nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒01‒08
eight papers chosen by
Martin Berka
University of Auckland

  1. Oil price shocks, monetary policy and current account imbalances within a currency union By Baas, Timo; Belke, Ansgar
  2. Dominant Currency Paradigm: A New Model for Small Open Economies By Camila Casas; Federico Diez; Gita Gopinath; Pierre-Olivier Gourinchas
  3. Financial Spillovers and Macroprudential Policies By Joshua Aizenman; Menzie D. Chinn; Hiro Ito
  4. Southern Europe's Institutional Decline By Ignacio Lopez, Jose; Mengus, Eric; Challe, Edouard
  5. Global Trade and the Dollar By Emine Boz; Gita Gopinath; Mikkel Plagborg-Møller
  6. Unconventional Policies and Exchange Rate Dynamics By Gustavo Adler; Ruy Lama; Juan Pablo Medina
  7. Global Liquidity Transmission to Emerging Market Economies, and Their Policy Responses By Woon Gyu Choi; Taesu Kang; Geun-Young Kim; Byongju Lee
  8. Inheritances and the Accumulation of Wealth in the Eurozone By Stefan Humer; Mathias Moser; Matthias Schnetzer

  1. By: Baas, Timo; Belke, Ansgar
    Abstract: For more than two decades now, current-account imbalances are a crucial issue in the international policy debate as they threaten the stability of the world economy. More recently, the government debt crisis of the European Union shows that internal current account imbalances inside a currency union may also add to these risks. Oil price fluctuations and a contracting monetary policy that reacts on oil prices, previously discussed to affect the current account may also be a threat to the currency union by changing internal imbalances. Therefore, in this paper, we analyze the impact of oil price shocks on current account imbalances within a currency union. Differences in institutions, especially labor market institutions and trade result in an asymmetric reaction to an otherwise symmetric shock. In this context, we show that oil price shocks can have a long-lasting impact on internal balances, as the exchange rate adjustment mechanism is not available. The common monetary policy authority, however, can reduce such effects by specifying an optimum monetary policy target. Nevertheless, we also show that there is no single best solution. CPI, core CPI or an asymmetric CPI target all come at a cost either regarding an increase in unemployment or increasing imbalances.
    Keywords: Current account deficit,Oil price shocks,DSGE models,Search and matching labor market,Monetary policy
    JEL: E32 F32 Q43
    Date: 2017
  2. By: Camila Casas; Federico Diez; Gita Gopinath; Pierre-Olivier Gourinchas
    Abstract: Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.
  3. By: Joshua Aizenman; Menzie D. Chinn; Hiro Ito
    Abstract: We investigate whether and to what extent macroprudential policies affect the financial link between the center economies (CEs, i.e., the U.S., Japan, and the Euro area), and the peripheral economies (PHs). We first estimate the correlation of the policy interest rates between the CEs and the PHs and use that as a measure of financial sensitivity. We then estimate the determinants of the estimated measure of financial sensitivity as a function of country-specific macroeconomic conditions and policies. The potential determinant of our focus is the extensity of macroprudential policies. From the estimation exercise, we find that a more extensive implementation of macroprudential policies would lead PHs to (re)gain monetary independence from the CEs when the CEs implement expansionary monetary policy; when PHs run current account deficit; when they hold lower levels of international reserves (IR); when their financial markets are relatively closed; when they are experiencing an increase in net portfolio flows; and when they are experiencing credit expansion.
    JEL: F4 F41 F42
    Date: 2017–12
  4. By: Ignacio Lopez, Jose; Mengus, Eric; Challe, Edouard
    Abstract: The run up to the euro currency initiated a period of capital inflows into southern European countries, i.e., Spain, Portugal, Italy and Greece. We document that those countries, and only them among OECD countries, concomitantly experienced a decline in the quality of their institutions. We confirm the joint pattern of capital inflows and institutional decline in a large panel of countries. We show theoretically that this joint pattern naturally follows from a "soft budget constraint" syndrome wherein persistently cheap external funding undermines incentives to maintain good institutions - understood here as the degree of government commitment not to support inefficient firms. Low institutional quality ultimately raises the share of inefficient firms, which lowers average productivity and raises productivity dispersion across firms - the typical pattern of productivity in southern Europe over the period under consideration.
    Keywords: TFP; Institutions; Current account
    Date: 2016–06–09
  5. By: Emine Boz; Gita Gopinath; Mikkel Plagborg-Møller
    Abstract: We document that the U.S. dollar exchange rate drives global trade prices and volumes. Using a newly constructed data set of bilateral price and volume indices for more than 2,500 country pairs, we establish the following facts: 1) The dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions. U.S. monetary policy induced dollar fluctuations have high pass-through into bilateral import prices. 2) Bilateral non-commodities terms of trade are essentially uncorrelated with bilateral exchange rates. 3) The strength of the U.S. dollar is a key predictor of rest-of-world aggregate trade volume and consumer/producer price inflation. A 1 percent U.S. dollar appreciation against all other currencies in the world predicts a 0.6–0.8 percent decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. 4) Using a novel Bayesian semiparametric hierarchical panel data model, we estimate that the importing country’s share of imports invoiced in dollars explains 15 percent of the variance of dollar pass-through/elasticity across country pairs. Our findings strongly support the dominant currency paradigm as opposed to the traditional Mundell-Fleming pricing paradigms.
    Date: 2017–11–13
  6. By: Gustavo Adler; Ruy Lama; Juan Pablo Medina
    Abstract: We study exchange rate dynamics under cooperative and self-oriented policies in a two-country DSGE model with unconventional monetary and exchange rate policies. The cooperative solution features a large exchange rate adjustment that cushions the impact of negative shocks and a moderate use of unconventional policy instruments. Self-oriented policies (Nash equilibrium), however, entail limited exchange rate movements and an aggressive use of unconventional policies in both countries. Our results highlight the role of international policy cooperation in allowing the exchange rate to play the traditional role of shock absorber.
    Keywords: Foreign exchange intervention;Quantitative Easing, International Policy Coordination, International Policy, Monetary Policy (Targets, Instruments, and Effects), Open Economy Macroeconomics, International Policy Coordination and Transmission, International Business Cycles
    Date: 2017–11–13
  7. By: Woon Gyu Choi; Taesu Kang; Geun-Young Kim; Byongju Lee
    Abstract: This paper distills and identifies global liquidity (GL) momenta from the macro-financial data of advanced economies through a factor model with sign restrictions as policy-driven, market-driven, and risk averseness factors. Using a panel factor-augmented VAR, we investigate responses of emerging market economies (EMEs) to GL shocks. A policy-driven liquidity increase boosts growth in EMEs, elevating stock prices and currency values, while a risk averseness rise has an opposite effect. A market-driven GL expansion boosts stock markets and lowers funding costs, promoting competitiveness and current account. Inflation targeting EMEs fare better than EMEs under alternative regimes with respect to macrofinancial volatility.
    Keywords: Global liquidity;Inflation targeting;Panel Factor-Augmented VAR, International Policy Coordination and Transmission
    Date: 2017–10–30
  8. By: Stefan Humer (Research Institute Economics of Inequality, WU Vienna); Mathias Moser (Research Institute Economics of Inequality and Institute for Economic Geography, WU Vienna); Matthias Schnetzer (Department of Economics, Vienna Chamber of Labor)
    Abstract: This paper empirically compares the contribution of the two major wealth accumulation factors-earned income and inheritances-to the within country net wealth position of Eurozone households with HFCS data. Using unconditional quantile regressions, we show the varying importance of earned income and inheritances at different parts of the per country distributions and compare them to Eurozone averages. The elasticities of both wealth sources are overly non-linear and display an inverted "U" shape pattern. Around the median household, an additional percentile in the income distribution corresponds to an increase in the net wealth distribution of as much as 0.5 percentiles, while an additional percentile in the inheritance distribution yields up to 1.3 percentiles. At the bottom of the wealth distribution, households have to climb less than two percentiles in the income distribution to compensate a one percentile increase in the inheritance distribution, whereas this ratio surges to almost four percentiles at the top tail and varies distinctively between different countries. These results emphasize the relative importance of inheritances versus income from employment for private wealth creation and question common perceptions of meritocracy.
    Keywords: Wealth distribution, household structure
    JEL: C21 D31
    Date: 2017–12

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