nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒10‒08
six papers chosen by
Martin Berka
University of Auckland

  1. International Asset Allocations and Capital Flows: The Benchmark Effect By Claudio Raddatz; Sergio Luis Schmukler; Tomas Williams
  2. Are all types of capital flows driven by the same factors? Evidence from Mexico By Ibarra-Ramírez Raúl; Téllez León Elizabeth
  3. Synchronicity of real and financial cycles and structural characteristics in EU countries By Mariarosaria Comunale
  4. US monetary regimes and optimal monetary policy in the Euro Area By Kostas Mavromatis
  5. International liquidity By Hartmann, Philipp
  6. Why Are Exchange Rates So Smooth? A Household Finance Explanation By YiLi Chien; Hanno Lustig; Kanda Naknoi

  1. By: Claudio Raddatz; Sergio Luis Schmukler (World Bank 1818 H Street NW, MC 3-301 Washington, DC 20433); Tomas Williams
    Abstract: We study different channels through which well-known benchmark indexes impact asset allocations, capital flows, asset prices, and exchange rates across countries, using unique monthly micro-level data of benchmark compositions and mutual fund investments during 1996-2014. We exploit different events and the presence of countries in multiple benchmarks to study the impact of benchmarks. We find that movements in benchmarks appear to have important effects on equity and bond mutual fund portfolios, including passive and active funds. The effects persist even after controlling for other relevant variables, such as time-varying industry-level factors, country-specific effects, and macroeconomic fundamentals. Exogenous, pre-announced changes in benchmarks impact asset allocations, capital flows, and abnormal returns in asset prices and exchange rates. These systemic effects occur not just when the benchmark changes are announced, but also later on when they become effective. By impacting country allocations, benchmarks explain apparently counterintuitive movements in capital flows and aggregate prices.
    Keywords: benchmark indexes, contagion, coordination mechanism, ETFs, international asset prices, international portfolio flows, mutual funds
    JEL: F32 F36 G11 G15 G23
    Date: 2017–09
  2. By: Ibarra-Ramírez Raúl; Téllez León Elizabeth
    Abstract: In this paper we analyze the impact and persistence of shocks to global (push) and domestic (pull) factors on each component of the financial account for the Mexican Balance of Payments at the highest degree of disaggregation, including investment by foreign residents in Mexican public and private sector securities, as well as investment by domestic residents in foreign securities. To this end, we estimate impulse response functions from vector autoregressive models for the period 1995-2015. We find that an increase in the foreign interest rate leads to lower portfolio investment, particularly in Mexican public sector securities. An increase in global risk generates lower portfolio investment, particularly in private sector securities. Foreign investors respond to a higher extent to foreign interest rate and liquidity shocks compared to domestic investors.
    Keywords: Capital Flows;Push Factors;Pull Factors;Vector Autoregression
    JEL: F21 F32 F41 F47
    Date: 2017–09
  3. By: Mariarosaria Comunale (Economics Department, Bank of Lithuania)
    Abstract: In this paper, we examine the relationships between real, credit and house price cycles, by using a synchronicity index, and structural characteristics and macroeconomic variables of 17 EU countries. We find that the cycles between credit variables and the real cycle with the property or equity prices cycles seem relatively well synchronised. Credit and GDP fluctuations seem to be less synchronised, mostly because credit volumes tend to lag the real cycle by several quarters. The high rates of private homeownership tend to be associated with larger cycles in GDP, credit, and house prices. Higher Loan-To-Value ratios, seen as a proxy of borrowing constraints, and a higher percentage of flexible-rate mortgages, could also indicate that a country is more sensitive to shocks and possibly increase pro-cyclicality and increase cycle volatility. Finally, the pro-cyclicality of the credit and housing market to the GDP cycle can be linked to the fluctuation in current accounts and their misalignments with respect to the theoretical equilibrium value. The synchronicity and the cycles of credit may also be considered for signaling recessions.
    Keywords: cycles; synchronicity; housing market; credit; European Union
    JEL: E32 E44 F36
    Date: 2017–09–25
  4. By: Kostas Mavromatis
    Abstract: Monetary policy in the US has been documented to have switched from reacting weakly to inflation fluctuations during the '70s, to fighting inflation aggressively from the early '80s onwards. In this paper, I analyze the impact of the US monetary policy regime switches on the Eurozone. I construct a New Keynesian two-country model where foreign (US) monetary policy switches regimes over time. I estimate the model for the US and the Euro Area using quarterly data and find that the US has switched between those two regimes, in line with existing evidence. I show that foreign regime switches affect home (Eurozone) inflation and output volatility and their responses to shocks, substantially, as long as the home central bank commits to a time invariant interest rate rule reacting to domestic conditions only. Optimal policy in the home country instead requires that the home central bank reacts strongly to domestic producer price inflation and to international variables, like imported goods relative prices. In fact, I show that currency misalignments and relative prices play a crucial role in the transmission of foreign monetary policy regime switches internationally. Interestingly, I show that only marginal gains arise for the Euro Area when the ECB adjusts its policy according to the monetary regime in the US. Thus, a simple time-invariant monetary policy rule with a strong reaction to PPI inflation and relative prices is enough to counteract the effects of monetary policy switches in the US.
    Keywords: Monetary Policy; Markov-switching DSGE and Bayesian estimation; optimal monetary policy; international spillovers
    JEL: C3 E52 F3 F41 F42
    Date: 2017–09
  5. By: Hartmann, Philipp
    Abstract: Global or international liquidity has moved to centre stage in recent international policy, research and market discussions. Contrary to the approach of major international organisations, which focus particularly on cross-border credit, this paper discusses five dimensions of international liquidity that are all of interest to central banks and should be subject to appropriate surveillance. It describes how they have evolved before, during and after the financial crisis. No general shortage of liquidity is found for the recent past and diverse developments can be explained, in part, by a small number of factors. The paper also raises salient policy issues related to these international liquidity developments. For example, financial regulation needs to be designed in a way that preserves incentives for market-making in major international assets. Data need to be made available for properly analysing to which extent global collateral re-use "lubricates" the financial system and to which extent it may act as a conduit for contagion. Ways need to be found how soaring corporate cash hoarding can be brought back into real investment. International spillovers of unconventional monetary policies suggest revisiting the current consensus on international monetary policy coordination. As the economic recovery in advanced economies strengthens consolidating public finances may be a more sustainable approach to re-increasing the availability of liquid and safe international assets than the further issuance of sovereign bonds by large countries that have already high levels of debt.
    Keywords: Collateral; Financial market liquidity; funding liquidity; global financial cycle; international financial stability; international payments; international safe assets; liquidity hoarding; money supply; Unconventional Monetary Policy
    JEL: E42 E51 E52 F21 F32 F33 G15 G28
    Date: 2017–09
  6. By: YiLi Chien (Federal Reserve Bank of St. Louis); Hanno Lustig (Stanford Graduate School of Business); Kanda Naknoi (University of Connecticut)
    Abstract: Empirical moments of asset prices and exchange rates imply that pricing kernels have to be almost perfectly correlated across countries. If they are not, observed real exchange rates are too smooth to be consistent with high Sharpe ratios in asset markets. However, the cross-country correlation of macro fundamentals is far from perfect. We reconcile these empirical facts in a two-country stochastic growth model with heterogeneous trading technologies for households and a home bias in consumption. In our model, only a small fraction of households actively participate in international risk sharing by frequently trading domestic and foreign equities. These active traders, who induce high cross-country correlation to the pricing kernels, are the marginal investors in foreign exchange markets. In a calibrated version of our model, we show that this mechanism can quantitatively account for the excess smoothness of exchange rates in the presence of highly volatile pricing kernels and weakly correlated macro fundamentals.
    Keywords: asset pricing, market segmentation, exchange rate, international risk sharing
    JEL: G15 G12 F31 F10
    Date: 2017–09

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