nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒12‒17
nine papers chosen by
Martin Berka
University of Auckland

  1. The Micro Origins of International Business-Cycle Comovement By Julian Di Giovanni; Andrei Levchenko; Isabelle Mejean
  2. Gross capital flows by banks, corporates and sovereigns By Stefan Avdjiev; Sebnem Kalemli-Ozcan; Luis Servén
  3. New Risk Sharing Channels in OECD Countries: a Heterogeneous Panel VAR By Asdrubali, Pierfederico; Kim, Soyoung; Pericoli, Filippo; Poncela, Pilar
  4. Why don’t agricultural prices always adjust towards parity? By Long H. Vo
  5. Adjustment dynamics and business cycle heterogeneity in the EMU: Evidence from estimated DSGE models By Giovannini, Massimo; Hohberger, Stefan; Ratto, Marco; Vogel, Lukas
  6. Banks, debt and risk: assessing the spillovers of corporate taxes By Fatica, Serena; Heynderickx, Wouter; Pagano, Andrea
  7. Monetary Independence and Rollover Crises By Bianchi, Javier; Mondragon, Jorge
  8. Foreign currency borrowing, balance sheet shocks and real outcomes By Bryan Hardy
  9. Stigma or Cushion? IMF Programs and Sovereign Creditworthiness By Kai Gehring; Valentin F. Lang

  1. By: Julian Di Giovanni (ICREA - Institució Catalana de Recerca i Estudis Avançats [Barcelona] - UB - Universitat de Barcelona - FCRI - Fundació Catalana per a la Recerca i la Innovació [Barcelona] - ICREA, CREI - Centre de Recerca en Economia Internacional - Universitat Pompeu Fabra [Barcelona], CEPR - Center for Economic Policy Research - CEPR); Andrei Levchenko (University of Michigan [Ann Arbor], CEPR - Center for Economic Policy Research - CEPR, National Bureau of Economic Research - National Bureau of Economic Research); Isabelle Mejean (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - ENSAE ParisTech - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR)
    Abstract: This paper investigates the role of individual firms in international business-cycle comovement using data covering the universe of French firm-level value added and international linkages over the period 1993-2007. At the micro level, trade and multinational linkages with a particular foreign country are associated with a significantly higher correlation between a firm and that foreign country. The impact of direct linkages on comovement at the micro level has significant macro implications. Without those linkages the correlation between France and foreign countries would fall by about 0.098, or one-third of the observed average correlation of 0.291 in our sample of partner countries. (JEL F14, F23, F44, F62, L14) Countries that exhibit greater bilateral trade and multinational production linkages have more correlated business cycles (Frankel and Rose 1998; Kleinert, Martin, and Toubal 2015). While the empirical literature has repeatedly confirmed the trade-comovement relationship in the data, its meaning is not well understood, either empirically or quantitatively. Taken at face value, the positive association between bilateral trade and multinational linkages and comovement is often interpreted as evidence of transmission of shocks across countries through those linkages. The empirical literature has faced two related challenges. The first is the critique by Imbs (2004) that countries that trade more with each other are similar in other ways, and thus subject to common shocks. Under an extreme version of this view, the trade linkage variable in the Frankel-Rose specification does not reflect the
    Date: 2018–01
  2. By: Stefan Avdjiev; Sebnem Kalemli-Ozcan; Luis Servén
    Abstract: We construct a new data set of quarterly international capital flows by sector, with an emphasis on debt flows. Using our new data set, we establish four facts. First, the co-movement of capital inflows and outflows is driven by inflows and outflows vis-à-vis the domestic banking sector. Second, the procyclicality of capital inflows is driven by banks and corporates, whereas sovereigns' external liabilities move acyclically in advanced and countercyclically in emerging countries. Third, the procyclicality of capital outflows is driven by advanced countries' banks and emerging countries' sovereigns (reserves). Fourth, capital inflows and outflows decline for banks and corporates when global risk aversion (VIX) increases, whereas sovereign flows show no response. These facts are inconsistent with a large class of theoretical models.
    Keywords: quarterly capital flows, business cycles, external corporate and bank debt, sovereign debt, VIX, systemic risk, emerging markets
    JEL: F21 F41 O1
    Date: 2018–11
  3. By: Asdrubali, Pierfederico (Department of Economics and Social Sciences, John Cabot University); Kim, Soyoung (Division of Economics, Seoul National University); Pericoli, Filippo (European Commission – JRC); Poncela, Pilar (European Commission – JRC)
    Abstract: We aim to improve upon the existing empirical literature on international risk sharing under three dimensions. First, we generalize dynamic multi-equation approaches to the estimation of risk sharing channels, by adopting a Heterogeneous Panel VAR model. Within this framework, the coefficients representing the extent of risk sharing achieved through the different mechanisms are allowed to vary across countries. Second, we introduce two new risk sharing channels – namely, government consumption and the real exchange rate (that we further decompose into relative prices and the nominal exchange rate) – which allow us to investigate the role of fiscal policy and international price adjustments in the absorption of macroeconomic shocks. Third, we establish a better link between the “channels†empirical model and a theoretical formulation of the risk sharing condition which allows for PPP violations. Our empirical analysis, for a set of 21 OECD countries over 1960-2016, contributes to identifying the geographical structure and dynamics of risk sharing channels and to describing their evolution in the latest half-century. For the OECD sample as a whole, we confirm through 2016 the strong smoothing role played by credit markets and the small degree of risk sharing achieved through factor incomes. Interestingly, government consumption tends to have a dis-smoothing effect, due to its counter-cyclical movements. Another noteworthy result is the negative risk sharing effect of the real exchange rate, driven by the dis-smoothing role played by the movements of the nominal exchange rate, only partially offset by relative price adjustments. The evolution of these risk sharing mechanisms is diverse, but the most important channels – namely credit markets and real exchange rate adjustments – exhibit slightly positive trends for the first half of the period, negative trends afterwards, and a recovery in more recent years. Our results demonstrate that the extent of risk sharing is strikingly different across countries, especially if we take into account valuation effects through the real exchange rate. Even considering only traditional risk sharing channels, the country-specific magnitude of risk sharing on impact ranges from around 15% to over 80%. In addition, dynamics are also quite diverse across countries; for example, risk sharing through credit markets, while quite effective on impact, provokes dis-smoothing for about two thirds of the countries from the second year onwards. Our approach is of particular interest for policy makers, as it allows identifying the strengths and the weaknesses of the institutional and behavioral risk sharing mechanisms at work in different countries.
    Keywords: consumption smoothing, government consumption, heterogeneity, panel VAR, risk sharing
    JEL: E00 E21 F15
    Date: 2018–11
  4. By: Long H. Vo (Business School, The University of Western Australia)
    Abstract: A prominent empirical regularity is the incomplete pass-through of exchange rate changes to domestic price changes, which reflects the failure of the purchasing power parity doctrine. We argue that such disconnection can be explained by the non-linear mean reversion dynamics of exchange rates: As a consequence of various trade barriers, there is a sizeable buffer region, a “band of inaction”, within which exchange rates can move independently of prices, thus generating large and persistent deviations from parity. When examining panels of large numbers of disaggregated and tradable agricultural products with a non-linear exchange rate specification, we observe relatively fast adjustment speeds whenever deviations are sufficiently large so as to induce arbitrage. On the other hand, when deviations fall within the band of inaction, there is evidence that movements in rates follow a random walk. Additionally, the speed of adjustment is asymmetric, in the sense that positive deviations are adjusted faster than negative deviations.
    Keywords: Agricultural prices; Exchange rates; Purchasing power parity; Non-linear models; Threshold auto-regression
    JEL: F31 F41 F47
    Date: 2018
  5. By: Giovannini, Massimo (European Commission – JRC); Hohberger, Stefan (European Commission – JRC); Ratto, Marco (European Commission – JRC); Vogel, Lukas (European Commission)
    Abstract: The paper reviews adjustment dynamics in the EMU on the basis of estimated DSGE models for four large EA Member States (DE, FR, IT, ES). We compare the response of the four countries to identical shocks and find a particularly strong response of employment and wages in ES, a high sensitivity of IT to investment-related shocks, and a comparatively strong impact of global shocks on the DE economy. We also perform counterfactual exercises that apply the estimated shocks and parameters for ES to DE, FR, and IT. The counterfactual simulations suggest that differences in shocks have been important for GDP growth differentials, and together with structural differences also contributed to differences in employment fluctuations across the four countries considered.
    Keywords: Estimated DSGE; adjustment dynamics; business cycles; EMU; counterfactuals
    JEL: E32 F41 F44
    Date: 2018–11
  6. By: Fatica, Serena (European Commission – JRC); Heynderickx, Wouter (European Commission – JRC); Pagano, Andrea (European Commission – JRC)
    Abstract: Using bank balance sheet data, we find evidence that leverage and asset risk of European multinational banks in the crisis and post-crisis period is affected by corporate taxes in their host country as well as by the tax rates in all the jurisdictions where the banking group operates. Then, we evaluate the effects that establishing tax neutrality between debt and equity finance has on systemic risk. We show that the degree of coordination in implementing the hypothetical tax reform matters. In particular, a coordinated elimination of the tax advantage of debt would significantly reduce systemic losses in the event of a severe banking crisis. By contrast, uncoordinated tax reforms are not equally beneficial. This is because national tax policies generate spillovers through cross-border bank activities and tax-driven strategic allocation of debt and asset risk across group affiliates.
    Keywords: Corporate tax, Debt bias, Debt shifting, Multinational banks, Leverage
    JEL: E32 F41 F44
    Date: 2018–11
  7. By: Bianchi, Javier (Federal Reserve Bank of Minneapolis); Mondragon, Jorge (Federal Reserve Bank of Minneapolis)
    Abstract: This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary autonomy, lenders anticipate that the government will face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. By contrast, a government with monetary autonomy can stabilize the economy and can easily remain immune to a rollover crisis. In a quantitative application, we find that the lack of monetary autonomy played a central role in making the Eurozone vulnerable to a rollover crisis. A lender of last resort can help ease the costs from giving up monetary independence.
    Keywords: Sovereign debt crises; Rollover risk; Monetary unions
    JEL: E4 E5 F34 G15
    Date: 2018–12–03
  8. By: Bryan Hardy
    Abstract: Emerging market firms frequently borrow in foreign currency (FX), but their assets are often denominated in domestic currency. This behavior leads to an FX mismatch on firms balance sheets, which can harm their net worth in the event of a depreciation. I use a large, unanticipated, and exogenous depreciation episode and a unique dataset to identify the real and financial effects of firm balance sheet shocks. I construct a new dataset of all listed non-financial firms, matched to their banks, in Mexico over 2008q1-2015q2. This dataset combines firm-level balance sheets and real outcomes, currency composition of both assets and liabilities, and firms' loan-level borrowing from banks in peso and FX. This data allows me to control for shocks to firms' credit supply to identify the balance sheet shock and examine its real consequences. I find that non-exporting firms that have a larger FX mismatch experience greater negative balance sheet effects following the depreciation. Among these, smaller firms see a decrease in loan growth, resulting in stagnant employment growth and decreased growth in physical capital relative to firms with smaller FX mismatch. Larger firms with a large FX mismatch also have lower growth in FX loans following the shock, but are able to increase borrowing in peso loans, resulting in relatively higher growth in employment and physical capital. My results imply that firms are subject to net worth based borrowing constraints, and that these constraints are more binding on smaller firms and for loans in FX.
    Keywords: balance sheet shocks, credit rationing, currency risk, foreign currency, corporate finance, bank lending, investment
    JEL: E44 F31 F41 F44 G31 G32
    Date: 2018–11
  9. By: Kai Gehring; Valentin F. Lang
    Abstract: IMF programs are often considered to carry a “stigma” that triggers adverse market reactions. We show that such a negative IMF effect disappears when accounting for endogenous selection into programs. To proxy for a country’s access to financial markets, we use credit ratings and investor assessments for 100 countries from 1987 to 2013. Our first identification strategy exploits the differential effect of changes in IMF liquidity on loan allocation. We find that the IMF can “cushion” against falling creditworthiness, despite contractionary adjustments resulting from its programs. A second, event-based strategy using country-times-year fixed effects supports this positive signaling effect. A supplementary text analysis of rating statements validates that agencies perceive IMF programs as positive, particularly when they are associated with reform commitments.
    Keywords: International Monetary Fund, sovereign credit ratings, capital market accss, creditworthiness, financial crises
    JEL: E44 F33 F34 G24
    Date: 2018

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