nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒07‒16
nine papers chosen by
Martin Berka
University of Auckland

  2. The international transmission of monetary policy By Buch, Claudia M.; Bussiere, Matthieu; Goldberg, Linda; Hills, Robert
  3. Politics-Driven Exchange Rate Cycles : East Asia vs. Latin America By Arslan Razmi
  4. Foreign-law bonds: can they reduce sovereign borrowing costs? By Chamon, Marcos; Schumacher, Julian; Trebesch, Christoph
  5. Current Account Dynamics under Information Rigidity and Imperfect Capital Mobility By Akihisa SHIBATA; Mototsugu SHINTANI; Takayuki TSURUGA
  6. Adjustment to Negative Price Shocks by a Commodity Exporting Economy: Does Exchange Rate Flexibility Resolve a Balance of Payments Crisis? By Nakatani, Ryota
  7. Financial friction sources in emerging economies: Structural estimation of sovereign default models By Takefumi Yamazaki
  8. The Real Exchange Rate Policy Trilemma in Developing Economies By Arslan Razmi
  9. What inflation measure should a currency union target? By Barnett, William A.; Wang, Chan; Wang, Xue; Wu, Liyuan

  1. By: Luisito Bertinelli; Olivier Cardi; Romain Restout
    Abstract: This paper develops a tractable version of a two-sector open economy model with search frictions to disentangle the implications of workers’ mobility costs and labor market institutions following higher relative productivity of tradables. Using a panel of eighteen OECD countries, our estimates show that higher productivity in tradables relative to non tradables causes a decline in non traded relative to traded wages. The fall in the relative wage reveals the presence of labor mobility costs which mitigate the appreciation in the relative price of non tradables and lower the relative unemployment rate of tradables following higher relative productivity of tradables. Whilst our evidence suggests that such responses have increased over time as the result of decreasing labor mobility costs, our estimates also reveal that the magnitude of the effects vary considerably across countries. Using a set of indicators capturing the heterogeneity of labor market frictions across economies, we find that both the relative wage and the relative unemployment rate of tradables decline significantly more and the relative price appreciates less in countries where labor market regulation is more pronounced. We show that these empirical findings can be rationalized in a two-sector open economy model with search in the labor market as long as we allow for an endogenous sectoral labor force participation decision. When we calibrate the model to country-specific data, numerical results reveal that the responses of the relative wage, the relative price, and to a lesser extent the relative unemployment rate display a wide dispersion across countries. Importantly, all variables display a significant negative relationship with labor market regulation.
    Keywords: Relative productivity of tradables; Search theory; Labor market institutions; Labor mobility; Sectoral price and wage differences; Sectoral unemployment; Current account.
    JEL: D82 K41
    Date: 2018
  2. By: Buch, Claudia M.; Bussiere, Matthieu; Goldberg, Linda; Hills, Robert
    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 seventeen countries use confidential micro-banking data for the years 2000 through 2015 to explore the international transmission of monetary policies of the U.S., 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 U.S. 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 nonbank lending generally are not large.
    Keywords: monetary policy,international spillovers,cross-border transmission,global bank,global financial cycle
    JEL: E52 F3 F4 G15 G21
    Date: 2018
  3. By: Arslan Razmi (Department of Economics, University of Massachusetts Amherst)
    Abstract: I develop the implications for real exchange rate cycles of different policy preferences, focusing in particular on broadly stylized features of major Latin American and East Asian economies. Recent political science literature has emphasized the role of factors such as the influence of the manufacturing sector and the nature of labor markets. I formalize some of these insights in a developing country framework with policy makers who inter-temporally optimize and voters/audiences that are incompletely informed. Given the choice between assigning greater weight to immediate worker purchasing power versus generating manufacturing employment and income over time, I show that countries where policy makers choose the former are more likely to experience cycles with overvaluation, current account deficits, and abrupt (postponed) devaluations.
    Keywords: Political business cycles, real exchange rate, capital accumulation, balance of payments
    JEL: O25 D72 F41 O14
    Date: 2018
  4. By: Chamon, Marcos; Schumacher, Julian; Trebesch, Christoph
    Abstract: Governments often issue bonds in foreign jurisdictions, which can provide additional legal protection vis-à-vis domestic bonds. This paper studies the effect of this jurisdiction choice on a bond prices. We test whether foreign-law bonds trade at a premium compared to domestic-law bonds. We use the euro area 2006-2013 as a unique testing ground, controlling for currency risk, liquidity risk, and term structure. Foreign-law bonds indeed carry significantly lower yields in distress periods, and this effect rises as the risk of a sovereign default increases. These results indicate that, in times of crisis, governments can borrow at lower rates under foreign law. JEL Classification: F34, G12, K22
    Keywords: creditor rights, law and finance, seniority, sovereign debt
    Date: 2018–06
  5. By: Akihisa SHIBATA; Mototsugu SHINTANI; Takayuki TSURUGA
    Abstract: The current account in developed countries is highly persistent and volatile in comparison to output growth. The standard intertemporal current account model with rational expectations (RE) fails to account for the observed current account dynamics together with persistent changes in consumption. The RE model extended with imperfect capital mobility by Shibata and Shintani (1998) can account for persistent changes in consumption, but only at the cost of the explanatory power for the volatility of the current account. This paper replaces RE in the intertemporal current account model with sticky information (SI) in which consumers are inattentive to shocks to their income and infrequently adjust their consumption. The SI model can better explain a persistent and volatile current account than the RE model but it overpredicts the persistence of changes in consumption. The SI model extended with imperfect capital mobility almost fully explains current account dynamics and the persistence of changes in consumption, if high degrees of information rigidity and imperfect capital mobility are taken into account. JEL classifications: E21, F21, F32, F41
    Keywords: Capital mobility, Imperfect information, Inattentiveness, Permanent income hypothesis
    Date: 2018–02
  6. By: Nakatani, Ryota
    Abstract: Negative commodity price shocks can induce balance of payments crises in resource dependent economies. Governments often react by intervening against currency depreciation as, for example, in the case of Papua New Guinea in response to the commodity price shocks of 2014. We develop an original theoretical model to analyze the balance of payments impact of a commodity price shock under alternative exchange rate regimes: a flexible rate regime and a fixed rate regime with foreign exchange rationing. The balance of payments consequences are shown to depend on the elasticity of exports and imports with respect to the exchange rate. For the Papua New Guinea case, we estimate export elasticities for a variety of commodities (gold, silver, copper, oil, coffee, cocoa, copra, copra oil, palm oil, rubber, tea, logs, and marine products) as well as for imports. The results indicate that the Marshall-Lerner condition is satisfied for this resource-rich economy, implying that exchange rate flexibility may be practicable. We implement our calibrated model to conduct a counter-factual simulation and find that with a flexible exchange rate, foreign reserves would have been 20 percent higher three years after the shock than they were under the actual policy of exchange rate stabilization. In light of this, we argue the merits of greater exchange rate flexibility.
    Keywords: Commodity Exporters; Foreign Exchange Rationing; Papua New Guinea; Marshall-Lerner Condition; Agriculture; Mining
    JEL: F31 F32 F41 O13 Q17 Q37
    Date: 2018–06–03
  7. By: Takefumi Yamazaki (Policy Research Institute, Ministry of Finance)
    Abstract: There are two literature strands that explain stylized facts in emerging economies: the stochastic productivity trend or financial frictions. However, financial frictions are driven by both trend and stationary productivity shocks, thus distinguishing their impact from the direct role of output fluctuations is essential. We estimate sovereign default models, full-nonlinear dynamic stochastic general equilibrium (DSGE) with micro-founded financial imperfections, applying a particle filter, and evaluate the source of financial frictions. The main finding is that stationary shocks rather than trend shocks account for financial frictions and the resulting countercyclicality, except for the post-1977 period in Mexico; however, the exception disappears for 1902?2005 as long-run data. The sources of financial frictions are determined by the persistence and volatility of shocks, asymmetric domestic cost of sovereign default, and mismatch between sovereign default and business cycles.
    Keywords: Sovereign default, Business cycles, Financial imperfections, Particle filter, Sequential Monte Carlo, Full nonlinear DSGE
    JEL: E32 E62 F41 F44
    Date: 2018–02
  8. By: Arslan Razmi (Department of Economics, University of Massachusetts Amherst)
    Abstract: This paper discusses some of the inter-temporal issues that arise in the pursuit of real undervaluation to achieve rapid development. Policy makers face a trade-off between achieving a capital stock target in a given amount of time on the one hand and boosting real wages and output in the short run, on the other. This generates a trilemma whereby development-focused policy makers can choose to pursue two out of three desirables: (1) use the real exchange rate as an instrument of development policy, (2) meet the development target within a politically relevant time frame, and (3) maintain political stability. The optimal path under a policy with "unambitious" aims will resemble the typical electoral business cycle trajectory whereby policy makers maintain real overvaluation over much of the cycle. By contrast, achieving relatively ambitious capital stock targets within a relatively short time requires the potentially unpopular strategy of choosing a highly undervalued real exchange rate at the beginning of the planning horizon and gradually increasing the degree of undervaluation thereafter as wages rise. Relevant structural differences between countries imply different initial levels of real undervaluation, distinct optimal trajectories over time, and hence, varying degrees of political trade-offs.
    Keywords: Real exchange rate, development, political business cycles, optimal policy, capital accumulation
    JEL: O11 O25 F43
    Date: 2018
  9. By: Barnett, William A.; Wang, Chan; Wang, Xue; Wu, Liyuan
    Abstract: What is the appropriate inflation target for a currency union, when conducting monetary policy: core inflation or headline inflation? We answer the question in a two-country New Keynesian model with an energy sector. We derive the welfare loss function and find that optimal monetary policy should target output gaps, the terms of trade gap, the Prouder Price Index inflation rates, and the real marginal cost gaps. We use the welfare loss function to evaluate two alternative Taylor-type monetary policy rules. We find that the choice of preferred policy rule depends on the shocks. Specifically, when productivity shocks hit the economy, the policymaker should follow the headline inflation Taylor rule, while the core inflation Taylor rule should be followed when a negative energy endowment shock hits the economy.
    Keywords: Core inflation; Headline inflation; Optimal monetary policy; Currency union; Welfare.
    JEL: E5 F3 F4
    Date: 2018–05–25

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