nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒03‒05
ten papers chosen by
Martin Berka
University of Auckland

  1. One Money, Many Markets - A Factor Model Approach to Monetary Policy in the Euro Area with High-Frequency Identification By Corsetti, G.; Duarte, J. B.; Mann, S.
  2. The Macroeconomic Effects of Exchange Rate Movements By Pablo Anaya; Stefan Hasenclever
  3. Exchange Rate Movements, Firm-Level Exports and Heterogeneity By A. Berthou; E. Dhyne
  4. Openness and Productitvity of the Swiss Economy By Föllmi, Reto; Fuest, Angela; an de Meulen, Philipp; Micheli, Martin; Schmidt, Thorsten; Zwick, Lisa
  5. Forward Guidance and the Exchange Rate By Jordi Galí
  6. Coherence of Business Cycles and Economic Shocks between Croatia and Euro Area Member States By Karlo Kotarac; Davor Kunovac; Rafael Ravnik
  7. A New Wave of ECB’s Unconventional Monetary Policies: Domestic Impact and Spillovers By Richard Varghese; Yuanyan Sophia Zhang
  8. On the origin of current account deficits in the Euro area periphery: A DSGE perspective By Christoph Zwick
  9. Boom-and-Bust Cycles in Emerging Markets: How Important is the Exchange Rate? By Pierre Siklos
  10. Asset Price Spillovers From Unconventional Monetary Policy: A Global Empirical Perspective By Domenico Lombardi, Pierre Siklos, Samantha St. Amand

  1. By: Corsetti, G.; Duarte, J. B.; Mann, S.
    Abstract: We reconsider the effects of common monetary policy shocks across countries in the euro area, using a data-rich factor model and identifying shocks with high-frequency surprises around policy announcements. We show that the degree of heterogeneity in the response to shocks, while being low in financial variables and output, is significant in consumption, consumer prices and macro variables related to the labour and housing markets. Mirroring country-specific institutional and market differences, we find that home ownership rates are significantly correlated with the strength of the housing channel in monetary policy transmission. We document a high dispersion in the response to shocks of house prices and rents and show that, similar to responses in the US, these variables tend to move in different directions.
    Keywords: Monetary Policy, High-Frequency Identification, Monetary Union, Labour Market, Housing Market.
    JEL: E21 E31 E44 E52 F44
    Date: 2018–02–22
  2. By: Pablo Anaya; Stefan Hasenclever
    Abstract: The macroeconomic effects of exchange rate movements have been subject to an extensive debate in international economics. Traditionally, much of the discussion was focused on the relation between the effective exchange rate and the trade balance. However, the process of financial globalization has led to a sharp increase in foreign asset and liability positions across countries and also to a greater dispersion in foreign currency positions, with many countries being either large net creditors or net debtors in foreign currency. This has shifted the focus of the discussion from the trade balance to the external balance sheets of countries. This Roundup provides a brief overview of the literature on the macroeconomic impact of exchange rate movements.
    Date: 2018
  3. By: A. Berthou; E. Dhyne
    Abstract: This paper provides an estimation of the reaction of firm-level exports consecutive to real exchange rate movements, the exchange rate elasticity of exports. Following recent theoretical works emphasizing the role played by firm heterogeneity, we test in particular how the exchange rate elasticity may be affected by firm-level productivity, and how the heterogeneous reaction of different firms may contribute to shape the aggregate reaction of countries' exports. The analysis relies on a unique cross-country micro-based dataset of exporters available for 11 European countries (2001-2011), which details in particular information about firms' productivity and export performance. Our results show that while the average exchange rate elasticity across firms is quite weak, it is also highly heterogeneous. The least productive firms within each country and sector tend to react more to real exchange rate movements than the most productive firms. This weak reaction of highly productive and large exporters tends to reduce the macroeconomic exchangerate elasticity in all countries. Cross-country differences in the shape of the productivity distribution among exporters have a strong influence on the macroeconomic exchange rate elasticity: countries populated with a higher density of low productive firms tend to respond more to exchange rate movements in terms of aggregate exports than countries populated with highlyproductive exporters.
    Keywords: Firm-level exports, heterogeneity, exchange rates movements.
    JEL: F12 F14 F31
    Date: 2018
  4. By: Föllmi, Reto; Fuest, Angela; an de Meulen, Philipp; Micheli, Martin; Schmidt, Thorsten; Zwick, Lisa
    Abstract: This paper analyzes the connection between openness and economic performance in Switzerland. Considering different dimensions of openness, we show that the Swiss economy classifies as relatively open. Nevertheless, there still is potential to further increase international integration, particularly through deregulation in the services sector. We also show that for some branches in the Swiss manufacturing sector, increases in international trade are associated with higher productivity in the long run. With regard to financial openness, we show that in the aftermath of the financial crisis, Switzerland mainly suffered from capital retrenchment. Foreign capital inflows were of minor importance. Short-run costs due to the high volatility of capital flows might therefore be lower than widely perceived.
    Keywords: Productivity, Openness, Trade Barriers
    JEL: O40 F10 F30
    Date: 2018–03
  5. By: Jordi Galí
    Abstract: I analyze the effectiveness of forward guidance policies in open economies, focusing on the role played by the exchange rate in their transmission. An open economy version of the "forward guidance puzzle" is shown to emerge. In partial equilibrium, the effect on the current exchange rate of an anticipated change in the interest rate does not decline with the horizon of implementation. In general equilibrium, the size of the effect is larger the longer is that horizon. Empirical evidence using U.S. and euro area data euro-dollar points to the presence of a forward guidance exchange rate puzzle: expectations of interest rate differentials in the near (distant) future have much larger (smaller) effects on the euro-dollar exchange rate than is implied by the theory.
    Keywords: forward guidance puzzle, uncovered interest rate parity, unconventional monetary policies, open economy New Keynesian model
    JEL: E43 E58 F41
    Date: 2018–02
  6. By: Karlo Kotarac (The Croatian National Bank, Croatia); Davor Kunovac (The Croatian National Bank, Croatia); Rafael Ravnik (European Central Bank)
    Abstract: The paper analyses the coherence of business cycles and supply and demand shocks between Croatia and euro area core countries. The results obtained point to several basic conclusions. Firstly, the coherence of business cycles and the correlation of supply and demand shocks between Croatia and euro area core countries are relatively high. Secondly, symmetric (common) shocks are dominant for explaining the dynamics in domestic GDP, while the contributions of asymmetric shocks are significantly smaller. Thirdly, the results point to the convergence of supply and demand shocks and business cycles between Croatia and euro area core countries. Based on all of the above, we may conclude that the introduction of the euro and the related adoption of the common countercyclical monetary policy should not result in significant costs for the Croatian economy.
    Keywords: cycle coherence, aggregate supply and demand shocks, symmetric and asymmetric shocks
    JEL: F33 F44 E42 C32
    Date: 2017–10
  7. By: Richard Varghese; Yuanyan Sophia Zhang
    Abstract: ECB President Draghi’s Jackson Hole speech in August 2014 arguably marked a new phase of unconventional monetary policies (UMPs) in the euro area. This paper examines the market impact and tranmission channels of this new wave of UMPs using a modified event study framework. They are found to have a more prominent impact on inflation expectations and exchange rates compared to the earlier UMP announcements. The impact on bank equity, however, is less significant in part due to narrowing profit margin in a low interest rate environment; and the marginal effect on sovereign spread compression has diminished. By extracting components of monetary policy shocks from the yield curve, we find that the traditional signaling channel of the monetary policy transmission continued to play an important role, but the portfolio rebalancing channel became more important in the new phase. Spillovers to non-euro area EU countries (the Czech Republic, Denmark, Poland, and Sweden) are transmitted mainly through the portfolio rebalancing channel, largely affecting sovereign yields and exchange rates.
    Date: 2018–01–24
  8. By: Christoph Zwick (University of Graz, Austria)
    Abstract: This paper studies the sources of current account deficits in Greece, Ireland, Portugal and Spain after the introduction of the Euro. I lay out a DSGE model with a rich structure of the external sector and estimate it separately on each periphery country. A three-region model structure allows for interactions between the respective periphery country, a “Rest of the Euro Area” aggregate and a “Rest of the World” block. I show that the model exhibits a solid in-sample-fit across periphery countries and use it to quantitatively assess the relevance of several explanations concerning the origin of the deficits.
    Keywords: Current account; Competitiveness; Euro area; DSGE
    JEL: C32 E42 E52 F32 F41
    Date: 2018–02
  9. By: Pierre Siklos (Wilfrid Laurier University)
    Abstract: This paper examines the macroeconomic implications of exchange rate shocks in a sample of 13 emerging market and 6 advanced economies since the early 1990s. Factor-augmented vector autoregressions are estimated with three separate factors identified. They are: real, monetary and financial factors. The main conclusion is that there is no ‘one size fits all’ when interpreting the domestic responses to an exchange rate shock. International policies that aim to define a particular exchange rate or exchange rate regime are unlikely to be able to deal with so many idiosyncratic responses. Nor is it the case that a particular monetary policy strategy, such as inflation targeting, can immunize a domestic economy against all external shocks. International cooperation should instead encourage individual economies to seek out the menu of policies that ensure that each one’s house is in order.
    Keywords: USD exchange rate channel, emerging markets, boom-and-busts, monetary policy strategy, globalization
    JEL: F42 E32 E65 E58
    Date: 2018–01–30
  10. By: Domenico Lombardi, Pierre Siklos, Samantha St. Amand (Wilfrid Laurier University)
    Abstract: This paper sheds new light on spillovers from US monetary policies before, during and after the 2008-09 global financial crisis by examining the behavior of select financial asset returns and incorporating indicators of the content of US Federal Open Market Committee announcements. The impact of US monetary policies is examined for systematically-important and small-open advanced economies. US monetary policy surprise easings are found to have decreased yields in advanced economies post-crisis. The impact of the content of US Federal Open Market Committee statements, coded using text analysis software, is also found to be significant but sensitive to the state of the economy.
    Keywords: central bank communication, financial asset prices, monetary policy spillovers, unconventional monetary policy
    JEL: G12 G28 E52 E58
    Date: 2018–01–30

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