nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒03‒26
ten papers chosen by
Martin Berka
University of Auckland

  1. Ramsey Taxation in the Global Economy By Chari, V. V.; Nicolini, Juan Pablo; Teles, Pedro
  2. Exchange Rate Misalignment, Capital Flows, and Optimal Monetary Policy Trade-offs By Corsetti, G.; Dedola, L.; Leduc, S.
  3. Twin Deficits Revisited: a role for fiscal institutions? By António Afonso; Florence Huart; João Tovar Jalles; Piotr Stanek
  4. Can a Country Save Too Much? The Case of Norway By Joseph E. Gagnon
  5. Global Imbalances and the Trade Slowdown By Caroline Freund
  6. Role of Foreign Exchange Reserve in Exchange Rate Behaviour The Persisting Asymmetry: A Historical Account By Atulan Guha
  7. Equilibrium real interest rates, secular stagnation, and the financial cycle: Empirical evidence for euro-area member countries By Belke, Ansgar; Klose, Jens
  8. Explaining International Business Cycle Synchronization By Robert Kollmann
  9. Two-country Model and Foreign Exchange Dynamics By Talmain, Gabriel
  10. How Global is FDI? Evidence from the Analysis of Theil Indices By Bickenbach, Frank; Liu, Wan-Hsin; Nunnenkamp, Peter

  1. By: Chari, V. V.; Nicolini, Juan Pablo; Teles, Pedro
    Abstract: We study cooperative optimal Ramsey equilibria in the open economy addressing classic policy questions: Should restrictions be placed to free trade and capital mobility? Should capital income be taxed? Should goods be taxed based on origin or destination? What are desirable border adjustments? How can a Ramsey allocation be implemented with residence-based taxes on assets? We characterize optimal wedges and analyze alternative policy implementations.
    Keywords: Capital income tax; free trade; value-added taxes; border adjustment; origin- and destination-based taxation; production e
    JEL: E60 E61 E62
    Date: 2018–02
  2. By: Corsetti, G.; Dedola, L.; Leduc, S.
    Abstract: What determines the optimal monetary trade-offs between internal objectives (inflation, and output gap) and external objectives (competitiveness and trade imbalances) when inefficient capital flows cause exchange rate misalignment and distort current account positions? We characterize this trade-offs analytically, using the workhorse model of modern monetary theory in open economies under incomplete markets–where inefficient capital flows and exchange rate misalignments can arise independently of nominal distortions. We derive a quadratic approximation of the utility-based global policy loss function under fairly general assumptions on preferences and openness, and solve for the optimal targeting rules under cooperation. We show that, in economies with a low degree of exchange rate pass-through, the optimal response to inefficient capital inflows associated with real appreciation is contractionary, above and beyond the natural rate: the optimal policy curbs excessive demand at the cost of exacerbating currency overvaluation. In contrast, a high degree of pass-through, and/or low trade elasticities, warrants expansionary policies that lean against exchange rate appreciation and competitive losses, at the cost of inefficient inflation.
    Keywords: Currency misalignments, trade imbalances, asset markets and risk sharing, optimal targeting rules, international policy cooperation, exchange rate pass-through
    JEL: E44 E52 E61 F41 F42
    Date: 2018–03–15
  3. By: António Afonso; Florence Huart; João Tovar Jalles; Piotr Stanek
    Abstract: We revisit the twin deficit relationship for a sample of 193 countries over the period 1980-2016, using a panel fixed effect (within-group) estimator, bias-corrected least-squares dummy variable, system GMM, and common correlated effects pooled estimation procedures. The analysis accounts also for the existence of fiscal rules in place, their features, and their interaction with the budget balance. In the absence of fiscal rules, the twin deficit hypothesis is confirmed. The size of the estimated coefficient on the budget balance is between 0.68 and 0.79. However, the existence of fiscal rules strongly reduces the effect of budget balance on the current account balance (the coefficient is reduced to 0.1). In fact, the twin deficits relationship does not hold with some specific kinds of rules: debt rules, rules with monitoring of compliance, as well as budget balance rules and debt rules in emerging market economies and lowest income countries, and in the post-crisis period.
    Keywords: current account, fiscal balance, fiscal rules, panel data, system GMM
    JEL: E62 F32 F41 H87
    Date: 2018–03
  4. By: Joseph E. Gagnon (Peterson Institute for International Economics)
    Abstract: Many countries have squandered their natural resource endowments. The International Monetary Fund and the World Bank routinely hector developing economies to save and invest more of their revenues from resources such as oil and gold for the benefit of future generations after the resources run out. But, can a country save too much of its resource revenues? Gagnon argues that since the first capital transfers to its Government Pension Fund Global in 1996, Norway has saved more than was needed to raise consumption of all generations equally. Norway’s excess saving imposes a cost on the rest of the world during periods of weak aggregate demand and ultralow interest rates. Gagnon proposes a counterfactual saving policy that would have increased Norway’s household consumption by nearly 9 percent on average from 1996 through 2017. The proposed policy would have reduced Norway’s current account surplus by more than one-third, or $13 billion per year on average, from 1996 through 2017. Even now, Norway could raise current consumption by more than US$2,000 per capita, while keeping the contribution of oil wealth to future generations equally large.
    Date: 2018–03
  5. By: Caroline Freund (Peterson Institute for International Economics)
    Abstract: From the mid-1990s until the financial crisis, global trade grew twice as fast as global income, far faster than in previous or subsequent periods. During this period of rapid trade growth, global current account imbalances also expanded rapidly. If excess savings in some countries financed more consumption and investment in other countries, then trade and trade imbalances would move together. Greater capital mobility thus may help to explain why trade surged in the period before 2007 and why it slowed more sharply in later years when demand stalled. Consistent with this explanation, the countries that contributed most to global trade growth during the period of rapid trade growth also experienced large imbalances. Constraining trade deficits to historical norms, this paper shows that trade growth would have been more moderate in the late 1990s and early 2000s and stronger in subsequent years. Going forward, assuming global imbalances remain relatively unconstrained, the relationship between trade growth and income growth will likely be less stable than before the 1990s.
    Keywords: Current account adjustment, elasticity of trade to income
    JEL: F14 F32
    Date: 2018–02
  6. By: Atulan Guha (Indian Institute of Management Kashipur)
    Abstract: Foreign exchange and monetary gold reserve is a very important factor to determine nominal exchange rate for the countries whose currency has very little use as reserve currency. Whereas, for the reserve currency countries it is not so important ?it is primarily because of their greater money pulling power internationally through rate of interest change. They have this power because their currencies are having greater use as international money. Though the international monetary systems have changed from fixed exchange rate of Gold Standard period to independent float or managed float exchange rate systems of today?s world, this asymmetry between the reserve currency countries and the other countries has not change. Though, ideally under flexible exchange rate system, the importance of foreign exchange reserve in determining nominal exchange rate should be very little. This paper takes an historical review of all the International Monetary System to establish the importance of foreign exchange reserve in determining exchange rate for developing countries; but it is not be the case with the reserve currency countries.
    Keywords: Exchange Rate, Foreign Exchange Reserve, fixed exchange rate, flexible exchange rate
    JEL: F31 F33 F41
    Date: 2017–10
  7. 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
  8. By: Robert Kollmann (ECARES, Université Libre de Bruxelles & CEPR)
    Abstract: The business cycles of the major advanced economies are synchronized. Standard macro models fail to explain that fact. This paper presents a simple two-country, two-good, complete-markets dynamic general equilibrium model in which country-specific productivity shocks generate highly correlated business cycles. The structure here differs from standard open economy macro models by assuming recursive intertemporal preferences, and a weak wealth effect on labor supply. Recursive preferences magnify the terms of trade response to shocks. In the model here, a persistent productivity (and GDP) increase in a given country triggers a strong improvement of the foreign country’s terms of trade. When the wealth effect on labor supply is weak, this induces a rise in foreign hours worked and GDP, i.e. domestic and foreign real activity comove positively.
    Date: 2017
  9. By: Talmain, Gabriel
    Abstract: We establish the nature of the dynamics of the exchange rate in a two country model with heterogenous firms a la Abadir and Talmain (2002).
    Keywords: General Equilibrium, Exchange Rate Models, Exchange Rate Dynamics.
    JEL: F31 G15
    Date: 2017–11–01
  10. By: Bickenbach, Frank; Liu, Wan-Hsin; Nunnenkamp, Peter
    Abstract: It is open to question whether the intensified worldwide competition for FDI has reduced its traditionally strong concentration in a few large and relatively advanced host countries. We calculate and decompose Theil indices to track changes in absolute and relative concentration of FDI during the period 1970-2013. We find that both absolute and relative concentration decreased when excluding offshore financial centers from the overall sample. In addition to the narrowing gap between OECD and non-OECD countries, the concentration across non-OECD countries declined – for major subgroups and for both the absolute and relative measures. Finally, recent developments indicate that low-income countries are no longer at the losing end of the competition for FDI.
    Keywords: Foreign direct investment,concentration,Theil decomposition
    JEL: F21
    Date: 2017

This nep-opm issue is ©2018 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.