nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒09‒17
thirteen papers chosen by
Martin Berka
University of Auckland

  1. Multiple Equilibria in Open Economy Models with Collateral Constraints: Overborrowing Revisited By Stephanie Schmitt-Grohé, Martín Uribe
  2. Currency Unions, Trade, and Heterogeneity By Natalie Chen; Dennis Novy
  3. Current account adjustment and retained earnings By Andreas M. Fischer; Henrike Groeger; Philip Sauré; Pinar Yesin
  4. Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment By Philippe Bacchetta; Eric van Wincoop
  5. Fiscal policy and the real exchange rate: Some evidence from Spain By Oscar Bajo-Rubio; Burcu Berke; Vicente Esteve
  6. Euro Area and U.S. External Adjustment: The Role of Commodity Prices and Emerging Market Shocks By Massimo Giovannini; Stefan Hohberger; Robert Kollmann; Lucas Vogel; Marco Ratto; Werner Roeger
  7. Devaluations and Growth: The Role of Financial Development By David Perez-Reyna; Filippo Rebessi
  8. Differences in wage determination in the Eurozone By Mariam Camarero; Gaetano D’Adamo; Cecilio Tamarit
  9. The Exposure of U.S. Manufacturing Industries to Exchange Rates By Willem Thorbecke
  10. Global silver: bullion or specie? Supply and demand in the making of the early modern global economy By Irigoin, Alejandra
  11. The Paradox of Global Thrift By Luca Fornaro
  12. Macroeconomic Adjustment in the Euro Area By Alessio Terzi
  13. Macroeconomic variables and current account balance in Namibia By Eita, Joel Hinaunye; Manuel, Victoria; Naimhwaka, Erwin

  1. By: Stephanie Schmitt-Grohé, Martín Uribe
    Abstract: This paper establishes the existence of multiple equilibria in infinite-horizon open- economy models in which the value of tradable and nontradable endowments serves as collateral. In this environment, the economy is shown to display self-fulfilling financial crises in which pessimistic views about the value of collateral induce agents to delever- age. The paper shows that under plausible calibrations, there exist equilibria with underborrowing. This result stands in contrast to the overborrowing result stressed in the related literature. Underborrowing emerges in the present context because in economies that are prone to self-fulfilling financial crises, individual agents engage in excessive precautionary savings as a way to self-insure.
    Keywords: Pecuniary externalities, collateral constraints, overborrowing, underborrowing, financial crises, capital controls
    JEL: E44 F41 G01 H23
    Date: 2018–01
  2. By: Natalie Chen (Warwick University); Dennis Novy (University of Warwick)
    Abstract: What is the effect of currency unions on international trade? This paper offers a new approach. We rely on a translog gravity equation that predicts variable trade cost elasticities, both across and within country pairs. While we estimate that currency unions are associated with a trade increase of around 38 percent on average, we find substantial underlying heterogeneity. Consistent with the predictions of our model, we find effects around three times as strong for country pairs associated with small import shares, and a zero effect for large import shares. Our results imply that conventional homogeneous currency union estimates do not provide helpful guidance for countries considering to join a currency union such as the euro.
    Date: 2018
  3. By: Andreas M. Fischer (Swiss National Bank); Henrike Groeger (European University Institute); Philip Sauré (Johannes Gutenberg-University Mainz); Pinar Yesin (Swiss National Bank)
    Abstract: This paper develops a formal strategy to calculate current accounts with retained earnings (RE) on equity investment and analyzes their adjustment during the global financial crisis. RE are the part of companies' profits which are reinvested and not distributed to shareholders as dividends. International statistical standards treat RE on foreign direct investment and RE on portfolio investment differently: while the former enter the current and financial account, the latter do not. We show that this differential treatment strongly affects current accounts of several advanced economies, frequently referred to as financial centers, with large positions in equity (portfolio) investment. Our empirical analysis finds that the differential treatment of RE alters the interpretation of current account adjustment for the global financial crisis.
    Keywords: Current account adjustment, financial centers, retained earnings, equity investment
    Date: 2018–08–28
  4. By: Philippe Bacchetta (University of Lausanne); Eric van Wincoop (University of Virginia)
    Abstract: This objective of this paper is to show that the proposal by Froot and Thaler (2000) of delayed portfolio adjustment can account for a broad set of puzzles about the relationship between interest rates and exchange rates. The puzzles include: i) the delayed overshooting puzzle; ii) the forward discount puzzle (or Fama puzzle); iii) the predictability reversal puzzle; iv) the Engel puzzle (high interest rate currencies are stronger than implied by UIP); v) the forward guidance exchange rate puzzle; vi) the absence of a forward discount puzzle with long-term bonds. These results are derived analytically in a simple two-country model with portfolio adjustment costs. Quantitatively, this approach can match all the moments related to these puzzles.
    Date: 2018
  5. By: Oscar Bajo-Rubio (Department of Economics, Universidad de Castilla-La Mancha, 13071 Ciudad Real, Spain); Burcu Berke (Department of Economics, Niğde Ömer Halisdemir University, 51240 Niğde, Turkey); Vicente Esteve (Department of Economic Structure, University of Valencia, Avda. dels Tarongers s/n, 46022 Valencia, Spain)
    Abstract: The factors influencing the real exchange rate are an important issue for a country’s price competitiveness, which is especially relevant to those countries belonging to a monetary union. In this paper, we analyse the relationship between fiscal policy and the real exchange rate for the case of Spain. In particular, we explore how changes in government spending, differentiating between consumption and investment, can affect the long-run evolution of the real exchange rate vis-à-vis the euro area. The distinction between two alternative definitions of the real exchange rate, based on consumption price indices and export prices, respectively, will also prove to be relevant for the results.
    Keywords: Real exchange rate, Government consumption, Government investment
    JEL: E62 F31 F41
    Date: 2018–08
  6. By: Massimo Giovannini; Stefan Hohberger; Robert Kollmann; Lucas Vogel; Marco Ratto; Werner Roeger
    Abstract: The trade balances of the Euro Area (EA) and of the US have improved markedly after the Global Financial Crisis. This paper quantifies the drivers of EA and US economic fluctuations and external adjustment, using an estimated (1999-2017) three-region (US, EA, rest of world) DSGE model with trade in manufactured goods and in commodities. In the model, commodity prices reflect global demand and supply conditions. The paper highlights the key contribution of the post-crisis collapse in commodity prices for the EA and US trade balance reversal. Aggregate demand shocks originating in Emerging Markets too had a significant impact on EA and US trade balances. The broader lesson of this paper is that Emerging Markets and commodity shocks are major drivers of advanced countries’ trade balances and terms of trade.
    Keywords: EA and US external adjustment, commodity markets, emerging markets
    Date: 2018–08
  7. By: David Perez-Reyna (Universidad de los Andes); Filippo Rebessi (California State University, East Bay)
    Abstract: In this paper we rationalize the observation that in emerging markets an exchange rate devaluation might have a negative effect on production, due to the fact that the increase in the value of liabilities denominated in foreign currency causes a tightening in the domestic financial conditions, potentially offsetting the effect of an increase in the value of exports. We build on \cite{Melitz2003} to propose a model with heterogeneous firms in a small open economy where firms face financial frictions when borrowing from abroad. Depending on how strong the friction is, a foreign shock that results in an exchange rate devaluation might translate into lower output, even if exports increase.
    Date: 2018
  8. By: Mariam Camarero (Jaume I University. Department of Economics, Av. de Vicent Sos Baynat s/n, E-12071 Castellón, Spain); Gaetano D’Adamo (University of Valencia, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, Spain); Cecilio Tamarit (University of Valencia, INTECO Joint Research Unit. Department of Applied Economics II. PO Box 22.006 - E-46071 Valencia, Spain)
    Abstract: This paper estimates a simple equilibrium wage equation for a subset of Eurozone countries over the period 1995-2015 using panel cointegration methods that account for cross-country heterogeneity and allow for structural breaks. Results show that the equilibrium wage has been affected by a structural change contemporaneous to the international financial crisis. Moreover, it has different determinants across euro area countries, among which two relatively distinct groups can be identified. In particular, the wage equation in Germany, Austria, Belgium, the Netherlands and Finland is more homogeneous and seem to respond more to macroeconomic conditions than in the group composed of Italy, Spain, Portugal, France and Ireland. This result is highly policy relevant in the context of a single monetary policy, as it may explain the diverging behavior of wages across the Eurozone and also be a potential source of asymmetric shocks and/or asymmetric response to a common shock.
    Keywords: panel cointegration, wage setting, labor market, productivity, real exchange rate
    JEL: E24 C23
    Date: 2018–09
  9. By: Willem Thorbecke
    Abstract: Safe asset demand and currency manipulation increase the dollar and the U.S. current account deficit. Deficits in manufacturing trade cause dislocation and generate protectionism. Dynamic OLS results indicate that U.S. export elasticities exceed unity for automobiles, toys, wood, aluminum, iron, steel, and other goods. Elasticities for U.S. imports from China are close to one or higher for footwear, radios, sports equipment, lamps, and watches and exceed 0.5 for iron, steel, aluminum, miscellaneous manufacturing, and metal tools. Elasticities for U.S. imports from other countries are large for electrothermal appliances, radios, furniture, lamps, miscellaneous manufacturing, aluminum, automobiles, plastics, and other categories. For U.S. exports and especially for U.S. imports from China, trade in more sophisticated products are less sensitive to exchange rates. Stock returns on many of the sectors with high export and import elasticities also fall when the dollar appreciates. Several manufacturing industries are thus exposed to a strong dollar. Policymakers could weaken the dollar and deflect protectionist pressure by promoting the euro, the yen, and the renminbi as alternative reserve currencies.
    Keywords: Exports, Imports, Elasticities, Exchange rate exposure
    JEL: F12 F41
    Date: 2018–03
  10. By: Irigoin, Alejandra
    Abstract: In the early modern period the world economy gravitated around the expansion of long distance commerce. Together with navigation improvements silver was the prime commodity which moved the sails of such trade. The disparate availability of, and the particular demand for silver across the globe determined the participation of producers, consumers and intermediaries in a growing global economy. American endowments of silver are a known feature of this process; however, the fact that the supply of silver was in the form of specie is a less known aspect of the integration of the global economy. This chapter surveys the production and export of silver specie out of Spanish America, its intermediation by Europeans and the re-export to Asia. It describes how the sheer volume produced and the quality and consistency of the coin provided familiarity with, and reliability to the Spanish American peso which made it current in most world markets. By the 18th century it has become a currency standard for the international economy which grew together with the production and coinage of silver. Implications varied according to the institutional settings to deal with specie and foreign exchange in each intervening economy. Generalized warfare in late 18th century Europe brought down governance in Spanish America and coinage fragmented along with the political fragmentation of the empire. The emergence of new sovereign republics and the end of minting as known meant the cessation of the silver standard that had contributed to the early modern globalization.
    Keywords: silver specie; international currency; international trade; monetary capacity; currency trade; global Smithian growth; early modern global economy
    JEL: E42 E44 E5 N10 N20 P5
    Date: 2018–09–01
  11. By: Luca Fornaro (CREI and Universitat Pompeu Fabra)
    Abstract: This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is frequently constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies, aiming at increasing national savings in good times to sustain aggregate demand and employment during busts. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. The reason is that prudential policies by booming countries generate a rise in the global supply of savings or, equivalently, a fall in global aggregate demand. In turn, weaker global aggregate demand exacerbates the recession in countries currently stuck in a liquidity trap. Therefore, paradoxically, the world might very well experience a fall in employment and output following the implementation of prudential policies.
    Date: 2018
  12. By: Alessio Terzi (Center for International Development at Harvard University)
    Abstract: Macroeconomic adjustment in the euro area periphery was more recessionary than pre-crisis imbalances would have warranted. To make this claim, this paper uses a Propensity Score Matching Model to produce counterfactuals for the Eurozone crisis countries (Greece, Portugal, Ireland, Cyprus, Spain) based on over 200 past macroeconomic adjustment episodes between 1960-2010 worldwide. At its trough, between 2010 and 2015 per capita GDP had contracted on average 11 percentage points more in the Eurozone periphery than in the standard counterfactual scenario. These results are not dictated by any specific country experience, are robust to a battery of alternative counterfactual definitions, and stand confirmed when using a parametric dynamic panel regression model to account more thoroughly for the business cycle. Zooming in on the potential causes, the lack of an independent monetary policy, while having contributed to a deeper recession, does not fully explain the Eurozone’s specificity, which is instead to be identified in a sharper-than-expected contraction in investment and fiscal austerity due to high funding costs. Reading through the overall findings, there are reasons to believe that an incomplete Eurozone institutional setup contributed to aggravate the crisis through higher uncertainty.
    Keywords: macroeconomic adjustment, financial crisis, Eurozone, growth, propensity score matching
    Date: 2018–02
  13. By: Eita, Joel Hinaunye; Manuel, Victoria; Naimhwaka, Erwin
    Abstract: This paper investigates macroeconomic determinants of the current account balance in Namibia. The results show that there is evidence of twin deficit hypothesis in Namibia. Evidence of twin deficit hypothesis suggest that it is important for Namibia to have fiscal discipline in order to improve its current account. Increase in capital flows, real GDP or per capita, results in a deterioration of the current account. Increase in interest rate, commodity prices and population cause the current account balance to improve. This suggest that contractionary monetary policy contributed to reduction of unproductive imports and improved the current account balance.
    Keywords: current account, balance of payments, cointegration, Namibia
    JEL: C19 F3 F30 F32
    Date: 2018–03–13

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