nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒01‒28
seven papers chosen by
Martin Berka
University of Auckland

  1. Liquidity and Exchange Rates: An Empirical Investigation By Charles Engel; Steve Pak Yeung Wu
  2. Demographics, Pension Systems and the Saving-Investment Balance By Hua Chai; Jun Il Kim
  3. Argentina’s “Missing Capital” Puzzle and Limited Commitment Constraints By Kapicka, Marek; Kydland, Finn E.; Zarazaga, Carlos E.
  4. Are banking and capital markets union complements? Evidence from channels of risk sharing in the eurozone By Mathias Hoffmann; Egor Maslov; Bent E. Sørensen; Iryna Stewen
  5. What is the Impact of Monetary Policy on Wealth Inequality? By Sutirtha Bagchi; Michael Patrick Curran; Matthew J. Fagerstrom
  6. Gains from Policy Cooperation in Capital Controls and Financial Market Incompleteness By Shigeto Kitano; Kenya Takaku
  7. EQCHANGE annual assessment 2018 By Carl Grekou

  1. By: Charles Engel; Steve Pak Yeung Wu
    Abstract: We find strong empirical evidence that economic fundamentals can well account for nominal exchange rate movements. The important innovation is that we include the liquidity yield on government bonds as an explanatory variable. We find impressive evidence that changes in the liquidity yield are significant in explaining exchange rate changes for all of the G10 countries. Moreover, after controlling for liquidity yields, traditional determinants of exchange rates – adjustment toward purchasing power parity and monetary shocks – are also found to be economically and statistically significant. We show how these relationships arise out of a canonical two-country New Keynesian model with liquidity returns. Additionally, we find a role for sovereign default risk and currency swap market frictions.
    JEL: F31 F41
    Date: 2018–12
  2. By: Hua Chai; Jun Il Kim
    Abstract: This paper studies the effect of demographic change on national saving, global interest rates, and international capital flows, focusing on the role of the public pension system. We develop a small open economy overlapping generations model to illustrate the channels through which demographic variables and pension system generosity interact to affect both private and public saving behavior. We then extend this framework to a two-country setting and simulate scenarios of demographic change and pension reform. We find that the generosity of the pension system plays an important role in determining the movement of the global interest rate and patterns of international capital flows.
    Keywords: Capital flows;Foreign exchange;Current account;Aging;Investment;Pensions;Private savings;Public sector savings;Demographic indicators;demographics, pension, saving
    Date: 2018–12–07
  3. By: Kapicka, Marek (Center for Economic Research and Graduate Education and Economics Institute (CERGE-EI)); Kydland, Finn E. (University of California, Santa Barbara); Zarazaga, Carlos E. (Federal Reserve Bank of Dallas)
    Abstract: Capital accumulation in Argentina was slow in the 1990s, despite high total factor productivity (TFP) growth and low international interest rates. A possible explanation for the “missing capital” is that foreign investors were reluctant to take advantage of the high returns to investment seemingly offered by that small open economy under such favorable conditions, on the grounds that previous historical developments had led them to perceive Argentina as a country prone to external debt “opportunistic defaults.” The paper examines this conjecture from the perspective of an optimal contract between foreign lenders and a small open economy subject to limited commitment constraints. Numerical experiments for a deterministic version of that analytical framework show that limited commitment constraints introduce an asymmetry to the capital accumulation process of small open economies: the responses of investment to positive TFP shocks are muted and shortlived, while those to negative TFP shocks are large and persistent. Furthermore, under some circumstances, a lower international interest rate environment can magnify the asymmetry. A quantitative implementation of the model economy to data from Argentina accounts, in line with asymmetry just described, for the rapid decline that that country’s capital stock experienced, along with a falling TFP during the 1980s, as well as for the lack of any visible recovery of that stock during the significant surges of TFP observed between 1992-1998 and 2002-2008. In the absence of the limited commitment constraint, Argentina’s capital stock in 2008 would have been 50% higher than it actually was.
    Keywords: external debt opportunistic defaults; missing capital; optimal contract; limited commitment constraints; capital accumulation; Argentina
    JEL: F34 F41 F42 F43 O19 O54
    Date: 2018–12–01
  4. By: Mathias Hoffmann; Egor Maslov; Bent E. Sørensen; Iryna Stewen
    Abstract: EMU was a major step towards deeper financial integration among member states. However, diversification of equity portfolios remained limited while banking integration surged. We argue that the nature of banking integration is of first-order importance for understanding the patterns and channels of risk sharing. While EMU was associated with the creation of an integrated interbank market, as witnessed by an explosion in cross-border interbank flows, “real” banking integration (in terms of cross-border bank-to-real sector flows or banking-consolidation) remained limited. But we find that real banking integration is associated with more risk sharing, while indirect integration via interbank flows is not. Further, indirect banking integration proved to be highly procyclical, which contributed to the freeze in risk sharing after 2008. Based on this evidence, and a stylized DSGE model that allows us to explain these patterns in the data, we discuss implications for banking union. Our results show that real banking integration and capital market union are complements and robust risk sharing in the EMU requires both.
    Date: 2018–12
  5. By: Sutirtha Bagchi (Department of Economics, Villanova School of Business, Villanova University); Michael Patrick Curran (Department of Economics, Villanova School of Business, Villanova University); Matthew J. Fagerstrom (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: We construct a global panel data set to examine the relationship between monetary policy and wealth inequality. Dynamic panel estimates suggest that both overall and inherited wealth inequality increase with growth in the base money supply. These results hold for countries with at least one billionaire and for OECD countries. Interest rates have an insigni cant distributional impact overall, but this relationship becomes signi cant in a sample of OECD countries.
    Keywords: Cantillon effect; wealth inequality; money nonneutrality
    JEL: F30 F31 F41 G15
    Date: 2019–01
  6. By: Shigeto Kitano (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan); Kenya Takaku (Faculty of International Studies, Hiroshima City University, Japan)
    Abstract: We examine how the degree of financial market incompleteness affects welfare gains from policy cooperation in capital controls. When financial markets are incomplete, international risk sharing is disturbed. However, the optimal global policy significantly reverses the welfare deterioration due to inefficient risk-sharing. We find that when financial markets are more incomplete, the welfare gap between the optimal global policy and the Nash equilibrium increases, and the welfare gains from policy cooperation in capital controls then become larger.
    Keywords: Financial markets; Incomplete markets; Policy cooperation; Capital controls; Optimal policy; Welfare; Ramsey policy; Open-loop Nash game
    JEL: D52 E61 F32 F42 G15
    Date: 2019–01
  7. By: Carl Grekou
    Abstract: The present publication, which accompanies the 2018’s update of EQCHANGE, aims at providing an overview as extensive as possible of the exchange rate misalignments for the year 2017. It also aims at discussing the evolution of exchange rates and currency misalignments between 2016 and 2017 as well as their underlying factors, hence identifying global patterns and monitoring —global— imbalances. Despite some intra-year volatility across major currencies, the changes in the currency misalignments have been of relatively small amplitudes in 2017, thus leaving the global configuration of currency misalignments that prevailed in 2016 broadly unchanged. Relatively few countries, however, registered noticeable changes in their currency misalignments.
    Keywords: EQCHANGE;Exchange Rates;Currency Misalignments;Imbalances
    JEL: E3 E4 E5 E6 F3
    Date: 2018–12

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