nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒05‒06
nine papers chosen by
Martin Berka
University of Auckland

  1. The International Monetary and Financial System By Pierre-Olivier Gourinchas; Hélène Rey; Maxime Sauzet
  2. The Global Factor in Neutral Policy Rates : Some Implications for Exchange Rates, Monetary Policy, and Policy Coordination By Richard H. Clarida
  3. Self-Fulfilling Debt Crises with Long Stagnations By Ayres, Joao Luiz; Navarro, Gaston; Nicolini, Juan Pablo; Teles, Pedro
  4. The Monetary and Fiscal History of Bolivia, 1960-2017 By Kehoe, Timothy J.; Machicado, Carlos Gustavo; Peres-Cajías, José
  5. The political economy of the Eurozone crisis: competitiveness and financialization in PIIGS By Duman, Özgün Sarımehmet
  6. The Seniority Structure of Sovereign Debt By Schlegl, Matthias; Trebesch, Christoph; Wright, Mark L. J.
  7. The Global Economic Recovery 10 Years After the 2008 Financial Crisis By Wenjie Chen; Mico Mrkaic; Malhar S Nabar
  8. Explaining Monetary Spillovers: The Matrix Reloaded By Jonathan Kearns; Andreas Schrimpf; Fan Dora Xia
  9. After the Panic: Are Financial Crises Demand or Supply Shocks? Evidence from International Trade By Felipe Benguria; Alan M. Taylor

  1. By: Pierre-Olivier Gourinchas; Hélène Rey; Maxime Sauzet
    Abstract: International currencies fulfill different roles in the world economy with important synergies across those roles. We explore the implications of currency hegemony for the external balance sheet of the United States, the process of international adjustment, and the predictability of the US dollar exchange rate. We emphasize the importance of international monetary spillovers, of the exorbitant privilege, and analyze the emergence of a new ‘Triffin dilemma’.
    JEL: E0 F3 F4 G1
    Date: 2019–04
  2. By: Richard H. Clarida
    Abstract: This paper highlights some of the theoretical and practical implications for monetary policy and exchange rates that derive specifically from the presence of a global general equilibrium factor embedded in neutral real policy rates in open economies. Using a standard two country DSGE model, we derive a structural decomposition in which the nominal exchange rate is a function of the expected present value of future neutral real interest rate differentials plus a business cycle factor and a PPP factor. Country specific “r*” shocks in general require optimal monetary policy to pass these through to the policy rate, but such shocks will also have exchange rate implications, with an expected decline in the path of the real neutral policy rate reflected in a depreciation of the nominal exchange rate. We document a novel empirical regularity between the equilibrium error in the VECM representation of the empirical Holston Laubach Williams (2017) four country r* model and the value of the nominal trade weighted dollar. In fact, the correlation between the dollar and the 12 quarter lag of the HLW equilibrium error is estimated to be 0.7. Global shocks to r* under optimal policy require no exchange rate adjustment because passing though r* shocks to policy rates ‘does all the work’ of maintaining global equilibrium. We also study a richer model with international spill overs so that in theory there can be gains to international policy cooperation. In this richer model we obtain a similar decomposition for the nominal exchange rate, but with the added feature that r* in each country is a function global productivity and business cycle factors even if these factors are themselves independent across countries. We argue that in practice, there could well be significant costs to central bank communication and credibility under a regime of formal policy cooperation, but that gains to policy coordination could be substantial given that r*’s are unobserved but are correlated across countries.
    Keywords: Exchange rate ; Monetary policy ; Policy coordination
    JEL: E4 F31 F33
    Date: 2019–04–22
  3. By: Ayres, Joao Luiz (Inter-American Development Bank); Navarro, Gaston (Federal Reserve Board); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis); Teles, Pedro (Banco de Portugal)
    Abstract: We explore quantitatively the possibility of multiple equilibria in a model of sovereign debt crises. The source of multiplicity is the one identified by Calvo (1988). This type of multiplicity has been at the heart of the policy debate through the recent European sovereign debt crisis. Key for multiplicity in the model is a stochastic process for output featuring long periods of either high or low growth. We calibrate the output process in the model using data for the southern European countries that were exposed to the debt crisis. We find that expectations-driven sovereign debt crises are empirically plausible, but only in periods of stagnation. Multiplicity is state dependent: in periods of stagnation and for intermediate levels of debt, interest rates may be high for reasons unrelated to fundamentals.
    Keywords: Self-fulfilling debt crises; Sovereign default; Multiplicity; Good and bad times; Stagnation
    JEL: E44 F34
    Date: 2019–04–18
  4. By: Kehoe, Timothy J. (Federal Reserve Bank of Minneapolis); Machicado, Carlos Gustavo (Institute for Advanced Development Studies); Peres-Cajías, José (University of Barcelona)
    Abstract: After the economic reforms that followed the National Revolution of the 1950s, Bolivia seemed positioned for sustained growth. Indeed, it achieved unprecedented growth from 1960 to 1977. Mistakes in economic policies, especially the rapid accumulation of debt due to persistent deficits and a fixed exchange rate policy during the 1970s, led to a debt crisis that began in 1977. From 1977 to 1986, Bolivia lost almost all the gains in GDP per capita that it had achieved since 1960. In 1986, Bolivia started to grow again, interrupted only by the financial crisis of 1998–2002, which was the result of a drop in the availability of external financing. Bolivia has grown since 2002, but government policies since 2006 are reminiscent of the policies of the 1970s that led to the debt crisis, in particular, the accumulation of external debt and the drop in international reserves due to a de facto fixed exchange rate since 2012.
    Keywords: Bolivia; Monetary policy; Fiscal policy; Hyperinflation; Public enterprises
    JEL: E52 E63 H63 N16
    Date: 2019–02–13
  5. By: Duman, Özgün Sarımehmet
    Abstract: This paper analyses the fundamental reasons for the current global economic crisis in the Eurozone and PIIGS—Portugal, Italy, Ireland, Greece and Spain. It evaluates the tight economic integration within the Eurozone, and scrutinizes the reasons that PIIGS were more intensely exposed to the economic crisis. It focuses on the structure of the real economy and the financial market, and outlines the levels of competitiveness and financialization across the Eurozone and PIIGS. The paper states that the reason for the economic crisis in PIIGS was not only (i) unregulated financialization or over-financialization, but also (ii) the economic and trade imbalance among the Eurozone members, (iii) the falling rates of profit in the real economy, and (iv) the failure of real profits to compensate financial profits.
    Keywords: competitiveness; economic crisis; Eurozone; financialisation; financial market; PIIGS; real economy
    JEL: F3 G3
    Date: 2017–10–23
  6. By: Schlegl, Matthias; Trebesch, Christoph; Wright, Mark L. J.
    Abstract: Sovereign governments owe debt to many foreign creditors and can choose which creditors to favor when making payments. This paper documents the de facto seniority structure of sovereign debt using new data on defaults (missed payments or arrears) and creditor losses in debt restructuring (haircuts). We overturn conventional wisdom by showing that official bilateral (government-to-government) debt is junior, or at least not senior, to private sovereign debt such as bank loans and bonds. Private creditors are typically paid first and lose less than bilateral official creditors. We confirm that multilateral institutions like the IMF and World Bank are senior creditors.
    Keywords: Arrears; IMF; Insolvency; International financial architecture; official debt; Pecking order; priority; Sovereign bonds; sovereign default
    JEL: F3 F4 F5 G1
    Date: 2019–04
  7. By: Wenjie Chen; Mico Mrkaic; Malhar S Nabar
    Abstract: This paper takes stock of the global economic recovery a decade after the 2008 financial crisis. Output losses after the crisis appear to be persistent, irrespective of whether a country suffered a banking crisis in 2007–08. Sluggish investment was a key channel through which these losses registered, accompanied by long-lasting capital and total factor productivity shortfalls relative to precrisis trends. Policy choices preceding the crisis and in its immediate aftermath influenced postcrisis variation in output. Underscoring the importance of macroprudential policies and effective supervision, countries with greater financial vulnerabilities in the precrisis years suffered larger output losses after the crisis. Countries with stronger precrisis fiscal positions and those with more flexible exchange rate regimes experienced smaller losses. Unprecedented and exceptional policy actions taken after the crisis helped mitigate countries’ postcrisis output losses.
    Date: 2019–04–26
  8. By: Jonathan Kearns (Reserve Bank of Australia); Andreas Schrimpf (Bank for International Settlements); Fan Dora Xia (Bank for International Settlements)
    Abstract: Using monetary policy shocks for 7 advanced economy central banks, measured at high frequency, we document the strength and characteristics of interest rate spillovers to 47 advanced and emerging market economies. Our main goal is to assess different channels through which spillovers occur and why some economies' interest rates respond more than others. We find that there is no evidence that spillovers relate to real linkages, such as trade flows. There is some indication that exchange rate regimes influence the extent of spillovers. By far the strongest determinant of interest rate spillovers is financial openness. Economies that have stronger bilateral (and aggregate) financial links with the United States or euro area are susceptible to stronger interest rate spillovers. These effects are much more pronounced at the longer end of the yield curve, indicating that while economies retain policy rate independence, financial conditions are influenced by global yields.
    Keywords: monetary policy spillovers; high-frequency data; financial integration
    JEL: E44 F36 F42
    Date: 2019–04
  9. By: Felipe Benguria; Alan M. Taylor
    Abstract: Are financial crises a negative shock to demand or a negative shock to supply? This is a fundamental question for both macroeconomics researchers and those involved in real-time policymaking, and in both cases the question has become much more urgent in the aftermath of the recent financial crisis. Arguments for monetary and fiscal stimulus usually interpret such events as demand-side shortfalls. Conversely, arguments for tax cuts and structural reform often proceed from supply-side frictions. Resolving the question requires models capable of admitting both mechanisms, and empirical tests that can tell them apart. We develop a simple small open economy model, where a country is subject to deleveraging shocks that impose binding credit constraints on households and/or firms. These financial crisis events leave distinct statistical signatures in the empirical time series record, and they divide sharply between each type of shock. Household deleveraging shocks are mainly demand shocks, contract imports, leave exports largely unchanged, and depreciate the real exchange rate. Firm deleveraging shocks are mainly supply shocks, contract exports, leave imports largely unchanged, and appreciate the real exchange rate. To test these predictions, we compile the largest possible crossed dataset of 200+ years of trade flow data and event dates for almost 200 financial crises in a wide sample of countries. Empirical analysis reveals a clear picture: after a financial crisis event we find the dominant pattern to be that imports contract, exports hold steady or even rise, and the real exchange rate depreciates. History shows that, on average, financial crises are very clearly a negative shock to demand.
    JEL: E44 F32 F36 F41 G01 N10 N20
    Date: 2019–04

This nep-opm issue is ©2019 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.