrei
  3. Nonlinear adjustment effects in the purchasing power parity By Andrew Phiri
  4. Offshore Production and Business Cycle Dynamics with Heterogeneous Firms By Zlate, Andrei
  5. Breaking Badly: The Currency Union Effect on Trade By Campbell, Douglas L.; Chentsov, Aleksandr
  6. International business cycles: quantifying the effects of a world market for oil By Gars, Johan; Olovsson, Conny
  7. The timing of uncertainty shocks in a small open economy By Armelius, Hanna; Hull, Isaiah; Stenbacka Köhler, Hanna

  1. By: Avdjiev, Stefan (Bank for International Settlements); Gambacorta, Leonardo (Bank for International Settlements); Goldberg, Linda S. (Federal Reserve Bank of New York); Schiaffi, Stefano (Bocconi University)
    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 flows to U.S. monetary policy rose substantially in the immediate aftermath of the global financial crisis, peaked around the time of the 2013 Federal Reserve “taper tantrum,” and then partially reverted toward pre-crisis levels. Conversely, the responsiveness of international bank lending to global risk conditions declined considerably after the crisis and became similar to that of international debt securities. The increased sensitivity of international bank flows to U.S. monetary policy has been driven mainly by post-crisis changes in the behavior of national banking systems, especially those that ex ante had banks that were less well capitalized. By contrast, the post-crisis fall in the sensitivity of international bank lending to global risk was mainly owing to a compositional effect, driven by increases in the lending market shares of national banking systems that were better capitalized. The post-2013 reversal in the sensitivities to U.S. monetary policy partially reflects the expected divergence in the monetary policies of the United States 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: global liquidity; international bank lending; international bond flows; capital flows
    JEL: F34 G10 G21
    Date: 2017–06–01
  2. By: Ahmed, Shaghil (Board of Governors of the Federal Reserve System); Coulibaly, Brahima (Board of Governors of the Federal Reserve System); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: We assess the importance of economic fundamentals in the transmission of international shocks to financial markets in various emerging market economies (EMEs), covering the so-called taper-tantrum episode of 2013 and seven other episodes of severe EME-wide financial stress since the mid-1990s. Cross-country regressions lead us to the following results: (1) EMEs with relatively better economic fundamentals suffered less deterioration in financial markets during the 2013 taper-tantrum episode. (2) Differentiation among EMEs set in relatively early and persisted through this episode. (3) During the taper tantrum, while controlling for the EMEs' economic fundamentals, financial conditions also deteriorated more in those EMEs that had earlier experienced larger private capital inflows and greater exchange rate appreciation. (4) During the EME crises of the 1990s and early 2000s, we find little evidence of investor differentiation across EMEs being explained by differences in their relative vulnerabilities. (5) However, differentiation across EMEs based on fundamentals does not appear to be unique to the 2013 episode; it also occurred during the global financial crisis of 2008 and, subsequently, during financial stress episodes related to the European sovereign crisis in 2011 and China's financial market stresses in 2015.
    Keywords: Emerging market economies; financial spillovers; economic fundamentals; vulnerability index; depreciation pressure; taper tantrum; financial stress.
    JEL: E52 F31 F32 F65
    Date: 2017–06–05
  3. By: Andrew Phiri
    Abstract: This study examines nonlinear adjustment effects in the purchasing power parity (PPP) between South Africa and her main currency trading partners; namely, the US, the UK, the Euro area, China and Japan. We use monthly data of the nominal exchange rates and domestic price level data collected between the periods 1971-2014. The empirical study is conducted using nonlinear unit root and asymmetric cointegration analysis. Our empirical results show significant asymmetric PPP effects between South Africa and her main trading partners with causal effects flowing from exchange rates to price differentials.
    Keywords: B22, C22, C32, E31, E58, F31.
    Date: 2017–06–08
  4. By: Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: To examine the effect of offshoring through vertical FDI on the international transmission of business cycles, I propose a two-country model in which firms endogenously choose the location of their production plants over the business cycle. Firms face a sunk cost to enter the domestic market and an additional fixed cost to produce offshore. As such, the offshoring decision depends on the firm-specific productivity and on fluctuations in the relative cost of effective labor. The model generates a procyclical pattern of offshoring and dynamics along its extensive margin that are consistent with data from Mexico's maquiladora sector. The extensive margin enhances the procyclical response of the value added offshore to expansions in the home economy, as the number of offshoring firms mirrors the dynamics of firm entry at home. As a result, offshoring increases the comovement of output across economies, in line with the empirical evidence.
    Keywords: Offshore production; extensive margin; heterogeneous firms; firm entry; business cycle dynamics; terms of labor.
    JEL: F23 F41
    Date: 2016–02–17
  5. By: Campbell, Douglas L.; Chentsov, Aleksandr
    Abstract: As several European countries debate entering, or exiting, the Euro, a key policy question is how much currency unions (CUs) affect trade. Recently, Glick and Rose (2016) confirmed that currency unions increase trade on average by 100%, and that the Euro has increased trade by a still-large 50%. In this paper, we find that the apparent large impact of CUs on trade is driven by other major geopolitical events correlated with CU switches, including communist takeovers, decolonization, warfare, ethnic cleansing episodes, the fall of the Berlin Wall and the whole history of European integration. We find that moving from robust standard errors to multi-way clustered errors alone reduces the t-score of the Euro impact by 75%. Looking at individual CUs, we find that in no cases does the time series evidence support a large trade effect, and that the effect breaks particularly badly once we find suitable control groups. Overall, we find that intuitive controls and omitting the CU switches coterminous with war and missing data render the trade impact of the Euro and all CUs together statistically insignificant.
    Keywords: The Euro, Currency Unions and Trade, Gravity Regressions for Policy Analysis
    JEL: F15 F33 F54
    Date: 2017–06–29
  6. By: Gars, Johan (GEDB, Royal Swedish Academy of Sciences); Olovsson, Conny (Research Department, Central Bank of Sweden)
    Abstract: To what extent is the international business cycle affected by the fact that an essential input (oil) is traded on the world market? We quantify the contribution of oil by setting up a model with separate shocks to efficiencies of capital/labor and oil, as well as global shocks to the oil supply. We find that the shocks to the supply and the efficiency of oil both contribute to positive comovements. These two shocks are also relatively transitory, which induces high responses in output and low responses in consumption. As a consequence, the model resolves both the consumption correlation puzzle and the international comovement puzzle.
    Keywords: International comovements; business cycles; oil; productivity
    JEL: E32 F32 F41 Q43
    Date: 2017–05–01
  7. By: Armelius, Hanna (Ministry of Finance); Hull, Isaiah (Research Department, Central Bank of Sweden); Stenbacka Köhler, Hanna (Monetary Policy Department, Central Bank of Sweden)
    Abstract: Foreign measures of uncertainty, such as the US EPU index, are often used as a proxies for domestic uncertainty in small open economies. We construct an EPU index for Sweden and demonstrate that shocks to the domestic index yield di erent impulse response functions for GDP growth than shocks to the US index. In particular, a one standard deviation shock to the Swedish index delivers its maximum impact in the same quarter, lowering GDP growth by 0.2 percentage points. In contrast, a shock to the US index delivers its maximum impact with a one-quarter delay. Other foreign proxies, such as the EU and German indices, also generate e ects that peak with a one-quarter delay.
    Keywords: economic uncertainty; policy uncertainty; business cycles; small open economy
    JEL: D80 E66 F41 F42
    Date: 2016–12–01

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