nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒04‒23
six papers chosen by
Martin Berka
University of Auckland

  1. Real Interest Rates and Productivity in Small Open Economies By Monacelli, Tommaso; Sala, Luca; Siena, Daniele
  2. Capital Inflows, Equity Issuance Activity, and Corporate Investment By Charles W. Calomiris; Mauricio Larrain; Sergio L. Schmukler
  3. Trade in Commodities and Business Cycle Volatility By Kohn, David; Leibovici, Fernando; Tretvoll, Hakon
  4. Labour responses, regulation and business churn in a small open economy By Marta Aloi; Huw Dixon; Anthony Savagar
  5. The Stabilizing Role of Net Foreign Asset Returns By Gustavo Adler; Daniel Garcia-Macia
  6. The Effect of Monetary Policy on Global Fixed Income Covariances By Paul Wohlfarth

  1. By: Monacelli, Tommaso; Sala, Luca; Siena, Daniele
    Abstract: In emerging market economies (EMEs), capital inflows are associated to productivity booms. However, the experience of advanced small open economies (AEs), like the ones of the Euro Area periphery, points to the opposite, i.e., capital inflows lead to lower productivity, possibly due to capital misallocation. We measure capital flow shocks as (exogenous) variations in (world) real interest rates. We show that, in the data, the misallocation narrative fits the evidence only for AEs: lower real interest rates lead to lower productivity in AEs, whereas the opposite holds for EMEs. We build a business cycle model with firms' heterogeneity, financial imperfections and endogenous productivity. The model combines a misallocation effect, stemming from capital inflows, with an original sin effect, whereby capital inflows, via a real exchange rate appreciation, affect the borrowing ability of the incumbent, marginally more productive firms. The estimation of the model reveals that a low trade elasticity combined with high (low) firms' productivity dispersion in EMEs (AEs) are crucial ingredients to account for the different effects of capital inflows across groups of countries. The relative balance of the misallocation and the original sin effect is able to simultaneously rationalize the evidence in both EMEs and AEs.
    JEL: F32 F41
    Date: 2018–03
  2. By: Charles W. Calomiris; Mauricio Larrain; Sergio L. Schmukler
    Abstract: We use issuance-level data to study how equity capital inflows that enter emerging market economies affect equity issuance and corporate investment. We show that foreign inflows are strongly correlated with country-level issuance. The relation reflects the behavior of large issuers issuing in domestic equity markets and that of firms issuing in international markets. Those larger, more liquid, and highly valued firms are the ones more likely to raise equity when their country receives capital inflows. To identify supply-side shocks, we instrument capital inflows into each country with exogenous changes in other countries’ attractiveness to foreign investors. Shifts in the supply of foreign capital are important drivers of increased equity inflows. Instrumented inflows lead a subset of firms (large domestic issuers and foreign issuers) to raise new equity, which they use mainly to fund investment. Corporate investment increases between one-tenth and four-tenths the amount of foreign equity capital entering the country.
    JEL: F21 F3 F36 F41 G11 G15 G3 O16
    Date: 2018–03
  3. By: Kohn, David; Leibovici, Fernando (Federal Reserve Bank of St. Louis); Tretvoll, Hakon
    Abstract: This paper studies the role of the patterns of production and international trade on the higher business cycle volatility of emerging economies. We study a multi-sector small open economy in which firms produce and trade commodities and manufactures. We estimate the model to match key cross-sectional differences across countries: emerging economies run trade surpluses in commodities and trade deficits in manufactures, while sectoral trade flows are balanced in developed economies. We find that these differences amplify the response of emerging economies to fluctuations in commodity prices. We show evidence consistent with these findings using cross-country data.
    Keywords: International business cycles; output volatility; emerging economies
    JEL: E32 F4 F41 F44
    Date: 2018–03–01
  4. By: Marta Aloi; Huw Dixon; Anthony Savagar
    Abstract: We analyze labour responses to technology shocks when firm entry is sluggish due to endogenous sunk costs. We provide closed-form solutions for transition dynamics that show, when firm entry is slow to respond, labour will increase (decrease) relative to its long-run response if returns to labour input at the firm level are increasing (decreasing). Under stricter regulation (slower business churn), such short-run deviations of labour persist for longer. There is also potential for short-run productivity effects to differ from the long run.
    Keywords: Deregulation, Endogenous entry, Aggregate labour productivity, Endogenous entry costs
    Date: 2018
  5. By: Gustavo Adler; Daniel Garcia-Macia
    Abstract: With the rapid growth of countries' foreign asset and liability positions over the last two decades, financial returns on those positions ('NFA returns') have become material drivers of current accounts and net stock positions. This paper documents the relative importance of NFA return versus trade channels in driving NFA dynamics, for a sample of 52 economies over 1990-2015. While persistent trade imbalances have been a strong force leading to diverging NFA positions, NFA returns have played an important stabilizing role, mitigating NFA divergence. The stabilizing role of NFA returns primarily reflects the response of asset prices, rather than yield differentials or exchange rates. There is also evidence of heterogeneity in the speed of NFA adjustment, with emerging market economies adjusting more rapidly than advanced economies, and reserve-currency countries adjusting more slowly than others. The paper also documents the role of NFA returns as insurance against domestic and global income shocks, with a focus on reserve-currency countries.
    Date: 2018–04–06
  6. By: Paul Wohlfarth (Birkbeck, University of London)
    Abstract: We analyse the effect of monetary policy on dynamic covariances on global fixed income markets, using a novel measure for monetary policy attention based on Google Search data. We filter covariances using a Dynamic Conditional Correlation model as baseline case and a BEKK model as well as a long-memory exponential smoother proposed by RiskMetrics for robustness. We find evidence for direct impact of policy on both asset variances and covariances domestically and internationally, supporting both signalling and portfolio rebalancing channels in the context of international policy transmission.
    Keywords: attention, internet search, Google, monetary policy, ECB, FED, policy effects, international financial markets, macro-finance, sovereign bonds, international finance, bond markets.
    JEL: E52 E44 G1 G10 G15 C32
    Date: 2018–02

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