nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒09‒30
fourteen papers chosen by
Martin Berka
University of Auckland

  1. A Guide to Sovereign Debt Data By S. M. Ali Abbas; Kenneth Rogoff
  2. The International Elasticity Puzzle Is Worse Than You Think By Lionel Fontagné; Philippe Martin; Gianluca Orefice
  3. Puzzling Exchange Rate Dynamics and Delayed Portfolio Adjustment By Philippe Bacchetta; Eric van Wincoop
  4. Sovereign Default Risk and Migration By George Alessandria; Minjie Deng; Yan Bai
  5. International Price Comparison using Scanner Data By David Argente; Chang-Tai Hsieh; Munseob Lee
  6. Loss Aversion and Search for Yield in Emerging Markets Sovereign Debt By Ricardo Sabbadini
  7. Credit intermediation and the transmission of macro-financial uncertainty: International evidence By Gächter, Martin; Geiger, Martin; Stöckl, Sebastian
  8. Sovereign Debt Overhang, Expenditure Composition and Debt Restructurings By Tamon Asonuma; Hyungseok Joo
  9. The Exchange Rate and Oil Prices in Colombia: A High Frequency Analysis By Juan Manuel Julio-Román; Fredy Gamboa-Estrada
  10. The Level REER model in the External Balance Assessment (EBA) Methodology By Rui Mano; Carolina Osorio Buitron; Luca A Ricci; Mauricio Vargas
  11. Modelling Opportunity Cost Effects in Money Demand due to Openness By Sophie van Huellen; Duo Qin; Shan Lu; Huiwen Wang; Qingchao Wang; Thanos Moraitis
  12. Financial Openness and Capital Inflows to Emerging Markets: In Search of Robust Evidence By Diego A. Cerdeiro; Andras Komaromi
  13. Tax and Spending Shocks in the Open Economy: Are the Deficits Twins? By Mathias Klein; Ludger Linnemann
  14. Estimating the Effect of Exchange Rate Changes on Total Exports By Thierry Mayer; Walter Steingress

  1. By: S. M. Ali Abbas; Kenneth Rogoff
    Abstract: The last decade or so has seen a mushrooming of new sovereign debt databases covering long time spans for several countries. This represents an important breakthrough for economists who have long sought to, but been unable to tackle, first-order questions such as why countries have differential debt tolerance, and how debt levels affect the scope for countercyclical policy in recessions and financial crises. This paper backdrops these recent data efforts, identifying both the key innovations, as well as caveats that users should be aware of. A Directory of existing publicly-available sovereign debt databases, featuring compilations by institutions and individual researchers, is also included.
    Date: 2019–09–13
  2. By: Lionel Fontagné (Maison des Sciences Economiques); Philippe Martin (Département d'économie); Gianluca Orefice (Centre d'Etudes Prospectives et d'Informations Internationales (CEPII))
    Abstract: We instrument export prices with firm level electricity cost shocks and estimate three international price elasticities using firm-level export data: the elasticity of firm exports to export price, tariff and real exchange rate shocks. In standard models these three elasticities should be equal. We find that this is far from being the case. The export price elasticity is the highest, around 5, much larger than the exchange rate elasticity. The international elasticity puzzle is therefore worse than previously thought. We also show that exporters absorb one third of tariff changes in their export prices. Because we take into account this reaction of export prices to tariffs, our estimate of the tariff elasticity corrects from this omitted-variable bias.
    Keywords: Elasticity; International Trade and Macroeconomics; Export Price; Firm Exports
    JEL: F14 F18 Q56
    Date: 2018–11
  3. By: Philippe Bacchetta; Eric van Wincoop
    Abstract: The objective of this paper is to show that the proposal by Froot and Thaler (1990) of delayed portfolio adjustment can account for a broad set of puzzles about the relationship between interest rates and exchange rates. The puzzles include: i) the delayed overshooting puzzle; ii) the forward discount puzzle (or Fama puzzle); iii) the predictability reversal puzzle; iv) the Engel puzzle (high interest rate currencies are stronger than implied by UIP); v) the forward guidance exchange rate puzzle; vi) the absence of a forward discount puzzle with long-term bonds. These results are derived analytically in a simple two-country model with portfolio adjustment costs. Quantitatively, this approach can match all targeted moments related to these puzzles.
    JEL: F3 F31 F41 G11 G12
    Date: 2019–09
  4. By: George Alessandria (University of Rochester); Minjie Deng (University of Rochester); Yan Bai (University of Rochester)
    Abstract: We study the role of migration in a sovereign debt crisis. Empirically, we document a large worker outflow accompanies a rise in sovereign debt spreads. We develop a model of sovereign default with an endogenous migration choice to understand how migration interacts with the default risk and propagates a debt crisis. In the model, the outflow of workers increases the government’s debt burden by increasing debt-per-capita, further increasing default risk. As a result, the government decreases investment, which affects the consumption of the workers. Lower consumption, in turn, increases the probability of emigration. Compared with a model without endogenous migration, our model generates a higher default risk, lower investment, and deeper and more prolonged recession. The impact of the migration channel is even more substantial when the average migrant has higher levels of human capital relative to locals.
    Date: 2019
  5. By: David Argente (Federal Reserve Bank of Minneapolis); Chang-Tai Hsieh (University of Chicago); Munseob Lee (University of California San Diego)
    Abstract: Cross-country price indices are crucial to compare living standards between countries. An accurate measurement of these price indices has proven to be an extremely difficult task because the consumption patterns of different countries do not overlap. We construct a unique data on prices and quantities at the barcode-level across two countries with different income level, United States and Mexico. At the aggregate level, we identify heterogeneity in quality and variety as important sources of bias in international price comparisons. In addition, we compute income- and country-specific price indices using a non-homothetic preference structure. We find that the price indices crucially depend on both the income distribution of each country and on the local producers' choice of quality. Our results indicate that previous studies importantly understate real income inequality between countries.
    Date: 2019
  6. By: Ricardo Sabbadini
    Abstract: Empirical evidence indicates that a decline in international risk-free interest rates decreases emerging markets (EM) sovereign spreads. A standard quantitative model of sovereign default, calibrated to match average levels of debt and spread, does not replicate this feature even if the risk aversion of lenders moves with international interest rates. In this paper, I show that a model with lenders that are loss-averse and have reference dependence, traits suggested by the behavioral finance literature, replicates the noticed stylized fact. In this framework, when international interest rates fall, EM sovereign spreads decline despite increases in debt and default risk. This happens because investors search for yield in risky EM bonds when the risk-free rate is lower than their return of reference. I find that larger spread reductions occur for i) riskier countries; ii) greater declines in the risk-free rate; and iii) higher degrees of loss aversion.
    Date: 2019–09
  7. By: Gächter, Martin; Geiger, Martin; Stöckl, Sebastian
    Abstract: We examine the transmission of global macro-financial uncertainty to economic activity depending on the current state of the banking sector. Previous literature suggests that credit supply and uncertainty shocks are important drivers of economic activity, but the distinction between the two is empirically challenging. In this paper, we introduce a new, but surprisingly simple measure of macro-financial uncertainty at the global level while the state of credit intermediation is being captured on the country level. Macro-financial uncertainty generally exerts adverse effects on economic growth in a sample of advanced economies. We find, however, that a shock to uncertainty is strongly reinforced when credit intermediation is distressed. In addition, we show that both macroeconomic and financial market uncertainty are associated with lower economic activity, although the latter exerts stronger effects. State-dependency of the effects is prevalent in both cases. Our findings have important policy implications, highlighting both the state of the banking sector as well as the origin of uncertainty as crucial factors in the transmission of uncertainty.
    Keywords: uncertainty,credit intermediation,local projection method,state-dependency
    JEL: D80 E32 E44 G21
    Date: 2019
  8. By: Tamon Asonuma (International Monetary Fund); Hyungseok Joo (University of Surrey)
    Abstract: Sovereigns' public capital influences sovereign debt crises and resolution. We compile a dataset on public expenditure composition around restructurings with private external creditors. We show that during restructurings, public investment (i) experiences severe decline and slow recovery, (ii) differs from public consumption and transfers, (iii) reduces share in public expenditure, and (iv) relates with restructuring delays. We develop a theoretical model of defaultable debt that embeds endogenous public capital accumulation, expenditure composition, production and multi-round debt renegotiations. The model quantitatively shows severe decline and slow recovery in public investment – “sovereign debt overhang” – delay debt settlement. Data support these theoretical predictions.
    JEL: F34 F41 H63
    Date: 2019–07
  9. By: Juan Manuel Julio-Román (Banco de la República de Colombia); Fredy Gamboa-Estrada (Banco de la República de Colombia)
    Abstract: We study the relationship between daily oil prices and nominal exchange rates between 1995 and 2019 in Colombia through a Time-Varying Vector Auto-Regressions with residual Stochastic Volatility, TV-VAR-SV, model. For this task we also employ cointegration, Univariate Auto-Regressions with residual Stochastic Volatility, UAR-SVTV, and De-trended Cross Correlation, DCC analyses. We found that a stable longrun relationship between the two processes is lacking. We also found significant time variation in residual volatility and co-volatility. More specifically, we found that both periods of time, the international financial crisis and the oil price drop of 2015, behave conspicuously different from other “more normal” times. These results are consistent with a shift in the features of the DCC at the start of the crisis. Before the crises the DCCs are positive but weak for different windows sizes, turning negative and significant after it. The latter DCCs and their significance increase with the window size. These results are concurrent, also, with two clearly differentiated periods of time; one when oil production was not financially feasible, and thus production, exports and oil related currency inflows were small, and the other when oil production became feasible because of the price increase, which led to a boom in exploration, production, exports and oil related currency inflows. **** RESUMEN: Estudiamos la evolución de la relación entre los precios diarios del petróleo y la tasa de cambio nominal Colombiana entre 1995 y 2019 a través de un modelo de Vectores Auto-Regresivos Tiempo-Variantes con Volatilidad Estocástica Residual. Para esto empleamos también técnicas de co-integración, Auto-Regresiones Univariadas con Volatilidad Estocástica Residual, y Correlaciones Cruzadas Des-tendeciadas. Se encontró que no existe una relación estable de largo plazo entre estos dos procesos. También hallamos evidencia de variación temporal de la volatilidad y co-volatilidad residual. Más específicamente, encontramos que tanto la crisis financiera global como la reducción de los precios de petróleo de 2015 son periodos particularmente distintos de otros periodos “más normales”. Estos resultados son consistentes con un cambio en el comportamiento de las DCC al inicio de la crisis financiera de 2008. En efecto, antes de la crisis estas correlaciones eran positivas pero poco significativas para diferentes tama˜nos de la ventana de estimación, pero después de la crisis se tornaron negativas y significancias. Las últimas DCCs y su significancia se incrementaron a mayores tama˜nos de la ventana. Estos resultados coinciden con dos periodos de tiempo claramente diferenciados en Colombia, uno en el cual la producción petrolera no era financieramente factible, y en consecuencia la producción, exportación y flujos entrantes de divisas por petróleo eran pequeños, y otro donde la producción fue factible, conduciendo a un boom en la exploración, producción, exportación y en los flujos entrantes de divisas relacionados con petróleo.
    Keywords: Nominal Exchange Rate, Oil prices, Small Open Economy, Co-Volatility, Tasa de Cambio Nominal, Precios del Petróleo, Economía Pequeña Abierta, Co-Volatilidad
    JEL: C22 C51 F31 F41 G15
    Date: 2019–09
  10. By: Rui Mano; Carolina Osorio Buitron; Luca A Ricci; Mauricio Vargas
    Abstract: This paper offers an empirical model of the drivers of the level of the Real Effective Exchange Rate (REER) that is now part of the IMF’s methodology for the assessment of external positions, including exchange rates. It constructs a measure of the level of the REER and it offers a panel regression that considers a large number of cross-sectional and time varying factors, guided by the extensive literature. Its main contribution is to enhance our understanding of the cross-sectional determinants of the level of the REER, while taking into account the time-series drivers. The framework accounts for the much larger cross-sectional variation of the level REER, and can better explain the time series variation of level REER when these are based on GDP-deflators rather than on consumer price indices. The latter suggest there may be merits to broadening the assessments to include such measures, although further analysis is required.
    Date: 2019–09–13
  11. By: Sophie van Huellen (Department of Economics, SOAS University of London, UK); Duo Qin (Department of Economics, SOAS University of London, UK); Shan Lu (School of Economics and Management, Beihang University, China PR.); Huiwen Wang (School of Economics and Management, Beihang University, China PR.); Qingchao Wang (Department of Economics, SOAS University of London, UK); Thanos Moraitis (Department of Economics, SOAS University of London, UK)
    Abstract: We apply a novel model-based approach to constructing composite international financial indices (CIFIs) as measures of opportunity cost effects that arise due to openness in money demand models. These indices are tested on the People’s Republic of China (PRC) and Taiwan Province of China (TPC), two economies which differ substantially in size and degree of financial openness. Results show that a) stable money demand equations can be identified if accounting for foreign opportunity costs through CIFIs, b) the monetary policy intervention in the PRC over the global financial crisis period temporarily mitigated disequilibrating foreign shocks to money demand, c) CIFIs capture opportunity costs due to openness more adequately than commonly used US interest rates and d) CIFI construction provides valuable insights into the channels through which foreign financial markets affect domestic money demand.
    Keywords: money demand, opportunity cost, open economy
    JEL: E41 F41 C22 O53
    Date: 2019–08
  12. By: Diego A. Cerdeiro; Andras Komaromi
    Abstract: We reassess the connection between capital account openness and capital flows in an empirical framework that is grounded in theory and makes use of previously unexplored variation in the data. We demonstrate how our theory-consistent regressions may overcome some ubiquitous measurement problems in the literature by relying on interaction terms between financial openness and traditional push-pull factors. Within our proposed framework, we ask: what can be said robustly about the effect of capital account restrictions on capital flows? Our results warrant against over-interpreting the existing cross-country evidence as we find very few robust relationships between capital account restrictiveness and various types of capital inflows. Countries with a higher degree of financial openness are more susceptible to some, but by no means all, push and pull factors. Overall, the results are still consistent with a complex set of tradeoffs faced by policymakers, where the ability to shield the domestic economy from volatile capital flow cycles must be weighed against the sources of exogenous risks and potential long run growth effects.
    Date: 2019–09–13
  13. By: Mathias Klein; Ludger Linnemann
    Abstract: We present evidence on the open economy consequences of US fiscal policy shocks identified through proxy-instrumental variables. Tax shocks and government spending shocks that raise the government budget deficit lead to persistent current account deficits. In particular, the negative response of the current account to exogenous tax reductions through a surge in the demand for imports is among the strongest and most precisely estimated effects. Moreover, we find that the reduction of the current account is amplified when the tax reduction is due to lower personal income taxes and when the government increases its consumption expenditures. Historically, a much larger share of current account dynamics has been due to tax shocks than to government spending shocks.
    Keywords: Tax policy, government spending, proxy-vector autoregressions, current account, twin deficits
    JEL: E32 E62 F41
    Date: 2019
  14. By: Thierry Mayer (Département d'économie); Walter Steingress (Bank of Canada)
    Abstract: This paper shows that real effective exchange rate (REER) regressions, the standard approach for estimating the response of aggregate exports to exchange rate changes, imply biased estimates of the underlying elasticities. We provide a new aggregate regression specification that is consistent with bilateral trade flows micro-founded by the gravity equation. This theory-consistent aggregation leads to unbiased estimates when prices are set in an international currency as postulated by the dominant currency paradigm. We use Monte-Carlo simulations to compare elasticity estimates based on this new “ideal-REER” regression against typical regression specifications found in the REER literature. The results show that the biases are small (around 1 percent) for the exchange rate and large (around 10 percent) for the demand elasticity. We find empirical support for this prediction from annual trade flow data. The difference between elasticities estimated on the bilateral and aggregate levels reduces significantly when applying an ideal-REER regression rather than a standard REER approach.
    Keywords: Econometric and Statistical Methods; Exchange Rates; International Topics
    JEL: F11 F12 F31 F32
    Date: 2019–05

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