nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒08‒06
ten papers chosen by
Martin Berka
University of Auckland

  1. The Micro Origins of International Business Cycle Comovement By Julian di Giovanni; Andrei A. Levchenko; Isabelle Mejean
  2. Foreign Financial Deregulation under Flexible and Fixed Exchange Rates By Paul J.J. Welfens
  3. Capital Controls, Macroprudential Regulation, and the Bank Balance Sheet Channel By Shigeto Kitano; Kenya Takaku
  4. Managing real exchange rate for economic development :empirical evidences from developing countries By Lúcio Otávio Seixas Barbosa; Frederico G. Jayme Jr; Fabrício J. Missio
  5. Step away from the zero lower bound: small open economies in a world of secular stagnation By Corsetti, Giancarlo; Mavroeidi, Eleonora; Thwaites, Gregory; Wolf, Martin
  6. Law of One Price, Distance, and Borders By Fernando Borraz; Leandro Zipitría
  7. EQCHANGE: A World Database on Actual and Equilibrium Effective Exchange Rates By Couharde, Cecile; Delatte, Anne-Laure; Grekou, Carl; Mignon, Valerie; Morvillier, Florian
  8. The Changing International linkages of Switzerland: An Overview By Tille, Cédric
  9. Does Real Exchange Rate Undervaluation Really Promote Economic Growth? By Rafael Saulo Marques Ribeiro; John S. L. McCombie, Gilberto Tadeu Lima
  10. The response of multinationals’ foreign exchange rate exposure to macroeconomic news By Boudt, Kris; Neely, Christopher J.; Sercu, Piet; Wauters, Marjan

  1. By: Julian di Giovanni; Andrei A. Levchenko; Isabelle Mejean
    Abstract: This paper investigates the role of individual firms in international business cycle comovement using data covering the universe of French firm-level value added and international linkages over 1993-2007. At the micro level, trade and multinational linkages with a particular foreign country are associated with a significantly higher correlation between a firm and that foreign country. The impact of direct linkages on comovement at the micro level has significant macro implications. Without those linkages the correlation between France and foreign countries would fall by about 0.098, or one-third of the observed average correlation of 0.291 in our sample of partner countries.
    Keywords: comovement, international trade, firm-level shocks, large firms
    JEL: F44
    Date: 2017–07
  2. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: An enhanced Mundell-Fleming model with domestic and foreign banking deregulation is considered for a small open economy. Deregulation is assumed to influence net capital outflows. It can be shown that under fixed exchange rates, foreign deregulation reduces output and employment and therefore there will be an international resistance to strong deregulation abroad - typically in the US or the UK whose big banking sectors could give an inherent incentive to deregulate. Under flexible exchange rates, banking deregulation abroad raises output and employment so that banking deregulation in the US – or the UK - will face less resistance than under a system of fixed exchange rates; excessive deregulation pressure could emerge in a system of flexible rates. There is a new trilemma. While banking deregulation might bring a national and global output increase in the medium term, the long-run effects could be higher government restructurings cost related to ailing banks in OECD countries. The debate of fixed exchange rates versus flexible exchange rates thus has a new additional aspect, namely the probability of banking deregulation. A key policy implication derived is thus that in a system of flexible exchange rates national and international as well as IMF monitoring of banking regulation quality is important for economic stability and welfare – the IMF’s FSAP and the work of the BIS are quite crucial. BREXIT allows one to expect a wave of deregulation in the UK (plus US); with negative external effects worldwide. New long-run effects are also considered in an enhanced Solow growth model with risk, trade and FDI.
    Keywords: Banking, Deregulation, Macroeconomics, OECD, Employment
    JEL: E52 F00 F41 F43
    Date: 2017–06
  3. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of International Studies, Hiroshima City University, Japan)
    Abstract: We develop a sticky price, small open economy model with financial frictions à la Gertler and Karadi (2011), in combination with liability dollarization. An agency problem between domestic financial intermediaries and foreign investors of emerging economies introduces financial frictions in the form of time-varying endogenous balance sheet constraints on the domestic financial intermediaries. We consider a shock that tightens the balance sheet constraint and show that capital controls, the effects of which are rigorously examined as a policy tool for the emerging economies, can be a credit policy tool to mitigate the negative shock.
    Keywords: Capital control; Macroprudential regulation; Financial frictions; Financial intermediaries; Balance sheets; Small open economy; Liability dollarization; DSGE; Welfare
    JEL: E69 F32 F41
    Date: 2017–07
  4. By: Lúcio Otávio Seixas Barbosa (Planning Department of Minas Gerais (SEPLAG-MG)); Frederico G. Jayme Jr (Cedeplar-UFMG); Fabrício J. Missio (Cedeplar-UFMG)
    Abstract: This paper analyses macroeconomic policies capable of influencing the long-run real exchange rate (RER). In this vein, it identifies economic policy tools that can devalue RER, covering a theoretical issue neglected by the economic literature, which argues that competitive exchange rate enhances growth. After discussing the “Trilemma”, we identify those variables that could affect RER without constraining monetary policy or exchange rate regime choice. In what follows, we model the probability of achieving an undervalued (small or large) RER for a sample of 14 developing countries from 1980 to 2010 (30 years) by applying econometric techniques for discrete choice and censored data. Afterwards, we compare the results for Latin-American nations with Asian ones. They suggest that competitive exchange rate requires different approaches depending on the region. Moreover, Latin American countries need to take on additional policies so that interventions in the Foreign Exchange Market become effective.
    Keywords: Competitive exchange rate, exchange rate management, exchange rate policy
    JEL: F31 F40 F41
    Date: 2017–07
  5. By: Corsetti, Giancarlo; Mavroeidi, Eleonora; Thwaites, Gregory; Wolf, Martin
    Abstract: We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al (2016), we show that the transition to full employment and at-target inflation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape can be beggar thy self, raising employment but actually lowering welfare. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities' ability to rescue the economy from stagnation.
    Keywords: beggar-thy-neighbour; capital controls; Deflation; depreciation; monetary policy; zero lower bound
    JEL: E62 F41
    Date: 2017–07
  6. By: Fernando Borraz (Banco Central del Uruguay y Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Leandro Zipitría (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República y Universidad de San Andrés)
    Abstract: We propose a decomposition of the border effect in international trade by controlling for differences in competition in local markets. An extension of the Hotelling (1929) model shows that the availability of local substitutes increases price dispersion and biases the estimation of the border effect. We test these predictions using detailed price database at the supermarket level for Uruguay. This stylized setting makes it possible to control for other potential explanations of the border effect (i.e., exchange rates, taxes, or transport costs). We find that for those goods without local competitors the border estimation increases substantially, while for those goods that do have local competitors the effect of border is negligible. As the literature suggests, results should be even larger for different countries than for different cities. The methodology developed in the paper allows a finer explanation for understanding the relevance of borders in price dispersion.
    Keywords: border effect, price dispersion, competition.
    JEL: F14 F15 L13
    Date: 2017–02
  7. By: Couharde, Cecile; Delatte, Anne-Laure; Grekou, Carl; Mignon, Valerie; Morvillier, Florian
    Abstract: The aim of this paper is to present EQCHANGE the new database developed by the CEPII on effective exchange rates. EQCHANGE includes two sub-databases containing data on (i) nominal and real effective exchange rates, and (ii) equilibrium real effective exchange rates and corresponding currency misalignments for advanced, emerging and developing countries. More specifically, the first sub-database delivers effective exchange rates for 187 countries that are computed under three different weighting schemes and two panels of trading partners (186 and top 30) over the 1973-2016 period. The second sub-database provides behavioral equilibrium exchange rate (BEER) estimates and corresponding currency misalignments for 182 economies over the 1973-2016 period. We describe the construction of the two datasets and illustrate some possible uses by presenting results concerning the evolution and main characteristics of currency misalignments in the world from 2015 to 2016. By providing publicly available indicators of equilibrium exchange rates, EQCHANGE aims to contribute to key debates in international macroeconomics.
    Keywords: Exchange rates; Equilibrium exchange rates; Currency misalignments
    JEL: C23 C82 F31
    Date: 2017–07
  8. By: Tille, Cédric
    Abstract: Over the last decade, the economic linkages between Switzerland and the rest of the world have been transformed. First, merchanting and the chemical industry account for an increasing share of international trade, with chemicals exports expanding robustly in recent years despite the European crisis and the strong Swiss franc. Second, the nature of international financial integration has changed. While private investors drove Switzerland's financial flows and net foreign assets before the financial crisis, the foreign reserves accumulation by the Swiss National Bank has been playing a major role since. Third, asset prices and foreign exchange movements led to substantial capital losses in foreign assets which fully absorbed the surplus on the current account. Finally, the crisis has weakened the role of foreign trade as an engine of growth and narrowed it across sectors.
    Keywords: current account; external investment position; Globalization; Switzerland
    JEL: F1 F4
    Date: 2017–07
  9. By: Rafael Saulo Marques Ribeiro; John S. L. McCombie, Gilberto Tadeu Lima
    Abstract: This article seeks to reassess the empirical literature on real exchange rate misalignment and growth in light of the extensive discussion about the relationship between income distribution and growth in developing economies. We state that the relationship between changes in the real exchange rate and growth can be characterised by two conflicting partial effects, as follows: i) undervaluation stimulates technological change and knowledge spillovers, thus affecting positively output growth; ii) undervaluation raises income inequality and hence harms output growth. Though there are a vast number of empirical studies presenting robust evidence of a positive relationship between currency undervaluation and growth for developing economies, none has yet explicitly considered the potentially negative distributional effects of undervaluation on growth. Our empirical model adds to this literature by suggesting that, once both functional income distribution and the level of technological capabilities are explicitly taken into account, the direct impact of real exchange rate misalignment on growth becomes statistically non-significant for a sample of developing countries. Further, based on our results, we state that the real exchange rate only affects growth indirectly through its impacts on functional income distribution and technological innovation. Our estimates have shown that the indirect impact of undervaluation on growth in developing countries is negatively signed.
    Keywords: Exchange rate; growth; income distribution; technological capabilities
    JEL: F43 F31 D63 O33
    Date: 2017–08–01
  10. By: Boudt, Kris (Vrije Universiteit Brussel and Vrije Universiteit Amsterdam); Neely, Christopher J. (Federal Reserve Bank of St. Louis); Sercu, Piet (KU Leuven); Wauters, Marjan (Vrije Universiteit Brussel and KU Leuven)
    Abstract: We use intraday data to estimate the daily foreign exchange exposure of U.S. multinationals and show that macroeconomic news affects these firms’ foreign exchange exposure. News creates a substantial shift in the joint distribution of stock and exchange rate returns that has both a transitory and a persistent component. For example, a positive domestic demand surprise, as reflected in higher-than-expected nonfarm payroll, increases the value of the low-exposure domestic activities and results in a persistent decrease in foreign exchange exposure.
    Keywords: Foreign exchange exposure; High-frequency data; Macro
    JEL: E3 F3 F44 G14
    Date: 2017–07–31

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