nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒03‒25
six papers chosen by
Martin Berka
University of Auckland

  1. Exchange rate dynamics, balance sheet effects, and capital flows. A Minskyan model of emerging market boom-bust cycles By Karsten Kohler
  2. The effects of conventional and unconventional monetary policy on exchange rates By Atsushi Inoue; Barbara Rossi
  3. Flexible exchange rates and current account adjustment By Michael Bleaney; Mo Tian
  4. International Business Cycle and Financial Intermediation By Tamas Csabafi; Max Gillman; Ruthira Naraidoo
  5. Shadow Banking and the Great Recession: Evidence from an Estimated DSGE Model By Fève, Patrick; Moura, Alban; Pierrard, Olivier
  6. Effects of a Mandatory Local Currency Pricing Law on the Exchange Rate Pass-Through By Castellares, Renzo; Toma, Hiroshi

  1. By: Karsten Kohler
    Abstract: The paper provides a dynamic Minskyan open economy model of endogenous boom-bust cycles in emerging market economies, which explains the empirically observed procyclicality of exchange rates and the countercyclicality of the trade balance. It highlights the interaction of exchange rate dynamics and balance sheets. Currency appreciation makes firm balance sheets with foreign currency debt more solid. Throughout the resulting boom phase, the current account position worsens. Pressures on the domestic exchange rate mount until the currency depreciates. Contractionary balance sheet effects then set in as domestic firms face a drop in their nominal net worth. If capital inflows are driven by exogenous risk appetite, these fluctuations can assume the form of shock-independent endogenous cycles. An exogenous increase in risk appetite increases the volatility of the cycle. We find that financial account regulation can help reduce macroeconomic volatility and that the larger the risk appetite, the more financial account regulation is required to achieve this.
    Keywords: Business cycles, boom-bust cycles, emerging market economies, Minsky
    JEL: E11 E12 F36 F41
    Date: 2019–03
  2. By: Atsushi Inoue; Barbara Rossi
    Abstract: What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. We revisit the conventional wisdom during both conventional and unconventional monetary policy shocks as changes int he whole yield curve due to unanticipated monetary policy moves and allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. Our empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods; (ii) however, there is substancial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents'expectations; (iii) we find favorable evidence to Dornbusch's (1976) overshooting hypothesis; (iv) changes in expected real interest rates play an important role in the transmission of monetary policy shocks.
    Keywords: Exchange rates, Zero-lower bound, unconventional monetary policy, forward guidance.
    JEL: F31 F37 C22 C53
    Date: 2018–12
  3. By: Michael Bleaney; Mo Tian
    Abstract: Current account imbalances should in theory be corrected by real exchange rate adjustments that stimulate exports and deter imports. Since pegging the exchange rate may inhibit real exchange rate adjustment, the correction of current account imbalances is likely to be slower when the exchange rate is less flexible. We re-investigate the puzzle that cross-country data lend little empirical support to this proposition. The current account can be disaggregated into the trade balance, which is likely to bear the burden of adjustment, and the other components (net property income and transfers), whose response to real exchange rate movements is complex. If we confine our attention to the trade balance, the puzzle disappears: unlike the current account balance, the trade balance is significantly less persistent when the exchange rate is more flexible. The trade balance responds only weakly, however, to the non-trade component of the current account. Estimation by robust regression suggests that the current account persistence puzzle is essentially a problem of distortion of the results by outliers. Under flexible exchange rates, real exchange rates respond in the expected direction to current account imbalances, and larger real exchange rate movements induce bigger corrections in the current account.
    Keywords: current account; exchange rates; trade balance
    Date: 2019
  4. By: Tamas Csabafi (Department of Economics, University of Missouri-St. Louis); Max Gillman (Department of Economics, University of Missouri-St. Louis); Ruthira Naraidoo (Department of Economics, University of Pretoria)
    Abstract: The paper extends a standard two-country international real business cycle model to include financial intermediation by banks of loans and government bonds. Taking in household deposits from home and abroad, the loans are produced by the bank in a Cobb-Douglas production approach such that a bank productivity shock can explain financial data moments. The paper contributes an explanation, for both the US relative to the Euro-area, and the US relative to China, of cross-country correlations of loan rates, deposit rates, and the loan premia. It provides a sense in which financial retrenchment resulted in the US following the 2008 bank crisis, and how the Euro-area and China reacted. The paper contributes evidence of how the Euro-area has been more Önancially integrated with the US, and China less financially integrated, with the Euro-area becoming more financially integrated after the 2008 crisis, and China becoming less so integrated.
    Keywords: international real business cycles, financial intermediation, credit spread, bank productivity, 2008 crisis.
    JEL: E13 E32 E44 F41
    Date: 2018–09
  5. By: Fève, Patrick; Moura, Alban; Pierrard, Olivier
    Abstract: We argue that shocks to credit supply by shadow and retail banks were key to understanding the behavior of the US economy during the Great Recession and the Slow Recovery. We base this result on an estimated DSGE model featuring a rich representation of credit flows. Our model selects the two banking shocks as the most important drivers of the crisis because they account simultaneously for the fall in real activity, the decline in credit intermediation, and the rise in lending-borrowing spreads. On the other hand, in contrast with the existing literature,our results assign only a moderate role to productivity and investment efficiency shocks.
    Keywords: Shadow Banking; Great Recession; Slow Recovery; estimated DSGE models.
    JEL: C32 E32
    Date: 2019–03
  6. By: Castellares, Renzo (Banco Central de Reserva del Perú); Toma, Hiroshi (Banco Central de Reserva del Perú)
    Abstract: We analyze whether a 2004 law requiring firms to express prices in the local currency in Peru, which had experienced a high degree of price dollarization, affected the exchange rate pass-through (ERPT). We hypothesize that the enactment of the law introduced menu costs for those firms that set their prices in dollars, prompting several of them to make a permanent switch from dollars to soles. Using disaggregated consumer price index (CPI) data, we find that after the enactment of the law, the ERPT was completely offset for non-durable goods with dollarized prices, and partially offset for durable goods with dollarized prices. These effects could be due to different shares of the imported content, market power and varying mark-ups.
    Keywords: exchange-rate pass through, price dollarization, local currency pricing
    JEL: D04 D49
    Date: 2019–01

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