nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒06‒10
seven papers chosen by
Martin Berka
University of Auckland

  1. Estimating monetary policy rules in small open economies By Michael S. Lee-Browne
  2. Can inaction account for the incomplete exchangerate pass-through? Evidence from threshold ARDL model By Konopczak, Karolina
  3. Trading and arbitrage in cryptocurrency markets By Makarov, Igor; Schoar, Antoinette
  4. Housing Cycle and Exchange Rates By Ma, Sai; Zhang, Shaojun
  5. Understanding Weak Capital Investment: the Role of Market Concentration and Intangibles By Nicolas Crouzet; Janice C. Eberly
  6. Sovereign default and imperfect tax enforcement By Francesco Pappada; Yanos Zylberberg
  7. The Tortuga disease: the perverse effects of illicit foreign capital By Jablonski, Ryan S.; Oliver, Steven; Hastings, Justin V.

  1. By: Michael S. Lee-Browne (The George Washington University)
    Abstract: This paper presents an approach for empirically estimating long-run monetary policy rules in small open economies. The approach utilizes the cointegrated VAR methodology and statistical tests on long- and short-run relations, and investigates policy responses. An application is presented for the case of Trinidad and Tobago. The analysis reveals an empirically supported long-run monetary policy rule for the nominal exchange rate, and provides empirical evidence that oil price shocks are transmitted through the TT economy in part via the effects on US prices. Dynamic specification of the nominal exchange rate reveals significant adjustment towards the target equilibrium level, and significant effects from foreign and domestic variables save for the exchange rate. Forecast analysis reveals the significance of oil-price forecasts, and forecast-errors, on monetary policy. The parsimonious model and its parameter estimates are empirically constant and generate reliable forecasts that provide important implications for using estimated policy rules.
    Keywords: Cointegration, exogeneity, Fisher open parity, forecast-encompassing, monetary policy, PPP, small open economies, Trinidad and Tobago, UIP
    JEL: C51 C52 E52 E58 F31 F41
    Date: 2019–05
  2. By: Konopczak, Karolina (Ministry of Finance in Poland)
    Abstract: Numerous empirical studies suggest that the responses of prices to exchange rate movements are muted, i.e. the exchange rate pass-through is incomplete. In this study we investigate whether this result can be explained by inaction to small changes in the exchange rate, in which case the incompleteness would constitute merely an artefact introduced by the linear specification of the pass-through equation. To this end we extend the non-linear ARDL framework of Shin et al. (2014) by allowing for threshold reactions, specifically in the form of a ‘band of inaction’. The results obtained for Polish industry show significant sign- and size-dependence in the sensitivity of export prices to exchange rate movements, but only in a few cases they fully account for the incompleteness of the pass-through. The tendency for inaction is to a large extent determined by industry’s characteristics, with sectors more technologically advanced and more involved in international activities, more willing or able to absorb exchange rate movements in their markups, thereby stabilising their prices in the destination markets.
    Keywords: exchange rate pass-through; non-linear cointegration; non-linear ARDL; band of inaction
    JEL: C32 E31 F14
    Date: 2019–05–29
  3. By: Makarov, Igor; Schoar, Antoinette
    Abstract: Cryptocurrency markets exhibit periods of large, recurrent arbitrage opportunities across exchanges. These price deviations are much larger across than within countries, and smaller between cryptocurrencies, highlighting the importance of capital controls for the movement of arbitrage capital. Price deviations across countries co-move and open up in times of large bitcoin appreciation. Countries with higher bitcoin premia over the US bitcoin price see widening arbitrage deviations when bitcoin appreciates. Finally, we decompose signed volume on each exchange into a common and an id- iosyncratic component. The common component explains 80% of bitcoin returns. The idiosyncratic components help explain arbitrage spreads between exchanges.
    Keywords: cryptocurrencies; bitcoin; arbitrage; price impact; capital controls
    JEL: F3 G3
    Date: 2019
  4. By: Ma, Sai (Board of Governors of the Federal Reserve); Zhang, Shaojun (The Ohio State University)
    Abstract: This paper documents that U.S. housing capital investment is a strong negative predictor of U.S. dollar changes and excess returns over the next six months to five years. Other advanced economies exhibit similar patterns. Moreover, positive housing supply shocks predict lower prices of housing services and nontradables relative to that of tradables, as well as higher output growth and macroeconomic volatility. An analytical model shows that these channels generate the exchange rate predictability under incomplete and complete markets, respectively. Cross-sectionally, currencies with higher loadings on the U.S. housing cycle carry higher average currency premia, compensating the U.S. investor for bearing the U.S. long-run consumption risk.
    JEL: F31 F37 G15 G17
    Date: 2019–05
  5. By: Nicolas Crouzet; Janice C. Eberly
    Abstract: We document that the rise of factors such as software, intellectual property, brand, and innovative business processes, collectively known as “intangible capital” can explain much of the weakness in physical capital investment since 2000. Moreover, intangibles have distinct economic features compared to physical capital. For example, they are scalable (e.g., software) though some also have legal protections (e.g., patents or copyrights). These characteristics may have enabled the rise in industry concentration over the last two decades. Indeed, we show that the rise in intangibles is driven by industry leaders and coincides with increases in their market share and hence, rising industry concentration. Moreover, intangibles are associated with at least two drivers of rising concentration: market power and productivity gains. Productivity gains derived from intangibles are strongest in the Consumer sector, while market power derived from intangibles is strongest in the Healthcare sector. These shifts have important policy implications, since intangible capital is less interest-sensitive and less collateralizable than physical capital, potentially weakening traditional transmission mechanisms. However, these shifts also create opportunities for policy innovation around new market mechanisms for intangible capital.
    JEL: E22
    Date: 2019–05
  6. By: Francesco Pappada; Yanos Zylberberg
    Abstract: We show that, in many countries, tax compliance is volatile and markedly responds to fiscal policy. To explore the consequence of this novel stylized fact, we build a model of sovereign debt with limited commitment and imperfect tax enforcement. Fiscal policy persistently affects the size of the informal economy, which impact future fiscal revenues and thus default risk. Thismechanism captures one key empirical regularity of economies with imperfect tax enforcement: the low sensitivity of debt price to fiscal consolidations. The interaction of imperfect tax enforcement and limited commitment strongly constrains the dynamics of optimal scal policy. During default crises, high tax distortions force the government towards extreme scal policies, notably including costly austerity spells.
    Keywords: China, productivity.
    Date: 2019–05–29
  7. By: Jablonski, Ryan S.; Oliver, Steven; Hastings, Justin V.
    Abstract: Transnational crime brings substantial foreign capital into a number of fragile and developing states. Yet the economic and political impacts of such capital have rarely been studied due to the challenges of obtaining accurate data on illicit activities. We overcome this challenge by compiling a dataset on the amount and disbursement dates of ransom payments made by ship owners and insurers to Somali pirates from 2005 to 2012, along with sub-national commodity prices and trade flows in Somalia. Using a difference-in-differences strategy, we hypothesize and find that ransoms have effects similar to those associated with the Dutch Disease. These effects include appreciating the local currency, decreasing export competitiveness, and increasing import dependence. The results illuminate a new channel through which illicit capital can undermine long-term economic development and foster an economic and political dependency on illicit sectors.
    JEL: N0 F3 G3
    Date: 2017–06–01

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.