nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒01‒29
eight papers chosen by
Martin Berka
University of Auckland

  1. Welfare Costs of Oil Shocks By Amir Yaron; Steffen Hitzemann
  2. Sovereign Risk Contagion By Cristina Arellano; Yan Bai; Sandra Lizarazo
  3. Optimal Monetary and Fiscal Policy with Migration in a Currency Union By Pedro, Gomis-Porqueras; Cathy, Zhang
  4. International Spillovers of (Un)Conventional Monetary Policy: The Effect of the ECB and US Fed on Non-Euro EU Countries By Jan Hajek; Roman Horvath
  5. Global Spillover Effects of US Uncertainty By Bhattarai, Saroj; Chatterjee, Arpita; Park, Woong Yong
  6. Finance and synchronization By Cesa-Bianchi, Ambrogio
  7. Current account dynamics and the real exchange rate: disentangling the evidence By Matthieu Bussiere; Aikaterini Karadimitropoulou; Miguel A. Leon-Ledesma
  8. Global imbalances from a stock perspective By Enrique Alberola; Ángel Estrada; Francesca Viani

  1. By: Amir Yaron (University of Pennsylvania); Steffen Hitzemann (The Ohio State University)
    Abstract: This paper investigates the costs of oil shocks for the economy's welfare. Using a VECM, we empirically show that domestic US oil production shocks only have a weak and temporary impact on macroeconomic variables, while the effect of global oil price shocks is persistent and economically and statistically significant. We rationalize these findings within a calibrated two-sector model in which oil is an input factor for industrial production and also part of the household's consumption bundle. Based on the model, we show that oil shocks are associated with large welfare costs for oil-importing economies. Our framework enables several experiments regarding the welfare implications of a reduced oil share in production and consumption, the strategic petroleum reserve, and technological innovations such as fracking.
    Date: 2017
  2. By: Cristina Arellano; Yan Bai; Sandra Lizarazo
    Abstract: We develop a theory of sovereign risk contagion based on financial links. In our multi-country model, sovereign bond spreads comove because default in one country can trigger default in other countries. Countries are linked because they borrow, default, and renegotiate with common lenders, and the bond price and recovery schedules for each country depend on the choices of other countries. A foreign default increases the lenders’ pricing kernel, which makes home borrowing more expensive and can induce a home default. Countries also default together because by doing so they can renegotiate the debt simultaneously and pay lower recoveries. We apply our model to the 2012 debt crises of Italy and Spain and show that it can replicate the time path of spreads during the crises. In a counterfactual exercise, we find that the debt crisis in Spain (Italy) can account for one-half (one-third) of the increase in the bond spreads of Italy (Spain).
    JEL: F3 G01
    Date: 2017–11
  3. By: Pedro, Gomis-Porqueras; Cathy, Zhang
    Abstract: We develop an open economy model of a currency union with frictional goods markets and costly migration to study optimal monetary and fiscal policy for the union. Households finance consump- tion with a common currency and can migrate across regions given regional differences in goods market characteristics and microstructure. Equilibrium is generically inefficient due to regional spillovers from migration. While monetary policy alone cannot correct this distortion, fiscal policy can help by taxing or subsidizing at the regional level. When households of only one region can migrate, optimal policy entails a deviation from the Friedman rule and a production subsidy (tax) if there is underinvestment (overinvestment) in migration. Optimal policy when households from both region can migrate is the Friedman rule and zero taxes in both regions.
    Keywords: currency unions, costly migration, search frictions, optimal monetary and fiscal policy
    JEL: D8 E4
    Date: 2018–01–07
  4. By: Jan Hajek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: We estimate a global vector autoregression model to examine the effects of euro area and US monetary policy stances, together with the effect of euro area consumer prices, on economic activity and prices in non-euro EU countries using monthly data from 2001-2016. Along with some standard macroeconomic variables, our model contains measures of the shadow monetary policy rate to address the zero lower bound and the implementation of unconventional monetary policy by the European Central Bank and US Federal Reserve. We find that these monetary shocks have the expected qualitative effects but their magnitude differs across countries, with Southeastern EU economies being less affected than their peers in Central Europe. Euro area monetary shocks have greater effects than those that emanate from the US. We also find certain evidence that the effects of unconventional monetary policy measures are weaker than those of conventional measures. The spillovers of euro area price shocks to non-euro EU countries are limited, suggesting that the law of one price materializes slowly.
    Keywords: International spillovers, monetary policy, global VAR, shadow rate
    JEL: E52 E58
    Date: 2017–09
  5. By: Bhattarai, Saroj (University of Texas at Austin); Chatterjee, Arpita (University of New South Wales); Park, Woong Yong (Seoul National University)
    Abstract: We study spillover effects of US uncertainty fluctuations using panel data from fifteen emerging market economies (EMEs). A US uncertainty shock negatively affects EME stock prices and exchange rates, raises EME country spreads, and leads to capital outflows from them. Moreover, it decreases EME output, while increasing their consumer prices and net exports. The negative effects on output, exchange rates, and stock prices are weaker, but the effects on capital and trade flows stronger, for South American countries compared to other EMEs. We present a model of a small open economy that faces an external shock to interpret our findings.
    JEL: C33 E44 E52 E58 F32 F41
    Date: 2017–11–01
  6. By: Cesa-Bianchi, Ambrogio
    Abstract: In the workhorse model of international real business cycles, financial integration exacerbates the cycle asymmetry created by country-specific supply shocks. The prediction is identical in response to purely common shocks in the same model augmented with simple country heterogeneity (e.g., where depreciation rates or factor shares are different across countries). This happens because common shocks have heterogeneous consequences on the marginal products of capital across countries, which triggers international investment. In the data, filtering out common shocks requires therefore allowing for country-specific loadings. We show that finance and synchronization correlate negatively in response to such common shocks, consistent with previous findings. But fi- nance and synchronization correlate non-negatively, almost always positively, in response to purely country-specific shocks.
    Keywords: Stochastic Discount Factor; Vector Autoregression; Shocks; Technology News; Monetary Policy; Cross-section; Stock Returns; Bond Returns
    JEL: E32 F15 F36 G21 G28
    Date: 2016–04–03
  7. By: Matthieu Bussiere (Banque de France); Aikaterini Karadimitropoulou (Bank of Greece and University of East Anglia); Miguel A. Leon-Ledesma (University of Kent)
    Abstract: We study the main shocks driving current account fluctuations for the G6 economies. Our theoretical framework features a standard two-goods inter-temporal model, which is specifically designed to uncover the role of permanent and temporary output shocks and the relation between the real exchange rate and the current account. We build a SVAR model including the world real interest rate, net output, the real exchange rate, and the current account and identify four structural shocks. Our results suggest four main conclusions: i) there is substantial support for the two-good intertemporal model with time-varying interest rate, since both external supply and preference shocks account for an important proportion of current account fluctuations; ii) temporary domestic shocks account for a large proportion of current account fluctuations, but the excess response of the current account is less pronounced than in previous studies; iii) our results alleviate the previous puzzle in the literature that a shock that explains little about net output changes can explain a large proportion of current account changes; iv) the nature of the shock matters to shape the relationship between the current account and the real exchange rate, which explains why is it difficult to understand the role of the real exchange rate for current account fluctuations.
    Keywords: Current account; real exchange rate; two-good intertemporal model; SVAR
    JEL: F32 F41
    Date: 2017–12
  8. By: Enrique Alberola (Bank for International Settlements); Ángel Estrada (Banco de España); Francesca Viani (Banco de España)
    Abstract: After the recent crisis, a reduction was observed in global current account (“flow”) imbalances. Even so, global disequilibria as measured in terms of countries’ net foreign assets (“stock imbalances”) kept increasing. This paper discusses whether stock imbalances have a stabilising or destabilising impact on countries’ accumulation of external wealth. That is, do creditor economies, by virtue of their positive stock of net foreign assets, keep accumulating –everything else equal– external wealth? Do debtor countries, due to their negative net foreign assets position, keep accumulating external debt? Our results show that in debtor economies the existing stock of net debt helps to limit current account deficits, thus halting future debt accumulation. In creditor countries, however, the positive stock of net foreign assets contributes –everything else equal– to increase future current account surpluses, potentially leading to destabilising dynamics in wealth accumulation. This asymmetry between creditors and debtors holds in spite of the stabilising impact that net foreign assets have on the trade balance of creditor countries through real exchange rate fluctuations, and might have major implications for global trade and growth.
    Keywords: global imbalances, current account, international investment position, external debt, growth
    JEL: F1 F32
    Date: 2017–11

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