nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒02‒18
ten papers chosen by
Martin Berka
University of Auckland

  1. The Macroeconomic Effects of Trade Tariffs: Revisiting the Lerner Symmetry Result By Lindé, Jesper; Pescatori, Andrea
  2. Deviations in Real Exchange Rate Levels in the OECD Countries and their Structural Determinants By Martin Berka; Daan Steenkamp
  3. Real Exchange Rate Misalignment and Economic Growth : An Update By Bulent Ulasan
  4. Understanding the International Elasticity Puzzle By Hakan Yilmazkuday
  5. Trade-Driven Sectoral Upgrading and the Global Balances By Haiping Zhang
  6. Oil Prices, Exchange Rates and Interest Rates By Lutz Kilian; Zhou Xiaoqing
  7. Sovereign Bonds since Waterloo By Josefin Meyer; Carmen M. Reinhart; Christoph Trebesch
  8. Exchange Rate Pass-Through to Prices: VAR Evidence for Albania By Matuka, Adelajda
  9. Determinants of International Consumption Risk Sharing in Developing Countries By Gardberg, Malin
  10. Remittances, Finance and Industrialisation in Africa By Uchenna R. Efobi; Simplice A. Asongu; Chinelo Okafor; Vanessa Tchamyou; Belmondo Tanankem

  1. By: Lindé, Jesper (Research Department, Central Bank of Sweden); Pescatori, Andrea (IMF)
    Abstract: We study the robustness of the Lerner symmetry result in an open economy New Keynesian model with price rigidities. While the Lerner symmetry result, i.e. the absence of allocative and trade-.ow effects of an equally-sized change in import tariff and export subsidy, holds up approximately for a number of alternative assumptions, we obtain quantitatively important long-term deviations under complete international asset markets. Direct pass-through of tariffs and subsidies to prices and slow exchange rate adjustment can also generate significant short-term deviations from Lerner. De- viations from symmetry, however, do not necessarily imply an impact on global output and are often limited to a redistribution of production and consumption across coun- tries. Finally, we quantify the macroeconomic costs of a trade war and find that they can be substantial, with permanently lower income and trade volumes. However, a fully symmetric retaliation to an unilaterally imposed border adjustment tax can prevent any sizable adverse real or nominal effects.
    Keywords: Import Tariffs; Export Subsidies; Lerner Condition; Incomplete Markets; Complete Markets; Border Adjustment Tax; Trade War; New Keynesian open-economy model
    JEL: E52 E58
    Date: 2018–12–01
  2. By: Martin Berka (School of Economics and Finance, Massey University, Palmerston North, New Zealand); Daan Steenkamp (South African Reserve Bank, Pretoria, South Africa)
    Abstract: We study the validity of an augmented Balassa-Samuelson theory in a panel of real exchange rate levels across 17 OECD countries between 1970 and 2012 using a unique panel of levels of total factor productivity (TFP) across sectors. We find that real exchange rates can be explained by relative sectoral TFP levels both across countries and over time in the direction predicted by Balassa-Samuelson hypothesis. We also show that drivers of labour wedges such as structural labour market differences are important in explaining real exchange rate levels. Nevertheless, large average conditional deviations in real exchange rate levels remain across countries in our sample. \
  3. By: Bulent Ulasan
    Abstract: This paper empirically examines the relationship between real exchange rate misalignment and economic growth by using an updated data set over the sample period 1990-2014 for a large number of countries. Our findings indicate that the measure of real exchange rate misalignment is positively associated with economic growth for the low and middle-income countries whereas no significant relationship between these two for richer countries, implying the more overvalued the currency is over the long run, the lower the long-run growth rate of per capita income in developing countries. A plausible interpretation of this finding is that following the financial liberalization, large capital inflows and lending boom lead to appreciation of real exchange rates in the majority of developing countries. Prolonged real appreciation may result in lower long-run growth because of two channels: first, by changing resource allocation in favour of nontraded-goods sector it may reduce the long-term growth prospects; and second, by promoting private debt denominated in foreign currency it makes economy more vulnerable to external shocks, that is due to contractionary balance-sheet effects, a sudden and sharp real depreciation, which often happens in the boost cycle, may have a negative effect on output and growth.
    Keywords: Economic growth, Real exchange rate, Cross-country growth regression
    JEL: F31 F43 C31 O11 O41 O47
    Date: 2018
  4. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: International trade studies have higher macro elasticity measures compared to international finance studies, which has evoked mixed policy implications regarding the effects of a change in trade costs versus exchange rates on welfare measures. This so-called international elasticity puzzle is investigated in this paper by drawing attention to the alternative strategies that the two literatures use for the aggregation of foreign products in consumer utility functions. Using the implications of having a finite number of foreign countries in nested CES frameworks that are consistent with the two literatures, the discrepancy between the elasticity measures is explained by showing theoretically and confirming empirically that the macro elasticity in international trade is a weighted average of the macro elasticity in international finance and the corresponding elasticity of substitution across products of foreign source countries.
    Keywords: International Elasticity Puzzle, International Trade and Finance
    JEL: F12 F14 F41
    Date: 2018–11
  5. By: Haiping Zhang (Department of Economics, University of Auckland Business School)
    Abstract: This paper analyzes how trade integration may affect international financial flows in a world with heterogeneous financial development. In the presence of financial frictions and sector-specific minimum investment requirements, the static gains from trade trigger the cross-sector investment reallocation on the extensive margin, which may allow the more financially developed country (North) to offshore low-return production activities and upgrade to high-return activities. This way, trade-driven sectoral upgrading in North becomes a mechanism through which the substantial decline in trade and communication costs and the resulting boom in supply-chain trade may contribute to the global imbalances in the recent decades.
    Keywords: financial frictions, global imbalances, minimum investment requirements, sectoral shifts, supply-chain trade
    JEL: F11 F41
    Date: 2018
  6. By: Lutz Kilian; Zhou Xiaoqing
    Abstract: There has been much interest in the relationship between the price of crude oil, the value of the U.S. dollar, and the U.S. interest rate since the 1980s. For example, the sustained surge in the real price of oil in the 2000s is often attributed to the declining real value of the U.S. dollar as well as low U.S. real interest rates, along with a surge in global real economic activity. Quantifying these effects one at a time is difficult not only because of the close relationship between the interest rate and the exchange rate, but also because demand and supply shocks in the oil market in turn may affect the real value of the dollar and real interest rates. We propose a novel identification strategy for disentangling the causal effects of oil demand and oil supply shocks from the effects of exogenous shocks to the U.S. real interest rate and exogenous shocks to the real value of the U.S. dollar. We empirically evaluate popular views about the role of exogenous real exchange rate shocks in driving the real price of oil, and we examine the extent to which shocks in the global oil market drive the U.S. real exchange rate and U.S. real interest rates. Our evidence for the first time provides direct empirical support for theoretical models of the link between oil prices, exchange rates, and interest rates.
    Keywords: exchange rate, interest rate, oil price, global real activity, commodity, carry trade
    JEL: E43 F31 F41 Q43
    Date: 2019
  7. By: Josefin Meyer; Carmen M. Reinhart; Christoph Trebesch
    Abstract: This paper studies external sovereign bonds as an asset class. We compile a new database of 220,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns averaged 7% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. The observed returns are hard to reconcile with canonical theoretical models and with the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median haircut is below 50%.
    JEL: F30 F34 G12 G15 N10 N20
    Date: 2019–02
  8. By: Matuka, Adelajda
    Abstract: This paper estimates the impact of exchange rate shocks to prices in Albania from 2000Q1 to 2017Q1. The empirical analysis is based on a Vector Autoregressive approach for Albanian economy following Cholesky decomposition scheme. Impulse-response functions give evidence for an incomplete “pass-through” of exchange rate shocks to prices. Impulse-response functions to oil shocks indicates initial positive values for import and producer prices and negative value for consumer prices and interest rates. Variance decomposition reveal that the highest fluctuations of import prices is triggered by growth rate and oil prices shocks, whereas the variance of producer prices and consumer prices is explained by its own innovations. Exchange rate’s innovations are less aggressive to import prices and producer prices then to consumer prices. We perform the robustness check allowing interest rate to be ordered before exchange rates and the results do not change from the previous findings.
    Keywords: Exchange Rate, Pass Through Effect, Inflation, Vector Autoregressive
    JEL: C32 E31 E41 F41
    Date: 2019–02–05
  9. By: Gardberg, Malin (Research Institute of Industrial Economics (IFN))
    Abstract: Complete financial markets allow countries to share their consumption risks internationally, thereby creating welfare gains through lower volatility of aggregate consumption. This paper empirically looks at international consumption risk sharing and its determinants in a panel of 120 countries from 1970 to 2014. Contrary to some previous studies, I show that financial liberalization and financial integration has a significantly positive impact on international consumption risk sharing in poorer developing countries, whereas in emerging market countries only capital account openness has an impact. Moreover, there is some evidence that high income inequality or a high share of low income individuals reduces consumption smoothing in less developed countries. Lack of financial reforms, a lower degree of financial integration and higher inequality can thus partly explain why the degree of risk sharing is lower in developing countries than in advanced economies.
    Keywords: International consumption risk sharing; Financial liberalization; Financial integration; Inequality; Panel data
    JEL: C23 E02 E21 E44 G15
    Date: 2019–01–31
  10. By: Uchenna R. Efobi (Covenant University, Ota, Ogun State, Nigeria); Simplice A. Asongu (Yaoundé, Cameroon); Chinelo Okafor (Covenant University, Ota, Ogun State, Nigeria); Vanessa Tchamyou (University of Antwerp, Antwerp, Belgium); Belmondo Tanankem (MINEPAT, Cameroon)
    Abstract: The paper assesses how remittances directly and indirectly affect industrialisation using a panel of 49 African countries for the period 1980-2014. The indirect impact is assessed through financial development channels. The empirical evidence is based on three interactive and non-interactive simultaneity-robust estimation techniques, namely: (i) Instrumental Fixed Effects (FE) to control for the unobserved heterogeneity; (ii) Generalised Method of Moments (GMM) to control for persistence in industrialisation and (iii) Instrumental Quantile Regressions (QR) to account for initial levels of industrialisation. The non-interactive specification elucidates direct effects of remittances on industrialisation whereas interactive specifications explain indirect impacts. The findings broadly show that for certain initial levels of industrialisation, remittances can drive industrialisation through the financial development mechanism. Policy implications are discussed.
    Keywords: Africa; Diaspora; Financial development; Industrialisation; Remittances
    JEL: F24 F43 G20 O55
    Date: 2019–01

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