nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒10‒01
eleven papers chosen by
Martin Berka
University of Auckland

  1. Relative productivity and search unemployment in an open economy By Luisito Bertinelli; Olivier Cardi; Romain Restout
  2. Rollover Crises and Currency Unions By Javier Bianchi; Jorge Mondragon
  3. Deviations in real exchange rate levels in the OECD countries and their structural determinants By Martin Berka; Daan Steenkamp
  4. Do global value chains amplify global imbalances? By Antonia Lopez Villavicencio; Valérie Mignon
  5. Germany in fundamental macroeconomic disequilibrium - the external surplus By Jan Priewe
  6. Financial Development, Unemployment Volatility, and Sectoral Dynamics By Epstein, Brendan; Finkelstein Shapiro, Alan
  7. Exchange Rate Pass-Through to Consumer Prices and the Role of Energy Prices By Hyeongwoo Kim; Ying Lin
  8. Gross Capital Flows and International Diversification By Hyunju Lee
  9. Global Financial Risk, Domestic Financial Access, and Unemployment Dynamics By Epstein, Brendan; Finkelstein Shapiro, Alan; Gonzalez Gomez, Andres
  10. International Spillovers and ‘Ex-ante’ Efficient Bailouts By Marina Azzimonti; Vincenzo Quadrini
  11. Imperfect mobility of labor across sectors and fiscal transmission By Olivier Cardi; Romain Restout; Peter Claeys

  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: E24 F16 F32 F41 J64
    Date: 2018
  2. By: Javier Bianchi (Federal Reserve Bank of Minneapolis); Jorge Mondragon (University of Minnesota)
    Abstract: This paper examines how an economy that belongs to a currency union is more vulnerable to a rollover crisis. We study a model of endogenous sovereign default with self-fulfilling rollover crisis and downward nominal wage rigidity. We show that a reces- sion triggered by self-fufilling beliefs about a rollover crisis pushes the economy towards more frequent defaults.
    Date: 2018
  3. By: Martin Berka; Daan Steenkamp
    Abstract: We study the validity of an augmented Balassa-Samuelson theory in a panel of real exchange rate levels across 17 OECD countries between 1970 and 2012 using a unique panel of levels of total factor productivity (TFP) across sectors. We find that real exchange rates can be explained by relative sectoral TFP levels both across countries and over time in the direction predicted by Balassa-Samuelson hypothesis. We also show that drivers of labour wedges such as structural labour market differences are important in explaining real exchange rate levels. Nevertheless, large average conditional deviations in real exchange rate levels remain across countries in our sample.
    Keywords: Balassa-Samuelson;Real Exchange Rates;OECD;Total Factor Productivity;Labour Wedge;Unit Labour Cost
    JEL: E12 E23 E24 F31 F33 F41 F43
    Date: 2018–09
  4. By: Antonia Lopez Villavicencio; Valérie Mignon
    Abstract: This paper addresses the impact of countries' participation in global value chains (GVCs) on their current account balances. Relying on a panel of 57 advanced and emerging countries, we do not find evidence that GVC participation directly raises economies' current account positions. On the contrary, we show that backward participation makes a negative contribution to current account balances: our results contradict the speculation that current account imbalances of downstream countries are likely to benefit more from GVC participation than economies which are located further upstream. Moreover, we show that there is no significant indirect effect of GVC on the current account operating through the exchange rate. Finally, our findings indicate that whereas GVC participation boosts exports, this increase is not accompanied by improvements in price competitiveness, nor by higher levels of saving rates.
    Keywords: Global value chains; Current account imbalances
    JEL: F32 F4
    Date: 2018
  5. By: Jan Priewe
    Abstract: Despite performing very positively on some key macroeconomic indicators in recent years, the German economy is in grave disequilibrium if the high current account surplus is included in the analysis. The paper scrutinises the evolution of Germany's external surplus since the inception of the Euro in 1999. This is done by identifying the main determinants of exports and imports and by analysing the accounting identity in which the current account is national saving less total fixed investment. While price competitiveness measured by real exchange rates is strongly improved by German imports for exports within international value chains, also by real undervaluation against other member countries, the focus is on the combination of price- and non-price competitiveness. The latter is mainly determined by the global income elasticity for imports from Germany, relative to the income elasticity for imports to Germany. Despite heavy fluctuations, the past trend shows a clear wedge between the growth of exports and imports of almost one percentage point. If this trend continues the German trade balance would reach 15% of GDP in 2026 which would be a time bomb for the cohesion of the European Monetary Union. Market-based rebalancing is not in sight. It is the built-in dynamics of the external surplus that is hazardous. The problem is aggravated as Germany sits in the same boat with three other hard-core surplus seeking countries (Netherlands, Ireland, Luxembourg). In recent years the imbalances within EMU have changed, pulling former deficit countries in mild surplus but leaving the diversity of current account balances among EMU members at a spread of 8-10 percentage points, with an external trade surplus of EMU as a whole of 4.5% and 3.5% current account surplus. Germany carries nearly 77% and 55% of the current account and the trade surplus, respectively, and has - far ahead others - become the largest surplus country on the globe, in absolute terms. This constellation is unsustainable and requires policy action in Germany, in the European Union, the Euro Area and also by global authorities.
    Keywords: balance of payments, global imbalances, real exchange rates, competitiveness, European Monetary Union
    JEL: E5 E6 F14 F15 F41 F42
    Date: 2018
  6. By: Epstein, Brendan; Finkelstein Shapiro, Alan
    Abstract: We document a negative and significant relationship between domestic financial de- velopment and unemployment volatility in developing and emerging economies (DEMEs). However, there is no significant relationship between these variables in advanced economies (AEs). A labor-search model with production heterogeneity, sectoral financial frictions, and interfirm input credit can rationalize these differential cross-country results. Un- employment volatility is decreasing in financial development, but the quantitative relevance of this relationship is increasing in the extent to which input credit is prevalent in an economy. This insight is consistent with the fact that, empirically, input credit is much more prominent in DEMEs compared to AEs.
    Keywords: Business cycles, financial development, financial frictions, labor markets, large firms, search frictions, small firms
    JEL: E24 E32 E44 F41
    Date: 2018
  7. By: Hyeongwoo Kim; Ying Lin
    Abstract: A group of researchers has asserted that the rate of exchange rate pass-through (ERPT) to domestic prices has declined substantially over the last few decades. We revisit this claim of a downward trend in the rate of ERPT to the Consumer Price Index (CPI) by employing the vector autoregressive (VAR) model for the U.S. macroeconomic data under the current floating exchange rate regime. Our VAR approach that nests the conventional single equation method reveals very weak evidence of ERPT during the pre-1990 era. On the other hand, we observe statistically significant evidence of ERPT during the post-1990 era, which sharply contrasts with previous findings. After statistically confirming a structural break in ERPT to the total CPI via Hansen's (2001) test procedure, we seek the source of the structural break using the disaggregate level CPIs, which pinned down a key role of energy prices in explaining the emergence of the break. The dependency of the U.S. energy consumption on imports has increased since the 1990s. This change magnifies the effects of the exchange rate shock on domestic energy prices, resulting in greater responses of the total CPI via this energy price channel.
    Keywords: Exchange Rate Pass Through; Disaggregated CPI; Structural Break; Oil Price Shock
    JEL: E31 F31 F41
    Date: 2018–09
  8. By: Hyunju Lee (University of Minnesota)
    Abstract: Gross capital flows, which arise from the changes in international investment positions, experienced a sudden collapse during the Great Recession in the United States and other advanced countries. This paper builds an open economy model of portfolio choice with two bonds and two non-tradable sectors. Equilibrium portfolios are long in domestic bonds and short in foreign bonds because the endogenous movements of real exchange rate make this portfolio a good hedge against non-tradable consumption risk. With a calibrated model, I find that the observed fluctuations in gross flows mitigated 4% of consumption drop during the Great Recession in the United States.
    Date: 2018
  9. By: Epstein, Brendan; Finkelstein Shapiro, Alan; Gonzalez Gomez, Andres
    Abstract: We empirically show that after an increase in global financial risk, the response of unemployment is markedly more subdued in emerging economies (EMEs) relative to small open advanced economies (SOAEs), while the differential response of GDP and investment across the two country groups is noticeably smaller, if at all, in EMEs. A model with banking frictions, frictional unemployment, and household and firm heterogeneity in financial inclusion can help rationalize these facts. Limited financial inclusion among households is central to explaining the differ- ential response of unemployment in EMEs amid global financial risk shocks.
    Keywords: Emerging economies, business cycles, unemployment, labor search frictions, financial frictions, financial inclusion.
    JEL: E24 E32 E44 F41
    Date: 2018
  10. By: Marina Azzimonti; Vincenzo Quadrini
    Abstract: We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction also in other countries. This generates a self-interest for these other countries to bailout the defaulting country. A novel insight of the paper is that bailouts could be efficient not only ex-post (after the debt has been issued) but also ex-ante (before the issuance of the debt). Although anticipated bailouts create the typical moral hazard problem leading countries to issue more debt, this may correct for the under issuance of public debt that would result from the lack of cross-country policy coordination.
    JEL: E44 E6 E61 E62 F3 F36 F42 F44 H63
    Date: 2018–09
  11. By: Olivier Cardi; Romain Restout; Peter Claeys
    Abstract: Our paper investigates the impact of government spending shocks on relative sector size and contrasts the effects across countries. Using a panel of sixteen OECD countries over the period 1970-2007, our VAR evidence shows that a rise in government consumption i) increases the share of non tradables in labor and real GDP while lowering the share of tradables, and ii) causes a significant increase in non traded wages relative to traded wages. While the first finding reveals that the non traded sector is more intensive in the government spending shock and experiences a labor inflow that increases its relative size, the second finding suggests the presence of labor mobility costs preventing wage equalization across sectors. These labor mobility costs appear to play a key role in determining changes in relative sector size across time and space. Whilst the responses of intersectoral labor reallocation and sectoral shares are found empirically to decline over time, the share of non tradables increases more in countries where the degree of labor mobility across sectors is higher. To account for our evidence, we develop an open economy version of the neoclassical model with tradables and non tradables. Our quantitative analysis shows that the open economy model is successful in replicating the responses of sectoral output shares to a fiscal shock, as long as we allow for a difficulty in reallocating labor across sectors along with adjustment costs to capital accumulation. Finally, calibrating the model to country-specific data, we are able to generate a cross-country relationship between the degree of labor mobility and the responses of sectoral output shares which is similar to that in the data.
    Keywords: Fiscal policy, Labor mobility, Investment, Current account, Non tradables, Sectoral wages
    JEL: E22 E62 F11 F41 J31
    Date: 2018

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