nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒01‒15
eleven papers chosen by
Martin Berka
University of Auckland

  1. Fixed on flexible rethink exchange rate regimes after the Great Recession By Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot J.
  2. Corporate Overseas Debt Issuance in the Context of Global Liquidity Transmission By Huang, Anni; Kishor, N. Kundan
  3. Do Governments Drive Global Trade Imbalances? By Joseph E. Gagnon
  4. International Inflation Spillovers Through Input Linkages By Philip Sauré; Andrei Levchenko; Raphael Auer
  5. Intermediate Goods and Exchange Rate Disconnect By Craighead, William
  6. Commodity booms and busts in emerging economies By Drechsel, Thomas; Tenreyro, Silvana
  7. Advanced economies and emerging markets: dissecting the drivers of business cycle synchronization By Aikaterini
  8. IT Countries: A Breed Apart? the case of Exchange Rate Pass-Through By Antonia López-Villavicencio; Marc Pourroy
  9. Asset Prices and Macroeconomic Outcomes: A Survey By Claessens, Stijn; Kose, Ayhan
  10. The Rise of Dollar Credit in Emerging Market Economies and US Monetary Policy By Huang, Anni; Kishor, N. Kundan
  11. Inequality and Imbalances : a Monetary Union Agent-Based Model By Alberto Cardaci; Francesco Saraceno

  1. By: Corsetti, Giancarlo; Kuester, Keith; Müller, Gernot J.
    Abstract: We study how small open economies can escape from deflation and unemployment in a situation where the world economy is permanently depressed. Building on the framework of Eggertsson et al. (2016), we show that the transition to full employment and at-target inflation requires real and nominal depreciation of the exchange rate. However, because of adverse income and valuation effects from real depreciation, the escape can be beggar thy self, raising employment but actually lowering welfare. We show that as long as the economy remains financially open, domestic asset supply policies or reducing the effective lower bound on policy rates may be ineffective or even counterproductive. However, closing domestic capital markets does not necessarily enhance the monetary authorities’ ability to rescue the economy from stagnation.
    Keywords: External shock; Great Recession; Exchange rate; Zero lower bound; Exchange rate peg; Currency union; Fiscal Multiplier; Benign coincidence
    JEL: E31 F41 F42
    Date: 2017–07–28
  2. By: Huang, Anni; Kishor, N. Kundan
    Abstract: Given the rising importance of non-financial corporate overseas debt issuance in the overall international capital flow activities, this paper tries to understand the determinants of corporate overseas bond issuance in 32 countries during the sample period 1993-2015. The results suggest that the compression in risk premium in advanced economies has encouraged the corporates in emerging markets to borrow more from international bond markets. This effect is more prevalent in countries where policy makers impose tighter international capital control, so that corporates outside financial regulation serve as surrogate financial intermediaries at the border. Besides, corporates hold short-term assets in domestic currency as collateral for outstanding overseas debt, in expecting domestic currency appreciation, a behavior often phased as price arbitrage or carry trade position. Our results suggest a potential systematic shift in international financial risk transmission through corporate fixed-income markets and a possible external shock transmission channeled through the monetary policy spillover effect.
    Keywords: Corporate Overseas Debt, Global Liquidity, Carry Trade Hypothesis, Monetary Policy Spillover
    JEL: E44 F31 F32 F34 F36 G15
    Date: 2017–10–03
  3. By: Joseph E. Gagnon (Peterson Institute for International Economics)
    Abstract: This paper examines the extent to which government policies are responsible for the pattern of current account (trade) imbalances and, by implication, the extent to which such policies might be used to achieve the G-20 goal of reducing imbalances. Fiscal balances and foreign exchange intervention are the most important observable factors behind differences in current account balances across countries and over time. This finding is robust to alternative equation specifications, estimation techniques, and sample selections. The empirical results in this paper strongly suggest that G-20 countries (and others) have the necessary tools to achieve their stated goal of narrowing current account imbalances.
    Keywords: current account balance; fiscal balance; foreign exchange intervention
    JEL: F32 F41 F42
    Date: 2017–12
  4. By: Philip Sauré (Swiss National Bank); Andrei Levchenko (University of Michigan); Raphael Auer (Bank for International Settlements)
    Abstract: We document that observed international input-output linkages contribute substantially to synchronizing producer price inflation (PPI) across countries. Using a multi-country, industry- level dataset that combines information on PPI and exchange rates with international and domestic input-output linkages, we recover the underlying cost shocks that are propagated internationally via the global input-output network, thus generating the observed dynamics of PPI. We then compare the extent to which common global factors account for the variation in actual PPI and in the underlying cost shocks. Our main finding is that across a range of econometric tests, input-output linkages account for half of the global component of PPI inflation. We report three additional findings: (i) the results are similar when allowing for imperfect cost pass-through and demand complementarities; (ii) PPI synchronization across countries is driven primarily by common sectoral shocks and input-output linkages amplify co-movement primarily by propagating sectoral shocks; and (iii) the observed pattern of in- ternational input use preserves fat-tailed idiosyncratic shocks and thus leads to a fat-tailed distribution of inflation rates, i.e., periods of disinflation and high inflation.
    Date: 2017
  5. By: Craighead, William
    Abstract: This paper introduces intermediate goods trade into a two-country real business cycle model and examines its implications for real exchange rate behavior. Intermediate goods trade is shown to reduce “exchange rate disconnect” by increasing the volatility of the real exchange rate relative to output and weakening the link between the real exchange rate and output. Intermediate goods trade also raises international output correlations and reduces the correlation between the trade balance and output.
    Keywords: Exchange Rate Disconnect Intermediate Goods
    JEL: F31 F41
    Date: 2017–12–01
  6. By: Drechsel, Thomas; Tenreyro, Silvana
    Abstract: Emerging economies, particularly those dependent on commodity exports, are prone to highly disruptive economic cycles. This paper proposes a small open economy model for a net commodity exporter to quantitatively study the triggers of these cycles. The economy consists of two sectors, one of which produces commodities with prices subject to exogenous international fluctuations. These fluctuations affect both the competitiveness of the economy and its borrowing terms, as higher commodity prices are associated with lower spreads between the country’s borrowing rate and world interest rates. Both effects jointly result in strongly positive effects of commodity price increases on GDP, consumption and investment, and a negative effect on the total trade balance. Furthermore, they generate excess volatility of consumption over output and a large volatility of investment. The model structure nests various candidate sources of shocks proposed in previous work on emerging economy business cycles. Estimating the model on Argentine data, we find that the contribution of commodity price shocks to fluctuations in post-1950 output growth is in the order of 38%. In addition, commodity prices account for around 42% and 61% of the variation in consumption and investment growth, respectively. We find transitory productivity shocks to be an important driver of output fluctuations, exceeding the contribution of shocks to the trend, which is smaller, although not negligible.
    JEL: E13 E32 F43 O11 O16
    Date: 2017–08–21
  7. By: Aikaterini (Bank of Greece and University of East Anglia)
    Abstract: What are the divers of business cycle synchronization within and between advanced and emerging economies at the sector level? This question is addressed by analysing international co-movements of value added growth in a multi-sector dynamic factor model. The model contains a world factor, region factors, sector factors, country factors, and idiosyncratic components. The model is estimated using Bayesian methods for 9 disaggregated sectors in 5 developed economies (G5) and 19 emerging economies for the 1972-2009 period. The results suggest that, while there exists a common ‘regional business cycle’ in the G5, fluctuations in sectoral value added growth are dominated by country-specific factors in the emerging markets. Despite that, the international factor (the sum of world and sector factors) is more important than the region factor, suggesting that the emerging markets are more synchronized with the G5. A simple regression shows that (i) the world factor would be more important the larger the share of agriculture in output; (ii) in more open economies the sector factor is more important in explaining sectoral VA growth fluctuations; (iii) the region factors is more important the richer and the less volatile the economy. Finally, a comparison of the variance of sectoral value added growth accounted for by each factor from the pre- to the post-globalization period shows convergence of the business cycles within the G5 and EM, respectively. The changes in the contribution of the world, sector and region factor are due to changes in the importance of those factors within sectors. However, for the emerging markets, the fall in the importance of the country factors is dominated by changes in the structural composition of the economies. Therefore, the evolution of the structural composition in the emerging markets could be an important driver for more synchronised business cycles at the regional and international level.
    Keywords: dynamic factors; disaggregated business cycles; international co-movement; emerging markets
    JEL: C38 E32 F44
    Date: 2017–12
  8. By: Antonia López-Villavicencio (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Marc Pourroy (Faculté de Sciences Economiques - Université de Poitiers - Université de Poitiers)
    Abstract: This paper estimates the effects of two monetary policy strategies in the exchange rate pass-through (ERPT). To this end, we employ propensity score matching and consider the adoption of a target by a country as a treatment to find suitable counterfactuals to the actual targeters. By controlling for self-selection bias and endogeneity of the monetary policy regime, we show that inflation target has helped in reducing the ERPT, with older regimes more successful than younger ones. However, a de facto flexible exchange rate regime has not noticeable advantages to reduce the extent to which exchange rate fluctuations contribute to inflation instability.
    Keywords: exchange rate pass-through,inflation targeting,exchange rate regime,propensity score matching
    Date: 2017
  9. By: Claessens, Stijn; Kose, Ayhan
    Abstract: This paper surveys the literature on the linkages between asset prices and macroeconomic outcomes. It focuses on three major questions. First, what are the basic theoretical linkages between asset prices and macroeconomic outcomes? Second, what is the empirical evidence supporting these linkages? And third, what are the main challenges to the theoretical and empirical findings? The survey addresses these questions in the context of four major asset price categories: equity prices, house prices, exchange rates and interest rates, with a particular focus on their international dimensions. It also puts into perspective the evolution of the literature on the determinants of asset prices and their linkages with macroeconomic outcomes, and discusses possible future research directions.
    Keywords: asset prices; equity prices; frictions; imperfections; macro-financial linkages; real-financial linkages
    JEL: D53 E21 E32 E44 E51 F36 F44 G01 G10 G12 G14 G15 G21
    Date: 2017–11
  10. By: Huang, Anni; Kishor, N. Kundan
    Abstract: This paper examines the hypothesis that the boom in dollar credit in the emerging market economies is associated with excessively low interest rate in the US. For this purpose, we use a multivariate correlated unobserved component model that allows for correlation between shocks to dollar credit, interest rates and dollar index both in the short-run and in the long-run. In addition, it also provides us a quantitative estimate of the permanent and transitory movements in dollar credit in emerging markets, US interest rate and the dollar index. The results from this model do suggest that a temporary decline in interest rate and dollar index below their long-run levels are associated with an increase in dollar credit with a very high degree of negative correlation. The estimate of the cyclical component of the dollar credit in emerging market from our model captures the recent boom and bust in this market and compares favorably to a univariate trend-cycle decomposition benchmark.
    Keywords: Dollar Credit, Emerging Market Economies, Monetary Policy Spillover, Trend-Cycle Decomposition, State-Space Model, Kalman Filter
    JEL: E32 E51 E58 F32 F34 F36 G15
    Date: 2017–05–01
  11. By: Alberto Cardaci (Universita Cattolica des Sacro Cuore, Via Lodovico Necchi, Milan, Italie); Francesco Saraceno (OFCE, Sciences Po Paris, France, LUISS-SEP, Rome, Italie)
    Abstract: Our paper investigates the impact of rising inequality in a two-country macroeconomic model with an agent-based household sector characterised by peer effects in consumption. In particular, the model highlights the role of inequality in determining diverging balance of payments dynamics within a currency union. Inequality may drive the two countries into different growth patterns: where peer effects in consumption interact with higher credit availability, rising income inequality leads to the emergence of a debt-led growth. Where social norms determine weaker emulation and credit availability is lower, an export-led regime arises. Eventually, a crisis emerges endogenously due to the sudden-stop of capital ows from the net lending country, triggered by the excessive risk associated to the dramatic amount of private debt accumulated by households in the borrowing country. Monte Carlo simulations for a wide range of calibrations confirm the robustness of our results.
    Keywords: Inequality, Current Account, Currency Union, Agent-based model
    JEL: C63 D31 E21 F32 F43
    Date: 2017–12–12

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