nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒04‒29
eight papers chosen by
Martin Berka
University of Auckland

  1. Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage By Paul R. Bergin; Giancarlo Corsetti
  2. Labor market reforms, precautionary savings, and global imbalances By Hochmuth, Brigitte; Moyen, Stephane; Stähler, Nikolai
  3. Country Risk Premium and Domestic Macroeconomic Fundamentals When Global Risk Appetite Slides By Fatih Akcelik; Salih Fendoglu
  4. Diagnosing the dutch disease: Are the symptoms present in Bhutan? By Norbu, Nyingtob
  5. How do international remittances respond to real exchange rate movements? By Michael Bleaney; Mo Tian
  6. International Consumption Risk Sharing and Trade Transaction Costs By Matthew Clance; Wei Ma; Ruthira Naraidoo
  7. Demographics and the Evolution of Global Imbalances By Michael Sposi
  8. The Role of a Flexible Foreign Exchange System in Macroeconomic Adjustment: The Case of Morocco By Abdelaaziz Aït Ali

  1. By: Paul R. Bergin; Giancarlo Corsetti
    Abstract: Motivated by the long-standing debate on the pros and cons of competitive devaluation, we propose a new perspective on how monetary and exchange rate policies can contribute to a country’s international competitiveness. We refocus the analysis on the implications of monetary stabilization for a country’s comparative advantage. We develop a two-country New-Keynesian model allowing for sectoral differences in the production of tradables in each economy: while in one sector firms are perfectly competitive, in another sector firms produce differentiated goods under monopolistic competition and subject to nominal rigidities, hence their performance is more sensitive to macroeconomic uncertainty. We show that, by stabilizing inflation and the output gap, monetary policy can foster the competitiveness of these firms, encouraging investment and entry in the differentiated goods sector, and ultimately affecting the composition of domestic output and exports. Welfare implications of alternative monetary policy rules that shift comparative advantage are found to be substantial in a calibrated version of the model.
    JEL: F41
    Date: 2019–04
  2. By: Hochmuth, Brigitte; Moyen, Stephane; Stähler, Nikolai
    Abstract: How do labor market reforms affect international competitiveness and net foreign assets? To answer this question, we build a two-region RBC model with labor market frictions, idiosyncratic consumption risk, and limited cross-sectional heterogeneity to establish a direct link between labor market reforms and changes in net foreign assets via a precautionary savings channel. We apply the model to simulate far-reaching labor market reforms in Germany during the mid-2000s. We find that reducing the generosity of unemployment benefits decreases wages, fosters employment and augments competitiveness as well as trade. In addition, we can explain a significant share of the observed increase in German net foreign assets. A standard representative agent framework is not able to generate any notable effects on net foreign assets and the current account.
    Keywords: unemployment benefits reform,current account imbalances,precautionary savings,Hartz reform
    JEL: E21 E24 F16 F41
    Date: 2019
  3. By: Fatih Akcelik; Salih Fendoglu
    Abstract: [EN] We provide evidence that domestic macroeconomic fundamentals play a stronger role for country risk premium dynamics for emerging market economies when global risk appetite is not accommodative. Based on a threshold dynamic panel fixed effects model and for a set of seven emerging market economies, we find that a deterioration in current account balance, international reserves, or fiscal budget balance, and an increase in foreign currency debt of non-financial corporates is estimated to increase the country risk premium more strongly when global risk appetite slides. Domestic macroeconomic fundamentals appear to matter less for the risk premium when global risk appetite is accommodative. [TR] Kuresel risk istahinin bozuldugu donemlerde, destekleyici oldugu donemlere kiyasla ulke risk primi icin yurtici makroekonomik temeller daha onemli midir? Bu soruyu ele almak icin, yedi gelismekte olan ulke icin dinamik panel esik sabit etki modeli kullaniyoruz. Ampirik sonuclar, cari isl emler dengesi, uluslararasi rezerv yeterliligi, finansal olmayan sirketlerin yabanci para borclulugu veya kamu butce dengesinde bozulmanin, kuresel risk istahinin dusuk oldugu donemlerde ulke risk primini daha guclu bir sekilde arttirdigini gostermektedir. Bulgularimiz kuresel risk istahi destekleyici oldugunda, yurtici makroekonomik temellere ulke risk primi acisindan daha az onem atfedildigine isaret etmektedir.
    Date: 2019
  4. By: Norbu, Nyingtob
    Abstract: Bhutan’s economy has evolved significantly since embarking on a period of modern development in 1960 when its first motor road was built. Underpinning its economic growth is the hydropower sector among other drivers, which has accounted for nearly 40% of exports on average in the last 5 years. However, the earnings thus far pale in comparison to what is projected with the completion of the recent massive surge in investments in the sector. The destabilizing effects of an unpreparedness to manage such inflows have already begun to manifest in the construction phase of Bhutan’s hydropower pursuits as evidenced by the recent balance of payments challenges. Hence, we can intuitively forecast the implications once these power plants are operational and export revenues surge exponentially. The academic consensus on the negative correlation between natural resource dependence and economic growth has been conceptualized in a framework known more popularly as the Dutch Disease. In this paper we attempt to technically assess whether the economy exhibits the symptoms associated with a Dutch Disease based on the three channels which include (1) the resource movement effect, (2) the spending effect and, (3) the monetary effect. Additionally, we also conduct an analysis of another important symptom- the Bilateral Real Exchange Rate- to ascertain whether it has been under pressure and the determinants of its movement. While we do find evidence of some of the symptoms such as real exchange rate appreciation, the estimates aren’t robust enough to categorically attribute these symptoms to power exports or a monetary disequilibrium in our framework. However, we argue that the traditional model may have to be tweaked slightly in our case because more traditional outcomes such as the resource movement effect probably manifest in different ways.
    Keywords: Bhutan, dutch disease, real exchange rate, energy exports, current account
    JEL: E60 O13 Q48
    Date: 2017–05
  5. By: Michael Bleaney; Mo Tian
    Abstract: Shifts in the bilateral real exchange rate between the countries of migrants’ origin and destination alter the real value of international remittances in origin currency relative to their real value in destination currency. Theoretical models predict a response in the form of some adjustment in remittances, measured in either currency. We construct real effective exchange rates weighted by migrant stocks for a large sample of countries to investigate the matter empirically. The evidence shows that remittances as a share of destination countries’ GDP tend to remain virtually unchanged, so that real exchange rate movements predominantly affect the real value of remittances in terms of origin countries’ currency. Possible explanations of this are discussed.
    Keywords: exchange rates, migration, remittances
    Date: 2019
  6. By: Matthew Clance (University of Pretoria, Department of Economics, Pretoria, 0002, South Africa); Wei Ma (Xi'an Jiaotong-Liverpool University, International Business School Suzhou, Suzhou, People's Republic of China); Ruthira Naraidoo (University of Pretoria, Department of Economics, Pretoria, 0002, South Africa)
    Abstract: This paper investigates the implications of international consumption risk sharing for a panel 69 developed and developing countries over the period 1986-2006. We theoretically derive the international consumption insurance proposition within an international real business cycle setup that involves consumption correlation with the real exchange rate to incorporate salient features that impede consumption risk sharing, namely trade costs and capital market imperfections, making use of the gravity structural model to obtain the trade costs estimates and output volatility to proxy capital market imperfections. We analyze the implications of the theory based on panel data estimation. We find that trade costs significantly impede risk sharing for the aggregate sample of countries and a 10% increase in trade costs can decrease consumption by almost 0:7% and 0:6% for trade between developed and developing countries and for intra-developing country trade respectively while intra-developed country trade seems to be affected by temporary changes in trade costs. Developed countries seem to be in line with insuring against output volatility while low income group face asset market constraints as output uncertainty increases. Policy implication hence involves lowering international trade costs in an attempt to alleviate issues of consumption allocations.
    Keywords: Trade costs, international consumption insurance, developed, developing, low income countries, capital market imperfection
    JEL: E21 E44 F14 F41 G15
    Date: 2019–04
  7. By: Michael Sposi (Southern Methodist University)
    Abstract: The age distribution evolves asymmetrically across countries, influencing relative saving rates and labor supply. Emerging economies experienced faster increases in working age shares than advanced economies did. Using a dynamic, multi-country model I quantify the effect of demographic changes on trade imbalances across 28 countries since 1970. Counterfactually holding demographics constant reduces net exports in emerging economies and boosts them in advanced economies. On average, a one percentage point increase in a country's working age share, relative to the world, increases its ratio of net exports to GDP by one-third of a percentage point. These findings alleviate the allocation puzzle.
    Keywords: Demographics, Trade imbalances, Dynamics, Labor supply.
    JEL: F11 F21 J11
    Date: 2019–04
  8. By: Abdelaaziz Aït Ali
    Abstract: Morocco has moved towards a more flexible exchange rate system by widening its currency fluctuation bands to +/- 2.5% around a central price. This transition will, in time, equip the Moroccan economy with a macroeconomic instrument acting as a shock absorber and facilitating rapid adjustment at lower costs. In the absence of such a mechanism, adjustment to macroeconomic shocks at times requires a contraction in demand and thereby a cyclical downturn in growth to restore external balances. Broadening the fluctuation bands is a first step towards a long-term managed floating regime that nevertheless gives the central bank an important role in smoothing out exchange rate fluctuations.
    Date: 2019–01

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