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on Open Economy Macroeconomics |
| By: | Michael B. Devereux (University of British Columbia); Gregor W. Smith (Queen's University) |
| Abstract: | Countries that specialize in commodity exports often exhibit a correlation between the relevant commodity price and the value of their currency. We explore a natural but little-studied explanation for this correlation. An increase in the commodity price leads to increases in the future values of the international differential in policy interest rates. The tightening of expected future monetary policy relative to the US then leads to an immediate appreciation. We show theoretically that this correlation depends on the stance of monetary policy. We then derive a statistical model that embodies this mechanism and test the over-identifying restrictions for Australia, Canada, and New Zealand. For all three countries, controlling for the effect of commodity prices in predicting current and future monetary policy leaves them no significant, remaining role in statistically explaining exchange rates. |
| Keywords: | commodity currency, exchange rate, monetary policy |
| JEL: | F31 F41 E52 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1408&r=opm |
| By: | Chen, Natalie; Chung, Wanyu; Novy, Dennis |
| Abstract: | Using detailed firm-level transactions data for UK imports, this paper studies the relationship between invoicing currency choices and the response of import prices to exchange rate changes. We find that for transactions invoiced in a vehicle currency, import prices are much more sensitive to changes in the vehicle currency than in the bilateral exchange rate. Aggregate pass-through therefore substantially increases once we account for vehicle currencies. We also show how this translates into higher pass-through for UK consumer prices, in particular during the Great Recession and in the period following the Brexit referendum. Finally, we develop a theoretical framework to conceptualize exchange rate pass-through in the context of vehicle currency pricing. Overall, our results contribute to understanding the exchange rate disconnect puzzle, and have implications for the setting of monetary policy. |
| Keywords: | CPI; Dollar; Euro; Exchange Rate Pass-Through; Inflation; Invoicing; Sterling; UK; Vehicle Currency Pricing |
| JEL: | F14 F31 F41 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13085&r=opm |
| By: | Franz Hamann (Banco de la República); Enrique Mendoza (University of Pennsylvania); Paulina Restrepo-Echavarria (Federal Reserve Bank of St Louis) |
| Abstract: | In this paper we document the stylized facts about the relationship between international oil price swings, sovereign risk and macroeconomic performance of oil-exporting economies. We show that even though being a bigger oil producer decreases sovereign risk–because it increases a country’s ability to repay–having more oil reserves increases sovereign risk by making autarky more attractive. We develop a small open economy model of sovereign risk with incomplete international financial markets, in which optimal oil extraction and sovereign default interact. We use the model to understand the mechanisms behind the empirical facts. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1235&r=opm |
| By: | Georg Duernecker (University of Munich); Berthold Herrendorf (Arizona State University) |
| Abstract: | The currency in which international prices are set is a factor of fundamental importance in international economics: it determines the benefits of floating versus pegged exchange rates and the spillover effects of national monetary policy on other economies. However, the standard assumption in existing models - that all prices are set in a currency of either the producer or the consumer - is inconsistent with two basic facts: the dominant status of the dollar in global trade and the radical transformation of the price system over history. In this paper, I develop a general equilibrium multi-country framework with endogenous currency choice that is consistent with thess of occupations. We then feed the stricter German degree requirements into the otherwise unchanged model. We find that as a result Germans in the model work considerably fewer hours than Americans in the service sector in particular and in the market in general. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:89&r=opm |
| By: | LI Zhigang; WEI Shang-Jin; ZHANG Hongyong |
| Abstract: | Using unique Japanese firm-level production network data combined with international trade data, we examine the upstream/downstream propagation effects of exchange rate shocks on the performance of indirect exporters/importers. Indirect exporters (importers) are defined as firms which do not export (import) by themselves but supply to (buy from) at least one exporting (importing) firm. We construct firm-specific export and import effective exchange rates to take account of the variations of exchange rate exposure across trading firms. We find significant and robust responses in sales and profitability of indirect exporters to exchange rate shocks of downstream exporting firms, which suggests the upstream propagation effect of exchange rate shocks. Both the sales and profitability of the indirect exporters improved significantly with yen depreciation in downstream industries. However, on the other hand, there is weak evidence on the responses of indirect importers to exchange rate exposure of upstream importing firms. Furthermore, the responses in sales and profitability are heterogeneous among direct and indirect exporters/importers by relative firm size and upstreamness in the production chains. Our results suggest that the stabilization of exchange rates is crucial to firm performance, especially to the small and medium enterprises engaging in indirect exporting, from the perspective of supply chains. |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:18058&r=opm |
| By: | Javier Bianchi (Federal Reserve Bank of Minneapolis); Cesar Sosa-Padilla (Notre Dame) |
| Abstract: | We study the use of foreign reserves for macroeconomic stabilization purposes in a small open economy. Three key features characterize our model economy: (i) nominal rigidities, (ii) fixed exchange rates, and (iii) sovereign default risk. We argue that these features are prevalent in a large number of emerging economies. In this setup, reserve accumulation not only serves a precautionary role (hedging against roll-over risk) but it is also useful for macro-stabilization goals: in bad times, when aggregate demand is low, involuntary unemployment arises and output is low, the country can use (i.e. run down) its reserves to boost aggregate demand and output. We study the country’s optimal external portfolio composition (debt and reserves), how the stabilization property of reserves interacts with the typical precautionary role, and how this affects the country’s default incentives. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:1166&r=opm |
| By: | Akay, Alpaslan (University of Gothenburg); Brausmann, Alexandra (ETH Zurich); Djajic, Slobodan (Graduate Institute of International and Development Studies, Geneva); Kirdar, Murat G. (Bogazici University) |
| Abstract: | How does saving behavior of immigrants respond to changes in purchasing power parity between the source and host countries? We examine this question by building a theoretical model of joint return-migration and saving decisions of temporary migrants and then test its implications by using data from the German Socioeconomic Panel on immigrants from 92 source countries. As implied by our theoretical model, we find that the saving rate increases in the nominal exchange rate but decreases in the source-country price level and that the absolute magnitude of both relationships increases as the time to retirement becomes shorter. At the median level of years to retirement, the absolute values of the elasticity of savings with respect to the nominal exchange rate and with respect to the source-country price level are both close to unity. Moreover, as we gradually restrict the sample to individuals with stronger return intentions, the estimated magnitudes become larger and their statistical significance higher. |
| Keywords: | migrants' savings, return migration, exchange rates, prices, PPP |
| JEL: | F22 J61 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp11679&r=opm |
| By: | Enrique Mendoza (Department of Economics, University of Pennsylvania) |
| Abstract: | Macroprudential policy holds the promise of becoming a powerful tool for preventing financial crises. Financial amplification in response to domestic shocks or global spillovers and pecuniary externalities caused by Fisherian collateral constraints provide a sound theoretical foundation for this policy. Quantitative studies show that models with these constraints replicate key stylized facts of financial crises, and that the optimal financial policy of an ideal constrained-efficient social planner reduces sharply the magnitude and frequency of crises. Research also shows, however, that implementing effective macroprudential policy still faces serious hurdles. This paper highlights three of them: (i) complexity, because the optimal policy responds widely and non-linearly to movements in both domestic factors and global spillovers due to regime shifts in global liquidity, news about global fundamentals, and recurrent innovation and regulatory changes in world markets, (ii) lack of credibility, because of time-inconsistency of the optimal policy under commitment, and (iii) coordination failure, because a careful balance with monetary policy is needed to avoid quantitatively large inefficiencies resulting from violations of Tinbergen’s rule or strategic interaction between monetary and financial authorities. |
| JEL: | E0 F0 G0 |
| Date: | 2016–10–24 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:16-020&r=opm |
| By: | Stephane Auray (CREST-Ensai and ULCO); Aurelien Eyquem (GATE, Universit\'e Lumiere Lyon 2, Institut Universitaire de France); Paul Gomme (Concordia University and CIREQ) |
| Abstract: | We solve the Ramsey-optimal tax plan for a small open economy with an endogenously-determined real exchange rate. The open economy constrains the government's setting of the capital income tax rate since physical capital cannot be dominated in rate of return by foreign assets. However, the endogenous real exchange rate loosens this constraint relative to a one good open economy model in which the real exchange rate is necessarily fixed. We find that, the dynamics of the two good small open economy model more closely resemble those of a closed economy model than a one good small open economy model. |
| Keywords: | optimal fiscal policy, tax reforms, welfare |
| JEL: | E32 E52 F41 |
| Date: | 2018–08 |
| URL: | http://d.repec.org/n?u=RePEc:crd:wpaper:18001&r=opm |
| By: | David Kohn (Universidad Catolica de Chile); Fernando Leibovici (Federal Reserve Bank of St. Louis); Michal Szkup (The University of British Columbia) |
| Abstract: | We study the role of financial frictions and balance-sheet effects in account- ing for the dynamics of aggregate exports, output, and investment in large devaluations. We investigate a small open economy with heterogeneous firms and endogenous export decisions, in which firms face financing constraints and debt can be denominated in foreign units. We find that these channels can explain only a small fraction of the dynamics of exports observed in the data since financially-constrained exporters increase exports by reallocating sales across markets. We show analytically the role of this mechanism on exports adjustment and document its importance using plant-level data. |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed018:949&r=opm |
| By: | Eberhardt, Markus |
| Abstract: | Why do some sovereigns repay their debts while others default? I empirically study four theories for default (or its avoidance): (i) reputation, (ii) punishment, (iii) domestic politics, and (iv) international spillovers. Running horse races for a large sample of developing and emerging economies (1970-2015) I find that reputation and spillover effects dominate in terms of economic significance; there is less convincing evidence for punishment effects or political factors. In robustness checks I allow for the transmission of each theory strand through macro-fundamentals, account for capital controls, debt relief, and capital flow bonanzas, investigate domestic, private and present-value external debt, and conduct sample splitting exercises (by exchange rate arrangement, political regime, financial development, and time period). Though they provide more refined insights into the differential mechanisms at work, none of these exercises substantially alter the above conclusions. |
| Keywords: | early warning system; International Capital Markets; Politics; public debt; punishment; reputation; sovereign default; Spillovers |
| JEL: | F34 F41 G15 H63 |
| Date: | 2018–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13084&r=opm |
| By: | Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Godwin Olasehinde-Williams (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus, Turkey); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, Omaha, USA, and School of Business and Economics, Loughborough University, Leicestershire, UK.) |
| Abstract: | In this paper, we analyze the spillovers of uncertainty from the United States (US) on Gross Domestic Product (GDP) in a large panel of 50 advanced and emerging economies. We allow the response of GDP in each country to vary according to its exchange rate regime, trade openness, and a vulnerability index (based on current account, foreign reserves, inflation, and external debt). We observe large heterogeneity in the response of advanced and emerging economies to uncertainty surprises of the US. In response to an increase in US uncertainty, GDP in foreign economies drops about as much as it does in the US. In addition we find that, for advanced economies trade intensity with the US and the exchange rate regime account for a large portion of the contraction in activity. In emerging economies, however, the responses do not depend on the exchange rate regime, but are larger when trade openness is high and vulnerability is low. |
| Keywords: | US uncertainty, Foreign spillovers, Local projection, Macroeconomic transmission, Panel data |
| JEL: | C32 C33 F4 G3 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201857&r=opm |