nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒09‒24
six papers chosen by
Martin Berka
University of Auckland

  1. Global Banking and the Conduct of Macroprudential Policy in a Monetary Union By Poutineau, Jean-Christophe; Vermandel, Gauthier
  2. A Note on Risk Sharing versus Instability in International Financial Integration: When Obstfeld Meets Stiglitz By Raouf Boucekkine; Benteng Zou
  3. Default Risk, Sectoral Reallocation and Persistent Recessions By Arellano, Cristina; Bai, Yan; Mihalache, Gabriel
  4. International Real Business Cycle Models with Incomplete Information By Guo, Zi-Yi
  5. Gravity in FX R-Squared: Understanding the Factor Structure in Exchange Rates By Hanno Lustig; Robert J. Richmond
  6. Findings of the recent literature on international capital flows: Implications and suggestions for further research By Stéphanie Guichard

  1. By: Poutineau, Jean-Christophe; Vermandel, Gauthier
    Abstract: This paper questions the role of cross-border lending in the definition of national macroprudential policies in the European Monetary Union. We build and estimate a two-country DSGE model with corporate and interbank cross-border loans, Core-Periphery diverging financial cycles and a national implementation of coordinated macroprudential measures based on Countercyclical Capital Buffers. We get three main results. First, targeting a national credit-to-GDP ratio should be favored to federal averages as this rule induces better stabilizing performances in front of important divergences in credit cycles between core and peripheral countries. Second, policies reacting to the evolution of national credit supply should be favored as the transmission channel of macroprudential policy directly impacts the marginal cost of loan production and, by so, financial intermediaries. Third, the interest of lifting up macroprudential policymaking to the supra-national level remains questionable for admissible value of international lending between Eurozone countries. Indeed, national capital buffers reacting to the union-wide loan-to-GDP ratio only lead to the same stabilization results than the one obtained under the national reaction if cross-border lending reaches 45%. However, even if cross-border linkages are high enough to justify the implementation of a federal adjusted solution, the reaction to national lending conditions remains remarkably optimal.
    Keywords: Macroprudential Policy; Global Banking; International Business Cycles; Euro Area
    JEL: E58 F34 F4 F42
    Date: 2016–11–01
  2. By: Raouf Boucekkine (Aix-Marseille Univ. (Aix-Marseille School of Economics), CNRS, EHESS and Centrale Marseille); Benteng Zou (CREA, University of Luxembourg)
    Abstract: International risk sharing is one of the main arguments in favor of financial liberalization. The pure risk sharing mechanism highlighted by Obstfeld (1994) implies that liberalization is growth enhancing for all countries as it allows the world portfolio to shift from safe low-yield capital to riskier high yield capital. This result is obtained under the assumption that the volatility figures for risky assets prevailing under autarky are not altered after liberalization. This note relaxes this assumption within the standard two-country model with intertemporal portfolio choices, formally incorporating the instability effect invoked by Stiglitz (2000). We show that putting together the pure risk sharing and instability effects in the latter set-up enriches the analysis and delivers predictions more consistent with the contrasted related empirical literature.
    Keywords: optimal growth, financial liberalization, risk sharing, volatility
    JEL: F21 G15 O16 O41
    Date: 2017–08
  3. By: Arellano, Cristina (Federal Reserve Bank of Minneapolis); Bai, Yan (University of Rochester); Mihalache, Gabriel (Stony Brook University)
    Abstract: Sovereign debt crises are associated with large and persistent declines in economic activity, disproportionately so for nontradable sectors. This paper documents this pattern using Spanish data and builds a two-sector dynamic quantitative model of sovereign default with capital accumulation. Recessions are very persistent in the model and more pronounced for nontraded sectors because of default risk. An adverse domestic shock increases the likelihood of default, limits capital inflows, and thus restricts the ability of the economy to exploit investment opportunities. The economy responds by reducing investment and reallocating capital toward the traded sector to support debt service payments. The real exchange rate depreciates, a reflection of the scarcity of traded goods. We find that these mechanisms are quantitatively important for rationalizing the experience of Spain during the recent debt crisis.
    Keywords: European debt crisis; Traded and nontraded production; Real exchange rate; Capital accumulation; Sovereign default with production economy
    JEL: E30 F30
    Date: 2017–09–13
  4. By: Guo, Zi-Yi
    Abstract: Standard international real business cycle (IRBC) models formulated by Backus, Kehoe, and Kydland (BKK, 1992) have been considered a natural starting point to assess the quantitative implications of dynamic stochastic general equilibrium (DSGE) models in an open economy environment. Since the standard IRBC model under assumptions of flexible prices and perfect competition cannot replicate all the observed characteristics of international business cycles, a number of extended models with more realistic features have been developed in the past two decades. We introduce a noisy information structure into an otherwise standard international real business cycle model with two countries. When domestic firms observe current foreign technology with some noise, predictions of the model on international correlation can be very different from those of a standard perfect information model. We show that the model can explain: (i) positive output correlation both in complete and incomplete market models; (ii) consumption correlation smaller than output correlation with an introduction of information constrained consumers; and (iii) observation of both positive and negative productivity-hours correlation in two countries.
    Date: 2017
  5. By: Hanno Lustig; Robert J. Richmond
    Abstract: We relate the risk characteristics of currencies to measures of physical, cultural, and institutional distance. The currencies of countries which are more distant from other countries are more exposed to systematic currency risk. This is due to a gravity effect in the factor structure of bilateral exchange rates: When a currency appreciates against a basket of all other currencies, its bilateral exchange rate appreciates more against the currencies of distant countries. As a result, currencies of peripheral countries are more exposed to the systematic variation than currencies of central countries. Trade network centrality is the best predictor of a currency’s average exposure to systematic risk.
    JEL: F31 G15
    Date: 2017–09
  6. By: Stéphanie Guichard
    Abstract: Financial globalisation has given international capital flows a central role in the functioning of the global economy and has therefore led to considerable economic research over the past 30 years. Making the most of capital flows by allowing countries to reap their benefits while reducing associated risks has always been a challenge. This challenge became however even more acute in the past decade: following the Global Financial Crisis new concerns have indeed emerged related to the complexity of global financial relations, their role in shock transmission as well the ability of fundamentals to protect countries from financial instability. Against this background, recent research has focused on understanding better the implications of financial globalisation for economic stability and the design of policies. This literature review assesses these recent developments. After reviewing the most important trends in capital flows over the past decade, it takes stock of the discussion on the role of the global financial cycle in driving cross-border capital flows and financial instability, reviews the new findings on the real impact of international capital flows on recipient economies, and provides an overview of the ongoing debates on the role of capital controls and the need for policy coordination.
    Keywords: cross-border capital flows, financial globalisation
    JEL: F21 F32 F42
    Date: 2017–09–19

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