nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒09‒24
ten papers chosen by
Martin Berka
University of Auckland

  1. Inflation Targeting Consequences for Exchange Rates By Paul Beaudry; Amartya Lahiri
  2. Ramsey Taxation in the Open Economy By Varadarajan Chari; Juan Pablo Nicolini; Pedro Teles
  3. Multiple Equilibria in Open Economy Models with Collateral Constraints: Overborrowing Revisited By Martin Uribe
  4. Fiscal Space and Government-Spending & Tax-Rate Cyclicality Patterns: A Cross-Country Comparison, 1960-2016 By Joshua Aizenman; Yothin Jinjarak; Hien Thi Kim Nguyen; Donghyun Park
  5. Price Rigidities and the Relative PPP By Julio Blanco; Javier Cravino
  6. Twin Deficits in Developing Economies By Davide Furceri; Aleksandra Zdzienicka
  7. Euro Area and U.S. External Adjustment: The Role of Commodity Prices and Emerging Market Shocks By Giovannini, Massimo; Hohberger, Stefan; Kollmann, Robert; Ratto, Marco; Roeger, Werner; Vogel, Lukas
  8. Current account adjustment and retained earnings By Fischer, Andreas M; Groeger, Henrike; Saure, Philip; Yesin, Pinar
  9. Global trends in interest rates By Del Negro, Marco; Giannone, Domenico; Giannoni, Marc; Tambalotti, Andrea
  10. Monetary Policy and Carry Trade By José Ignacio López Gaviria; Virginia Olivella

  1. By: Paul Beaudry (University of British Columbia); Amartya Lahiri (University of British Columbia)
    Abstract: We uncover a curious data fact. Countries which have switched to inflation targeting have seen their currencies turn into oil currencies with rising oil prices inducing a currency appreciation while in the pre-inflation targeting regime there was no such relationship. Importantly, this data fact holds independent of whether the country is a net oil exporter or importer. We show that one possible explanation for this is that inflation targeting in open economies renders the equilibrium dynamics indeterminate when uncovered interest parity (UIP) does not hold. In such situations, oil prices may well act as a focal point for currency pricing decisions.
    Date: 2018
  2. By: Varadarajan Chari (University of Minneapolis); Juan Pablo Nicolini (Minneapolis Fed); Pedro Teles (Banco de Portugal, Univ Catolica Portugu)
    Abstract: We study cooperative optimal Ramsey equilibria in the open economy addressing classic policy questions: Should there be restrictions to free trade and capital mobility? Should capital income be taxed? Should goods be taxed based on origin or destination? What are desirable border adjustments? Can a Ramsey allocation be implemented with residence based taxes on assets? We characterize optimal wedges and analyze alternative policy implementations.
    Date: 2018
  3. By: Martin Uribe (Columbia University)
    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 deleverage. 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.
    Date: 2018
  4. By: Joshua Aizenman; Yothin Jinjarak; Hien Thi Kim Nguyen; Donghyun Park
    Abstract: The upward trajectory of OECD policy interest rates may impose growing fiscal challenges, thus testing the fiscal space of countries and their resilience. Against this background, we compare fiscal cyclicality across Asia, Latin America, OECD, and other regions from 1960-2016, then identify factors that explain countries’ government spending and tax-policy cyclicality. Our study reveals a mixed fiscal scenery, where more than half of the countries are recently characterized by limited fiscal space, and fiscal policy is either acyclical or procyclical (though not as high the level of 1980s), notably post-GFC becoming even more procyclical in government spending when accounting for net acquisition of nonfinancial assets and capital expenditure (spending components do matter). The cyclicality is also asymmetric: on average, a more indebted (relative to tax base) government spent more in good times (positive growth) and cut back the spending even more in bad times (weak economy). Added to the public debt/GDP data, we construct the ‘limited-fiscal-capacity’ statistic, measured by the size of public debt/[average tax revenue] and its volatility, which is found positively associated with the fiscal pro-cyclicality. Further, we also find that country’s sovereign wealth fund has a countercyclical effect in our estimation. The analysis depicts a significant economic impact of an enduring interest-rate rise on fiscal space: a 10% increase of public debt/tax base is associated with an upper bound of 6.1% increase in government-spending procyclicality. For both government-spending cyclicality and tax-rate cyclicality, we find no one-size-fits-all explanation for all (OECD/developing) countries at all (good/bad) times. Fiscal space, trade, and financial openness, the share of natural resource/manufacturing exports, inflation, and institutional risks are associated with the cross-country patterns of fiscal cyclicality, suggesting the measured cyclicality is context specific and the fiscal-monetary-political economy interactions are at work. We rank the explanatory factors across countries and regions and discuss policies to increase the fiscal capacity for countercyclical policy.
    JEL: F4 F41 H2 H3
    Date: 2018–09
  5. By: Julio Blanco (University of Michigan); Javier Cravino (University of Michigan)
    Abstract: We measure the proportion of real exchange rate movements accounted for by cross-country movements in relative reset prices (prices that changed since the previous period) using CPI microdata for the UK, Austria and Mexico. Relative reset prices account for almost all of the real exchange rate movements in the data. This is at odds with the predictions of Sticky Price Open Economy models with complete markets, which generate volatile and persistent real exchange rates but not through movements in relative reset prices. We show that incomplete markets models featuring UIP deviations are much closer to replicating the empirical decomposition at low frequencies.
    Date: 2018
  6. By: Davide Furceri; Aleksandra Zdzienicka
    Abstract: This paper provides new evidence on the existence and magnitude of the “twin deficits” in developing economies. It finds that a one percent of GDP unanticipated increase in the government budget balance improves, on average, the current account balance by 0.8 percentage point of GDP. This effect is substantially larger than that obtained using standard measures of fiscal impulse, such as the cyclically-adjusted budget balance. The results point to heterogeneity across countries and over time. The effect tends to be larger: (i) during recessions; in countries (ii) that are more open to trade; (iii) that have less flexible exchange rate regimes; and (iv) with lower initial public debt-to-GDP ratios.
    Keywords: Fiscal policy;Current account;Twin Deficits, Developing Economies, International Policy Coordination and Transmission
    Date: 2018–07–27
  7. By: Giovannini, Massimo; Hohberger, Stefan; Kollmann, Robert; Ratto, Marco; Roeger, Werner; Vogel, Lukas
    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: Euro Area and US external adjustment, commodity markets, emerging markets
    JEL: F2 F3 F4
    Date: 2018–08–06
  8. By: Fischer, Andreas M; Groeger, Henrike; Saure, Philip; Yesin, Pinar
    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: financial centers; Current account adjustment; equity investment; retained earnings
    JEL: F32 F47 G11
    Date: 2018–08
  9. By: Del Negro, Marco (Federal Reserve Bank of New York); Giannone, Domenico (Federal Reserve Bank of New York); Giannoni, Marc (Federal Reserve Bank of Dallas); Tambalotti, Andrea (Federal Reserve Bank of New York)
    Abstract: The trend in the world real interest rate for safe and liquid assets fluctuated close to 2 percent for more than a century, but has dropped significantly over the past three decades. This decline has been common among advanced economies, as trends in real interest rates across countries have converged over this period. It was driven by an increase in the convenience yield for safety and liquidity and by lower global economic growth.
    Keywords: world interest rate; convenience yield; interest rate parity; VAR with common trends
    JEL: E43 E44 F31 G12
    Date: 2018–09–01
  10. By: José Ignacio López Gaviria (Universidad de los Andes); Virginia Olivella (Banque de France)
    Abstract: This paper discusses the relation between monetary policy and currency risk premium in the context of a model in which central banks diverge in terms of the preferences and act either under discretion or commitment. The model is able to reproduce sizable foreign currency risk premium under discretion when the central bank in the foreign country is less conservative than the monetary authority at home which leads to higher nominal interest rates and a counter-cyclical inflation in the foreign country. The model when calibrated to match key moments of real and nominal macroeconomic variables of Latin America countries can explain the excess returns of the currencies of the region.
    Date: 2018

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