nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒02‒24
ten papers chosen by
Martin Berka
University of Auckland

  1. Global macro-financial cycles and spillovers By Jongrim Ha; M. Ayhan Kose; Christopher Otrok; Eswar S. Prasad
  2. Global recessions By M. Ayhan Kose; Naotaka Sugawara; Marco E. Terrones
  3. How far is the Indian nominal exchange rate from equilibrium? By Ashima Goyal; Krittika Banerjee
  4. Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies By Robert Kollmann
  5. A TNT DSGE Model for Chile: Explaining the ERPT By Mariana García-Schmidt; Javier García-Cicco
  6. Optimal monetary policy cooperation with a global shock and dollar standard By Xiaoyong Cui; Liutang Gong; Chan Wang; Heng-fu Zou
  7. Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe By Hannes Boehm; Julia Schaumburg; Lena Tonzer
  8. The Role of Imported Inputs in Pass-through Dynamics By Dilara Ertug; Pinar Ozlu; M. Utku Ozmen; Caglar Yunculer
  9. Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default) By Cristina Arellano; Yan Bai; Gabriel Mihalache
  10. Debt and financial crises By Wee Chian Koh; M. Ayhan Kose; Peter S. Nagle; Franziska L. Ohnsorge; Naotaka Sugawara

  1. By: Jongrim Ha; M. Ayhan Kose; Christopher Otrok; Eswar S. Prasad
    Abstract: We develop a new dynamic factor model that allows us to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption, and investment) and financial variables (equity and house prices, and interest rates). We find that the global macro factor plays a major role in explaining G-7 business cycles, but there are also spillovers from equity and house price shocks onto macroeconomic aggregates. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find little evidence of spillovers from macroeconomic cycles to financial cycles.
    Keywords: Global business cycles, global financial cycles, common shocks, international spillovers, dynamic factor models
    JEL: E32 F4 C32 C1
    Date: 2020–02
  2. By: M. Ayhan Kose; Naotaka Sugawara; Marco E. Terrones
    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
  3. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Krittika Banerjee (Indira Gandhi Institute of Development Research)
    Abstract: Examining misalignments from equilibrium exchange rates for eight key emerging markets does not find evidence of systemic overvaluation. Swings associated with global events suggest changes are driven more by surges in global capital. The Indian equilibrium nominal rate depreciated since 2012 despite real appreciation but the range of 68-71 for INR/USD was close to equilibrium in 2018.
    Keywords: Nominal exchange rate, Misalignments, India, Emerging market economies
    JEL: F31 F41
    Date: 2019–11
  4. By: Robert Kollmann
    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: rational bubbles, boom-bust cycles, business cycles in closed and open economies, non-linear DSGE models, Long-Plosser model, Dellas model
    Date: 2020–01
  5. By: Mariana García-Schmidt; Javier García-Cicco
    Abstract: We present a fully-edged dynamic stochastic general equilibrium (DSGE) model for the Chilean economy to explain the economy's adjustments to external shocks, explicitly separating between tradable and non-tradable sectors (TNT). The model was built to explain Chile's linkages with the external sector, to recognize that the sectors of the economy have particular price dynamics that are affected differently by shocks that move the nominal exchange rate, and to study different measures of exchange rate pass through (ERPT). We show unconditional and conditional ERPT measures. The former measures are comparable with the empirical literature, while the latter are defined after a particular shock hit the economy. We highlight important differences in their magnitudes and in their effect on different prices. While a shock to international prices has a transitory and low ERPT, one that affects the uncovered interest rate parity condition has a very high and persistent ERPT for all price indexes. In addition, the prices that are more rapidly affected are those of tradable sectors, while non-tradable prices are affected with a lag, but for longer. We use the model to show that the conditional ERPT measures could have helped to anticipate a great part of the inflationary effects of the depreciation following the tapering announcements of the US in 2013-2015, which was not possible using unconditional ERPT measures of the empirical literature.
    Date: 2020–02
  6. By: Xiaoyong Cui (School of Economics, Peking University); Liutang Gong (Guanghua School of Management, Peking University); Chan Wang (School of Finance, Central University of Finance and Economics); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics)
    Abstract: Contrary to the consensus in the literature, we demonstrate that there exist the welfare gains from monetary policy cooperation when the world is hit by a global shock. We reach our conclusion in a two-country New Keynesian model with a global oil price shock and dollar standard. When exporters in both countries and oil producer which is modeled as a third party such as OPEC price goods in the home currency, the U.S. dollar, the status of home and foreign monetary policy is asymmetric. Speciffically, home monetary policy can influence the welfare levels of the households in the world while foreign monetary policy can only affect the welfare level of the domestic household. By internalizing the negative externality of home monetary policy to foreign country, world planner can achieve the welfare gains from monetary policy cooperation. In addition, unlike what is found in the literature, we show that not all countries are willing to take part in monetary policy cooperation, unless the world planner transfers part of the welfare gains from the country which benefits from the monetary policy cooperation to the one which loses.
    Keywords: A global shock, Dollar standard, Monetary policy cooperation, Welfare gains
    JEL: E5 F3 F4
    Date: 2020
  7. By: Hannes Boehm (Halle Institute for Economic Research); Julia Schaumburg (Vrije Universiteit Amsterdam); Lena Tonzer (Halle Institute for Economic Research)
    Abstract: We analyze 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 synchronization. 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 Synchronization, Industry Dynamics, Spatial Model
    JEL: E32 F44 G10
    Date: 2020–02–04
  8. By: Dilara Ertug; Pinar Ozlu; M. Utku Ozmen; Caglar Yunculer
    Abstract: In this paper, we analyze the extent to which the use of imported inputs affects exchange rate and import price pass-through into domestic producer and consumer prices for services in Turkey. We first calculate the use of imported inputs on sectoral level by analyzing the input-output tables. Then, by taking the sectoral heterogeneity regarding the use of imported inputs into account, we estimate import price and exchange rate pass-through by utilizing import prices, producer prices (consumer prices for services) and output gap on sectoral basis. Our results point to a substantial heterogeneity across sectors in terms of exchange rate and import price pass-through. While the import price (in foreign currency) pass-through is in line with the share of imported input to a large extent, the pass-through of exchange rate shocks to domestic prices are generally higher than the share of imported inputs in costs inclusive of labor. Our findings also reveal that this excess exchange rate pass-through has strengthened over the recent period. Additional analyses carried out reveal that the high share of foreign currency debt is associated with higher exchange rate pass-through, suggesting that the management of foreign exchange liability might play a critical role to enhance the effectiveness of monetary policy and to create room for maneuver to fight against inflation by reducing the excess exchange rate pass-through.
    Keywords: Imported inputs, Import price pass-through, Exchange rate pass-through, FX liability
    JEL: D57 E31 E52
    Date: 2020
  9. By: Cristina Arellano; Yan Bai; Gabriel Mihalache
    Abstract: This paper develops a New Keynesian model with sovereign default risk (NK-Default). We focus on the interaction between monetary policy, conducted according to an interest rate rule that targets inflation, and external defaultable debt issued by the government. Monetary policy and default risk interact since both affect domestic consumption, production, and inflation. We find that default risk amplifies monetary frictions and generates a tension for monetary policy, which increases the volatility of inflation and nominal rates. These monetary frictions in turn discipline sovereign borrowing, slowing down debt accumulation and lowering sovereign spreads. Our framework replicates the positive comovements of spreads with nominal domestic rates and inflation, a salient feature of emerging markets data, and can rationalize the experience of Brazil during the 2015 downturn, with high inflation, nominal rates, and spreads.
    Date: 2020
  10. By: Wee Chian Koh; M. Ayhan Kose; Peter S. Nagle; Franziska L. Ohnsorge; Naotaka Sugawara
    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

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