nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒02‒17
fourteen papers chosen by
Martin Berka
University of Auckland

  1. Global Recessions By M. Ayhan Kose; Naotaka Sugawara; Marco E. Terrones
  2. Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies By Kollmann, Robert
  3. Corporate investment and the exchange rate: The financial channel By Ryan Niladri Banerjee; Boris Hofmann; Aaron Mehrotra
  4. Financial Market Incompleteness and International Cooperation on Capital Controls By Shigeto Kitano; Kenya Takaku
  5. Industrialisation and the big push in a global economy By Kreickemeier, Udo; Wrona, Jens
  6. Business Cycle Fluctuations in Nigeria: Some Insights from an Estimated DSGE Model By Omotosho, Babatunde S.
  7. Migration and Remittances in the Former Soviet Union Countries of Central Asia and the South Caucasus : What Are the Long-Term Macroeconomic Consequences? By Brownbridge,Martin; Canagarajah,Sudharshan
  8. The External Wealth of Arab Nations : Structure, Trends, and Policy Implications By Mohieldin,Mahmoud; Rostom,Ahmed Mohamed Tawfick; Zaki,Chahir
  9. Global Corporate Debt during Crises : Implications of Switching Borrowing across Markets By Cortina Lorente,Juan Jose; Didier Brandao,Tatiana; Schmukler,Sergio L.
  10. Commodity Shocks and Optimal Fiscal Management of Resource Revenue in an Economy with State-owned Enterprises By King Yoong Lim; Shuonan Zhang
  11. Debt and Financial Crises By Wee Chian Koh; M. Ayhan Kose; Peter S. Nagle; Franziska L. Ohnsorge; Naotaka Sugawara
  12. Financial linkages and sectoral business cycle synchronisation: Evidence from Europe By Böhm, Hannes; Schaumburg, Julia; Tonzer, Lena
  13. The LoP game: BigMac versus Fortnite By Pierdzioch, Christian; Schöber, Timo; Stadtmann, Georg
  14. Monetary Policy Uncertainty Spillovers in Time- and Frequency-Domains By Rangan Gupta; Chi Keung Marco Lau; Jacobus A Nel; Xin Sheng

  1. By: M. Ayhan Kose (Prospects Group, World Bank; Brookings Institution; CEPR; CAMA); Naotaka Sugawara (Prospects Group, World Bank); Marco E. Terrones (Department of Economics and Finance, Universidad del Pacifico)
    Abstract: The world economy has experienced four global recessions over the past seven decades: in 1975, 1982, 1991, and 2009. During each of these episodes, annual real per capita global GDP contracted, and this contraction was accompanied by weakening of other key indicators of global economic activity. The global recessions were highly synchronized internationally, with severe economic and financial disruptions in many countries around the world. The 2009 global recession, set off by the global financial crisis, was by far the deepest and most synchronized of the four recessions. As the epicenter of the crisis, advanced economies felt the brunt of the recession. The subsequent expansion has been the weakest in the post-war period in advanced economies as many of them have struggled to overcome the legacies of the crisis. In contrast, most emerging market and developing economies weathered the 2009 global recession relatively well and delivered a stronger recovery than after previous global recessions.
    Keywords: Global economy; global expansion; global recession; global recovery; synchronization of cycles; financial markets; real activity.
    JEL: E32 F44 N10 O47
    Date: 2020–02
  2. By: Kollmann, Robert
    Abstract: This paper studies rational bubbles in non-linear dynamic general equilibrium models of the macroeconomy. The term ‘Rational bubble’ refers to multiple equilibria due to the absence of a transversality condition (TVC) for capital. The lack of TVC can be due to an OLG population structure. If a TVC is imposed, the macro models considered here have a unique solution. Bubbles reflect self-fulfilling fluctuations in agents’ expectations about future investment. In contrast to explosive rational bubbles in linearized models (Blanchard (1979)), the rational bubbles in non-linear models here are bounded. Bounded rational bubbles provide a novel perspective on the drivers and mechanisms of business cycles. I construct bubbles (in non-linear models) that feature recurrent boom-bust cycles characterized by persistent investment and output expansions which are followed by abrupt contractions in real activity. Both closed and open economies are analyzed. In a non-linear two-country model with integrated financial markets, bubbles must be perfectly correlated across countries. Global bubbles may, thus, help to explain the synchronization of international business cycles.
    Keywords: E1,E3,F3,F4, C6
    JEL: C6 E1 E3 F3 F4
    Date: 2020–01–29
  3. By: Ryan Niladri Banerjee; Boris Hofmann; Aaron Mehrotra
    Abstract: Using firm-level data for 18 major global economies, we find that the exchange rate affects corporate investment through a financial channel: exchange rate depreciation dampens corporate investment through firm leverage and FX debt. These findings are consistent with the predictions of a stylised model of credit risk in which exchange rates can affect investment through FX debt or borrowing in local currency from foreign lenders. Empirically, the channel is more pronounced in emerging market economies (EMEs), reflecting their greater dependence on foreign funding and their less developed financial systems. Moreover, we find that exchange rate depreciation induces highly leveraged firms to increase their cash holdings, supporting from a different angle the notion of a financial channel of the exchange rate. Overall, these findings suggest that the large depreciation of EME currencies since 2011 was probably a significant amplifying factor in the recent investment slowdown in these economies.
    Keywords: corporate investment, emerging markets, exchange rates, financial channel, financial constraints
    JEL: E22 F31 F41 O16
    Date: 2020–02
  4. By: Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University, Japan); Kenya Takaku (Faculty of International Studies, Hiroshima City University, Japan)
    Abstract: We examine how the degree of financial market incompleteness affects welfare gains from international cooperation on capital controls. When financial markets are incomplete, international risk sharing is disturbed. However, the optimal global policy significantly reverses the welfare deterioration due to inefficient risk-sharing. We show that when financial markets are more incomplete, the welfare gap between the optimal global policy and the Nash equilibrium increases, and the welfare gains from international cooperation on capital controls then become larger.
    Keywords: Financial markets; Incomplete markets; Policy cooperation; Capital controls; Optimal policy; Welfare; Ramsey policy; Open-loop Nash game
    JEL: D52 E61 F32 F38 F42 G15
    Date: 2020–01
  5. By: Kreickemeier, Udo; Wrona, Jens
    Abstract: In this paper, we develop a multi-country open economy extension of the famous Big Push model for a closed economy by Murphy et al. (1989). We show under which conditions the global economy in our model is caught in a poverty trap, characterised by a low-income equilibrium from which an escape is possible (only) via a coordinated modernization effort across sectors and countries. We also analyze to what extent the degree of openness matters for the prospects of achieving the high-income equilibrium. We show that under monopolistic competition with CES preferences the openness to international trade does not affect the set of parameter combinations leading to a poverty trap, whereas international trade makes it more difficult to achieve industrialisation through a Big Push with continuum quadratic preferences. Responsible for this adverse outcome is the pro-competitive effect of opening up to international trade, which bites into firms' profit margins, rendering the adoption of a superior production technology unprofitable as it becomes more difficult for firms to amortise their adoption fixed costs.
    Keywords: Big Push,multiple equilibria,backward linkages,international trade,globalisation,poverty trap,technology upgrading,monopolistic competition
    JEL: F12 O14 F43
    Date: 2020
  6. By: Omotosho, Babatunde S.
    Abstract: This paper develops a two-agent New Keynesian model, which is suitable for identifying the drivers of business cycle fluctuations in small open, resource-rich, resource-dependent emerging economies. We confront the model with Nigerian data on eleven macro-economic variables using the Bayesian likelihood approach and show that output fluctuations are driven mainly by oil and monetary policy shocks in the short run and domestic supply shocks in the medium term. On the other hand, monetary and domestic supply shocks jointly account for around 70 per cent of short run variations in headline and core measures of inflation while oil shocks play a less prominent role owing partly to the low pass-through effect arising from the extant fuel subsidy regime in the country. Interrogating these findings further, we find that negative oil price shocks generate a persistent negative impact on output and a short-lived positive effect on headline inflation. In terms of policy responses, the estimated Taylor rule indicates a hawkish monetary policy stance over the sample period while the estimated fiscal rule provides evidence for a pro-cyclical and rather muted fiscal policy. Since domestic supply and oil-related shocks are key sources of macroeconomic fluctuations, the study calls for a more creative use of the country’s stabilisation funds as well as strategic fiscal interventions aimed at addressing the issues of domestic supply constraints and promoting private sector investments.
    Keywords: Business cycles, resource-rich economy, DSGE model
    JEL: E31 E32 E52 E58 F41 Q43
    Date: 2019–11
  7. By: Brownbridge,Martin; Canagarajah,Sudharshan
    Abstract: Armenia, Georgia, the Kyrgyz Republic, and Tajikistan have all experienced substantial out-migration of workers and an associated inflow of workers'remittances over the past two decades. These four countries have much higher human capital, as measured by the Human Capital Index, than is typical for countries with similar levels of per capita income, and this may enable migrant workers to exploit opportunities to work in economies where labor productivity is higher. The inflow of workers'remittances has had effects analogous to those of Dutch disease in the Kyrgyz Republic and Tajikistan, which have experienced a large rise in expenditure to output and the share of services in gross domestic product, appreciation of the Balassa-Samuelson adjusted real exchange rates, and poor trade performance. In Armenia and Georgia, where remittances are a smaller share of gross domestic product, the effects were much more muted and their trade performance was much better.
    Date: 2020–01–15
  8. By: Mohieldin,Mahmoud; Rostom,Ahmed Mohamed Tawfick; Zaki,Chahir
    Abstract: The paper makes two main contributions. First, it analyzes net foreign assets and liabilities in selected Arab countries over the past two decades, emphasizing the relative significance of direct versus portfolio investment. It distinguishes between foreign direct investment, portfolio equity investment, official reserves, and external debt. Second, the paper examines the effects of policy variables that affect the accumulation of net foreign assets and its components, analyzing how the existence of a sovereign wealth fund, the country's exchange rate regime, and the development of its financial system affect its net foreign assets. The main findings show that the presence of a sovereign wealth fund is positively and statistically significantly associated with foreign direct investment in Arab countries. Financial development (defined as credit to the private sector as a percentage of gross domestic product) is also statistically significant across various regressions. The more financially developed a country is, the more it should invest in riskier assets, such as portfolio assets. But Arab investors are more risk averse than investors elsewhere. Oil-exporting countries tend to invest more in debt assets than in portfolio assets. For oil-importing countries, financial development is the most important determinant of foreign direct investment.
    Date: 2020–01–06
  9. By: Cortina Lorente,Juan Jose; Didier Brandao,Tatiana; Schmukler,Sergio L.
    Abstract: This paper studies how crises prompted firms to switch borrowing across markets, impacting the amount borrowed, maturity, and currency denomination at the firm and aggregate levels. Using data on worldwide debt issuance from advanced and emerging economies, the paper shows that firms shifted their issuances between domestic and international syndicated loans and corporate bonds during financial crises. Firms reduced their borrowing in shock-hit markets but increased it in other debt markets. Firms also moved toward longer-term markets, maintaining (or even increasing) their borrowing maturity. As they moved toward domestic markets during international crises, firms reduced the share of foreign currency debt. The opposite occurred during domestic crises. Large firms were the ones that switched between international and domestic markets, affecting aggregate capital raising activity. The analysis of four distinct markets generates patterns consistent with credit supply shocks that are different from those obtained when studying the dynamics of individual markets.
    Date: 2020–02–06
  10. By: King Yoong Lim; Shuonan Zhang
    Abstract: We present a dynamic model in which a resource-rich State allocates its resource revenue between a resource stabilization fund and investments in state-owned enterprises (SOEs). Despite being less productive efficient, SOEs' operation benefits from scale economies tied to the resource sector: its profitability is procyclical to commodity shocks. We identify analytically a threshold share of fiscal allocation to SOEs above which SOEs make non-zero profits. Based on a Bayesian-estimated model, we solve for an optimal resource revenue allocation between SOE investments and Resource Fund, and find the optimal share of SOE investment to be in the range of 9.0-12.9 percent.
    Keywords: Commodity Shocks, Fiscal Management, Open-economy DSGE models, Resource Wealth, State-owned Enterprises.
    JEL: E32 F41 H54
    Date: 2020–02
  11. By: Wee Chian Koh (World Bank); M. Ayhan Kose (World Bank, Brookings Institution, CAMA); Peter S. Nagle (World Bank); Franziska L. Ohnsorge (World Bank, CAMA); Naotaka Sugawara (World Bank)
    Abstract: Emerging market and developing economies have experienced recurrent episodes of rapid debt accumulation over the past fifty years. This paper examines the consequences of debt accumulation using a three-pronged approach: an event study of debt accumulation episodes in 100 emerging market and developing economies since 1970; a series of econometric models examining the linkages between debt and the probability of financial crises; and a set of case studies of rapid debt buildup that ended in crises. The paper reports four main results. First, episodes of debt accumulation are common, with more than 500 episodes occurring since 1970. Second, around half of these episodes were associated with financial crises which typically had worse economic outcomes than those without crises— after 8 years output per capita was typically 6-10 percent lower and investment 15-22 percent weaker in crisis episodes. Third, a rapid buildup of debt, whether public or private, increased the likelihood of a financial crisis, as did a larger share of short-term external debt, higher debt service, and lower reserves cover. Fourth, countries that experienced financial crises frequently employed combinations of unsustainable fiscal, monetary and financial sector policies, and often suffered from structural and institutional weaknesses.
    Keywords: Financial crises, currency crises, debt crises, banking crises, public debt, private debt, external debt.
    JEL: E32 E61 G01 H12 H61 H63
    Date: 2020–02
  12. By: Böhm, Hannes; Schaumburg, Julia; Tonzer, Lena
    Abstract: We analyse whether financial integration between countries leads to converging or diverging business cycles using a dynamic spatial model. Our model allows for contemporaneous spillovers of shocks to GDP growth between countries that are financially integrated and delivers a scalar measure of the spillover intensity at each point in time. For a financial network of ten European countries from 1996-2017, we find that the spillover effects are positive on average but much larger during periods of financial stress, pointing towards stronger business cycle synchronisation. Dismantling GDP growth into value added growth of ten major industries, we observe that some sectors are strongly affected by positive spillovers (wholesale & retail trade, industrial production), others only to a weaker degree (agriculture, construction, finance), while more nationally influenced industries show no evidence for significant spillover effects (public administration, arts & entertainment, real estate).
    Keywords: financial integration,business cycle synchronisation,industry dynamics,spatial model
    JEL: E32 F44 G10
    Date: 2020
  13. By: Pierdzioch, Christian; Schöber, Timo; Stadtmann, Georg
    Abstract: We analyze the law of one price (LoP) based on BigMac and Fortnite prices. We find a positive but less than a perfect correlation between the over-/undervaluations of the two indices. While LoP holds for the Fortnite data, it does not hold for the BigMac data.
    Keywords: Fortnite,BigMac,law of one price
    JEL: F30 F31
    Date: 2020
  14. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Chi Keung Marco Lau (Huddersfield Business School, University of Huddersfield, Huddersfield, HD1 3DH, United Kingdom); Jacobus A Nel (University of Pretoria, 0002, South Africa); Xin Sheng (Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford, CM1 1SQ, United Kingdom)
    Abstract: We use the recently created monthly Interest Rate Uncertainty measure, to investigate monetary policy uncertainty across the US, Germany, France, Italy, Spain, UK, Japan, Canada, and Sweden in both the time and frequency domains. We find that the largest spillover indices are from innovations in the country itself, however, there are some instances where spillover indices between countries are large. These relationships change over time and we observe large variances in pairwise spillovers during the global financial crisis. We find that most of the volatility is confined to the crisis period.
    Keywords: Connectedness, Frequency domain spillover, Monetary policy uncertainty, Pairwise spillovers, Uncertainty spillover
    JEL: C32 D80 E52 F42
    Date: 2020–01

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