nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒07‒09
nineteen papers chosen by
Martin Berka
University of Auckland

  1. International Currencies and Capital Allocation By Maggiori, Matteo; Neiman, Brent; Schreger, Jesse
  2. The Effect of Skilled Emigration on Real Exchange Rates through the Wage Channel By Ouyang, Alice Y.; Paul, Saumik
  3. Sovereign Default in a Monetary Union By de Ferra, Sergio; Romei, Federica
  4. How EU Markets Became More Competitive Than US Markets: A Study of Institutional Drift By Gutierrez, German; Philippon, Thomas
  5. Financial Institutions’ Business Models and the Global Transmission of Monetary Policy By Isabel Argimon; Clemens Bonner; Ricardo Correa; Patty Duijm; Jon Frost; Jakob de Haan; Leo de Haan; Viktors Stebunovs
  6. Reputation and Sovereign Default By Amador, Manuel; Phelan, Christopher
  7. Oil currencies in the face of oil shocks: what can be learned from time-varying specifications? By Jean-Pierre Allegret; Cécile Couharde; Valérie Mignon; Tovonony Razafindrabe
  8. Model-Free International Stochastic Discount Factors By Sandulescu, Paula Mirela; Trojani, Fabio; Vedolin, Andrea
  9. International tax cooperation and sovereign debt crisis resolution: reforming global governance to ensure no one is left behind By José Antonio Alonso
  10. Foreign currency bank funding and global factors By Krogstrup, Signe; Tille, Cédric
  11. The international transmission of monetary policy By Buch, Claudia; Bussiere, Matthieu; Goldberg, Linda; Hills, Robert
  12. Exchange Rates, International Trade, and Growth: Re-evaluation of Undervaluation By Sokolova, Maria V.
  13. Balance sheets, exchange rates, and international monetary spillovers By Akinci, Ozge; Queralto, Albert
  14. Trade and currency weapons By Agnès Bénassy-Quéré; Matthieu Bussière; Pauline Wibaux
  15. Assessing the Effectiveness of IMF Programs Following the Global Financial Crisis: How Did It Change Since the Asian Crisis? By De Resende, Carlos; Takagi, Shinji
  16. Uncertainty and economic activity: a multi-country perspective By Cesa-Bianchi, Ambrogio; Pesaran, M Hashem; Rebucci, Alessandro
  17. International monetary policy spillovers through the bank funding channel By Lindner, Peter; Loeffler, Axel; Segalla, Esther; Valitova, Guzel; Vogel, Ursula
  18. International confidence spillovers and business cycles in small open economies By Michał Brzoza-Brzezina; Jacek Kotłowski
  19. Self-Fulfilling Debt Dilution: Maturity and Multiplicity in Debt Models By Aguiar, Mark; Amador, Manuel

  1. By: Maggiori, Matteo; Neiman, Brent; Schreger, Jesse
    Abstract: We establish that global portfolios are driven by an often neglected aspect: the currency of denomination of assets. Using a dataset of $27 trillion in security-level investment positions, we demonstrate that investor holdings are biased toward their own currencies to such an extent that each country holds the bulk of all debt securities denominated in their own currency, even those issued by foreign borrowers in developed countries. Surprisingly, currency is such a strong predictor of the nationality of a security's holder that the nationality of the issuer - to date, the most powerful predictor in a voluminous literature on cross-border portfolios - adds very little explanatory power. While large firms issue bonds in foreign currency and borrow from foreigners, the vast majority of firms issue only in local currency and do not directly access foreign capital. These patterns hold broadly across countries with the exception of countries, like the United States, that issue an international currency. The global willingness to hold the US dollar means that even smaller US firms that borrow exclusively in dollars have little difficulty borrowing from abroad. Global portfolios shifted sharply away from the euro and toward the dollar starting with the 2008 financial crisis, further cementing the dollar's international role and potentially amplifying the benefit that its status brings to the US.
    Keywords: Capital Flows; Exorbitant Privilege; Home Bias; reserve currencies
    JEL: E42 E44 F3 F55 G11 G15 G23 G28
    Date: 2018–06
  2. By: Ouyang, Alice Y. (Asian Development Bank Institute); Paul, Saumik (Asian Development Bank Institute)
    Abstract: Building on an analytical model, we provide cross-country empirical evidence that net skilled emigration appreciates bilateral real exchange rates through the wage channel in source countries. Chains of causality in the presence of the Law of One Price run through the “spending effect” and the “resource allocation effect,” analogous to the remittance-based Dutch disease effect. A pricing-to-market model allows pass-through for both traded and nontraded prices when the Law of One Price is violated. The skilled emigration elasticity of real exchange rate is estimated to be in the range of between .6 and .8, with internal prices playing a dominant role. Alternative model specifications show robust outcomes.
    Keywords: emigration; exchange rate; the Dutch disease
    JEL: F22 F31
    Date: 2018–03–16
  3. By: de Ferra, Sergio; Romei, Federica
    Abstract: In the aftermath of the global fi nancial crisis, sovereign default risk and the zero lower bound have limited the ability of policy-makers in the European monetary union to achieve their stabilization objective. This paper investigates the interaction between sovereign default risk and the conduct of monetary policy, when borrowers can act strategically and they share with their lenders a single currency in a monetary union. We address this question in an endogenous sovereign default model of heterogeneous countries in a monetary union, where the monetary authority may be constrained by the zero lower bound. We uncover three main results. First, in normal times, debtors have a stronger incentive to default to induce more expansionary monetary policy. Second, the zero lower bound, or constraints on monetary policy, may act as a disciplining device to enforce repayment of sovereign debt. Third, sovereign default risk induces countries with a preference for tight monetary policy to accept a laxer policy stance. These results help to shed light on the recent European experience of high default risk, expansionary monetary policy and low nominal interest rates.
    Keywords: Heterogeneous Countries; monetary union; sovereign default; zero lower bound
    JEL: F34 F42 H63
    Date: 2018–06
  4. By: Gutierrez, German; Philippon, Thomas
    Abstract: Until the 1990's, US markets were more competitive than European markets. Today, European markets have lower concentration, lower excess profits and lower regulatory barriers to entry. We document this surprising outcome and propose an explanation using a model of political support. Politicians care about consumer welfare but also enjoy retaining control over industrial policy. We show that politicians from different countries who set up a common regulator will make it more independent and more pro-competition than the national ones it replaces. Our comparative analysis of antitrust policy reveals strong support for this and other predictions of the model.
    Date: 2018–06
  5. By: Isabel Argimon; Clemens Bonner; Ricardo Correa; Patty Duijm; Jon Frost; Jakob de Haan; Leo de Haan; Viktors Stebunovs
    Abstract: Global financial institutions play an important role in channeling funds across countries and, therefore, transmitting monetary policy from one country to another. In this paper, we study whether such international transmission depends on financial institutions' business models. In particular, we use Dutch, Spanish, and U.S. confidential supervisory data to test whether the transmission operates differently through banks, insurance companies, and pension funds. We find marked heterogeneity in the transmission of monetary policy across the three types of institutions, across the three banking systems, and across banks within each banking system. While insurance companies and pension funds do not transmit home-country monetary policy internationally, banks do, with the direction and strength of the transmission determined by their business models and balance sheet characteristics.
    Keywords: Monetary policy transmission ; Global financial institutions ; Bank lending channel ; Portfolio channel ; Business models
    JEL: E5 F3 F4 G2
    Date: 2018–05–29
  6. By: Amador, Manuel (Federal Reserve Bank of Minneapolis); Phelan, Christopher (Federal Reserve Bank of Minneapolis)
    Abstract: This paper presents a continuous-time model of sovereign debt. In it, a relatively impatient sovereign government’s hidden type switches back and forth between a commitment type, which cannot default, and an optimizing type, which can default on the country’s debt at any time, and assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. We show that if these beliefs satisfy reasonable assumptions, in any Markov equilibrium, the optimizing type mimics the commitment type when borrowing, revealing its type only by defaulting on its debt at random times. Further, in such Markov equilibria (the solution to a simple pair of ordinary differential equations), there are positive gross issuances at all dates, constant net imports as long as there is a positive equilibrium probability that the government is the optimizing type, and net debt repayment only by the commitment type. For countries that have recently defaulted, the interest rate the country pays on its debt is a decreasing function of the amount of time since its last default, and its total debt is an increasing function of the amount of time since its last default. For countries that have not recently defaulted, interest rates are constant.
    Keywords: Sovereign debt; Sovereign default; Reputation; Learning; Debt intolerance; Serial defaulters
    JEL: F34
    Date: 2018–05–30
  7. By: Jean-Pierre Allegret (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Cécile Couharde (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Valérie Mignon (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique); Tovonony Razafindrabe (EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)
    Abstract: While the oil currency property is clearly establis hed from a theoretical viewpoint, its existence is less clear-cut in the empirical literature. We investigate the reasons for this apparent puzzle by studying the time-varying nature of the relationship between real effective exchange rates of five oil exporters and the real price of oil in the aftermath of the oil price shocks of the last two decades. Accordingly, we rely on a time-varying parameter VAR specification which allows the responses of real exchange rates to different oil price shocks to evolve over time. We find that the reason of the mixed results obtained in the empirical literature is that oil currencies follow different hybrid models in the sense that oil countries’real exchange rates may be driven by one or several sources of oil price shocks that furthermore can vary over time. In addition to structural changes affecting oil countries, structural changes arising from the oil market itself through the various, time-varying sources of oil price shocks are found to be crucial.
    Keywords: oil currencies,oil shocks,Time-Varying Parameter VAR model,exchange rates
    Date: 2017
  8. By: Sandulescu, Paula Mirela; Trojani, Fabio; Vedolin, Andrea
    Abstract: We provide a theoretical characterization of international stochastic discount factors (SDFs) in incomplete markets under different degrees of market segmentation. Using 40 years of data on a cross-section of countries, we estimate model-free SDFs and factorize them into permanent and transitory components. We find that large permanent SDF components help to reconcile the low exchange rate volatility, the exchange rate cyclicality, and the forward premium anomaly. However, integrated markets entail highly volatile and almost perfectly comoving international SDFs. In contrast, segmented markets can generate less volatile and more dissimilar SDFs. In quest of relating the SDFs to economic fundamentals, we document strong links between proxies of financial intermediaries' risk-bearing capacity and model-free international SDFs. We interpret this evidence through the lens of an economy with two building blocks: limited participation by households and financiers who face an intermediation friction.
    Keywords: Exchange Rates; financial intermediaries; market incompleteness; Market Segmentation; Stochastic discount factor
    JEL: F31 G15
    Date: 2018–06
  9. By: José Antonio Alonso
    Abstract: The paper focuses on two crucial issues that hinder the fiscal sovereignty of developing countries: the reduced level of international tax cooperation, and the lack of appropriate procedures for sovereign debt crisis resolution. The low level of international tax cooperation enables a ‘race to the bottom’ in tax rates among countries, tax avoidance through profit-shifting activities by companies and tax evasion by individuals and companies, based on the existence of non-cooperative jurisdictions. In the last five years, the international community has made some improvements in this field, but the situation remains far from satisfactory. On the other hand, the current procedure for sovereign debt resolution, through negotiations at the Paris Club with the support of the IMF, is not only unfair, but also inefficient. The paper explores alternatives in both fields. Appropriate responses to these international problems would have to show benefits in terms of efficiency and welfare at the global level, and establish fundamentals for countries to take full advantage of their resources, which is a necessary condition for funding policies that will not leave (or push) any nation or social sector behind.
    Keywords: tax system, international tax cooperation, tax avoidance, tax evasion, tax havens, external debt, restructuring debt, sovereign debt resolution
    JEL: E62 F34 F55 H63
    Date: 2018–05
  10. By: Krogstrup, Signe; Tille, Cédric
    Abstract: The literature on drivers of capital flows stresses the prominent role of global financial factors. Recent empirical work, however, highlights how this role varies across countries and time, and this heterogeneity is not well understood. We revisit this question by focusing on financial intermediaries' funding flows in different currencies. A portfolio model shows that the sign and magnitude of the response of foreign currency funding flows to global risk factors depend on the financial intermediary's pre-existing currency exposure. Analysis of data on European banks' aggregate balance sheets lends support to the model predictions, especially in countries outside the euro area.
    Keywords: currency mismatch,capital flows,push factors,spillovers,cross-border transmission of shocks,European bank balance sheets
    JEL: F32 F34 F36
    Date: 2018
  11. By: Buch, Claudia (Deutsche Bundesbank); Bussiere, Matthieu (Banque de France); Goldberg, Linda (Federal Reserve Bank of New York); Hills, Robert (Bank of England)
    Abstract: This paper presents the novel results from an internationally coordinated project by the International Banking Research Network (IBRN) on the cross-border transmission of conventional and unconventional monetary policy through banks. Teams from 17 countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the US, euro area, Japan, and United Kingdom. Two other studies use international data with different degrees of granularity. International spillovers into lending to the private sector do occur, especially for US policies, and bank-specific heterogeneity influences the magnitudes of transmission. The effects are supportive of the international bank lending channel and the portfolio channel of monetary policy transmission. They also show that the frictions that banks face matter; in particular, foreign currency funding and hedging considerations can be a key source of heterogeneity. The forms of bank balance sheet heterogeneity that differentiate spillovers across banks are not uniform across countries. International spillovers into lending can be large for some banks, even while the average international spillovers of policies into non-bank lending generally are not large.
    Keywords: Monetary policy; international spillovers; cross-border transmission; global bank; global financial cycle
    JEL: E52 G15 G21
    Date: 2018–06–01
  12. By: Sokolova, Maria V. (Asian Development Bank Institute)
    Abstract: We show that regional trade integration shifts the burden of the exchange rate adjustment towards the less integrated trading partners. Thus, they bear the cost of trade balance expansion, while competitive exchange rate moves vis-a-vis regional trade agreement (RTA) trading partners result in no expansion or deterioration of the overall trade balance. First, using the data on 138 countries that have been involved in regional trade integration through signing regional trade agreements (RTAs) since 1990, we show that upon a 10% depreciation towards non-RTA trading partners results in a 4.4% improvement of the aggregate trade balance. A similar competitive depreciation towards RTA trading partners has resulted in an average 3.7% deterioration of the aggregate trade balance. Second, we confirm that RTA participation can act as a good proxy for trade integration, and test the results with alternative measures of trade balance. Third, we use a simple model framework based on the current account adjustments to put the empirical findings into the theoretical frame. Altogether, we indicate that regional trade integration in the form of RTAs should be taken into account in questions related to the competitive exchange rate effects and trade balance adjustment.
    Keywords: trade balance; regional trade agreements; competitive depreciation; economic integration; terms-of-trade
    JEL: F10 F13 F14 F15 F40 F41
    Date: 2017–03–03
  13. By: Akinci, Ozge (Federal Reserve Bank of New York); Queralto, Albert (Federal Reserve Board)
    Abstract: We use a two-country New Keynesian model with balance sheet constraints to investigate the magnitude of international spillovers of U.S. monetary policy. Home borrowers obtain funds from domestic households in domestic currency, as well as from residents of the foreign economy (the United States) in dollars. We assume agency frictions are more severe for foreign debt than for domestic deposits. As a consequence, a deterioration in domestic borrowers’ balance sheets induces a rise in the home currency’s premium and an exchange rate depreciation. We use the model to investigate how international monetary spillovers are affected by the degree of currency mismatches in balance sheets, and whether the latter make it desirable for domestic policy to target the nominal exchange rate. We find that the magnitude of spillovers is significantly enhanced by the degree of currency mismatches. Our findings also suggest that using monetary policy to stabilize the exchange rate is not necessarily more desirable with greater balance sheet mismatches and may actually exacerbate short-run exchange rate volatility.
    Keywords: financial intermediation; U.S. monetary policy spillovers; currency premium; uncovered interest rate parity condition
    JEL: E32 E44 F41
    Date: 2018–06–01
  14. By: Agnès Bénassy-Quéré (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Matthieu Bussière (Banque de France - Banque de France); Pauline Wibaux (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The debate on trade wars and currency wars has re-emerged since the Great recession of 2009. We study the two forms of non-cooperative policies within a single framework. First, we compare the elasticity of trade flows to import tariffs and to the real exchange rate, based on product level data for 110 countries over the 1989-2013 period. We find that a 1 percent depreciation of the importer's currency reduces imports by around 0.5 percent in current dollar, whereas an increase in import tariffs by 1 percentage point reduces imports by around 1.4 percent. Hence the two instruments are not equivalent. Second, we build a stylized short-term macroeconomic model where the government aims at internal and external balance. We find that, in this setting, monetary policy is more stabilizing for the economy than trade policy, except when the internal transmission channel of monetary policy is muted (at the zero-lower bound). One implication is that, in normal times, a country will more likely react to a trade "aggression" through monetary easing rather than through a tariff increase. The result is reversed at the ZLB.
    Keywords: tariffs,exchange rates,trade elasticities,protectionism
    Date: 2018–06
  15. By: De Resende, Carlos (Asian Development Bank Institute); Takagi, Shinji (Asian Development Bank Institute)
    Abstract: We identify the key features of International Monetary Fund (IMF)–supported programs following the 2008 global financial crisis. The statistical analysis of a large sample of countries that borrowed from the IMF during 1997–2013 indicates that, compared to the amount of financing provided to crisis countries during the post-Asian crisis period, the amount was larger on average by more than 3 percentage points of GDP. Yet, the observed magnitude of adjustment in key macroeconomic variables, such as output, the exchange rate, and the current account balance, was just as large, even when the influence of less favorable global economic conditions was controlled for. We argue that the puzzle can be explained, in part, by the large-scale global financial deleveraging, as well as the large initial domestic imbalances observed during the post-global crisis period. The IMF’s post-global crisis programs routinely allowed fiscal balance targets to be relaxed in the face of adverse shocks; some attempted to bail in private investors or accommodated the use of capital and exchange controls to limit capital outflows; and the IMF often collaborated with other donors to boost total official financing. It is reasonable to surmise that, without these innovations, the required macroeconomic adjustments would have been even greater.
    Keywords: Asian financial crisis; global financial crisis; IMF programs
    JEL: E65 F33 F53 F55
    Date: 2018–04–30
  16. By: Cesa-Bianchi, Ambrogio (Bank of England); Pesaran, M Hashem (Department of Economics); Rebucci, Alessandro (Johns Hopkins University)
    Abstract: Measures of economic uncertainty are countercyclical, but economic theory does not provide definite guidance on the direction of causation between uncertainty and the business cycle. This paper takes a common-factor approach to the analysis of the interaction between uncertainty and economic activity in a multi-country model without a priori restricting the direction of causality at the level of individual countries. Motivated by the observation that cross-country correlations of volatility series are much higher than cross-country correlations of GDP growth series, we set up a multi-country version of the Lucas tree model with time-varying volatility consistent with this stylized fact and use it to identify two common factors, a real and a financial one. We then quantify the absolute and the relative importance of the common shocks as well as country-specific volatility and GDP growth shocks. The paper highlights three main empirical findings. First, it is shown that most of the unconditional correlation between volatility and growth can be accounted for by shocks to the real common factor, which is extracted from world growth in our empirical model and linked to the risk-free rate in the theoretical model and in the data. Second, the share of volatility forecast error variance explained by the real common shock and by country-specific growth shocks amounts to less than 5%. Third, common financial shocks explain about 10% of the growth forecast error variance, but when such shocks occur, their negative impact on growth is large and persistent. In contrast, country-specific volatility shocks account for less than 1%-2% of the forecast error variance decomposition of country-specific growth rates.
    Keywords: Uncertainty; business cycle; common factors; real and financial global shocks; multi-country; identification; realized volatility
    JEL: E44 F44 G15
    Date: 2018–06–01
  17. By: Lindner, Peter; Loeffler, Axel; Segalla, Esther; Valitova, Guzel; Vogel, Ursula
    Abstract: In this paper, we examine the international transmission of monetary policies of major advanced economies (US, UK, euro area) through banks in Austria and Germany. In particular, we compare the role of banks' funding structure, broken down by country of origin as well as by currency denomination, in the international transmission of monetary policy changes to bank lending. We find weak evidence for inward spillovers. The more a bank is funded in US dollars, the more its domestic real sector lending is affected by monetary policy changes in the US. This effect is more pronounced in Germany than in Austria. We do not find evidence for outward spillovers of euro area monetary policy through a bank funding channel.
    Keywords: monetary policy spillover,global banks,bank funding channel
    JEL: E52 F33 G21
    Date: 2018
  18. By: Michał Brzoza-Brzezina (Narodowy Bank Polski and Warsaw School of Economics); Jacek Kotłowski (Narodowy Bank Polski and Warsaw School of Economics)
    Abstract: This paper draws from two observations in the literature. First, that shocks to entrepreneur or household confidence matter for economic outcomes. Second, that it is hard to explain the extent of cyclical comovement between economies taking into account their trade links only. We check empirically to what extent confidence fluctuations matter for business cycles and in particular for their comovement between economies. We focus on a large (euro area) and a small, nearby economy (Poland). Our results show that confidence fluctuations account for approximately 40% of business cycle fluctuations in the euro area. Spillovers of confidence shocks are also large. Our main finding is that the their direct impact (i.e. not via trade but through the cross-border spread of news and business sentiment) accounts for almost 40% of business cycle fluctuations in Poland.
    Keywords: International spillovers, animal spirits, sentiments, business cycle
    JEL: C32 E32 F44
    Date: 2018
  19. By: Aguiar, Mark (Princeton University); Amador, Manuel (Federal Reserve Bank of Minneapolis)
    Abstract: We establish that creditor beliefs regarding future borrowing can be self-fulfilling, leading to multiple equilibria with markedly different debt accumulation patterns. We characterize such indeterminacy in the Eaton-Gersovitz sovereign debt model augmented with long maturity bonds. Two necessary conditions for the multiplicity are: (i) the government is more impatient than foreign creditors, and (ii) there are deadweight losses from default; both are realistic and standard assumptions in the quantitative literature. The multiplicity is dynamic and stems from the self-fulfilling beliefs of how future creditors will price bonds; long maturity bonds are therefore a crucial component of the multiplicity. We introduce a third party with deep pockets to discuss the policy implications of this source of multiplicity and identify the potentially perverse consequences of traditional “lender of last resort” policies.
    Keywords: Sovereign debt; Self-fulfilling debt crises; Debt dilution; Multiple equilibria
    JEL: F34
    Date: 2018–05–30

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