nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒01‒07
thirteen papers chosen by
Martin Berka
University of Auckland

  1. A Global Safe Asset for and from Emerging Market Economies By Brunnermeier, Markus K; Huang, Lunyang
  2. The Rise of the Dollar and Fall of the Euro as International Currencies By Matteo Maggiori; Brent Neiman; Jesse Schreger
  3. The Macroeconomic Effects of Trade Policy By Christopher J. Erceg; Andrea Prestipino; Andrea Raffo
  4. The Imbalances of the Bretton Woods System 1965 to 1973: U.S. Inflation, The Elephant in the Room By Michael D. Bordo
  5. Monetary Independence and Rollover Crises By Javier Bianchi; Jorge Mondragon
  6. Real Interest Rates and Productivity in Small Open Economies By Tommaso Monacelli; Luca Sala; Daniele Siena
  7. International Business Cycle and Financial Intermediation By Tamas Csabafi; Max Gillman; Ruthira Naraidoo
  8. Reforms and the Real Exchange Rate: The Role of Pricing-to-Market By Lise Patureau; Céline Poilly
  9. The Corporate Savings Glut and the Current Account in Germany By Thorsten Klug; Tobias Schuler; Eric Mayer
  10. Exchange rates and prices: a continuous wavelet perspective By Gabor Uliha; Janos Vincze
  11. International Capital Flows in Club of Convergence By Hung Ly-Dai
  12. Dominant Currency Debt By Eren, Egemen; Malamud, Semyon
  13. Non-Linear Pattern of International Capital Flows By Hung Ly-Dai

  1. By: Brunnermeier, Markus K; Huang, Lunyang
    Abstract: This paper examines international capital flows induced by flight-to-safety and proposes a new global safe asset. In the model domestic investors have to co-invest in a safe asset along with their physical capital. At times of crisis, investors replace the initially safe domestic government bonds with safe US Treasuries and fire-sell part of their capital. The reduction in physical capital lowers GDP and tax revenue, leading to increased default risk justifying the loss of the government bond's safe-asset status. We compare two ways to mitigate this self-fulfilling scenario. In the "buffer approach" international reserve holding reduces the severity of a crisis. In the "rechannelling approach'' flight-to-safety capital flows are rechannelled from international cross-border flows to flows across two EME asset classes. The two asset classes are the senior and junior bond of tranched portfolio of EME sovereign bonds.
    Keywords: Capital Flows; Flight to safety; SBBS; sovereign bond backed securities; sudden stop
    JEL: F32 G23
    Date: 2018–12
  2. By: Matteo Maggiori; Brent Neiman; Jesse Schreger
    Abstract: The modern notion of an international currency involves use in areas of international finance and trade that extend well beyond central banks' coffers. In addition to their important roles as foreign exchange reserves, international currencies are most frequently used to denominate corporate and government bonds, bank loans, and import and export invoices. These currencies offer unrivaled liquidity, constituting large shares of the volume on global foreign exchange markets, and are commonly chosen as the anchors targeted by countries with pegged or managed exchange rate regimes. In this short article, we provide evidence suggesting a recent rise in the use of the dollar, and fall of the use in the euro, with similar patterns manifesting across all these aspects of international currency use.
    JEL: E4 E5 F3 G15 G23
    Date: 2018–12
  3. By: Christopher J. Erceg; Andrea Prestipino; Andrea Raffo
    Abstract: We study the short-run macroeconomic effects of trade policies that are equivalent in a friction-less economy, namely a uniform increase in import tariffs and export subsidies (IX), an increase in value-added taxes accompanied by a payroll tax reduction (VP), and a border adjustment of corporate pro.t taxes (BAT). Using a dynamic New Keynesian open-economy framework, we summarize conditions for exact neutrality and equivalence of these policies. Neutrality requires the real exchange rate to appreciate enough to fully offset the effects of the policies on net exports. We argue that a combination of higher import tariffs and export subsidies is likely to trigger only a partial exchange rate offset and thus boosts net exports and output (with the output stimulus largely due to the subsidies). Under full pass-through of taxes, IX and BAT are equivalent but VP is not. We show that a temporary VP can increase intertemporal prices enough to depress aggregate demand and output, even when wages are sticky. These contractionary effects are especially pronounced under fixed exchange rates.
    Keywords: Trade policy ; Fiscal policy ; Exchange rates ; Fiscal devaluation
    JEL: E32 F30 H22
    Date: 2018–12
  4. By: Michael D. Bordo
    Abstract: This paper argues that the key deep underlying fundamental for the growing international imbalances leading to the collapse of the Bretton Woods system between 1971 and 1973 was rising U.S. inflation since 1965. It was driven in turn by expansionary fiscal and monetary policies—the elephant in the room. What was kept in the background at the Camp David meeting on August 15 1971 when President Richard Nixon closed the U.S. gold window, as well as imposing a ten per cent surcharge on all imports and a ninety day wage price freeze—was that U.S. inflation, driven by macro policies, was the main problem facing the Bretton Woods System, and that for political and doctrinal reasons was not directly addressed. Instead President Nixon blamed the rest of the world rather than focusing on issues with U.S. monetary and fiscal policies. In addition, at the urging of Federal Reserve Chairman Arthur F. Burns, Nixon adopted wage and price controls to mask the inflation, hence punting the problem into the future. This paper revisits the story of the collapse of the Bretton Woods system and the origins of the Great Inflation. Based on historical narratives and conversations with the Honorable George P. Shultz, a crucial player in the events of the period 1969 to 1973, I argue the case that the pursuit of tighter monetary and fiscal policies could have avoided much of the turmoil in the waning years of Bretton Woods. Moreover, I point out some of the similarities between the imbalances of the 1960s and 1970s—especially fiscal and the use of tariff protection as a strategic tool, as well as some differences—relatively stable monetary policy and floating exchange rates.
    JEL: E31 E42 E62 F33 F41 N10
    Date: 2018–12
  5. By: Javier Bianchi; Jorge Mondragon
    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.
    JEL: E4 E5 F34 G15
    Date: 2018–12
  6. By: Tommaso Monacelli; Luca Sala; Daniele Siena
    Abstract: In emerging market economies (EMEs), capital inflows are associated to productivity booms. However, the experience of advanced small open economies (AEs), like the ones of the Euro Area periphery, points to the opposite, i.e., capital inflows lead to lower productivity, possibly because of entry of less productive firms. We measure capital flow shocks as exogenous variations in world real interest rates. We show that, in the data, lower real interest rates lead to lower productivity only in AEs, whereas the opposite holds for EMEs. We build a business cycle model with firms' heterogeneity, financial imperfections and endogenous productivity. The model combines a cleansing effect, stemming from capital outflows (inflows), with an original sin effect, whereby capital outflows (inflows), via a real exchange rate depreciation (appreciation), decreases (increases) the opportunity cost of producing for less productive firms and the borrowing ability of the incumbent, marginally more productive firms. The estimation of the model reveals that a low trade elasticity combined with high (low) firms' productivity dispersion in EMEs (AEs) are crucial ingredients to account for the different effects of capital flows across groups of countries. The relative balance of the cleansing and the original sin effect is able to simultaneously rationalize the evidence in both EMEs and AEs.
    Keywords: World Interest Rates, Financial Frictions, Firms' Heterogeneity, Small Open Economies.
    JEL: F32 F41
    Date: 2018
  7. By: Tamas Csabafi (University of Missouri-St. Louis - Department of Economics); Max Gillman (University of Missouri-St. Louis; IEHAS, Budapest; CERGE-EI, Prague); Ruthira Naraidoo (Department of Economics - University of Pretoria, South Africa)
    Abstract: The paper extends a standard two-country international real business cycle model to include financial intermediation by banks of loans and government bonds. Taking in household deposits from home and abroad, the loans are produced by the bank in a Cobb-Douglas production approach such that a bank productivity shock can explain financial data moments. The paper contributes an explanation, for both the US relative to the Euro-area, and the US relative to China, of cross-country correlations of loan rates, deposit rates, and the loan premia. It provides a sense in which financial retrenchment resulted in the US following the 2008 bank crisis, and how the Euro-area and China reacted. The paper contributes evidence of how the Euro-area has been more financially integrated with the US, and China less financially integrated, with the Euro-area becoming more financially integrated after the 2008 crisis, and China becoming less so integrated.
    Keywords: International Real Business Cycles, Financial Intermediation, Credit Spread, Bank Productivity, 2008 Crisis
    JEL: E13 E32 E44 F41
    Date: 2018–11
  8. By: Lise Patureau (Université Paris-Dauphine, PSL Research University, LEDa); Céline Poilly (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: The paper investigates how endogenous markups affect the extent to which policy reforms can influence international competitiveness. In a two-country model where trade costs allow for international market segmentation, we show that endogenous pricing-to-market behavior of firms acts as an important transmission channel of the policies. By strengthening the degree of competition between firms, product market deregulation at home leads to a reduction in domestic markups, which generally leads to an improvement in the international competitiveness of the Home country. Conversely, the power of competitive tax policy to depreciate the real exchange rate is dampened, as domestic firms take the opportunity of the labor tax cut to increase their markups. The variability of markups also affects the normative implications of the reforms. This indicates the importance of taking into account endogenous pricing-to-market behavior when intending to correctly evaluate the overall effects of the reforms.
    Keywords: exchange rate, product market deregulation, fiscal reform, endogenous firm entry, pricing-to-market, endogenous markups
    JEL: E32 E52 F41
    Date: 2018–10
  9. By: Thorsten Klug; Tobias Schuler; Eric Mayer
    Abstract: We investigate for Germany the positive correlation between the corporate savings glut in the non-financial corporate sector and the current account surplus from a capital account perspective. By employing sign restrictions our findings suggest that mostly labor market, world demand and financial friction shocks can account for the joint dynamics of excess corporate savings and the current account surplus. Private savings shocks, in contrast, cannot explain the correlation. We conclude that a corporate savings glut is a main driver of the current account surplus.
    Keywords: Current account, corporate savings, macro shocks
    JEL: E32 F32
    Date: 2018
  10. By: Gabor Uliha (OTP Bank Nyrt.); Janos Vincze (Center for Economic and Regional Studies, Hungarian Academy of Sciences and Corvinus University of Budapest)
    Abstract: In this paper we analyze statistics derived from the cross-wavelet transform of inflation differentials and exchange rate changes for a group of countries with Germany as the reference country. An important tool is the wavelet coherency measure from which we can judge the strength of the price-exchange rate nexus at different time scales, and also whether it has changed in time. Complex cross-wavelets provide information about phase relationship, and we can investigate whether there is any consistent pattern in the lead-lag relationship between prices and exchange rates. Also, we calculate a summary measure, based on singular value decomposition, that shows which countries have significantly similar inflation differential – exchange rate change processes. Our results accord, in some ways, with former findings, but suggest an even gloomier view on the possibility of finding statistically reliable relationships between exchange rates and aggregate price indices (CPI or PPI). In line with the literature we haven’t found strong co-movement between prices and exchange rates in the short or medium term. There are only weak indications that at least in some countries the price-exchange rate connection strengthened during the crisis, and detectable cycles at business cycle frequencies do not appear at all. Though by and large the lead-lag relationship between prices and exchange rates is the expected one, still this is unstable practically for every country. Results with respect to the PPI are more promising. The three countries that seem to be closest to theoretical expectations are Sweden, Japan and South-Korea. It is possible that the coherence between exchange rates and prices on the macro level may depend more on similarities of export structure than on trading relations, that microeconomic intuition would suggest. Also it is possible that macro price indices are too noisy by their very nature to be amenable for statistical analyses not committed to strong presumptions.
    Keywords: real exchange rates, exchange rate pass-through, continuous wavelet analysis
    JEL: E31 C14 F41
    Date: 2018–12
  11. By: Hung Ly-Dai (VNU - Vietnam National University [Hanoï])
    Abstract: We explain U-shape pattern of international capital inflows by one multi-country OLG economy and one cross-section data sample. The theory proves that capital inflows are decreasing on distance to frontier, which is measured by ratio of domestic productivity level over United States' level. The evidences not only confirm the theory but also reveal that growth is decreasing on distance to frontier for club of convergence but increasing for club of unconvergence. Therefore, Neo-Classical growth model's implication, that capital inflows are positively correlated to growth, applies for club of convergence. However, Allocation puzzle, that capital inflows are negatively correlated to growth, works for club of unconvergence. The turning point of U-shape pattern is the productivity growth rate at world technology frontier.
    Keywords: International Capital Flows,Productivity Growth,Relative Convergence
    Date: 2018–07
  12. By: Eren, Egemen; Malamud, Semyon
    Abstract: Why is the dollar the dominant currency for debt contracts and what are its macroeconomic implications? We develop an international general equilibrium model where firms optimally choose the currency composition of their debt. We show that there always exists a dominant currency debt equilibrium, in which all firms borrow in a single dominant currency. It is the currency of the country that effectively pursues aggressive expansionary monetary policy in global downturns, lowering real debt burdens of firms. We show that the dollar empirically fits this description, despite its short term safe haven properties. We provide further modern and historical empirical support for our mechanism across time and currencies. We use our model to study how the optimal monetary policy differs if the Federal Reserve reacts to global versus domestic conditions.
    Keywords: dollar debt; dominant currency; Exchange Rates; inflation
    JEL: E44 E52 F33 F34 F41 F42 F44 G01 G15 G32
    Date: 2018–12
  13. By: Hung Ly-Dai (VNU - Vietnam National University [Hanoï])
    Abstract: We establish one non-linear pattern of international capital flows by building up one two-country OLG economy. With symmetric growth and asymmetric interest rate wedges across countries, net total capital inflows are either decreasing or increasing on productivity growth rate. However, with asymmetric growth and asymmetric wedges, they follow one U-shaped curve by first decreasing and then increasing on growth. The turning point of the curve is built on world average growth rate and wedges. Our proposed model can provide an explanation for inconsistencies between theories (i.e, Lucas paradox, uphill capital flows, and allocation puzzle) about the pattern of international capital flows.
    Keywords: Allocation Puzzle,Capital Flows,Financial Frictions,Productivity Growth
    Date: 2018–10

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