nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒03‒04
eight papers chosen by
Martin Berka
Massey University

  1. Liquidity and Exchange Rates - An Empirical Investigation By Engel, Charles M; Wu, Steve Pak Yeung
  2. Flexibility of Adjustment to Shocks: Economic Growth and Volatility of Middle-Income Countries before and after the Global Financial Crisis of 2008 By Aizenman, Joshua; Jinjarak, Yothin; Estrada, Gemma; Tian , Shu
  3. Global Collateral and Capital Flows By Ana Fostel; John Geanakoplos; Gregory Phelan
  4. Push Factors and Capital Flows to Emerging Markets: Why Knowing Your Lender Matters More Than Fundamentals By Cerutti, Eugenio; Claessens, Stijn; Puy, Damien
  5. The Rise of the Dollar and Fall of the Euro as International Currencies By Maggiori, Matteo; Neiman, Brent; Schreger, Jesse
  6. Banking Regulation with Risk of Sovereign Default By D'Erasmo, Pablo; Livshits, Igor; Schoors, Koen
  7. Global Spillover Effects of US Uncertainty By Saroj Bhattarai; Arpita Chatterjee; Woong Yong Park
  8. Skewed Credit and Growth Dynamics after the Global Financial Crisis By Estrada, Gemma; Erce, Aitor; Park, Donghyun; Rojas , Juan

  1. By: Engel, Charles M; Wu, Steve Pak Yeung
    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: Aizenman, Joshua (University of Southern California); Jinjarak, Yothin (Victoria University of Wellington); Estrada, Gemma (Asian Development Bank); Tian , Shu (Asian Development Bank)
    Abstract: The pronounced and persistent impact of the global financial crisis of 2008 motivates our empirical analysis of the role of institutions and macroeconomic fundamentals on countries’ adjustment to shocks. Our empirical analysis shows that the associations of growth level, growth volatility, shocks, institutions, and macroeconomic fundamentals have changed in important ways after the crisis. Gross domestic product growth across countries has become more dependent on external factors, including global growth, global oil prices, and global financial volatility. After accounting for the effects global shocks, we find that several factors facilitate adjustment to shocks in middle-income countries. Educational attainment, share of manufacturing output in gross domestic product, and exchange rate stability increase the level of economic growth, while exchange rate flexibility, education attainment, and lack of political polarization reduce the volatility of economic growth. Countries cope with shocks better in the short to medium term by using appropriate policy tools and having good long-term fundamentals.
    Keywords: growth; institutions; middle income; shocks; volatility
    JEL: C38 E02 F43
    Date: 2017–11–21
  3. By: Ana Fostel (University of Virginia); John Geanakoplos (Yale University); Gregory Phelan (Williams College)
    Abstract: Cross-border financial flows arise when (otherwise identical) countries differ in their abilities to use assets as collateral to back financial contracts. Financially integrated countries have access to the same set of financial instruments, and yet there is no price convergence of assets with identical payoffs, due to a gap in collateral values. Home (financially advanced) runs a current account deficit. Financial flows amplify asset price volatility in both countries, and gross flows driven by collateral differences collapse following bad news about fundamentals. Our results can explain financial flows among rich, similarly-developed countries, and why these flows increase volatility.
    Keywords: Collateral, capital flows, asset prices, current account, securitized markets, asset-backed securities
    JEL: D52 D53 E32 E44 F34 F36 G01 G11 G12
    Date: 2019–02
  4. By: Cerutti, Eugenio (International Monetary Fund); Claessens, Stijn (Bank for International Settlements); Puy, Damien (International Monetary Fund)
    Abstract: This paper analyzes the behavior of gross capital inflows across 34 emerging markets (EMs), including eight Asian economies. We first confirm that aggregate inflows to EMs comove considerably. Three findings are reported: (i) the aggregate comovement conceals significant heterogeneity across asset types as only bank-related and portfolio bond and equity inflows comove; (ii) while global push factors in advanced economies mostly explain the common dynamics, their relative importance varies by type of flow; and (iii) the sensitivity to common dynamics varies significantly across borrower countries, with market structure characteristics (especially the composition of the foreign investor base and the level of liquidity) rather than a borrower country’s institutional fundamentals strongly affecting sensitivities. Countries relying more on international funds and global banks are found to be more sensitive to push factors. Our findings suggest that EMs need to closely monitor their lenders and investors to assess their inflow exposures to global push factors.
    Keywords: capital flows; emerging markets; global banks; mutual funds; push factors
    JEL: F32 F36 G11 G15 G23
    Date: 2017–11–30
  5. By: Maggiori, Matteo; Neiman, Brent; Schreger, Jesse
    Abstract: The modern notion of an international currency involves use in areas of international finance and trade that extend well beyond central banks' coffers. In addition to their important roles as foreign exchange reserves, international currencies are most frequently used to denominate corporate and government bonds, bank loans, and import and export invoices. These currencies offer unrivaled liquidity, constituting large shares of the volume on global foreign exchange markets, and are commonly chosen as the anchors targeted by countries with pegged or managed exchange rate regimes. In this short article, we provide evidence suggesting a recent rise in the use of the dollar, and fall of the use in the euro, with similar patterns manifesting across all these aspects of international currency use.
    Date: 2018–12
  6. By: D'Erasmo, Pablo (Federal Reserve Bank of Philadelphia); Livshits, Igor (Federal Reserve Bank of Philadelphia); Schoors, Koen (Ghent, HSE)
    Abstract: Banking regulation routinely designates some assets as safe and thus does not require banks to hold any additional capital to protect against losses from these assets. A typical such safe asset is domestic government debt. There are numerous examples of banking regulation treating domestic government bonds as “safe,” even when there is clear risk of default on these bonds. We show, in a parsimonious model, that this failure to recognize the riskiness of government debt allows (and induces) domestic banks to “gamble” with depositors’ funds by purchasing risky government bonds (and assets closely correlated with them). A sovereign default in this environment then results in a banking crisis. Critically, we show that permitting banks to gamble this way lowers the cost of borrowing for the government. Thus, if the borrower and the regulator are the same entity (the government), that entity has an incentive to ignore the riskiness of the sovereign bonds. We present empirical evidence in support of the key mechanism we are highlighting, drawing on the experience of Russia in the run-up to its 1998 default and on the recent Eurozone debt crisis.
    Keywords: Banking; Sovereign default; Prudential regulation; Financial crisis
    JEL: F34 G01 G28
    Date: 2019–02–22
  7. By: Saroj Bhattarai (University of Texas at Austin); Arpita Chatterjee (UNSW Business School, UNSW); Woong Yong Park (Seoul National University)
    Abstract: Spillover effects of US uncertainty shocks are studied in a panel VAR of fifteen emerging market economies (EMEs). A US uncertainty shock negatively affects EME stock prices and exchange rates, raises EME country spreads, and decreases capital inflows into them. It decreases EME output and consumer prices while increasing net exports. Negative effects on output and asset prices are weaker, but effects on external balance stronger, for Latin American EMEs. We attribute such heterogeneity to differential EME monetary policy response to US uncertainty shocks. Analysis of central bank minutes shows Latin American EMEs pay less attention to smoothing capital flows.
    Keywords: US Uncertainty; Panel VAR; Emerging Market Economies; Monetary Policy Response; Emerging Market Monetary Policy Minutes
    JEL: C11 C33 E44 E52 E58 F32
    Date: 2019–02
  8. By: Estrada, Gemma (Asian Development Bank); Erce, Aitor (European Stability Mechanism); Park, Donghyun (Asian Development Bank); Rojas , Juan (European Stability Mechanism)
    Abstract: A large empirical literature finds that financial development is beneficial for economic growth, although some recent evidence suggests otherwise. We contribute to the finance–growth literature by examining the role of credit growth skewness and long-run growth. Earlier literature found that credit growth skewness is negatively associated with economic growth. We revisit this relationship using a large and recent panel dataset that encompasses Organisation for Economic Co-operation and Development economies and the impact of the global financial crisis. While our results reconfirm an association between credit skewness and growth, the relationship is more nuanced than previously thought. We find that the beneficial effects from lower skewness—systemic financial risks—were evident only prior to 2000. Our findings help explain why boom–bust dynamics were positively associated with economic growth in emerging markets in the past and why the growth of advanced economies has been sluggish since the global financial crisis.
    Keywords: credit dynamics; economic growth; skewness
    JEL: F34 F36 F43 O41
    Date: 2018–10–16

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