nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒06‒24
thirteen papers chosen by
Martin Berka
University of Auckland

  1. Vehicle Currency Pricing and Exchange Rate Pass-Through By Natalie Chen; Wanyu Chung; Dennis Novy
  2. Boom-Bust Capital Flow Cycles By Graciela L. Kaminsky
  3. Hoarding for Stormy Days - Test of International Reserves Providing Financial Buffer Services By Joshua Aizenman; Yothin Jinjarak
  4. Anatomy of a Sovereign Debt Crisis: CDS Spreads and Real-Time Macroeconomic Data By Alessi, Lucia; Balduzzi, Pierluigi; Savona, Roberto
  5. Commodity booms and busts in emerging economies By Drechsel, Thomas; Tenreyro, Silvana
  6. The distributional effects of conventional monetary policy and quantitative easing: Evidence from an estimated DSGE model By Hohberger, Stefan; Priftis, Romanos; Vogel, Lukas
  7. A consumption-based approach to exchange rate predictability By Ojeda-Joya, Jair
  8. Self-fulfilling debt crises, fiscal policy and investment By Galli, Carlo
  9. The Corporate Sector and the Current Account By Jan Behringer; Till van Treeck
  10. Technology and employment in a vertically connected economy: a model and an empirical test By Dosi, G.; Piva, M.; Virgillito, M. E.; Vivarelli, M.
  11. Effects of US Interest Rate Hikes and Global Risk on Daily Capital Flows in Emerging Market Countries By OGAWA Eiji; SHIMIZU Junko; LUO Pengfei
  12. Optimal Fiscal Spending and Reserve Accumulation Policies under Volatile Aid By Ioana Moldovan; Shu-Chun Susan Yang; Luis-Felipe Zanna
  13. The Macroeconomics of the Greek Depression By Gabriel Chodorow-Reich; Loukas Karabarbounis; Rohan Kekre

  1. By: Natalie Chen; Wanyu Chung; Dennis Novy
    Abstract: Using detailed firm-level transactions data for UK imports, we find that invoicing in a vehicle currency is pervasive, with more than half of transactions in our sample invoiced in neither sterling nor the exporter's currency. We then study the relationship between invoicing currency choices and the response of import prices to exchange rate changes. We find that for transactions invoiced in a vehicle currency, import prices are much more sensitive to changes in the vehicle currency than in the bilateral exchange rate. Pass-through therefore substantially increases once we account for vehicle currencies. Our results help to explain the higher-than-expected pass-through into import prices during the Great Recession and after the EU referendum. Finally, within a theoretical framework we conceptualize an omitted variable bias arising in estimating pass-through with only bilateral exchange rates under vehicle currency pricing. Overall, our results contribute to understanding the disconnect between exchange rates and prices.
    Keywords: CPI, Dollar, Euro, exchange rate pass-through, inflation, invoicing, Sterling, UK, vehicle currency pricing
    JEL: F14 F31 F41
    Date: 2019–06
  2. By: Graciela L. Kaminsky
    Abstract: This paper examines the new trends in research on capital flows fueled by the 2007-2009 Global Crisis. Previous studies on capital flows focused on current-account imbalances and net capital flows. The Global Crisis changed that. The onset of this crisis was preceded by a dramatic increase in gross financial flows while net capital flows remained mostly subdued. The attention in academia zoomed in on gross inflows and outflows with special attention to cross border banking flows before the crisis erupted and the shift towards corporate bond issuance in its aftermath. The boom and bust in capital flows around the Global Crisis also stimulated a new area of research: capturing the “global factor.” This research adopts two different approaches. The traditional literature on the push-pull factors, which before the crisis was mostly focused on monetary policy in the financial center as the “push factor,” started to explore what other factors contribute to the comovement of capital flows as well as to amplify the role of monetary policy in the financial center on capital flows to the periphery. This new research focuses on global banks’ leverage, risk appetite, and global uncertainty. Since the “global factor” is not known, a second branch of the literature has captured this factor indirectly using dynamic common factors extracted from actual capital flows or movements in asset prices.
    JEL: F3 F34
    Date: 2019–05
  3. By: Joshua Aizenman; Yothin Jinjarak
    Abstract: This paper outlines a tractable cost-benefit analysis of the buffers stock financial services provided by international reserves, and applies it to 8 of the largest Emerging Markets (BRICS, Indonesia, Mexico, Turkey) during 2000Q1-2019Q1. Efficient management of international reserves generates sizable benefits for countries characterized by hard-currency external debt. These benefits increase with the volatility of the real exchange rates and sovereign spreads. Counter-cyclical management of hoarding reserves in good times and selling them in bad times provides buffers stock financial services adding up to about 3% of GDP during our sample period.
    JEL: F31 F34 F41
    Date: 2019–05
  4. By: Alessi, Lucia (European Commission – JRC); Balduzzi, Pierluigi (Boston College); Savona, Roberto (Dipartimento di Economia e Management Università degli Studi di Brescia)
    Abstract: We construct a unique and comprehensive data set of 19 real-time daily macroeconomic indicators for 11 Eurozone countries, for the 5/11/2009{4/25/2013 period. We use this new data set to characterize the time-varying dependence of the cross-section of sovereign credit default swap (CDS) spreads on country-specific macro indicators. We employ daily Fama-MacBeth type cross-sectional regressions to produce time-series of macro-sensitivities, which are then used to identify risk regimes and forecast future equity market volatility. We document pronounced time-variation in the macro-sensitivities, consistent with the notion that market participants focused on very different macro indicators at the different times of the crisis. Second, we identify three distinct crisis risk regimes, based on the general level of CDS spreads, the macro-sensitivities, and the GIPSI connotation. Third, we document the predictive power of the macro-sensitivities for future option-implied equity market volatility, consistent with the notion that expected future risk aversion is an important driver of how CDS spreads impound macro information.
    Keywords: Sovereign crises; Real-time data
    JEL: G12
    Date: 2019–02
  5. By: Drechsel, Thomas; Tenreyro, Silvana
    Abstract: Emerging economies, particularly those dependent on commodity exports, are prone to highly disruptive economic cycles. This paper proposes a small open economy model for a net commodity exporter to quantitatively study the triggers of these cycles. The economy consists of two sectors, one of which produces commodities with prices subject to exogenous international fluctuations. These fluctuations affect both the competitiveness of the economy and its borrowing terms, as higher commodity prices are associated with lower spreads between the country's borrowing rate and world interest rates. Both effects jointly result in strongly positive effects of commodity price increases on GDP, consumption, and investment, and a negative effect on the total trade balance. Furthermore, they generate excess volatility of consumption over output and a large volatility of investment. Besides explicitly incorporating a double role of commodity prices, the model structure nests the various candidate sources of shocks proposed in previous work on emerging economy business cycles. Estimating the model on Argentine data, we find that the contribution of commodity price shocks to fluctuations in post-1950 output growth is in the order of 38%. In addition, commodity prices account for around 42% and 61% of the variation in consumption and investment growth, respectively. We find transitory productivity shocks to be an important driver of output fluctuations, exceeding the contribution of shocks to the trend, which, though smaller, is not negligible
    Keywords: 681664-Research on Macroeco-nomic Fluctuations and Trade
    JEL: N0
    Date: 2018–05–01
  6. By: Hohberger, Stefan (European Commission – JRC); Priftis, Romanos (Bank of Canada); Vogel, Lukas (European Commission)
    Abstract: This paper compares the distributional effects of conventional monetary policy and quantitative easing (QE) within an estimated open-economy DSGE model of the euro area. The model includes two groups of households: (i) wealthier households, who own financial assets and are able to smooth consumption over time, and (ii) poorer households, who only receive labor and transfer income and live ‘hand to mouth’. We use the model to compare the impact of policy shocks on constructed measures of income and wealth inequality (net disposable income, net asset position, and relative per-capita income). Except for the short term, expansionary conventional policy and QE shocks tend to mitigate income and wealth inequality between the two population groups. In light of the coarse dichotomy of households that abstracts from richer income and wealth dynamics at the individual level, the analysis emphasizes the functional distribution of income.
    Keywords: Bayesian estimation; distributional effects; open-economy DSGE model; portfolio rebalancing; quantitative easing
    JEL: E44 E52 E53 F41
    Date: 2018–12
  7. By: Ojeda-Joya, Jair
    Abstract: We study whether the implications of an international consumption-based asset-pricing model are useful to provide out-sample predictability evidence for the real exchange rate. This model implies a predictability equation that results from the presence of both internal and external consumption habits in the utility function. In this equation, domestic, U.S. and world consumption growth are predictors of the real exchange rate. Our empirical exercises confirm this connection by providing evidence of short-term predictability on the bilateral rates of 15 out of 17 countries vis-à-vis the U.S. over the post Bretton-Woods float. A non-linear GMM estimation of some parameters of the model also brings about evidence of the presence of consumption habits in the utility function.
    Keywords: exchange rates, out-of-sample, predictability, asset pricing, habits
    JEL: C53 F31 F47 G15
    Date: 2019–05–24
  8. By: Galli, Carlo
    Abstract: This paper studies the circular relationship between sovereign credit risk, government fiscal and debt policy, and output. I consider a sovereign default model with fiscal policy and private capital accumulation. I show that, when fiscal policy responds to borrowing conditions in the sovereign debt market, multiple equilibria exist where the expectations of lenders are self-fulfilling. In the bad equilibrium, pessimistic beliefs make sovereign debt costly. The government substitutes borrowing with taxation, which depresses private investment and future output, increases default probabilities and verifies lenders’ beliefs. This result is reminiscent of the European debt crisis of 2010-12: while recessionary, fiscal austerity may be the government best response to excessive borrowing costs during a confidence crisis.
    Keywords: Self-fulfilling debt crises; sovereign default; multiple equilibria; fiscal austerity
    JEL: E44 E62 F34
    Date: 2019–02–21
  9. By: Jan Behringer; Till van Treeck
    Abstract: In this paper, we analyze how corporate sector behavior has affected national current account balances in a sample of 25 countries for the period 1980-2015. A consistent finding is that an increase (decrease) in corporate net lending leads to an increase (decrease) in the current account, controlling for standard current account determinants. We disentangle the current account effects of corporate saving and investment and we explore a number of alternative explanations of our results, including incomplete piercing of the "corporate veil" by households, foreign direct investment activities, a temporary crisis phenomenon, and changes in income inequality. We conclude that corporate sector saving is an important driver of macroeconomic trends and that the rise of corporate net lending especially in a number of current account surplus countries has contributed considerably to global current account imbalances.
    Keywords: Corporate sector, sectoral financial balances, current account determinants
    JEL: E21 F41 G35
    Date: 2019
  10. By: Dosi, G.; Piva, M.; Virgillito, M. E.; Vivarelli, M.
    Abstract: This paper addresses, both theoretically and empirically, the sectoral patterns of job creation and job destruction in order to distinguish the alternative effects of embodied vs disembodied technological change operating into a vertically connected economy. Disembodied technological change turns out to positively affect employment dynamics in the “upstream’’ sectors, while expansionary investment does so in the “downstream’’ industries. Conversely, the replacement of obsolete capital vintages tends to exert a negative impact on labour demand, although this effect turns out to be statistically less robust.
    Keywords: Innovation,disembodied and capital-embodied technological change,employment,jobcreation,job-destruction,sectoral interdependencies
    JEL: O14 O31 O33
    Date: 2019
  11. By: OGAWA Eiji; SHIMIZU Junko; LUO Pengfei
    Abstract: The interest rate hikes in the United States and higher global risk aversion have increased capital outflows from emerging market countries in recent years. This paper attempts to investigate the effects of global risk and interest rate hikes in the United States on capital flows in emerging market countries on a daily basis during a period from 11 November 2015 to 2 October 2018. Vector Autoregressive (VAR) models are employed to obtain the following main empirical results. Firstly, we found that both a higher interest rate in the United States (both market rates and market expectations on future interest hikes) and a higher global risk aversion possibly decrease portfolio flows (both equity flows and debt flows) in most of the sampled emerging market countries, although not all of them are statistically significant. Secondly, exchange rate depreciation of emerging market country currencies against the US dollar and plunges in equity prices of emerging market countries significantly lead to portfolio outflows from most of the sampled countries, demonstrating the large driving power of emerging market portfolio flows. Thirdly, for all of the sampled countries, portfolio outflows (both equity flows and debt flows) tend to significantly lead to further outflows. Fourthly, we found that the portfolio outflows from emerging market countries significantly deteriorate their domestic equity prices and depreciate their home currencies against the US dollar. Finally, we found wide contagion effects of portfolio flows among emerging market countries. It shows that portfolio outflows from emerging market countries will be reinforced and become more serious under the circumstances of global portfolio outflows from emerging market countries, and will be transmitted more severely among the emerging market countries with highly regional economic and financial nexuses.
    Date: 2019–03
  12. By: Ioana Moldovan; Shu-Chun Susan Yang; Luis-Felipe Zanna
    Abstract: This paper assesses the optimal setting of fiscal spending and foreign exchange rate intervention policies in response to volatile foreign aid, in a small open economy model that incorporates typical features of low-income countries. Within a class of policy rules, it jointly considers the optimal aid spending and international reserve accumulation policies. The results show that it is optimal to adjust government spending gradually in response to unpredictable fluctuations in aid, while partially accumulating foreign exchange reserves to offset Dutch disease effects. Also, allocating relatively more of the government spending to productive public investment, and less to government consumption, is welfare improving.
    Date: 2019–06–11
  13. By: Gabriel Chodorow-Reich; Loukas Karabarbounis; Rohan Kekre
    Abstract: The Greek economy experienced a boom until 2007, followed by a prolonged depression resulting in a 25 percent shortfall of GDP by 2016. Informed by a detailed analysis of macroeconomic patterns in Greece, we develop and estimate a rich dynamic general equilibrium model to assess quantitatively the sources of the boom and bust. Lower external demand for traded goods and contractionary fiscal policies account for the largest fraction of the Greek depression. A decline in total factor productivity, due primarily to lower factor utilization, substantially amplifies the depression. Given the significant adjustment of prices and wages observed throughout the cycle, a nominal devaluation would only have short-lived stabilizing effects. By contrast, shifting the burden of adjustment from taxes toward spending or from capital taxes toward other taxes would generate significant longer-term production and consumption gains.
    JEL: E20 E32 E44 E62 F41
    Date: 2019–05

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