nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒11‒12
eleven papers chosen by
Martin Berka
University of Auckland

  1. The Solution to the Feldstein-Horioka Puzzle By Horioka, Charles Yuji; Ford, Nicholas
  2. Real exchange rate misalignments in the euro area By Fidora, Michael; Giordano, Claire; Schmitz, Martin
  3. Equilibrium Exchange Rates and Misalignments: The Case of Homogenous Emerging Market Economies By Christian K. Tipoy; Marthinus C. Breitenbach; Mulatu F. Zerihun
  4. Recovery from Dutch Disease By Mardi Dungey; Renée Fry-McKibbin; Verity Todoroski; Vladimir Volkov
  5. Global and Domestic Modeling of Macroeconomic Shocks: A GVAR Analysis of Ireland By O'Grady, Michael; Rice, Jonathan; Walsh, Graeme
  6. Flow specific capital controls for emerging markets By Chris Garbers; Guangling Liu
  7. Unconventional Monetary Policy under Appreciation Pressure - The Role of Financial Frictions By Nicole Aregger; Jessica Leutert
  8. Financial and real shocks and the effectiveness of monetary and macroprudential policies in Latin American countries By Javier Garcia-Cicco; Markus Kirchner; Julio Carrillo; Diego Rodríguez; Fernando Perez; Rocío Gondo; Carlos Montoro; Roberto Chang
  9. What explains output recoveries in developing and emerging market economies after the global financial crisis? By Avendano, Rolando; Daude, Christian
  10. Are current accounts driven by competitiveness or asset prices? A synthetic model and an empirical test By Guschanski, Alexander; Stockhammer, Engelbert
  11. Fiscal policy transmission in a non-Ricardian model of a monetary union By Christoph Bierbrauer

  1. By: Horioka, Charles Yuji; Ford, Nicholas
    Abstract: The purpose of this paper is to set out a surprisingly simple solution to the Feldstein-Horioka Puzzle or Paradox, which is that even though global financial markets appear to be integrated, levels of saving and investment are correlated across countries because financial markets cannot, by themselves, achieve net transfers of financial capital. This is because net transfers of financial capital require the integration not only of financial markets but also of goods markets and because there are substantial frictions in goods markets (e.g., transport, marketing, and distribution costs, technical standards, certification procedures, tariffs and nontariffbarriers, etc.).
    Keywords: Capital flows, capital mobility, capital transfers, Feldstein-Horioka Paradox, Feldstein-Horioka Puzzle, financial market integration, goods market integration, interest rate parity, international capital flows, international capital mobility, investment, net capital transfers, Niehans model, real interest rate parity, saving, saving-investment correlations, trade frictions, F15, F21, F32, F36, G15
    Date: 2017–10–31
  2. By: Fidora, Michael; Giordano, Claire; Schmitz, Martin
    Abstract: Building upon a Behavioural Equilibrium Exchange Rate (BEER) model, estimated at a quarterly frequency since 1999 on a broad sample of 57 countries, this paper assesses whether both the size and the persistence of real effective exchange rate misalignments from the levels implied by economic fundamentals are affected by the adoption of a single currency. While real misalignments are found to be smaller in the euro area than in its main trading partners, they are also more persistent, although the reactivity of real exchange rates to past misalignments increased, and therefore the persistence decreased, after the global financial crisis. In the absence of the nominal adjustment channel, an improvement in the quality of regulation and institutions is found to reduce the persistence of real exchange rate misalignments, plausibly by removing real rigidities. JEL Classification: E24, E30, F00
    Keywords: equilibrium exchange rate, monetary union, real effective exchange rate, regulation
    Date: 2017–11
  3. By: Christian K. Tipoy; Marthinus C. Breitenbach; Mulatu F. Zerihun
    Abstract: We compute the exchange rate misalignment for a set of emerging economies between 1980 and 2013 using the behavioural equilibrium exchange rate definition. The real equilibrium exchange rate is constructed using a parsimonious model and estimators that are robust to cross-sectional independence and small sample size bias. We find that these countries tend to intervene to avoid real appreciation of their currencies following a rise in relative productivity, casting doubt on the Balassa-Samuelson effect. East-Asian countries have maintained their currencies at an artificially low level in order to remain competitive and boost economic growth these past years.
    Keywords: equilibrium exchange rate, panel cointegration, autoregressive distributed lag
    JEL: F31 C23
    Date: 2017–10
  4. By: Mardi Dungey; Renée Fry-McKibbin; Verity Todoroski; Vladimir Volkov
    Abstract: Dutch Disease is thought to have ongoing negative effects on resource rich open economies. There is little evidence on how economies recover. We document the Australian case in the aftermath of the commodities price boom resulting from high input demand from China. We show that where the boom is contained in an export-oriented, small-employment sector of the economy and driven by external demand rather than price shocks, the economy recovers to its equilibrium relatively quickly. To show this we add a new tool to the SVAR toolbox which enables us to assess the source of deviations in the observed outcomes from an empirical steady-state implied by the model.
    Keywords: Dutch Disease, Australia, China, SVAR, historical decomposition, empirical steady-state gap.
    JEL: C51 E32 F43
    Date: 2017–11
  5. By: O'Grady, Michael (Central Bank of Ireland); Rice, Jonathan (Central Bank of Ireland); Walsh, Graeme (Central Bank of Ireland)
    Abstract: This paper studies the effects of external macroeconomic shocks on Ireland. Using a weighting scheme based on international trade linkages, we apply a global vector autoregressive model (GVAR) to investigate the degree of shock transmission between Ireland and a number of advanced countries / regions. Constructing a global model of 25 countries over the 1980q1-2016q1 sample period, we examine responses to five distinct shocks: a US interest rate hike; a decline in UK GDP; a depreciation of UK exchange rates; a reduction in Chinese output; and a global economic slowdown. Results suggest that Ireland is relatively more exposed to shocks to the UK economy, than either the euro area or the US, while it is relatively more insulated to movements in oil prices.
    Keywords: Global VAR, macro-financial linkages, global spillovers
    JEL: E44 F41 C33
    Date: 2017–11
  6. By: Chris Garbers; Guangling Liu
    Abstract: This paper investigates the impact of capital controls on business cycle fluctuations and welfare. To perform this analysis, we deploy an asymmetric two country model that is subject to negative foreign interest rate shocks. The results show that both an inflow and outflow capital control are able to attenuate capital flow dynamics, but each control bears different implications for macroeconomic outcomes. Whilst the outflow capital control is associated with shock attenuation benefits, the inflow capital control is shown to amplify the impact of shocks. Easier capital control regimes enhance the attenuation and amplification properties associated with each capital control, whilst strict regimes do the opposite. Lastly, the analysis shows that the welfare effects of capital controls are agent dependent, and that society prefers the outflow capital control to the inflow capital control. Taken together, these results are indicative of the comparative desirability of capital controls imposed on the financial sector (outflows) as compared to the real sector (inflows).
    Keywords: Capital controls, Welfare, Wealth, DSGE, real business cycle, Financial intermediation
    JEL: E21 E32 E43 E44 E51 E52
    Date: 2017–10
  7. By: Nicole Aregger; Jessica Leutert
    Abstract: We build a two-country model with imperfect financial intermediation. Banks face limits to arbitrage which lead to positive excess returns in the investment markets and a risk premium in the international credit market. Gross capital flows affect the exchange rate since banks are balance sheet constrained and can only absorb additional fl ows on the international credit market if the exchange rate adjusts. Similarly, unconventional monetary policies such as foreign exchange interventions and credit easing infl uence asset prices in financial markets where banks are credit constrained. Within this framework, we study three external sources of appreciation pressure: Financial frictions in the foreign investment market, financial frictions in the international credit market and capital infl ow shocks. In the two latter cases, foreign exchange interventions can reverse the resulting exchange rate movements and misallocations of capital. Furthermore, under certain conditions, foreign exchange interventions and credit easing are substitutes since asset purchases in one market reduce the excess returns in both.
    Date: 2017–11
  8. By: Javier Garcia-Cicco; Markus Kirchner; Julio Carrillo; Diego Rodríguez; Fernando Perez; Rocío Gondo; Carlos Montoro; Roberto Chang
    Abstract: This work compares the impact of monetary and macroprudential policies on financial and real sectors in four Latin American countries: Chile, Colombia, Mexico and Peru, and explores the commonalities and differences in the reaction to shocks to both the financial and real sector. In order to do that, we estimate a New Keynesian small open economy model with frictions in the domestic financial intermediation sector and a commodity sector for each country. Results suggest that financial shocks are important drivers of output and investment fluctuations in the short run for most countries, but in the long run their contribution is small. Furthermore, we evaluate the ability of macroprudential policies to limit the impact on credit growth and its effect on real variables. In a scenario of tighter financial conditions, monetary policy becomes expansionary due to both lower inflation (given the exchange rate appreciation) and weaker output growth, and macroprudential policies further contribute to restoring credit and output growth. However, in the case of a negative commodity price shock, macroprudential policies are less effective but useful as a complement for the tightening of monetary policy. Higher inflation (due to the exchange rate depreciation) and higher policy rates lead to a contraction in output growth, but macroprudential policies could alleviate this by improving credit conditions.
    Keywords: central banking, monetary policy, macroprudential policy, financial frictions
    JEL: E52 F41 F47
    Date: 2017–10
  9. By: Avendano, Rolando; Daude, Christian
    Abstract: This paper presents a systematic assessment of the macroeconomic factors associated with differences in GDP dynamics in emerging markets in the aftermath of the global financial crisis. We implement a Bayesian Model Averaging approach to explore the drivers of economic resilience – measured by the output recoveries for a group of 40 emerging economies after 2008, which allows us to account for the uncertainty in the model selection of the relevant variables. Out of a large group of variables used in the literature on balance of payments crises and early warning indicators, we find that a reduced set of variables is systematically associated with output dynamics after the crisis. Countries with overvalued currencies, current account deficits and larger external liabilities before the global financial crisis exhibit systematically weaker output recoveries afterwards. These findings are robust to different definitions of output recovery, the distribution of priors and exclusion of potential outliers. There is also some evidence, but less systematic, that de facto financial openness, links to European banks, and trade openness had a negative impact on output recoveries.
    Keywords: Desarrollo, Economía, Investigación socioeconómica, Sector financiero,
    Date: 2017
  10. By: Guschanski, Alexander; Stockhammer, Engelbert
    Abstract: This paper analyses the emergence of current account imbalances as a result of the co-existence of trade flows and financial flows. The literature has tended to view these factors in isolation: Many post-Kaleckian models, as well as Net-saving approaches assume that financial flows will adjust to trade flows. Models focusing on financial crises feature a strong role for financial flows but ignore drivers of trade flows. Similarly, empirical analyses either ignore drivers of financial flows or insufficiently capture determinants of trade flows. The paper, first, proposes a simple macroeconomic framework of the current account which gives equal emphasis to trade flows, determined by price competitiveness, and financial flows, determined by asset prices. Second, we test a reduced form of the model for 28 OECD countries for the period 1971-2014. Our results indicate that cost competitiveness as well as asset prices play a role in the determination of current accounts, but asset prices have dominated in the last two decades.
    Keywords: current account, financial flows, competitiveness, asset prices,
    JEL: E12 F32 F41
    Date: 2017–10–28
  11. By: Christoph Bierbrauer (Hochschule Darmstadt)
    Abstract: We present an analytically tractable two-country New Open Economy Macroeconomics model of a currency union featuring an overlapping generations structure of the Blanchard (1985)-Yaari (1965) type. It enables us to study the transmission and spillover effects of a wider range of fiscal shocks in comparison to the standard model. We show that, depending on the financing decision of the government, fiscal policy measures can have very different effects on key macroeconomic variables such as consumption and output. Moreover, the spillovers of national fiscal policy depend on the composition of government spending, the type of the fiscal measure and the cross-country substitutability between goods.
    Keywords: Overlapping generations; New open economy macroeconomics; Public Debt; Decentralized fiscal policy; Monetary union
    JEL: E62 F33 F41 H31 H50 H63
    Date: 2017–10–29

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