nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒04‒15
eight papers chosen by
Martin Berka
University of Auckland

  1. Global Capital Flows Cycle: Impact on Gross and Net Flows By J. Scott Davis; Giorgio Valente; Eric van Wincoop
  2. Dominant Currency Debt By Egemen Eren; Semyon Malamud
  3. The Synchronization of Business Cycles and Financial Cycles in the Euro Area By William Oman
  4. Monetary Systems and the Global Balance-of-Payments Adjustment in the Pre-Gold Standard Period, 1700-1870 By Esteves, Rui; Nogues-Marco, Pilar
  5. Heterogeneity within the euro area: New insights into an old story By Virginie Coudert; Cécile Couharde; Carl Grekou; Valérie Mignon
  6. On the credit and exchange rate channels of central bank asset purchases in a monetary union By Darracq Pariès, Matthieu; Papadopoulou, Niki
  7. Does international reserve accumulation crowd out domestic private investment? By Wishnu Mahraddika
  8. On the relationship between domestic saving and the current account: Evidence and theory for developing countries By Markus Brueckner; Wojtek Paczos; Evi Pappa

  1. By: J. Scott Davis; Giorgio Valente; Eric van Wincoop
    Abstract: While prior to the global financial crisis the empirical international capital flow literature has focused on net capital flows (the current account), since the crisis there has been an increased focus on gross flows. In this paper we jointly analyze global drivers of gross flows (outflows plus inflows) and net flows (outflows minus inflows) by estimating a latent factor model. We find evidence of two global factors, which we call the GFC (global financial cycle) factor and commodity price factor as they closely track respectively the Miranda-Agrippino and Rey asset price factor and an average of oil and gas prices. These factors together account for half the variance of gross flows in advanced countries and forty percent of the variance of gross flows in emerging markets. But remarkably, they also account for forty percent of the variance of net capital flows in both groups of countries. We also analyze the heterogeneity across countries in the impact of the two factors. One of the key findings is that the impact of the GFC factor on both gross and net capital flows is stronger in countries that have larger net debt liabilities. Other asset classes (FDI and portfolio equity) do not significantly impact the exposure to the GFC factor.
    JEL: F3 F32 F41
    Date: 2019–04
  2. By: Egemen Eren (Bank for International Settlements (BIS) - Monetary and Economic Department); Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute)
    Abstract: Why is the dollar the dominant currency for debt contracts and what are its macroeconomic implications? We develop an international general equilibrium model where firms optimally choose the currency composition of their debt. We show that there always exists a dominant currency debt equilibrium, in which all firms borrow in a single dominant currency. It is the currency of the country that effectively pursues aggressive expansionary monetary policy in global downturns, lowering real debt burdens of firms. We show that the dollar empirically fits this description, despite its short term safe haven properties. We provide further modern and historical empirical support for our mechanism across time and currencies. We use our model to study how the optimal monetary policy differs if the Federal Reserve reacts to global versus domestic conditions.
    Keywords: dollar debt, dominant currency, exchange rates, inflation
    JEL: E44 E52 F33 F34 F41 F42 F44 G01 G15 G32
    Date: 2018–08
  3. By: William Oman (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, International Monetary Fund (IMF))
    Abstract: Using a frequency-based filter, I document the existence of a euro-area financial cycle and high- and low-amplitude national financial cycles. Applying concordance and similarity analysis to business and financial cycles, I provide evidence of five empirical regularities: (i) the aggregate euro-area creditto- GDP ratio behaved procyclically in the years preceding euro-area recessions; (ii) financial cycles are less synchronized than business cycles; (iii) business cycle synchronization has increased while financial cycle synchronization has decreased; (iv) financial cycle desynchronization was more pronounced between high-amplitude and low-amplitude countries, especially Germany; (v) high-amplitude countries and Germany experienced divergent leverage dynamics after 2002.
    Keywords: Business cycle,Economic integration,Euro area,Financial cycle,Monetary policy
    Date: 2019–03
  4. By: Esteves, Rui; Nogues-Marco, Pilar
    Abstract: We divide this paper into four sections. The first section outlines the taxonomy of commodity-based monetary regimes in Europe and their advantages and costs. The second section describes the main international monetary flows in the Early Modern period and relates them to East-West balance-of-trade adjustments and monetary systems in Asia (1700-1800). In the third section, we turn to the development of the foreign exchange market, which was mostly based on bills of exchange in this period. We explain the expansion of bills-of-exchange market from the European to the intercontinental network in the mid-19th century. The final section then investigates how nominal exchange rates and relative prices contributed to the global current account adjustments in the near pre-gold standard period (1820s-1870s).
    Keywords: Balance of Payments; Monetary Systems; Price-specie flow mechanism; Real effective exchange rates (REERs)
    JEL: E42 F31 N10
    Date: 2019–04
  5. By: Virginie Coudert; Cécile Couharde; Carl Grekou; Valérie Mignon
    Abstract: We assess cross-country heterogeneity within the eurozone and its evolution over time by measuring the distances between the equilibrium exchange rates’ paths of member countries. These equilibrium paths are derived from the minimization of currency misalignments, by matching real exchange rates with their economic fundamentals. Using cluster and factor analyses, we identify two distinct groups of countries in the run-up to the European Monetary Union (EMU), Greece being clearly an outlier at that time. Comparing the results with more recent periods, we find evidence of rising dissimilarities between these two sets of countries, as well as within the groups themselves. Overall, our findings illustrate the building-up of macroeconomic imbalances within the eurozone before the 2008 crisis and the fragmentation between its member countries that followed.
    Keywords: Euro area; Equilibrium exchange rates; Cluster analysis; Factor analysis; Macroeconomic imbalances
    JEL: F33 E5 C38
    Date: 2019
  6. By: Darracq Pariès, Matthieu; Papadopoulou, Niki
    Abstract: Through the euro area crisis, financial fragmentation across jurisdictions became a prime concern for the single monetary policy. The ECB broadened the scope of its instruments and enacted a series of non-standard measures to engineer an appropriate degree of policy accommodation. The transmission of these measures through the currency union remained highly dependent on the financial structure and conditions prevailing in various regions. This paper explores the country-specific macroeconomic transmission of selected non-standard measures from the ECB using a global DSGE model with a rich financial sector: we extend the six-region multi-country model of Darracq Pariès et al. (2016), introducing credit and exchange rate channels for central bank asset purchases. The portfolio rebalancing frictions are calibrated to match the sovereign yield and exchange rate responses after ECB's Asset Purchase Programme (APP) first announcement. The domestic transmission of the APP through the credit intermediation chain is significant and quite heterogenous across the largest euro area countries. The introduction of global portfolio frictions on euro area government bond holdings by international investors opens up for a larger depreciation of the euro. The interaction between international and domestic channels affect the magnitude and the cross-country distribution of the APP impact. JEL Classification: E4, E5, F4
    Keywords: banking, bank lending rates, cross-country spillovers, DSGE models, financial regulation, non-standard measures
    Date: 2019–03
  7. By: Wishnu Mahraddika
    Abstract: Foreign exchange reserve accumulation is one of the preferred strategies to protect against susceptibility to financial crises. At the same time, maintaining a healthy international reserve position has the potential to promote domestic investment by reducing the cost of foreign borrowing through improving international creditworthiness. However, contractionary monetary policy in the form of sterilization operations implemented as part of reserve accumulation strategy could crowd out financing for domestic investment. This study examines the relationship between foreign reserve accumulation and domestic private investment by undertaking a dynamic panel data econometric analysis covering 58 countries over the period 2000–2014. The findings suggest that reserve accumulation is positively associated with domestic private investment in the long run.
    Keywords: Reserves; Investment; Panel ARDL estimator
    JEL: E2 E5 F30 F4 G15
    Date: 2019
  8. By: Markus Brueckner; Wojtek Paczos; Evi Pappa
    Abstract: We examine the relationship between domestic saving and the current account in developing countries. Our three main findings are that: (i) domestic saving has a small effect on the current account; (ii) domestic saving has a significant positive effect on the trade balance – this effect is much larger than the effect that domestic saving has on the current account; (iii) domestic saving has a significant negative effect on net-current transfers. We use countries in the sub-Saharan African region as a laboratory for an instrumental variables approach. The IV approach enables to obtain estimates of casual effects. Underlying the IV approach is the significant positive first-stage response of domestic saving to plausibly exogenous annual rainfall: an unanticipated, transitory supply-side shock. We construct a small open-economy DSGE model with debt adjustment costs and endogenous current transfers to match the empirical findings. The model enables to examine the relationship between domestic saving and the current account for different types of shocks. An important message of our paper is that, for developing countries, estimates of the relationship between domestic saving and domestic investment are not informative for answering the question how domestic saving effects a country’s accumulation of net foreign assets.
    Keywords: Domestic Saving, Current Account, Current Transfers, Small Open Economy Model, Financial Frictions, Feldstein-Horioka Puzzle
    Date: 2019–04

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