nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒05‒21
six papers chosen by
Martin Berka
University of Auckland

  1. How Important are the International Financial Market Imperfections for the Foreign Exchange Rate Dynamics: A Study of the Sterling Exchange Rate By Xue, Dong; Minford, Patrick; Meenagh, David
  2. The Transmission of Commodity Price Super-Cycles By Felipe Benguria; Felipe Saffie; Sergio Urzúa
  3. Financial openness, policy vs. realized outcomes By Ramsay Bush Georgia
  4. The speed of exchange rate pass-through By Barthélémy Bonadio; Andreas M. Fischer; Philip Sauré
  5. Multihorizon Currency Returns and Purchasing Power Parity By Mikhail Chernov; Drew D. Creal
  6. Estimating a Latent Risk Premium in Exchange Rate Futures By Kerstin Bernoth; Jürgen von Hagen; Casper G. de Vries

  1. By: Xue, Dong (Cardiff Business School); Minford, Patrick (Cardiff Business School); Meenagh, David (Cardiff Business School)
    Abstract: The UK has been a net debtor over the past two decades and the sterling exchange rates are sensitive to any chaos that might occur in the Financial market. This paper examines the importance of the inter-national financial imperfections in the sterling exchange rate dynamics. We build a small open economy DSGE model with the constrained international financial institutions that intermediate capital flows, and derive tractable analytical solutions. The constraint works to introduce a wedge between lending and borrowing rates, which compensates financiers for their currency risk-taking. The model has been estimated by using a simulation-based Indirect Inference approach, which provides a natural framework for testing the hypothesis implied by the model. We find that the model cannot be rejected by the UK data. Shocks to financial forces are the main driving forces behind the large and sudden depreciation of the Sterling exchange rates in the aftermath of the collapse of Lehman Brothers and the Brexit vote. Furthermore, the optimal policy rules have been proposed.
    Keywords: Small open economy DSGE model, International financial imperfections, Sterling exchange rates, Indirect Inference, Crisis, Policy rules
    JEL: E63 F31 F34 F41 F47
    Date: 2018–05
  2. By: Felipe Benguria; Felipe Saffie; Sergio Urzúa
    Abstract: We examine the channels through which commodity price super-cycles affect the economy. Exploiting regional variation in exposure to commodity price shocks and administrative firm-level data from Brazil we disentangle two transmission channels. Higher commodity prices increase domestic demand (wealth channel), disproportionately benefiting nonexporters, and induce wage increases (cost channel) especially among unskilled workers, hurting unskilled-intensive industries. We introduce a dynamic model with heterogeneous firms and workers to quantify these mechanisms and evaluate welfare. The cost channel explains two-thirds of intersectoral labor reallocation, while the wealth channel explains two-thirds of the labor reallocation between exporters and nonexporters.
    JEL: E32 F16 F42
    Date: 2018–04
  3. By: Ramsay Bush Georgia
    Abstract: This paper examines how the 1990s capital account liberalization policy trend affected international capital flows, and tests a new hypothesis that the depth and efficiency of the domestic financial system impacts the efficacy of capital account policy. The paper exploits a recently published IMF database on financial development that spans the period 1980-2014 and includes both developing and developed countries. The results confirm that policy on average does not have a significant effect on gross capital flows, when controlling for other factors. I also find no effect on flows disaggregated by type and direction. However, interacting capital account policy and financial development, I do find that for financially developed countries, policy has the expected effect --policy openness leads to capital flows. The implication is that the effectiveness of capital account liberalization requires developing the domestic financial system.
    Keywords: financial globalization;financial integration;financial development;capital flows;capital control measures
    JEL: F3 F4
    Date: 2018–04
  4. By: Barthélémy Bonadio; Andreas M. Fischer; Philip Sauré
    Abstract: On January 15, 2015, the Swiss National Bank discontinued its minimum exchange rate policy of one euro against 1.2 Swiss francs. This policy shift resulted in a sharp, unanticipated and permanent appreciation of the Swiss franc by more than 11% against the euro. We analyze the pass-through of this unusually clean exchange rate shock into import unit values at the daily frequency using Swiss transaction-level trade data. Our key findings are twofold. First, for goods invoiced in euros, the pass-through is immediate and complete. Second, for goods invoiced in Swiss francs, the pass-through is partial and exceptionally fast, beginning on the second working day after the exchange rate shock and reaching the medium-run pass-through after twelve working days on average.
    Keywords: Daily exchange rate pass-through, speed, large exchange rate shock
    JEL: F14 F31 F41
    Date: 2018
  5. By: Mikhail Chernov; Drew D. Creal
    Abstract: Exposures of expected future depreciation rates to the current interest rate differential violate the UIP hypothesis in a distinctive pattern that is a non-monotonic function of horizon. Conversely, forward, risk-adjusted expected depreciation rates are monotonic. We explain the two patterns by incorporating the weak form of PPP into a no-arbitrage joint model of the depreciation rate, inflation differential, domestic and foreign yield curves. Short-term departures from PPP generate the first pattern. The risk premiums for these departures generate the second pattern.
    JEL: F31 F47 G12 G15
    Date: 2018–04
  6. By: Kerstin Bernoth; Jürgen von Hagen; Casper G. de Vries
    Abstract: Using exchange rates futures instead of forwards completes the maturity spectrum of the correlation between the spot return and the premium. The correlation decreases with increasing maturity, presumably due to a latent risk premium. We hypothesize that the influence of the unobserved risk factor has a contract-specific risk component. Our main contribution is to control for the omitted variable bias by using a modified version of the CCE panel estimator in combination with futures data. This renders the coefficient on the futures premium insignificantly different from one. Subsequently, the contract-specific part is related to conventional proxies of risk.
    Keywords: Forward premium puzzle, CCE estimation, futures rates, latent risk
    JEL: F31 F37 G13
    Date: 2018

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