nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒05‒13
seven papers chosen by
Martin Berka
University of Auckland

  1. Exchange rate volatility and cooperation in an incomplete markets' economy By Sara Eugeni
  2. Consumption dynamics and the expectation channel in a Small Open Economy By César Carrera; Miguel Puch
  3. Global Commodity Markets and Rebalancing in China: The Case of Copper By Jeannine Bailliu; Doga Bilgin; Kun Mo; Kurt Niquidet; Benjamin Sawatzky
  4. The Synchronization of Business Cycles and Financial Cycles in the Euro Area By William Oman
  5. The impact of global value chains on the euro area economy By Gunnella, Vanessa; Al-Haschimi, Alexander; Benkovskis, Konstantins; Chiacchio, Francesco; de Soyres, François; Di Lupidio, Benedetta; Fidora, Michael; Franco-Bedoya, Sebastian; Frohm, Erik; Gradeva, Katerina; Lopez-Garcia, Paloma; Koester, Gerrit; Nickel, Christiane; Osbat, Chiara; Pavlova, Elena; Schmitz, Martin; Schroth, Joachim; Skudelny, Frauke; Tagliabracci, Alex; Vaccarino, Elena; Wörz, Julia; Dorrucci, Ettore
  6. After the Panic: Are Financial Crises Demand or Supply Shocks? Evidence from International Trade By Benguria, Felipe; Taylor, Alan M.
  7. The Seniority Structure of Sovereign Debt By Matthias Schlegl; Christoph Trebesch; Mark L.J. Wright

  1. By: Sara Eugeni (Durham University Business School)
    Abstract: In this paper, we contribute to the debate on whether exchange rate volatility is detrimental or not for welfare by characterizing optimal monetary policies in a two-country OLG model where markets are incomplete. The equilibrium nominal exchange rate is volatile as a result of shocks against which agents are not able to insure. In a non-cooperative environment, central banks have an incentive to devaluate the domestic currency by giving monetary transfers to domestic agents. However, such policies result in higher exchange rate volatility. We show that cooperation reduces exchange rate volatility as: (1) the negative spillover effects due to the expansionary monetary policies are internalized; (2) cooperative policies smooth the effects of shocks to fundamentals on the exchange rate. For standard parameter values, the gains from cooperation are not negligible. However, for cooperation to be Pareto improving countries should be weighted differently in the social welfare function. This could explain the lack of cooperation across countries, instead of the negligible gains as previously argued.
    Keywords: exchange rate volatility, incomplete markets, international spillovers, gains from cooperation, OLG models
    JEL: D52 F31 F41 F42
    Date: 2019–03
  2. By: César Carrera (Banco Central de Reserva del Perú and Universidad del Pacífico); Miguel Puch (Banco Central de Reserva del Perú)
    Abstract: The transmission mechanism between consumption and its fundamentals has been under reviews in the literature from Friedman’s permanent income hypothesis to household’s liquidity constraints. One particular angle to explain consumption is focused on the role of consumer expectations as a determinant of consumption spending. Here we explore alternative measures for consumer expectations (captured by surveys to households) by taking into account general manager expectations and by using imports of durable consumption goods (which capture consumer confidence about future economic conditions). We argue that, for a small open economy, the expectations channel is well captured by alternative measures; find that even though there is a pass-through from expectations to consumption, this effect tends to have a short-period effect; and also report those values and periods of time for which the alternative measures have a significant impact on consumption.
    Keywords: Consumption, Durable goods, Business expectations, Households expectations
    JEL: C16 F31 F41
    Date: 2019–04
  3. By: Jeannine Bailliu; Doga Bilgin; Kun Mo; Kurt Niquidet; Benjamin Sawatzky
    Abstract: Given that China accounts for about half of global copper consumption, it is reasonable to expect that any significant change in Chinese copper consumption will have an impact on the global market. This paper examines the likely impact of the rebalancing of the Chinese economy on its copper consumption over the next decade, focusing on the relationship between the copper intensity of GDP and the share of investment in GDP. We use a panel smooth transition regression model to account for potential non-linearities in this relationship at different levels of urbanization and income. Our findings suggest that there is indeed a significant relationship between a country’s copper intensity of GDP and its investment share. Our baseline rebalancing scenario for China implies that copper intensity in China has already peaked and is expected to decline steadily through the next decade. This anticipated reduction in Chinese copper intensity is the result of the dampening impact of rebalancing and higher per capita income on copper intensity, which more than offsets the upward pressure stemming from the ongoing process of urbanization. An exploration of alternative rebalancing scenarios suggests that China’s rebalancing path could have a significant impact on global copper consumption.
    Keywords: Econometric and statistical methods; International topics
    JEL: O13 O14 Q02
    Date: 2019–04
  4. 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
  5. By: Gunnella, Vanessa; Al-Haschimi, Alexander; Benkovskis, Konstantins; Chiacchio, Francesco; de Soyres, François; Di Lupidio, Benedetta; Fidora, Michael; Franco-Bedoya, Sebastian; Frohm, Erik; Gradeva, Katerina; Lopez-Garcia, Paloma; Koester, Gerrit; Nickel, Christiane; Osbat, Chiara; Pavlova, Elena; Schmitz, Martin; Schroth, Joachim; Skudelny, Frauke; Tagliabracci, Alex; Vaccarino, Elena; Wörz, Julia; Dorrucci, Ettore
    Abstract: The studies summarised in this paper focus on the economic implications of euro area firms’ participation in global value chains (GVCs). They show how, and to what extent, a large set of economic variables and inter-linkages have been affected by international production sharing. The core conclusion is that GVC participation has major implications for the euro area economy. Consequently, there is a case for making adjustments to standard macroeconomic analysis and forecasting for the euro area, taking due account of data availability and constraints. JEL Classification: F6, F10, F14, F16, E3
    Keywords: euro area, global value chains, international interlinkages, international trade, vertical specialisation
    Date: 2019–04
  6. By: Benguria, Felipe; Taylor, Alan M.
    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.
    Keywords: Deleveraging; exports; financial crises; Imports; local projections
    JEL: E44 F32 F36 F41 F44 G01 N10 N20
    Date: 2019–04
  7. By: Matthias Schlegl; Christoph Trebesch; Mark L.J. Wright
    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 such as the IMF and World Bank are senior creditors.
    JEL: F3 F4 F5 G1
    Date: 2019–05

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