nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒02‒26
fourteen papers chosen by
Martin Berka
University of Auckland

  1. International Capital Flow Pressures By Linda S. Goldberg; Signe Krogstrup
  2. Patterns of convergence (divergence) in the euro area: profitability versus cost and price indicators By Monica Amici; Emmanuele Bobbio; Roberto Torrini
  3. Secular drivers of the global real interest rate By Rachel, Lukasz; Smith, Thomas D
  4. Equilibrium Real Interest Rates, Secular Stagnation, and the Financial Cycle: Empirical Evidence for Euro-Area Member Countries By Belke, Ansgar; Klose, Jens
  5. Heterogeneity, Convergence and Imbalances in the Euro Area By Stephane Auray; Aurelien Eyquem
  6. The Paradox of Transfers: Distribution and the Dutch Disease By Richard Chisik; Nazanin Behzadan; ;
  7. Does Financial Sector Development Augment Cross Border Capital Flows? By Sen Gupta, Abhijit; Atri, Pragya
  8. Financial Vulnerability and Stabilization Policy in Commodity Exporting Emerging Economies By Jalali Naini, Ahmad Reza; Naderian, Mohammad Amin
  9. Using Online Prices for Measuring Real Consumption Across Countries By Alberto Cavallo; W. Erwin Diewert; Robert C. Feenstra; Robert Inklaar; Marcel P. Timmer
  10. Oil price shocks, monetary policy and current account imbalances within a currency union By Baas, Timo; Belke, Ansgar
  11. Can Trend Inflation Solve the Delayed Overshooting Puzzle? By Cooke, Dudley; Kara, Engin
  12. Household's Balance Sheets and the Effect of Fiscal Policy By Javier Andres; Jose E. Bosca; Javier Ferri; Cristina Fuentes-Albero
  13. The tale of two international phenomena: International migration and global imbalances. By Dramane Coulibaly; Blaise Gnimassoun; Valérie Mignon
  14. Current Account Dynamics under Information Rigidity and Imperfect Capital Mobility By Shibata, Akihisa; Shintani, Mototsugu; Tsuruga, Takayuki

  1. By: Linda S. Goldberg; Signe Krogstrup
    Abstract: This paper presents a new measure of capital flow pressures in the form of a recast Exchange Market Pressure index. The measure captures pressures that materialize in actual international capital flows as well as pressures that result in exchange rate adjustments. The formulation is theory-based, relying on balance of payments equilibrium conditions and international asset portfolio considerations. Based on the modified exchange market pressure index, the paper also proposes the Global Risk Response Index, which reflects the country-specific sensitivity of capital flow pressures to measures of global risk aversion. For a large sample of countries over time, we demonstrate time variation in the effects of global risk on exchange market pressures, the evolving importance of the global factor across types of countries, and the changing risk-on or risk-off status of currencies.
    JEL: F32 G11 G20
    Date: 2018–02
  2. By: Monica Amici (Bank of Italy); Emmanuele Bobbio (Bank of Italy); Roberto Torrini (Bank of Italy)
    Abstract: We analyse patterns of convergence (divergence) across euro-area countries in manufacturing since monetary union and find that not only costs, but also profitability have followed divergent paths. We further find that profitability developments only partially overlap with those of unit labour costs and producer prices, more extensively studied in the literature. Considering the largest countries, profitability in manufacturing in Germany and Spain has risen by comparison with non-tradables and with respect to France and Italy, where profit margins in manufacturing have declined and have lost ground with respect to the non-tradable sector. We show that these developments are correlated to the relative export performance of these countries. This correlation also holds in a two digit sector-level panel analysis, comprising all the euro-area countries that first entered the monetary union. This is consistent with the recent international trade literature, according to which successful exporting firms, which are more efficient or produce better products, also charge higher mark-ups. Turning to Italy, after a protracted decline both export shares and profit margins in manufacturing have improved in recent years, which is consistent with a recovery in external competitiveness.
    Keywords: euro area, profit shares, profit margins, export shares, unit labour costs
    JEL: D33 D4 J3 L1 F10
    Date: 2017–12
  3. By: Rachel, Lukasz; Smith, Thomas D
    Abstract: Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall. Although there is huge uncertainty, under plausible assumptions we think we can account for around 400 basis points of the 450 basis points fall. Our quantitative analysis highlights slowing global growth as one force that may have pushed down on real rates recently, but shifts in saving and investment preferences appear more important in explaining the long-term decline. We think the global saving schedule has shifted out in recent decades due to demographic forces, higher inequality and to a lesser extent the glut of precautionary saving by emerging markets. Meanwhile, desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and due to an increase in the spread between risk-free and actual interest rates. Moreover, most of these forces look set to persist and some may even build further. This suggests that the global neutral rate may remain low and perhaps settle at (or slightly below) 1% in the medium to long run. If true, this will have widespread implications for policymakers — not least in how to manage the business cycle if monetary policy is frequently constrained by the zero lower bound.
    Keywords: Equilibrium interest rate; long-term yields; global saving and investment; global trend growth.
    JEL: E10 E20 E40 E50 E60 F0 F41 F42 F47 J11 O30 O40
    Date: 2016–12
  4. By: Belke, Ansgar; Klose, Jens
    Abstract: Is the Euro area as a whole, or are individual Euro-area member countries facing a period of sustained lower economic growth, a phenomenon known as secular stagnation? We tackle this question by estimating equilibrium real interest rates and comparing them to actual real rates. Since the financial crisis has altered the degree of leverage in several European economies, we expand our model to incorporate the financial cycle. We estimate the model for the Euro area as a whole and for nine Euro-area member countries. Incorporating the financial cycle changes the estimated equilibrium real interest rates: For some Euro-area member countries, estimates of the equilibrium real interest rate are substantially higher than the standard estimates. In other cases, including our estimates for the Euro area as a whole, the estimated equilibrium real rates are slightly lower than without taking the financial cycle into account but are still higher than the actual rates. This indicates that real monetary policy rates were set even more systematically and consistently below (or not as far above) the natural real rate. Comparing the sequence of actual and equilibrium real rates, only Belgium, France, and Greece are likely to face a period of secular stagnation.
    Keywords: equilibrium real interest rate,Euro area,financial cycle,heterogeneity,monetary policy,secular stagnation
    JEL: E43 C32
    Date: 2018
  5. By: Stephane Auray (CREST;ENSAI); Aurelien Eyquem (Université Lumière Lyon 2; GATE L-SE)
    Abstract: The inception of the euro allowed countries from the periphery to experience a large fall in the cost of borrowing. Lower nominal rates were only partially o?set by lower in?ation rates. We rationalize this real interest rate reversal using a two-region model of a monetary union where, consistently with real interest rate data, discount factors are initially heterogeneous, leading the periphery to be borrowing-constrained. We model the inception of the euro as a partial convergence process in in?ation rates and a slow rise in the discount factor of the periphery, relaxing the borrowing constraint. This simple set-up accounts for the bulk of post-euro ?uctuations in both regions. In particular, it replicates very well the observed joint dynamics of current accounts and terms of trade
    Keywords: Monetary union; in?ation convergence; current account imbalances; borrowing constraints
    JEL: E32 E52 F32 F41
    Date: 2017–01–11
  6. By: Richard Chisik (Department of Economics, Ryerson University, Toronto, Canada); Nazanin Behzadan (Department of Economics, Ryerson University, Toronto, Canada); ;
    Abstract: Abstract In this paper we show that an important determinant of a foreign transfer generating a Dutch disease effect is the income of the recipient. The marginal propensity to consume luxury services is larger for wealthier recipients who are more likely to receive the benefits of foreign aid than they are to receive remittances. In a three good model of international trade with production we show that foreign aid can generate a Dutch disease and remittances can foster economic growth. We empirically verify these hypotheses with data from a panel of data covering the years 1991-2009 while dealing with the issues of omitted variable bias and possible endogeneity of remittances.
    Date: 2018–02
  7. By: Sen Gupta, Abhijit; Atri, Pragya
    Abstract: The sharp increase in volatility of capital flows in recent years has resulted in many countries altering the regulations governing the ow of foreign capital only to find such changes having a limited impact. We postulate that one reason for the limited effectiveness of such changes in regulations is the level of financial sector development in the country. As a country enhances its level of financial sector development, it also develops more and more sophisticated financial instruments. The more advanced the domestic financial instruments are, and the deeper is the integration of the domestic financial markets with the world markets, the greater is the likelihood of developing strategies to bypass capital account management measures. In this paper, we undertake various empirical techniques to identify the impact of financial sector development on capital flows, accounting for regulatory regime. The empirical results indicate that there is a threshold effect in the financial sector development capital flow relationship. In particular, financial sector development augments greater integration with global capital flows only above a threshold level. Below the threshold level we find financial development reduces the extent of integration with global capital markets.
    Keywords: Capital Flows, Financial Sector Development, Macroeconomic Management
    JEL: E52 F36 F41
    Date: 2017–12
  8. By: Jalali Naini, Ahmad Reza; Naderian, Mohammad Amin
    Abstract: This paper develops a new Keynesian DSGE model compatible with the structural characteristics of commodity exporting developing economies (financial vulnerability, relatively high pass-through rates, procyclical fiscal policy, and high terms of trade volatility) to compare the performance of alternative policy regimes, namely flexible domestic inflation targeting, flexible consumer price index inflation targeting, and the real exchange rate targeting. Evaluation of the above alternative policy regimes and relative stability of key macroeconomic variables are conducted through an optimal Ramsey policy method. The policy evaluation results based both on stabilization and welfare measures obtained for the case of Iran imply that for the developing commodity (oil) exporting economies stabilization with a broader inflation targeting framework in which the real exchange rate is also targeted is the superior policy regime. Optimality of the alternative policy regimes and their rank are sensitive to the degree of financial vulnerability. Financial vulnerability in this model explains why departure from floating exchange rate in an inflation targeting framework is the appropriate policy and not merely a “fear”. As the degree of financial development increases sufficiently, the standard flexible inflation targeting becomes the superior policy regime. A policy rule to weaken procyclicality of fiscal policy further enhances the welfare performance of this regime.
    Keywords: Financial vulnerability; inflation targeting; fear of floating; Ramsey method.
    JEL: E52
    Date: 2017–08–01
  9. By: Alberto Cavallo; W. Erwin Diewert; Robert C. Feenstra; Robert Inklaar; Marcel P. Timmer
    Abstract: We show that online prices can be used to construct quarterly purchasing power parities (PPPs) with a closely-matched set of goods and identical methodologies in a variety of developed and developing countries. Our results are close to those reported by the International Comparisons Program (ICP) in 2011 and the OECD in 2014, and can be used to obtain more up-to-date estimates of real consumption across countries without the need for consumer price index extrapolations. We discuss advantages and limitations associated with the use of online prices for PPs, including issues of representativeness and limited coverage of product categories and countries.
    JEL: E3 E31 F0 F41 O47
    Date: 2018–02
  10. 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
  11. By: Cooke, Dudley (University of Exeter); Kara, Engin (Cardiff University)
    Abstract: We develop an open economy New Keynesian model with heterogeneity in price stickiness and positive trend inflation. The main insight of our analysis is that, in the presence of heterogeneity in price stickiness, there is a strong link between trend inflation and the timing of the peak response of the real exchange rate to a monetary policy shock. Without trend inflation, the real exchange rate peaks almost immediately. With trend inflation set at historical values, the peak occurs at around 2 years. Delayed overshooting is a consequence of the interaction between heterogeneity in price stickiness and trend inflation.
    JEL: E52 F41 F44
    Date: 2018–01–01
  12. By: Javier Andres; Jose E. Bosca; Javier Ferri; Cristina Fuentes-Albero
    Abstract: Using the Panel Survey of Income Dynamics, we identify six household types as a function of their balance sheet composition. Since 1999, there has been a decline in the share of patient households and an increase in the share of impatient households with negative wealth. Using a DSGE model with search and matching frictions, we explore how changes in the distribution of households affect the transmission of government spending shocks. We show that the relative share of households in the left tail of the wealth distribution plays a key role in the aggregate marginal propensity to consume, the magnitude of the fiscal multipliers, and the distributional consequences of fiscal shocks. While the output and consumption multipliers are positively correlated with the share of households with negative wealth, the size of the employment multiplier is negatively correlated. For calibrations based on the empirical household weights after the Great Recession, our model delivers jobless fiscal expansions.
    Keywords: Fiscal policy ; Panel Survey of Income Dynamics ; Heterogeneity ; Household balance sheet ; Search and matching
    JEL: E21 E62
    Date: 2018–02–08
  13. By: Dramane Coulibaly; Blaise Gnimassoun; Valérie Mignon
    Abstract: Following the dynamics of globalization, international migration has increased dramatically since the 1990s. Given that these migrations may obscure the natural demographic structure of nations, they are likely to explain a significant part of global imbalances. This paper tackles this issue by investigating the role played by international migration in the dynamics of global imbalances. To this end, we rely on an overlapping generations model to derive the theoretical relationship between international migration and current account position. Through a series of robust estimates, we empirically investigate this relationship by relying on a panel of 157 developed and developing countries over the period 1990-2014. Our results point to substantial effects of international migration. Specifically, we show that an increase in migration improves national savings and the current account balance in the destination country, while it has opposite impacts in the origin country. These effects are particularly pronounced in developing economies, explaining the structural current account deficits that most of them face.
    Keywords: International migration, current account, global imbalances, remittances.
    JEL: F22 F32 O55 C33
    Date: 2018
  14. By: Shibata, Akihisa (Kyoto University); Shintani, Mototsugu (University of Tokyo); Tsuruga, Takayuki (Osaka University)
    Abstract: The current account in developed countries is highly persistent and volatile in comparison to output growth. The standard intertemporal current account model with rational expectations (RE) fails to account for the observed current account dynamics together with persistent changes in consumption. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for persistent changes in consumption, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income and infrequently adjust their consumption. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility almost fully explains current account dynamics and the persistence of changes in consumption, if high degrees of information rigidity and imperfect capital mobility are taken into account.
    JEL: E21 F21 F32 F41
    Date: 2018–01–01

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