nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒10‒29
nine papers chosen by
Martin Berka
University of Auckland

  1. No Pain, All Gain? Exchange Rate Flexibility and the Expenditure-Switching Effect By Yan Carriere-Swallow; Nicolas E Magud; Juan Yepez
  2. The Yen Exchange Rate and the Hollowing-out of Japanese Industry By Belke, Ansgar; Volz, Ulrich
  3. Cross-border Banking and the Circumvention of Macroprudential and Capital Control Measures By Eugenio M Cerutti; Haonan Zhou
  4. Sovereign risk and cross-country heterogeneity in the transmission of monetary policy to bank lending in the euro area By Pietro Grandi
  5. Exchange rate pass-through into euro area inflation. An estimated structural model By Lorenzo Burlon; Alessandro Notarpietro; Massimiliano Pisani
  6. Endogenous Time-Varying Volatility and Emerging Market Business Cycles By Jan-Philipp Dueber
  7. The global effects of global risk and uncertainty By Bonciani, Dario; Ricci, Martino
  8. Which External Shock Matters in Small Open Economies? US Economic Policy Uncertainty vs. Global Risk Aversion By Youngju Kim; Hyunjoon Lim
  9. Gold Price and Exchange Rates: A Panel Smooth Transition Regression Model for the G7 Countries By Nikolaos Giannellis; Minoas Koukouritakis

  1. By: Yan Carriere-Swallow; Nicolas E Magud; Juan Yepez
    Abstract: Theoretical models on the relationship between prices and exchange rates predict that the magnitude of expenditure switching affects the optimal choice of exchange rate regime. Focusing on the transmission of terms-of-trade shocks to domestic real variables we document that the magnitude of the expenditure switching effect is positively associated to the degree of exchange rate flexibility. Moreover, results show that flexible exchange rates allow for significant adjustment in relative prices, which in turn lowers the burden of adjustment on demand for domestic goods and, in some cases, facilitates a faster and more durable external adjustment process. These results, which are robust to accounting for possible non-linearities due to balance sheet effects or currency mismatches, shed new light on the shock absorbing properties of flexible exchange rates.
    Date: 2018–09–28
  2. By: Belke, Ansgar; Volz, Ulrich
    Abstract: Since the demise of the Bretton Woods, the yen has seen several episodes of strong appreciation, including in the late 1970s, after the 1985 Plaza Agreement, the early and late 1990s and after 2008. These appreciations have not only been associated with “expensive yen recessions” resulting from negative effects on exports; since the late 1980s, the strong yen has also raised concerns about a de-industrialisation of the Japanese economy. Against this backdrop, the paper investigates the effects of changes to the yen exchange rate on the hollowing out of the Japanese industrial sector. To this end, the paper uses both aggregate and industry-specific data to gauge the effects of yen fluctuations on the output and exports of different Japanese industries, exploiting new data for industry-specific real effective exchange rates. Our findings support the view that the periods of yen appreciation had more than just transitory effects on Japanese manufacturing. The results also provide indication of hysteresis effects on manufacturing. While there are certainly also other factors that have contributed to a hollowing out of Japanese industry, a strong yen played a role, too.
    Keywords: Yen appreciation,exchange rates,Japanese manufacturing,hollowing out,hysteresis
    JEL: F31 O14
    Date: 2018
  3. By: Eugenio M Cerutti; Haonan Zhou
    Abstract: We analyze the joint impact of macroprudential and capital control measures on cross-border banking flows, while controlling for multidimensional aspects in lender-and-borrower-relationships (e.g., distance, cultural proximity, microprudential regulations). We uncover interesting spillover effects from both types of measures when applied either by lender or borrowing countries, with many of them most likely associated with circumvention or arbitrage incentives. While lender countries’ macroprudential policies reduce direct cross-border banking outflows, they are associated with larger outflows through local affiliates. Direct cross-border inflows are higher in borrower countries with more usage of macroprudential policies, and are linked to circumvention motives. In the case of capital controls, most spillovers seem to be present through local affiliates. We do not find evidence to support the idea that additional capital inflow controls could interact with macro-prudential policies to mitigate cross-border spillovers.
    Date: 2018–09–28
  4. By: Pietro Grandi (Université Panthéon Assas (Paris 2), LEMMA - Laboratoire d'économie mathématique et de microéconomie appliquée - UP2 - Université Panthéon-Assas - Sorbonne Universités)
    Abstract: Is the transmission of monetary policy to bank lending heterogeneous across euro area countries? This paper employs annual bank level data to test whether the bank lending channel of monetary policy was heterogeneous in the euro area over the period 2007-2016. To do so it follows a simple procedure that allows direct testing of how monetary policy affected similar banks located in different countries. Results indicate that the transmission of monetary policy to bank lending was heterogeneous across countries that were differently exposed to the sovereign debt crisis. On average, the same 1% cut in the policy rate led to a 1.6% increase in lending by banks located in non-stressed countries as opposed to a 0.4% increase for banks located in countries under severe sovereign stress. Unconventional monetary policy – as captured by the ECB shadow rate – was also unevenly transmitted to bank lending. Exposure to sovereign risk is identified as a key source of heterogeneity. Within stressed countries, banks with larger sovereign exposures reacted to monetary easing by expanding lending by less than banks with smaller exposures. As a result, monetary accommodation was smoothly transmitted to lending only by banks with limited exposure to sovereign risk. In response to the same 1% policy rate cut, the credit expansion of highly exposed stressed countries banks was instead 2.75% weaker than that of banks in non-stressed countries. These findings support existing evidence on sovereign risk having direct adverse consequences for bank lending and highlight the extent to which sovereign risk aggravated heterogeneities in the transmission on monetary policy to the real economy via the banking system during the euro area debt crisis.
    Keywords: Bank lending channel,Monetary policy transmission,Cross-country heterogeneity,Sovereign risk,Financial structures,Banking integration
    Date: 2018–09–21
  5. By: Lorenzo Burlon; Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the exchange rate pass-through (ERPT) into euro area (EA) inflation by estimating an open economy New Keynesian model with Bayesian methods. In the model ERPT is incomplete because of local currency pricing and distribution services, with the latter allowing to distinguish between ERPT at the border and ERPT at the consumer level. Our main results are the following ones. First, ERPT into EA prices is, in general, high. Second, it is particularly high in correspondence of exchange rate and monetary policy shocks. Third, the EA monetary stance is relevant for ERPT; in particular, ERPT is higher if the stance is accommodative in correspondence of expansionary demand shocks.
    Keywords: exchange rate, import prices, pass-through, monetary policy, euro area.
    JEL: C11 E40 E47 E52 F41
    Date: 2018–09
  6. By: Jan-Philipp Dueber
    Abstract: Time-varying volatility plays a crucial role in understanding business cycles in emerging market economies. However, the literature treats volatility as an exogenous process. This paper endogenizes time-varying volatility in the debt premium and total factor productivity into a standard small open economy model and assesses the quality of the model by comparing it to emerging market data. An additional volatility channel that operates through the debt premium on the interest rate faced by a small open economy can generate countercyclical net exports and excess volatility in consumption as observed in data on emerging market business cycles.
    Keywords: Endogenous Volatility, DSGE, Emerging Markets
    JEL: E32 F41 F44
    Date: 2018–10
  7. By: Bonciani, Dario; Ricci, Martino
    Abstract: In this paper, we analyse the effects of a shock to global financial uncertainty and risk aversion on real economic activity. To this end, we extract a global factor, which explains approximately 40% of the variance of about 1000 risky asset returns from around the world. We then study how shocks to the factor affect economic activity in 36 advanced and emerging small open economies by estimating local projections in a panel regression framework. We find the output responses to be quite heterogeneous across countries but, in general, negative and persistent. Furthermore, the effects of shocks to the global factor are stronger in countries with a higher degree of trade and/or financial openness, as well as in countries with higher levels of external debt, less developed financial sectors, and higher risk rating. JEL Classification: C30, F41, E32, F65
    Keywords: global financial cycle, local projection, macroeconomic transmission, panel data
    Date: 2018–09
  8. By: Youngju Kim (Economic Research Institute, The Bank of Korea); Hyunjoon Lim (Economic Research Institute, The Bank of Korea)
    Abstract: We investigate the relative roles of US economic policy uncertainty and global risk aversion in contributing to financial and macroeconomic fluctuations in small open economies (SOEs) using a panel of forty SOEs that includes both advanced economies (AEs) and emerging markets economies (EMEs). We find that SOEs¡¯ financial and real economic activities respond smoothly and persistently to US policy uncertainty shocks, consistent with Bloom et al. (2018), while exhibiting relatively short-lived and robust reactions to US risk aversion shocks. A novel finding of this paper is that the responses of AEs and EMEs are asymmetric: AEs react more strongly to US policy uncertainty shocks while EMEs are more sensitive to risk aversion shocks. These results suggest that the channels through which each shock is transmitted to SOEs may vary.
    Keywords: Economic Policy Uncertainty, Risk Aversion, Spillovers, Small Open Economies
    JEL: F21 F32 F42
    Date: 2018–10–02
  9. By: Nikolaos Giannellis (Department of Economics); Minoas Koukouritakis
    Abstract: In this paper we investigate whether the price of gold is affected by internal and external macroeconomic performance, which is reflected in exchange rate movements
    Keywords: G7, external balance model, panel cointegration, misalignment rate, panel smooth transition regression model
    JEL: E42 F31 F41
    Date: 2018–10–20

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