nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2019‒12‒02
eight papers chosen by
Martin Berka
University of Auckland

  1. Exchange rate volatility in the eurozone By Bajo Rubio, Oscar; Berke, Burcu; McMillan, David G.
  2. Capital Flow Dynamics in Emerging Market Economies By Masahiro Enya; Akira Kohsaka; Kimiko Sugimoto
  3. Relative price dynamics in the Euro area: where do we stand? By Pietro Cova; Lisa Rodano
  4. Optimal monetary and macroprudential policies for financial stability in a commodity-exporting economy By Ivan Khotulev; Konstantin Styrin
  5. Fiscal Discipline and Exchange Rates: Does Politics Matter? By João Tovar Jalles; Carlos Mulas-Granados; José Tavares
  6. Wages and prices in the euro area: exploring the nexus By Antonio M. Conti; Andrea Nobili
  7. Is Monetary Policy Always Effective? Incomplete Interest Rate Pass-through in a DSGE Model By Hilde C. Bjørnland; Andrew Binning; Junior Maih
  8. A new and benign hegemon on the horizon? The Chinese century and growth in the global South By NguyenHuua, Tam; Karaman Örsal, Deniz Dilan

  1. By: Bajo Rubio, Oscar; Berke, Burcu; McMillan, David G.
    Abstract: The current economic crisis has witnessed a strong deceleration in the growth of international trade. This has been even greater in the cases of the European Union and the eurozone, where the rates of export growth have even reached negative figures. In this paper, the authors examine to which extent exchange rate volatility might account for the drop in the rate of growth of exports in the eurozone since the start of the crisis. To that end, the authors estimate export functions, augmented to include several measures of exchange rate volatility, for the four largest economies of the eurozone, i.e., France, Germany, Italy and Spain, for the period 1994:1-2014:4. In the empirical application, they make use of two alternative measures for exchange rate volatility, i.e., (i) the standard deviation and (ii) the conditional variance from the GARCH methodology, of the change in the logarithm of the exchange rate, for both nominal and real exchange rates, and in the latter case computed using as deflators both export prices and unit labour costs. The empirical results show no clear-cut evidence on the impact of exchange rate volatility on the exports of the countries analysed, suggesting that financial markets were developed enough so that exchange rate volatility does not hinder the evolution of exports.
    Keywords: exchange rate volatility,exports,eurozone
    JEL: F31 F41 F45
    Date: 2019
  2. By: Masahiro Enya (Faculty of Economics and Management, Institute of Human and Social Sciences, Kanazawa University); Akira Kohsaka (Osaka School of International Public Policy, Osaka University); Kimiko Sugimoto (Hirao School of Management, Konan University)
    Abstract: This paper analyzes the dynamics of gross capital flows since the 1990s across three regions, i.e. East Asia, Europe and Latin America, and across types of capital flows, i.e. foreign direct investment, portfolio equity flows, portfolio debt flows and other investment. First, we demonstrate distinct features of gross capital inflows and outflows with selected EMs across the three regions by types of capital flows. Then, using panel data regression in the period of 2000-2015, we show how both domestic and global factors contribute to the dynamics of these gross capital flows. We confirm that both global factors such as expected growth and international investors’ risk perception in AEs, and domestic factors such as exchange rate regimes, and financial deepening in EMs, contribute to the dynamics. Furthermore, we detect significant regional diversities in relative importance and sensitivities in the roles of these factors.
    Keywords: Tenure; Managerial Skill; gross capital flows, emerging market economies (EMs), types of capital flows, Asian Financial Crisis, Global Financial Crisis
    JEL: F3 F4 F6
    Date: 2019–11
  3. By: Pietro Cova (Bank of Italy); Lisa Rodano (Bank of Italy)
    Abstract: We propose a novel metric to evaluate price developments within the euro area (EA), which involves the decomposition of the overall variability of cross country inflation rates into common and idiosyncratic labor cost and markup components. The analysis yields several interesting results. First, over the period 1978-2015, inflation variability in the EA reflects most of all idiosyncratic (country-specific) developments in unit labor costs (ULC). This sharply contrasts with what we find for the US states, where price dynamics to a much greater extent reflects common developments in costs and profits, consistently with the role played by the greater mobility of capital and labor. Second, when we apply our approach to data for two subgroups of countries, namely Core and Non-core countries, we find that they both display higher intra-group homogeneity, in that the role of the subgroup-specific common components in explaining inflation variability increases, while idiosyncratic developments in ULC become correspondingly less relevant. Third, over the more recent period (1999-2015) in the Core countries the idiosyncratic component due to price markups has become the dominant driver of the variability of inflation, a pattern similar to the one we detect for the US. Our analysis also sheds light on the adjustment mechanisms to asymmetric, or country specific, shocks. Using a panel VAR approach we find that price changes driven by diverging developments of ULC are reflected into trade balance adjustments that are costly from the point of view of the smooth functioning of the currency area.
    Keywords: euro area inflation and unit labor costs; EMU; optimum currency area; risk sharing; current account balance
    JEL: F02 F15 F33 F45
    Date: 2019–06
  4. By: Ivan Khotulev (Bank of Russia, Russian Federation); Konstantin Styrin (Bank of Russia, Russian Federation)
    Abstract: We develop a model to analyze the optimal combination of macroprudential and monetary policies in a small open commodity-exporting economy. Unlike a closed economy, where monetary and macroprudential policies tend to be substitutes, in a small open economy the optimal policy mix depends on the specifics of shocks and economic structure. Monetary and macroprudential policies tend to be complements when the degree of pass-through of credit spreads into marginal costs and prices is sufficiently high, or when a credit boom is caused by a commodity boom, a fraction of consumers lacks access to financial markets, and the government follows a fiscal policy rule. The two policies are substitutes when the complementarity between domestic and imported production inputs is sufficiently high.
    Keywords: Monetary policy, macroprudential policy, financial stability, commodity exporter, small open economy.
    JEL: E52 E58 G01 G28
    Date: 2019–11
  5. By: João Tovar Jalles; Carlos Mulas-Granados; José Tavares
    Abstract: We look at the effect of exchange rate regimes on fiscal discipline, taking into account the effect of underlying political conditions. We present a model where strong politics(defined as policymakers facing longer political horizon and higher cohesion) are associated with better fiscal performance, but fixed exchange rates may revert this result and lead to less fiscal discipline. We confirm these hypotheses through regression analysis performed on a panel sample covering 79 countries from 1975 to 2012.Our empirical results also show that the positive effect of strong politics on fiscal discipline is not enough to counter the negative impact of being at/moving to fixed exchange rates. Our results are robust to a number of important sensitivity checks, including different estimators, alternative proxies for fiscal discipline, and sub-sample analysis.
    Keywords: Fiscal discipline, Deficit, Political Economy, Exchange Rates
    JEL: H11 H62 H63
    Date: 2019–11
  6. By: Antonio M. Conti (Bank of Italy); Andrea Nobili (Bank of Italy)
    Abstract: We investigate the structural relationship between wages dynamics and core inflation in the euro area using Bayesian VAR models. We find that the pass-through from wages to consumer prices net of food and energy is less than unity and depends on the nature of the shocks hitting the economy. A monetary policy shock implies a positive co-movement between these variables, which is similar in magnitude to that stemming from an aggregate demand shock. Financial shocks, as captured by credit spreads and indicators of systemic stress, are instead associated with a negative co-movement between wages and prices and generate firms’ countercyclical mark-ups, consistently with recent models featuring financial frictions and nominal rigidities. These findings may explain why the recent pick-up in wages is not associated with a sustained path of core inflation in the euro area.
    Keywords: wage-price pass-through, countercyclical mark-ups, financial shocks, Bayesian VAR
    JEL: E30 E32 E51
    Date: 2019–10
  7. By: Hilde C. Bjørnland; Andrew Binning; Junior Maih
    Abstract: We estimate a regime-switching DSGE model with a banking sector to explain incomplete and asymmetric interest rate pass-through, especially in the presence of a binding zero lower bound (ZLB) constraint. The model is estimated using Bayesian techniques on US data between 1985 and 2016. The framework allows us to explain the time-varying interest rate spreads and pass-through observed in the data. We ?nd that pass-through tends to be delayed in the short run, and incomplete in the long run. All this impacts the dynamics of the other macroeconomic variables in the model. In particular, we ?nd monetary policy to be less e?ective under incomplete pass-through. Furthermore, the behavior of pass-through in the loan rate is di?erent from that of the deposit rate shocks. This creates asymmetric dynamics at the zero lower bound, and incomplete pass-through exacerbates that asymmetry.
    Keywords: banking sector, incomplete or symmetric interest rate pass-through, DSGE
    Date: 2019–11
  8. By: NguyenHuua, Tam; Karaman Örsal, Deniz Dilan
    Abstract: This study investigates the impacts of trade with China on the gross domestic product (GDP) of the global South. While the current literature on the growth impacts of trade (by leading partner countries) often neglects the properties of macro panel data, such as cross-sectional dependence, heterogeneity and structural breaks, our models take these features into account. The empirical results of 22 major developing countries over 2000Q1 to 2016Q4 find positive contributions of imports from China to GDP in our studied sample, although the magnitude of these effects is smaller than that of otheremerging and developing economies (not including China) (EDE) and advanced economies (AdE). The authors also show that, in contrast with considerable impacts of exports to EDE and AdE, exports to China have limited effects on the growth of its partners. However, the recent financial crisis marks a turning point of China's role as a major driver of growth in the South. Namely, while contributions of trade with China in its partners after the global crisis are on the rise, the opposite is true for EDE and AdE.Examining the effects by individual countries, they present that the distance between China and its partners and economic development level of its partners are almost irrelevant to the contributions of imports from China to its partners' growth. They provide some important policy recommendations for the global South from these findings.
    Keywords: China,growth,developing and emerging economies,international trade,panel data,econometrics,cross-sectional dependence
    JEL: C23 F43 O4
    Date: 2019

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.