nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒01‒14
nine papers chosen by
Martin Berka
University of Auckland

  1. The paradox of global thrift By Luca Fornaro; Federica Romei
  2. Global Imbalances with Safe Assets in Eurozone By Hung Ly-Dai
  3. Commodities and International Business Cycles By Myunghyun Kim
  4. Spillovers from US monetary policy: Evidence from a time-varying parameter GVAR model By Crespo Cuaresma, Jesus; Doppelhofer, Gernot; Feldkircher, Martin; Huber, Florian
  5. Invoicing currency and exchange rate pass-through: evidence from firm level analysis of Italian firms By Alessandro Borin; Andrea Linarello; Elena Mattevi; Giordano Zevi
  6. Does Trilemma Speak Chinese? By Georgios Magkonis; Simon Rudkin
  7. Transmission of U.S. Monetary Policy to Commodity Exporters and Importers By Myunghyun Kim
  8. How openness to trade rescued the Irish economy By McQuinn, Kieran; Varthalitis, Petros
  9. Euro Area Growth and European Institutional Reforms By Mariarosaria Comunale; Francesco Paolo Mongelli

  1. By: Luca Fornaro (CREI, Universitat Pompeu Fabra, Barcelona GSE and CEPR); Federica Romei (Stockholm School of Economics and CEPR)
    Abstract: This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies to stabilize the economy. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. In fact, prudential policies generate a rise in the global supply of savings and a drop in global aggregate demand. Weaker global aggregate demand depresses output in countries at the zero lower bound. Due to this effect, non-cooperative financial and fiscal policies might lead to a fall in global output and welfare
    Keywords: liquidity traps, zero lower bound, capital flows, fiscal policies, macroprudential policies, current account policies, aggregate demand externalities, international cooperation
    JEL: E32 E44 E52 F41 F42
    Date: 2018–12
  2. By: Hung Ly-Dai (VNU - Vietnam National University [Hanoï])
    Abstract: In one open two-country economy, a higher domestic productivity level raises both mean and variance of wealth dynamic, and can lead to a greater accumulation of safe assets. The empirical evidences on the 19 countries of Eurozone confirm that the safe assets exchange supports the international risk-sharing across countries. Moreover, in comparison with the risky investments (FDI and Portfolio Equities), the safe assets (Bonds) are the dominant driver of global imbalances within Eurozone.
    Keywords: Current Account,Endogenous Portfolio Choice,Safe Assets,Produc-tivity Level
    Date: 2018–05
  3. By: Myunghyun Kim (Economic Research Institute, The Bank of Korea)
    Abstract: I introduce commodities and countries¡¯ different commodity trade structures into an otherwise standard two-country model to analyze international business cycles between the U.S. and commodity-exporting countries. In the model, only the foreign country (the commodity-exporting country) produces commodities and exports them to the home country (the U.S., the commodity-importing country). The model produces international business cycle statistics that are closer to the data than a standard model. In particular, the output correlation between the two countries increases and the consumption correlation falls compared to the standard model. Notably, unlike standard models, this model yields an output correlation that exceeds the consumption correlation, which mitigates the ¡°quantity anomaly¡± that was previously noted in the literature. Commodity consumption and the complementarity between commodities and noncommodity goods in consumption play key roles in generating this result.
    Keywords: International Business Cycles, Commodity-exporting countries, Commodity Trade Structures
    JEL: F40 F41 F44
    Date: 2018–12–28
  4. By: Crespo Cuaresma, Jesus; Doppelhofer, Gernot (Dept. of Economics, Norwegian School of Economics and Business Administration); Feldkircher, Martin; Huber, Florian (Dept. of Economics, Norwegian School of Economics and Business Administration)
    Abstract: This paper develops a global vector autoregressive (GVAR) model with time-varying parameters and stochastic volatility to analyze whether international spillovers of US monetary policy have changed over time. The proposed model allows assessing whether coefficients evolve gradually over time or are better characterized by infrequent, but large breaks. Our findings point towards pronounced changes in the international transmission of US monetary policy throughout the sample period, especially so for the reaction of international output, equity prices, and exchange rates against the US dollar. In general, the strength of spillovers has weakened in the aftermath of the global financial crisis. Using simple panel regressions, we link the variation in international responses to measures of trade and financial globalization. We find that a broad trade base and a high degree of financial integration with the world economy tend to cushion risks stemming from a foreign shock such as a US monetary policy tightening, whereas a reduction in trade barriers and/or a liberalization of the capital account increase these risks.
    Keywords: Spillovers; zero lower bound; globalization; mixture innovation models
    JEL: C30 E52 F41
    Date: 2018–12–21
  5. By: Alessandro Borin (Bank of Italy); Andrea Linarello (Bank of Italy); Elena Mattevi (Bank of Italy); Giordano Zevi (Bank of Italy)
    Abstract: The paper analyzes how the choice of the invoicing currency used in international transactions by the Italian companies influences the transmission of exchange rates shocks to their price strategies and business activity. Companies invoicing in euros tend to not adjusting the prices of exported goods; in this case the exchange rate fluctuations are transmitted almost entirely to the prices of their goods in the destination countries, also inducing a large response of the exported volumes. On the other hand, companies that invoice in local currency transmit weakly the exchange rate fluctuations to prices in destination markets and therefore attenuate the impacts on exports volumes. Fixing prices in foreign currency is more frequent among larger and more productive companies, which tend to transfer the exchange rate shocks mostly on unit margins. Overall, despite the different transmission channels, the effect of exchange rate fluctuations on foreign turnover in euros, is quite similar among the different pricing strategies.
    Keywords: invoicing currency, exchange rate pass-through
    JEL: F3 F4
    Date: 2018–12
  6. By: Georgios Magkonis (University of Portsmouth); Simon Rudkin (Swansea University)
    Abstract: Based on the limitations imposed by the trilemma, this paper examines the trade-offs faced by the Chinese economy. Taking into account the role of accumulation of foreign reserves we examine how binding the constraints are for the Chinese monetary authorities. Using a Panel VAR with dynamic and static interdependencies as well as cross-sectional heterogeneities, we examine the monetary spillovers from China to a series of Asian economies. In this way, we measure the degree to which the Chinese trilemma constraints are exported to other countries. Consistent with previous research, our empirical evidence suggests that China's trilemma configurations are unique as China manages to achieve exchange rate stability, along with moderate financial liberalization, without losing its monetary autonomy. Furthermore, there are no significant spillovers to regional economies. Overall, trilemma does speak Chinese, but only for a short period.
    Keywords: Trilemma, international reserves, Panel VAR
    JEL: F36 F41 O53
    Date: 2019–01–09
  7. By: Myunghyun Kim (Economic Research Institute, The Bank of Korea)
    Abstract: This paper studies international transmission of U.S. monetary policy shocks to commodity exporters and importers. After first showing empirically that the shocks have stronger effects on commodity exporters than on importers, I then augment a standard three-country model to include commodities. Consistent with the empirical evidence, the model indicates that an expansionary monetary policy shock to the U.S. increases the aggregate output of commodity exporters by more than that of importers. This is because the increased U.S. aggregate demand triggered by the shock leads to greater U.S. demand for commodities and higher real commodity prices, and thus the exports of commodity exporters increase relative to those of commodity importers. Furthermore, I show that if commodity exporters¡¯ currencies are pegged to the U.S. dollar, then the U.S. monetary policy shocks have stronger spillovers to commodity exporters and importers. In the event that the U.S. becomes a net energy exporter, the shocks will have weaker effects on commodity exporters and stronger impacts on importers.
    Keywords: Monetary policy shocks, International transmission, Commodity exporters, Commodity importers, VAR with external instruments
    JEL: E52 F42 Q43
    Date: 2018–12–18
  8. By: McQuinn, Kieran; Varthalitis, Petros
    Abstract: In this paper we examine the performance of the Irish economy over the period 2008 to 2014. In particular we examine whether the recovery observed was due to the successful adoption of structural reforms in labour and product markets or whether the improved performance was due to a rebalancing of the Irish economy, post 2008, away from the disproportionate influence of the construction (non-tradable) sector and back to the more productive tradable sector? Prior to 2007 had seen the emergence of a significant, property-related credit boom which resulted in the Irish economy being increasingly influenced by the non-tradable sector. This was in sharp contrast to the earlier period of the Celtic tiger, which had mainly relied on export-orientated growth. We use a small open economy DSGE model with a tradable and a non-tradable sector to examine this issue. Our results suggest that the financial crisis acted as a rebalancing mechanism for the Irish economy, with the tradable sector contracting less and recovering quicker than the non-tradable sector. Our model-based simulations indicate that the Irish recovery is mostly export-driven with structural reforms playing a very minor role in stimulating growth in the immediate period after the crisis.
    Keywords: Trade, Openness, Reforms, DSGE
    JEL: F3 F41 F43
    Date: 2018–12–06
  9. By: Mariarosaria Comunale (Bank of Lithuania and European Central Bank); Francesco Paolo Mongelli (European Central Bank and Johann Wolfgang Goethe University of Frankfurt)
    Abstract: Euro area countries have experienced profound economic, financial and institutional changes over the last three decades. GDP growth has been very volatile, and very uneven, across countries. Which factors played a role in stirring growth and/or reducing it? We provide an atheoretical toolkit looking at a large set of real, financial, monetary and institutional variables, as possible factors behind fluctuations and differences in growth rates among euro area countries since 1990. The main outcome stresses the key positive role for long-run growth of higher European institutional integration, overall and for the periphery in specific. This result is robust across specifications and setups. If we split the European institutional integration in its main components, we can see a significant positive role for financial and political integration in the long-run. However the first seems to have beneficial effects for the core only while the opposite holds for the political integration which influences positively the periphery.
    Keywords: euro area, GDP growth, monetary policy, fiscal policy, institutional integration, financial crisis, systemic stress, synchronization
    JEL: C23 E40 F33 F43
    Date: 2019–01–02

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