nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒01‒21
seven papers chosen by
Martin Berka
University of Auckland

  1. Dominant currencies How firms choose currency invoicing and why it matters By Mary Amiti; Oleg Itskhoki; Jozef Konings
  2. Exchange Rates and Uncovered Interest Differentials: The Role of Permanent Monetary Shocks By Stephanie Schmitt-Grohé; Martín Uribe
  3. Classifying de facto exchange rate regimes of financially open and closed economies: A statistical approach By Dąbrowski, Marek A.; Papież, Monika; Śmiech, Sławomir
  4. Real Effective Exchange Rates determinants and growth: lessons from Italian regions By Silvia Calò; Mariarosaria Comunale
  5. A key currency view of global imbalances By Robert N McCauley; Hiro Ito
  6. Borrowing in Excess of Natural Ability to Repay By Victor Filipe Martins da Rocha; Yiannis Vailakis
  7. The Danger of a “Geyser Disease” Effect: Structural Fragility of the Tourism-Led Recovery in Iceland By Francesco Macheda; Roberto Nadalini

  1. By: Mary Amiti (Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045); Oleg Itskhoki (Princeton University, Department of Economics, Princeton, NJ 08544); Jozef Konings (University of Liverpool Management School, Chatham St, Liverpool L69 7ZH, UK and Katholieke Universiteit Leuven, Department of Economics, Naamsestraat 69, 3000 Leuven, Belgium)
    Abstract: Large movements in exchange rates have small eects on the prices of internationally traded goods. Using a new dataset on currency invoicing of Belgian rms, we study how the currency of invoicing interacts with rm characteristics in shaping the extent of exchange rate pass-through at dierent time horizons. The US dollar and the Euro are the dominant currencies in both Belgium’s exports and imports, with substantial variation in currency choice across rms and products even within narrowly dened manufacturing industries. We nd that smaller, nonimport-intensive rms tend to denominate their exports in euros (producer currency pricing) and exhibit nearly complete exchange-rate pass-through into destination currency prices at all horizons. In contrast, the largest most import-intensive rms, and in particular with imports denominated in US dollars, tend to also denominate their exports in US dollars (dominant currency pricing) and exhibit very low passthrough in the short run, which gradually increases to 40–50% pass-through at the annual horizon. We show that these empirical patterns are in line with the predictions of a theoretical framework featuring heterogeneous rms with variable markups, endogenous international input sourcing and staggered price setting with endogenous currency choice. We plan to use a variant of a such model, disciplined with the Belgian rm-level data, for counterfactual analysis of the gradual increase in the use of the euro in international trade flows.
    Keywords: inflation forecastsmonthly consumer and producer surveysqualitative survey informationmodel-consistent expectationsJDemetra+ SSF library
    JEL: E31 E37
    Date: 2018–10
  2. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: We estimate an empirical model of exchange rates with transitory and permanent monetary shocks. Using monthly post-Bretton-Woods data from the United States, the United Kingdom, and Japan, we report four main findings: First, there is no exchange rate overshooting in response to either temporary or permanent monetary shocks. Second, a transitory increase in the nominal interest rate causes appreciation, whereas a permanent increase in the interest rate causes short-run depreciation. Third, transitory increases in the interest rate cause short-run deviations from uncovered interest-rate parity in favor of domestic assets, whereas permanent increases cause deviations against domestic assets. Fourth, permanent monetary shocks explain the majority of short-run movements in nominal exchange rates.
    JEL: E4 F3 F40
    Date: 2018–12
  3. By: Dąbrowski, Marek A.; Papież, Monika; Śmiech, Sławomir
    Abstract: This paper offers a new de facto exchange rate regime classification that draws on the strengths of three popular classifications. Its two hallmarks are the careful treatment of a nexus between exchange rate regime and financial openness and the use of formal statistical tools (the trimmed k-means and k-nearest neighbour methods). It is demonstrated that our strategy minimises the impact of differences between market-determined and official exchange rates on the ‘fix’ and ‘float’ categories. Moreover, it is more suited to assess empirical relevance of the Mundellian trilemma and ‘irreconcilable duo’ hypotheses. Using comparative analysis we find that the degree of agreement between classifications is moderate: the null of no association is strongly rejected, but its strength ranges from low to moderate. Moreover, it is shown that our classification is the most strongly associated with each of the other classifications and as such can be considered (closest to) a centre of a space of alternative classifications. Finally, we demonstrate that unlike other classifications, ours lends more support to the Mundellian trilemma than to the ‘irreconcilable duo’ hypothesis. Overall, our classification cannot be considered a variant of any other de facto classification. It is a genuinely new classification.
    Keywords: exchange rate regime; financial openness; macroeconomic trilemma; cluster analysis
    JEL: C38 C82 F31 F33
    Date: 2019–01–09
  4. By: Silvia Calò (Central Bank of Ireland); Mariarosaria Comunale (Bank of Lithuania and European Central Bank)
    Abstract: In this paper we analyse the price competitiveness of the Italian regions by computing the Real Effective Exchange Rate (REER) for each region, deflated by CPI and vis-à-vis the main partner countries. We use them to look for the medium-term determinants, finding significant heterogeneities in the role of government consumption and investment expenditure. Government consumption has an extremely negative effect on competitiveness in North-Eastern Italy, Southern Italy and Lazio. Investment plays a negative role especially in the North-West, while it can be positive for competitiveness in Lazio and Southern Italy. We also find that the transfer theory does not necessarily hold and it even behaves in the opposite direction in case of North-Eastern Italy and Lazio. Lastly, we show that an increase in the regional price competitiveness influences regional growth positively only in the long run and spillovers may play a role.
    Keywords: Italian regions, government consumption, government investment, Real Effective Exchange Rate, growth
    JEL: E62 F31 F41 R11
    Date: 2019–01–15
  5. By: Robert N McCauley; Hiro Ito
    Abstract: This study divides the world into currency zones according to the co-movement of each currency with the key currencies. The dollar zone groups economies that produce well over half of global GDP. The euro zone now includes almost all of Europe and some commodity producers, but remains less than half the size of the dollar zone. The dollar zone share has shown striking stability despite big shifts across zones over time. These include the demise of the sterling zone and the expansion of the DM/euro from northwestern Europe to Europe and beyond. Global imbalances differ from a currency perspective. In the 2000s, the dollar zone's current account disappeared by the onset of the Global Financial Crisis (GFC), even as the US current account plumbed all-time lows. The dollar zone's net international investment position also reached balance then. Thus, neither flow nor stock readings on the dollar zone supported widespread predictions in the early 2000s of an imminent dollar crash. In fact, most of the long-term widening of current accounts occurred within currency zones, where by construction currency risk is limited. Our account of the dollar's dominance rests not on the US economy's size but rather on the size of the dollar zone. In such a world, the rise of another large economy poses the question not of relative size but rather of re-alignment of third currencies. What if the renminbi becomes a key currency alongside the dollar and the euro? Already some emerging market currencies are co-moving with the renminbi against the dollar. On current evidence, a renminbi zone would shrink the dollar zone, and widen its current account deficit.
    Keywords: global imbalances, current accounts, currency zones, international investment positions
    JEL: F31 F32 F33 F41
    Date: 2018–12
  6. By: Victor Filipe Martins da Rocha (EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro], CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique); Yiannis Vailakis (Adam Smith Business School - University of Glasgow)
    Abstract: The paper aims at improving our understanding of self-enforcing debt in competitive dynamic economies with lack of commitment when default induces a permanent loss of access to international credit markets. We show, by means of examples, that a sovereign's creditworthiness is not necessarily limited by the ability to repay out of its future resources. Self-enforcing debt grows at the same rate as interest rates. If a sovereign's endowment growth rates are lower than interest rates, then debt limits eventually exceed the natural debt limits. This implies that there is asymptotic borrowing in present value terms. We show that this can be compatible with lending incentives when credible borrowers facilitate inter-temporal exchange, acting as pass-through intermediaries that alleviate the lenders' credit restrictions.
    Keywords: Limited Commitment,Self-enforcing Debt,Natural Debt Limit
    Date: 2017–01–02
  7. By: Francesco Macheda; Roberto Nadalini
    Abstract: The fall of the Icelandic economy in 2008 highlighted the destructive effects of unbridled markets. Yet, the small Nordic country has experienced an impressive recovery, so much so that in recent years its annual growth rates have been significantly higher than those of the overwhelming majority of advanced capitalist countries. Several commentators have attributed this extraordinary accomplishment to the interventionist state policies adopted by successive Icelandic governments. The aim of this article is to debunk this myth by delving into the fragile foundations that the current Icelandic economic boom rests on. We argue that the substantial growth of the real exchange rate has made the rapid absorption of unemployment compatible with price stability during the recovery period. At the same time, the boom in tourism services made the impressive appreciation of the Icelandic króna compatible with the country’s external balance. However, the laissez-faire approach shown by the Icelandic authorities towards the krona appreciation hasseverely penalized most of the tradable sector, in which the bulk of skilled labor is usually concentrated. Arguably, the heavy specialization in the tourism sector, by restricting sources of productivity growth and international competitiveness, will render the current level of unemployment and real wages inconsistent with internal and external equilibrium in Iceland in the long run.
    Keywords: Natural rate, Wage, Real exchange rate, Human Capital, Marxian
    JEL: E24 F31 J24 O33 B51
    Date: 2019–01

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