nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒02‒11
eight papers chosen by
Martin Berka
University of Auckland

  1. Endogenous Trade Protection and Exchange Rate Adjustment By Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
  2. The Valuation Channel of External Adjustment in Small Open Economies By Aquino, Juan Carlos
  3. Trade and currency weapons By Agnès Bénassy-Quéré; Matthieu Bussière; Pauline Wibaux
  4. The Role of Global and Domestic Shocks for In flation Dynamics: Evidence from Asia By David Finck; Peter Tillmann
  5. Exchange Rate vs Foreign Price Pass-through: Evidence from the European Gasoline Market By Deltas, George; Polemis, Michael
  6. Effective Trade Costs and the Current Account: An Empirical Analysis By Emine Boz; Nan Li; Hongrui Zhang
  7. Commodity Terms of Trade; A New Database By Bertrand Gruss; Suhaib Kebhaj
  8. Exchange rate uncertainty and import prices in the euro area By Blagov, Boris

  1. By: Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
    Abstract: This paper explores the relationship between exchange rate adjustment and trade policy in a simple New Keynesian open economy macro model. We show that movement in exchange rates have a direct implication for trade policy when governments choose tariffs endogenously. In particular, we show that the strategic incentive to impose trade restrictions is greater under flexible exchange rates than when exchange rates are fixed. This surprising result goes counter to conventional wisdom, which suggests that pressures to impose trade restrictions are greater when countries resist adjustments in exchange rates. But in fact, we show that the empirical evidence supports the model predictions. The paper goes on to characterize the path of equilibrium sustainable tariffs in the presence of sticky prices and flexible exchange rates. In our baseline model, tariff rates will rise in response to monetary policy shocks, but fall in response to productivity shocks. Estimating an SVAR model, we also find evidence in support of this prediction.
    JEL: F13 F33 F41
    Date: 2019–01
  2. By: Aquino, Juan Carlos (Banco Central de Reserva del Perú)
    Abstract: A common problem in international finance consists of the indeterminacy of the equilibrium asset portfolio in small open economy models. This paper develops a simple approach to compute this portfolio under the assumption of incomplete financial markets. The procedure involves the limiting allocation of a class of two-country world economies where the relative size of one of them tends to zero. Such approach allows to identify the effect of portfolio decisions on the dynamics of the net foreign asset position of a small open economy in a structural fashion. As an illustration, an approximated closed-form solution is obtained for a highly stylized model that is isomorphic to the class of Dynamic Stochastic General Equilibrium (DSGE) models typically used in the literature. JEL Classification: F32. Keywords: net foreign assets, endogenous portfolios, small open economies, DSGE models.
    Keywords: net foreign assets, endogenous portfolios, small open economies, DSGE models
    JEL: F32
    Date: 2018–12
  3. By: Agnès Bénassy-Quéré (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics); Matthieu Bussière (Banque de France - Banque de France); Pauline Wibaux (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The debate on trade wars and currency wars has re-emerged since the Great recession of 2009. We study the two forms of non-cooperative policies within a single framework. First, we compare the elasticity of trade flows to import tariffs and to the real exchange rate, based on product level data for 110 countries over the 1989-2013 period. We find that a 1 percent depreciation of the importer's currency reduces imports by around 0.5 percent in current dollar, whereas an increase in import tariffs by 1 percentage point reduces imports by around 1.4 percent. Hence the two instruments are not equivalent. Second, we build a stylized short-term macroeconomic model where the government aims at internal and external balance. We find that, in this setting, monetary policy is more stabilizing for the economy than trade policy, except when the internal transmission channel of monetary policy is muted (at the zero-lower bound). One implication is that, in normal times, a country will more likely react to a trade "aggression" through monetary easing rather than through a tariff increase. The result is reversed at the ZLB.
    Keywords: tariffs,exchange rates,trade elasticities,protectionism
    Date: 2018–06
  4. By: David Finck (Justus-Liebig-University Giessen); Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: This paper studies the determinants of business cycles in small open economies and adds to the discussion about the changing nature of in flation dynamics. We estimate a series of VAR models for a set of six Asian emerging market economies, in which we identify a battery of domestic and global shocks using sign restrictions. We find that global shocks explain large parts of infl ation and output dynamics. The global shocks are procyclical with respect to the domestic components of economic activity. We estimate Phillips curve regressions based on alternative decompositions of output into global and domestic components. For the domestic component of GDP we find a positive and significant Phillips curve slope. While the output component driven by oil prices 'fl attens' the Phillips curve, the component driven by global demand shocks 'steepens' the trade-off. Hence, whether or not global shocks fl atten the Phillips curve crucially depends on the nature of these global shocks. A series of counterfactuals supports these findings and suggests that the role of monetary policy and exchange rate shocks is limited.
    Keywords: in ation targeting, business cycle, open economy, monetary policy, Phillips curve
    JEL: E3 E5 F4
    Date: 2019
  5. By: Deltas, George; Polemis, Michael
    Abstract: We show that European retail gasoline prices respond slower to changes in the dollar exchange rate than to changes in the international spot price of wholesale gasoline, which is quoted in dollars. This differential passthrough is not specific to the Euro, and is observed both for Euro-member states and also for those using national currencies. We examine the possibility that this pattern is driven by differences in either the variability and or persistence of exchange rates changes relative to those of the dollar price of gasoline, but find minimal supporting evidence for either. Refinery supply contracts treat changes in the dollar price and the exchange rate symmetrically, and are thus also an unlikely explanation. Other possibilities, such pricing to the market or pricing based on the country of origin are precluded by the nature of the product. There is evidence, however, that exchange rate fluctuations are more strongly correlated with country-specific economic conditions, which reduces the ability of firms to pass-through price increases and lessens their incentive to pass-through price decreases. Moreover, consumers likely draw a more direct link between the crude oil and retail gasoline prices, affecting their price expectations and search intensity, and optimal passthrough.
    Keywords: Price Adjustment, Inflation, Gasoline Pricing.
    JEL: F31 L11 L16
    Date: 2019–01–24
  6. By: Emine Boz; Nan Li; Hongrui Zhang
    Abstract: A view receiving increased support is that the height of trade costs in prime export sectors has a strong effect on current account balances: countries specializing in sectors that face relatively high trade costs, such as services, tend to run current account deficits, and similarly, countries specializing in low trade cost sectors, such as manufacturing, tend to run current account surpluses. To test this view, we first infer comparative advantages and trade costs, by sector, within a large sample of countries for the period 1970–2014. Then we construct effective trade costs—trade costs weighted by sectoral comparative advantage—to gauge the height of a country’s overall trade costs. Results reveal that, although higher effective exporting costs are associated with lower current account balances, their impact is quantitatively limited; furthermore, the effective costs of importing often have no statistically significant effect.
    Date: 2019–01–15
  7. By: Bertrand Gruss; Suhaib Kebhaj
    Abstract: This paper presents a comprehensive database of country-specific commodity price indices for 182 economies covering the period 1962-2018. For each country, the change in the international price of up to 45 individual commodities is weighted using commodity-level trade data. The database includes a commodity terms-of-trade index—which proxies the windfall gains and losses of income associated with changes in world prices—as well as additional country-specific series, including commodity export and import price indices. We provide indices that are constructed using, alternatively, fixed weights (based on average trade flows over several decades) and time-varying weights (which can account for time variation in the mix of commodities traded and the overall importance of commodities in economic activity). The paper also discusses the dynamics of commodity terms of trade across country groups and their influence on key macroeconomic aggregates.
    Date: 2019–01–24
  8. By: Blagov, Boris
    Abstract: This paper analyses the effects of exchange rate uncertainty on the pricing behaviour of import firms in the euro area. Uncertainty is measured via the volatility of the structural shocks to the exchange rate in a non-linear VAR framework and is an important determinant of import prices. An increase in exchange rate uncertainty is associated with a fall in prices on average, which suggests that the exchange rate risk is borne by the importers. The analysis utilizes a dataset on industrial import prices, disaggregated by origin of imports. Controlling for intra- and extra-euro area trade is important.
    Keywords: exchange rate uncertainty,exchange rate pass-through,non-linearities,import price inflation,extra-euro area trade
    JEL: C11 C22 F31
    Date: 2018

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