nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2017‒12‒18
eight papers chosen by
Martin Berka
University of Auckland

  1. Slow Moving Capital: Evidence from Global Equity Portfolios By Philippe Bacchetta
  3. Exchange rates of oil exporting countries and global oil price shocks: A nonlinear smooth-transition approach By Haug, Alfred A.; Basher, Syed Abul
  4. Reputation and Sovereign Default By Christopher Phelan; Manuel Amador
  5. Milton Friedman and the case for flexible exchange rates and monetary rules By Harris Dellas; George S. Tavlas
  6. International Investments and Current Account Imbalances: The Importance of Valuation Changes By Guido Baldi; Thore Schlaak; Björn Bremer
  7. Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America By Paulina Restrepo-Echavarria; Mark Wright; Lee Ohanian
  8. Consumer Goods Market Integration among Asia Pacific Economic Cooperation Member Economies: A PPP-Based Analysis By Moon, Seongman

  1. By: Philippe Bacchetta (University of Lausanne)
    Abstract: In this paper, we explore the implications of infrequent portfolio adjustment for international portfolios and asset prices in a two-country model. We focus on equity portfolios and estimate the model based on available data. For portfolio positions, we consider the U.S. versus the rest of the world and we use the estimates for U.S. assets and liabilities computed by Bertaut and Tryon (2007) and Bertaut and Judson (2014). We assume that infrequent portfolio investors face each period a constant probability p of adjusting their portfolio position. We then determine the endogenous response of asset prices and portfolios to three types of shocks. The estimated version of the model is able to match the dynamic behavior of portfolio position and excess returns when p is low.
    Date: 2017
  2. By: Jamel Saadaoui (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique, BETA - Bureau d'Economie Théorique et Appliquée - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique)
    Abstract: From the onset of the euro crisis to the Brexit vote, we have witnessed impressive reductions of current account imbalances in peripheral countries of the euro area. These reductions can be the result of either a compression of internal demand or an improvement in external competitiveness. In this paper, we compute exchange rate misalignments within the euro area to assess whether peripheral countries have managed to improve their external competitiveness. After controlling for the reduction of business cycle synchronization within the EMU, we find that peripheral countries have managed to reduce their exchange rate misalignments thanks to internal devaluations. To some extent, these favourable evolutions reflect improvements in external competitiveness. Nevertheless, these gains could only be temporary if peripheral countries do not improve their non-price competitiveness, their trade structures and their international specializations in the long run.
    Keywords: Internal Devaluation,Equilibrium Exchange Rate,External Competitiveness
    Date: 2017–11–11
  3. By: Haug, Alfred A.; Basher, Syed Abul
    Abstract: This paper considers logistic (asymmetric) and exponential (symmetric) smooth transition adjustments of real and nominal exchange rates for six major oil-exporting countries in response to different shocks affecting oil prices. Real exchange rate movements affect the terms of trade and hence may affect relative competitiveness. We detect no statistically significant non-linearities for the adjustment process of real exchange rate returns, be they asymmetric or symmetric, in response to oil supply shocks, idiosyncratic oil-market-specific shocks, and speculative (crude oil inventory) oil-market shocks. On the other hand, global aggregate demand shocks, which are shocks that do not directly originate in the oil market, have nonlinear asymmetric effects on real exchange rate returns for Canada, Mexico, Norway and Russia, and linear effects for the UK. These qualitative results mostly hold for nominal exchange rate returns as well. Exceptions are that linear effects are found for aggregate demand shocks for Brazil and for idiosyncratic shocks for Norway, whereas the aggregate demand shocks for the UK have nonlinear and asymmetric effects instead of linear ones.
    Keywords: Logistic and exponential smooth transition; oil price shocks; exchange rates
    JEL: F31 Q43
    Date: 2017–12–07
  4. By: Christopher Phelan (University of Minnesota); Manuel Amador (University of Minnesota and Federal Reserve Bank of Minneapolis)
    Abstract: This paper presents a continuous time model of sovereign debt. In it, a relatively impatient sovereign government's hidden type switches back and forth between a behavioral type which cannot default and follows a set rule governing its borrowing as a function of its current debt and the price at which it can issue additional bonds, and an optimizing type which can default on the country’s debt at any time. We show that in the unique Markov perfect equilibrium, the optimizing type mimics the behavioral type when borrowing, revealing its type only by defaulting on its debt at random times. The Markov perfect equilibrium (the solution to a simple pair of ordinary differential equations) displays positive gross issuances at all dates, constant net imports as long as there is a positive equilibrium probability the government is the optimizing type, and net debt repayment only by the behavioral type. For countries which have recently defaulted, the interest rate the country pays on its debt is a decreasing function of the amount of time since its last default, its total debt is an increasing function of the amount of time since its last default, and the yield curve on its debt is downward sloping. For countries which have not recently defaulted, interest rates are constant and yield curves are flat.
    Date: 2017
  5. By: Harris Dellas (University of Bern and Bank of Greece); George S. Tavlas (Bank of Greece and University of Leicester)
    Abstract: Managed currency without definite, stable, legislative rules is one of the most dangerous forms of "planning." A free enterprise economy can function only within a legal framework of rules; and no part of that framework is more important than the rules which define the monetary system. In the past those rules have been empty and inadequate; but there is no tolerable solution to be found in resort to the wisdom of "authorities." No liberal can contemplate with equanimity the prospect of an economy in which every investment and business venture is largely a speculation in the future actions of the Federal Reserve Board. [Henry Simons (1935, p. 558)]
    Keywords: exchange rate systems; monetary rules; Taylor Rule.
    JEL: F02 F33 E52
    Date: 2017–10
  6. By: Guido Baldi; Thore Schlaak; Björn Bremer
    Abstract: Global capital flows have strongly increased from the 1980s until the outbreak of the financial crisis. As a result of this development, Germany's foreign investment has risen to around 250 percent of gross domestic product while foreign investments in Germany have increased to about 200 percent of Germany’s gross domestic product. This positive difference between Germany’s assets and liabilities is a result of the country’s continuous current account surpluses, which represent net financial flows – the difference between outflows and inflows. Investments abroad offer investors the opportunity to diversify their savings and possibly generate higher returns than in Germany. In return, however, foreign investment also entails risks; fluctuations in price and exchange rates can lead to high losses. Potential value fluctuations on international investments are relevant for Germany. German policy advisors controversially discuss whether additional investment in domestic infrastructure or research and development would yield higher and less volatile returns than some of Germany’s foreign investments.
    Date: 2017
  7. By: Paulina Restrepo-Echavarria (Federal Reserve Bank of St Louis); Mark Wright (Federal Reserve Bank of Chicago); Lee Ohanian (University of California Los Angeles)
    Abstract: Since 1950, the economies of East Asia grew rapidly but received little international capital, while Latin America received considerable international capital even as their economies stagnated. The literature typically explains the failure of capital to flow to high growth regions as resulting from international capital market imperfections. This paper proposes a broader thesis that country-specific distortions, such as domestic labor and capital market distortions, also impact capital flows. We develop a DSGE model of Asia, Latin America, and the Rest of the World that features an open-economy business cycle accounting framework to measure these domestic and international distortions, and to quantify their contributions to international capital flows. We find that domestic distortions have been the predominant drivers of international capital flows, and that the general equilibrium effects of these distortions are very large. International capital market distortions also matter, but less so.
    Date: 2017
  8. By: Moon, Seongman (Chonbuk National University)
    Abstract: This paper examines persistent behavior of deviations from purchasing power parity (PPP) constructed using consumer price indices and nominal exchange rates for APEC member economies over the period of 1981-2015. In particular, we ask if these deviations tend to converge to their long run equilibrium value. For this, we consider three different sample periods of 1981-2015, 1997-2015, and 1981-1996. We find that the panel unit root test rejects the unit root hypothesis that a deviation from PPP does not converge to its long run value for the period of 1997-2015 but does not reject it for the other two periods. We then investigate how quickly this deviation converges to its long run value and find that a half-life of a deviation from PPP is 5.7 quarters, which is much quicker than the estimates of 3 to 5 years reported by previous studies. This result is consistent with the argument that globalization and advancement in transportation and information technology significantly contribute to lowering trade barriers among APEC member economies.
    Keywords: PPP; half-life; panel unit root tests; deviations from PPP; trade barriers
    JEL: F31 F41
    Date: 2017–12–10

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