nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒11‒05
eight papers chosen by
Martin Berka
University of Auckland

  1. Monetary Policy in the Small Open Economy with Market Segmentation By Shim, Jae-Hun
  2. Monetary policy transmission with two exchange rates and a single currency : The Chinese experience By Qing, He; Korhonen, Iikka; Zongxin, Qian
  3. Financial Frictions in the Small Open Economy By Shim, Jae-Hun
  4. International Financial Market Integration, Asset Compositions, and the Falling Exchange Rate Pass-Through By Almira Enders; Zeno Enders; Mathias Hoffmann
  5. The Dutch Disease in Reverse: Iceland's Natural Experiment By Thorvaldur Gylfason; Gylfi Zoega
  6. Vocational Education, Manufacturing, and Income Distribution: International Evidence and Case Studies By Joshua Aizenman; Yothin Jinjarak; Nam Ngo; Ilan Noy
  7. The Center and the Periphery: Two Hundred Years of International Borrowing Cycles By Kaminsky, Graciela
  8. Industrialisation and the Big Push in a Global Economy By Udo Kreickemeier; Jens Wrona

  1. By: Shim, Jae-Hun
    Date: 2016–09
  2. By: Qing, He; Korhonen, Iikka; Zongxin, Qian
    Abstract: In emerging market economies, transmission of monetary policy through the foreign exchange market is complicated by the coexistence of financial restrictions and arbitrages. Using China as an example, we show that the coexistence of exchange rate interventions, capital controls and an on-shore-offshore exchange rate differential makes the long run equilibrium in the currency market nonlinear. Disturbances to this nonlinear long run equilibrium could offset the impact of monetary policy actions on domestic price stability. Omitting such nonlinearity leads to biased inference on the effectiveness of monetary policy.
    JEL: E52 F31 F40
    Date: 2017–10–21
  3. By: Shim, Jae-Hun
    Abstract: This paper introduces a global banking system in a small open economy DSGE model with financialfrictions. The model features global relative price adjustments with incomplete asset market. Three mainfindings stand out. Firstly, foreign financial shocks capture negative spillovers from foreign country ina global financial crisis. We show that country differences in the severity of the shocks depend on thedegree of trade openness and banking system stability. Secondly, credit policy could be more powerfulthan monetary policy to alleviate foreign financial shocks since an expansionary monetary policy andalternative policy rules are not a sufficient tool in the global financial crisis. In particular, credit policybased on international credit spread outperforms credit policy based on domestic credit spread since thelatter leads to “excess smoothness” in the real exchange rate. Lastly, foreign credit policy has a negligibleinfluence on domestic welfare so that the small open economy can effectively reduce welfare losses onlyif the central bank in the economy injects credit.
    Date: 2016–06
  4. By: Almira Enders; Zeno Enders; Mathias Hoffmann
    Abstract: This paper provides an explanation for the observed decline of the exchange rate pass-through into import prices by modeling the effects of financial market integration on the optimal choice of the pricing currency in the context of rigid nominal goods prices. Contrary to previous literature, we take the interdependence of this decision with the optimal portfolio choice of internationally traded financial assets explicitly into account. In particular, price setters move towards more local-currency pricing and portfolios include more foreign debt assets following increased financial integration. Both predictions are in line with novel empirical evidence.
    Keywords: exchange rate pass-through, financial integration, portfolio home bias, international price setting
    JEL: F41 F36 F31
    Date: 2017
  5. By: Thorvaldur Gylfason; Gylfi Zoega
    Abstract: For a long time, abundant natural resources brought Iceland a high and volatile real exchange rate with adverse effects on manufacturing and services. During 2003-2008, another national treasure, the sovereign’s AAA rating, was used by privatized banks to attract foreign capital, elevating the real exchange rate even further. The financial collapse and the associated collapse of the currency in 2008 left the country with a large foreign debt which offset some of the effect of the natural resources on the real exchange rate. In effect, this was the Dutch disease in reverse as witnessed, in particular, by a massive increase in the number of tourists following the financial collapse. This paper discusses the behavior of the exchange rate of the Icelandic króna before and after 2008 as well as its relationship to natural resources, capital flows, output, exports and imports, including tourism.
    Keywords: natural resource curse, Dutch disease, financial crisis
    JEL: F41 O23 O33
    Date: 2017
  6. By: Joshua Aizenman; Yothin Jinjarak; Nam Ngo; Ilan Noy
    Abstract: Economic integration has brought about not only benefits and opportunities but also required adjustment, especially for the youth entering the labor force. The lower growth rates characterizing the post Global Financial Crisis era and the concerns about income inequality put to the fore the degree that better targeted investment in human capital may ameliorate the challenges facing the working poor. Using cross-country data, we find the association between the income shares of the working poor, dependence on manufacturing sector, and the availability of vocational education. Conditioning on tertiary educational attainment, improved access to better vocational education will probably contribute more than large increase in regular college attainment. Comparing the US to Germany suggests that pushing more students to BA granting colleges may no longer be the most efficient way to deal with the challenges caused by the decline in manufacturing employment affecting in particular lower-income households. We also note that a tracking of technical training and educational budget, shown in the case of Vietnam in comparison to Thailand, as well as government subsidies for reskilling of labor force throughout their career in Singapore, is a potential explanation for their relative manufacturing competitiveness.
    JEL: F15 F21 F4 F41 F43
    Date: 2017–10
  7. By: Kaminsky, Graciela
    Abstract: A common belief in both academic and policy circles is that capital flows to the emerging periphery are excessive and ending in crises. One of the most frequently mentioned culprits is the cycles of monetary easing and tightening in the financial center. Also, many focus on the role of crises in the financial center, pointing to excess international borrowing predating crises in the financial center and global retrenchment in capital flows in its aftermath. I re-examine these views using a newly-constructed database on capital flows spanning two hundred years. Extending the study of capital flows to the first episode of financial globalization has two major advantages: During this episode, monetary policy in the financial center is constrained by the adherence to the Gold Standard, thus providing a benchmark for capital flow cycles in the absence of an active role of central banks in the financial centers. Second, panics in the financial center are rare disasters that need to be examined in a longer historical episode. I find that boom-bust capital flow cycles in the periphery are milder in the second episode of financial globalization when the financial center follows a cyclical monetary policy. Also, cyclical monetary policy in the financial center is far more pronounced in times of crises in the financial center, cutting short capital flow bonanzas in the periphery and injecting liquidity in the aftermath of the crisis.
    Keywords: International borrowing cycles, systemic and idiosyncratic capital flow bonanzas
    JEL: F3 F30 F34
    Date: 2017–10–22
  8. By: Udo Kreickemeier; Jens Wrona
    Abstract: In their famous paper on the “Big Push†, Murphy, Shleifer, and Vishny (1989) show how the combination of increasing returns to scale at the firm level and pecuniary externalities can give rise to a poverty trap, thereby formalising an old idea due to Rosenstein-Rodan (1943). We develop in this paper an oligopoly model of the Big Push that is very close in spirit to the Murphy-Shleifer-Vishny (MSV) model, but in contrast to the MSV model it is easily extended to the case of an economy that is open to international trade. Having a workable open-economy framework allows us to address the question whether globalization makes it easier or harder for a country to escape from a poverty trap. Our model gives a definite answer to this question: Globalisation makes it harder to escape from a poverty trap since the adoption of the modern technology at the firm level is impeded by tougher competition in the open economy.
    Keywords: poverty traps, multiple equilibria, international trade, technology upgrading, general oligopolistic equilibrium
    JEL: F12 O14 F43
    Date: 2017

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