nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒09‒17
five papers chosen by
Martin Berka
University of Auckland

  1. Exchange rates, interest rates and the global carry trade By Martin D.D. Evans; Dagfinn Rime
  2. Pricing sovereign debt in resource rich economies By Thomas McGregor
  3. Real Exchange Rates, Income per Capita, and Sectoral Input Shares By Javier Cravino; Samuel E. Haltenhof
  4. Remittances and the real effective exchange rates in MENA countries: What is the long run impact? By Mariem Brahim; Nader Nefzi; Hamed Sambo
  5. Aggregate Uncertainty and Sectoral Productivity Growth: The Role of Credit Constraints By Sangyup Choi; Davide Furceri; Yi Huang; Prakash Loungani

  1. By: Martin D.D. Evans (Georgetown University and NBER); Dagfinn Rime (Norges Bank (Central Bank of Norway) and BI Norwegian Business School)
    Abstract: We empirically examine how the global carry trade affects the dynamics of spot exchange rates and interest rates across 13 countries from 2000, through the world financial crisis, until the end of 2011. Our model identifies the weekly carry trade position in each currency by matching data on forex trading flows with the predictions of a dynamic portfolio allocation problem that exploits the predictability in excess currency returns (deviations from uncovered interest parity). Using these carry positions produce two surprising results: First, in nine countries carry trades are an economically significant driver of interest rate differentials (vs. U.S. rates). Second, the carry trade only affects the dynamics of spot exchange rates insofar as it is contributes to total forex order flow; (i.e., flows generated by the carry trade and all other trading motives). These findings contradict the conventional view that sudden large movements in exchange rates are attributable to the carry trade. They suggest, instead, that the effects of the global carry trade are primarily concentrated in bond markets.
    Keywords: Exchange Rate Dynamics, Microstructure, Order Flow
    JEL: F3 F4 G1
    Date: 2017–09–06
  2. By: Thomas McGregor
    Abstract: This paper investigates the link between commodity price movements and risk premiums in resource-dependent,developing economies. I develop a stochastic general equilibrium model of a small open economy that receives a stream of resourc erevenues.The government sells bonds to foreign investors which it can renege on in the future, at some cost, whilst international investors form expectations on the likelihood of sovereign default. This delivers an endogenous risk premium which is inversely related to the price of oil.The model is able to explain a large proportion of the business cycle fl uctuations in interest-rate spreads in resource dependent developing economies. I then ask how specific structural features of developing economies affect the relationship between commodity prices and the optimal price of sovereig ndebt, including:a higher dependence on natural resource revenues, impatient consumers and governments,a higher degree of risk-aversion, and a lower ability to substitute consumption inter-temporally. Including them in the model significantly improves the ability of the model to explain the key macroeconomic co-movements in a resource rich, developing economy context. Model simulations reveal an interesting policy insight. An endogenous risk premium that is driven by falling oil prices, provides an additional rationale for a volatility fund in which liquidity buffers are accumulated to manage debt repayments. These buffers should be larger the stronger the link between oil prices and the domestic economy is, the more impatient policymakers are and the more willing they are to substitute current for future consumption.
    Keywords: Pricing sovereign debt, default, natural resources, BBC, volatility fund
    JEL: E13 E32 E44 F34 O11 O13 O16 H63
    Date: 2017
  3. By: Javier Cravino (University of Michigan and NBER); Samuel E. Haltenhof (University of Michigan)
    Abstract: Aggregate price levels are positively related to GDP per capita across countries. We propose a mechanism that rationalizes this observation through sectorial differences in intermediate input shares. As aggregate productivity and income grow, so do wages relative to intermediate input prices, which increases the relative price of non-tradables if tradable sectors use intermediate inputs more intensively. We show that sectorial differences in intermediate input shares can account for two thirds of the observed elasticity of the aggregate price level with respect to GDP per capita. The mechanism has stark implications for industry-level real exchange rates that are strongly supported by the data.
    Keywords: Real exchange rates, aggregate price levels
    JEL: F31 F41
    Date: 2017–08
  4. By: Mariem Brahim (Centre d'Economie de l'Université de Paris Nord (CEPN)); Nader Nefzi (Centre d'Economie de l'Université de Paris Nord (CEPN)); Hamed Sambo (Centre d'Economie de l'Université de Paris Nord (CEPN))
    Abstract: The aim of this paper is to examine the effect of remittances on real effective exchange rate in MENA countries using an autoregressive distributive lag (ARDL) model and three estimators, namely the Pooled Mean Group estimator, the Mean Group estimator and the dynamics common correlated effects estimator. We use data from 9 countries of MENA region for the 1980-2015 period. On the long-run, we find that migrants’ remittances towards the whole MENA countries negatively and significantly affect the real effective exchange rate. Indeed, the increase in remittances leads to a depreciation of the real exchange rate, meaning that remittances do not deteriorate the price competitiveness of the recipient countries in the long-run. Therefore, remittances do not cause the Dutch disease’s risk in MENA countries.
    Keywords: Migration, Remittances, Real effective exchange rate, Dutch Disease, Monetary policy, MENA, ARDL
    JEL: F22 F24 F31
    Date: 2017–08
  5. By: Sangyup Choi (Yonsei University); Davide Furceri (IMF); Yi Huang (Graduate Institute, Geneva); Prakash Loungani (IMF)
    Abstract: We show that an increase in aggregate uncertainty?measured by stock market volatility?reduces productivity growth more in industries that depend heavily on external finance. The mechanism at play is that during periods of high uncertainty, firms that are credit constrained switch the composition of investment by reducing productivity-enhancing investment?such as on ICT capital?which is more subject to liquidity risks (Aghion et al., 2010). The effect is larger during recessions, when financing constraints are more likely to be binding, than during expansions. Our statistical method?a difference-in-difference approach using productivity growth of 25 industries from 18 advanced economies over the period 1985-2010?mitigates concerns with omitted variable bias and reverse causality. The results are robust to the inclusion of other sources of interaction effects, instrumental variable approaches, and different datasets. The results also hold if economic policy uncertainty (Baker et al., 2016) is used instead of stock market volatility as a measure of aggregate uncertainty.
    Keywords: productivity growth; financial dependence; uncertainty; Information and communication technology investment
    JEL: E22 F43 O30 O47
    Date: 2017–09

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