nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒03‒02
thirteen papers chosen by
Martin Berka
University of Auckland

  1. An Empirical Investigation of Real Exchange Rate Responses to Foreign Currency Inflows: Revisiting the Dutch Disease phenomenon in South Asia By Murshed, Muntasir; Rashid, Seemran
  2. Rational Bubbles in Non-Linear Business Cycle Models: Closed and Open Economies By Robert Kollmann
  3. Turkey : An Empirical Assessment of the Determinants of the Current Account Balance By Knight,David Stephen; Portugal-Perez,Alberto; Nedeljkovic,Milan
  4. Global Recessions By Kose, M. Ayhan; Sugawara, Naotaka; Terrones, Marco E.
  6. Global implications of a US-led currency war By Adam Triggs; Warwick J McKibbin
  7. Fettered Cross-Border Capital Flows, External Finance Dependence, and International Trade By Ndubuisi, Gideon
  8. The Vietnamese business cycle in an estimated small open economy New Keynesian DSGE model By Van Nguyen, Phuong
  9. The relationship between budget deficit and external deficit: the case of Portugal By José Carlos Coelho
  10. Stimulant or depressant? Resource-related income shocks and conflict By Kai Gehring; Sarah Langlotz; Stefan Kienberger
  11. Shock-Dependent Exchange Rate Pass-Through: Evidence Based on a Narrative Sign Approach By Lian An; Mark A. Wynne; Ren Zhang
  12. Asymmetric exchange rates pass-through: New evidence from Vietnam By Ho, Sy-Hoa; Hafrad, Idir
  13. Why South Africa Is Cheap for the Rich and Expensive for the Poor : Reconsidering the Balassa-Samuelson Effect By Dadam,Vincent; Hanusch,Marek; Viegi,Nicola

  1. By: Murshed, Muntasir; Rashid, Seemran
    Abstract: Inflows of foreign currencies into the developing economies, in particular, have been associated with the Dutch disease phenomenon whereby a surge in such inflows is believed to stimulate real appreciation of the real exchange rate. As a result, there could be deindustrialization impacts on the recipient economies following a growth in the non-tradable sector at the expense of the tradable sector's contraction. This paper empirically investigates the dynamics of real exchange rate responses to official development assistance, foreign direct investments and international remittances flowing into the four emerging South Asian economies Bangladesh, India, Pakistan, and Sri Lanka. The results from the extensive econometric analyses show that a 1% rise in the total volume of official development assistance and remittances received appreciates the real exchange rate by 0.18% and 0.23% respectively. In contrast, a 1% rise in FDI inflows was found to trigger a 0.19% depreciation of the real exchange rate. Furthermore, the Dumitrescu and Hurlin (2012) test results reveal unidirectional long run causalities running from official development assistances and FDI inflow to real exchange rate while certifying a bidirectional causal association between inward international remittances and the real exchange rate.
    Keywords: Dutch disease; foreign exchange inflows; real exchange rate; foreign aid; remittance; foreign direct investment; causality
    JEL: F0 F1 F2 F3 F31 F35 F4 F41
    Date: 2020
  2. By: Robert Kollmann (University of California San Diego)
    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: Long-Plosser model; rational bubbles; non-linear DSGE models; business cycles in closed and open economies; boom-bust cycles; Dellas model
    JEL: E3 C6 E1 F3 F4
    Date: 2020–02–11
  3. By: Knight,David Stephen; Portugal-Perez,Alberto; Nedeljkovic,Milan
    Abstract: Turkey has moved rapidly from a current account that was relatively in balance up to the turn of the millennia, to sustaining relatively large current account deficits over the past 15 years. Using annual data from 1986 to 2017 and a jackknife model-averaging estimator, the paper estimates the relationship between the current account balance and a set of determinants that are broadly consistent with the cross-country literature. These determinants include private sector credit, public expenditure, real exchange rate changes, gross domestic product growth relative to the rest of the world, trade openness, international oil prices, foreign direct investment levels, past net foreign assets, inflation volatility, and global levels of uncertainty. The analysis then decomposes the predicted current account balance for five-year periods to illustrate the factors that have driven the current account over time. Over 2003-07, a large current account deficit became established in Turkey, driven by an expansion of credit to households and rapid gross domestic product growth, coupled with improved macroeconomic stability that supported higher spending and therefore imports. Since then, the negative effect of household credit has abated, but was replaced in 2008-17 by an expansion of credit to the corporate sector as a driver of the current account deficit. The current account balance in Turkey is also found to be less persistent than is typically found in the cross-country literature, implying that it adjusts more rapidly in response to shocks.
    Keywords: Macroeconomic Management,International Trade and Trade Rules,Inflation
    Date: 2019–08–15
  4. By: Kose, M. Ayhan; Sugawara, Naotaka; Terrones, Marco E.
    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
    JEL: E32 F44 N10 O47
    Date: 2020–02
  5. By: Romain RESTOUT; Olivier CARDI; Romain RESTOUT
    Abstract: Motivated by recent evidence pointing at an increasing contribution of asymmetric shocks across sectors to economic fluctuations, we explore the sectoral composition effects of technology shocks biased toward the traded sector. Using a panel of seventeen OECD countries over the period 1970-2013, our VAR evidence reveals that a permanent increase in traded relative to non-traded TFP lowers the traded hours worked share by shifting labor toward the non-traded sector, and has an expansionary effect on the labor income share in both sectors. Our quantitative analysis shows that the open economy version of the neoclassical model can reproduce the reallocation and redistributive effects we document empirically once we allow for technological change biased toward labor together with additional specific elements. Calibrating the model to country-specific data, the model can account for the cross-country dispersion in the reallocation and redistributive effects we document empirically once we let factor-biased technological change vary across sectors and between countries. Finally, we document evidence which supports our hypothesis of factor-biased technological change as we find empirically that countries where capital-intensive industries contribute more to the increase in traded TFP are those where capital relative to labor efficiency increases.
    Keywords: Sector-biased technology shocks; Factor-augmenting efficiency; Open economy; Labor reallocation; CES production function; Labor income share.
    JEL: E25 E32 F11 F41
    Date: 2019
  6. By: Adam Triggs; Warwick J McKibbin
    Abstract: In 2019, President Trump called on the U.S. Federal Reserve to cut interest rates to depreciate the U.S. dollar, which, according to the IMF, is overvalued by between 6 and 12 percent. This paper uses an intertemporal general equilibrium model to explore what would likely happen if the President’s wish was granted. Using the G-Cubed (G20) model, it shows that the general equilibrium effects of a depreciated real effective exchange rate brought about by lower U.S. interest rates can result in a wide variety of unintended consequences, many of which contradict the stated aims of President Trump and his administration. Such a policy would likely result in a larger U.S. trade deficit, would only temporarily devalue the real effective exchange rate and would only temporarily support the U.S. economy. The policy would boost the trade balances of most U.S. trading partners, depreciate China’s exchange rate and boost China’s GDP. Given the policy would make the overvalued exchange rates of many economies even more overvalued, the paper explores what would happen if U.S. trading partners were to retaliate by devaluing their currencies. It shows that this makes it harder for the U.S. to achieve its objectives and forces a more severe adjustment for economies that presently have undervalued exchange rates.
    Keywords: Econometric modelling, Computable general equilibrium models, productivity, monetary policy, fiscal policy, international trade and finance, globalization
    JEL: C5 C68 D24 E2 E5 E6 E62 F1 F2 F3 F4 F6
    Date: 2020–02
  7. By: Ndubuisi, Gideon
    Abstract: The effects of capital controls on international trade have not been thoroughly examined empirically. Using highly disaggregated bilateral industry-level export data across a large number of countries, this paper evaluates how restrictions on cross-border capital flows affect export. We identify the effect of capital control on export by exploiting the variation in capital control across countries and variation in external finance dependence across industries. While we find that capital control adversely effects total exports, analyses of the export margins indicate that the export distorting effect of capital controls works by deterring single and multiple export market entries by exporters, reducing export intensities of exporters, and the range of goods exporters can ship to each market destination. Our result has important policy implications for countries that seek to pursue export-led growth but suffer from capital accounts restrictions.
    Keywords: Capital controls, International Trade, External Finance Dependence
    JEL: F1 F14 F2 F21 F3 F32 F38
    Date: 2019–11
  8. By: Van Nguyen, Phuong
    Abstract: The primary purpose of this paper is to investigate the sources of the business cycle fluctuations in Vietnam. To this end, we develop a small open economy New Keynesian Dynamic Stochastic General Equilibrium (SOE-NK-DSGE) model. Accordingly, this model includes various features, such as habit consumption, staggered price, price indexation, incomplete exchange-rate pass-through, the failures of the law of one price and the uncovered interest rate parity. It is then estimated by using the Bayesian technique and Vietnamese data 1999Q1 − 2017Q1. Based on the estimated model, this paper analyzes the sources of the business cycle fluctuations in this emerging economy. Indeed, this research paper is the first attempt on developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.
    Keywords: International macroeconomics; international spillover; Vietnamese economy; New Keynesian DSGE model; Bayesian estimation
    JEL: E12 E31 E32 E47 E52 F41 F43
    Date: 2020–02
  9. By: José Carlos Coelho
    Abstract: This paper makes an empirical analysis applied to Portugal between 1999 and 2016 which investigates the existence of a causal relationship between the budget balance (overall and primary) and the external balance (goods and services and current). Using Granger Causality Test (1969) and the Toda-Yamamoto Methodology (1995), we conclude that there is causality between the overall budget balance and the current external balance and between the primary budget balance and the current external balance, which provides support to the Twin Deficits Hypothesis. We also found some evidence to verify the Current Account Targeting Hypothesis, which points to the possibility of bi-directional causality between the budget deficit and the external deficit in Portugal.
    Keywords: budget deficit; external deficit; Portugal; Granger Causality Test (1969); Toda-Yamamoto Methodology (1995)
    JEL: F32 F41 H62 C22
    Date: 2020–02
  10. By: Kai Gehring (University of Zurich); Sarah Langlotz (Heidelberg University); Stefan Kienberger (University of Salzburg)
    Abstract: We provide evidence about the mechanisms linking resource-related income shocks to conflict. To do so, we combine temporal variation in international drug prices with new data on spatial variation in opium suitability. We find a conflict-reducing effect of higher drug prices over the 2002-2014 period, both in a reduced-form setting and using instrumental variables. There are two main mechanisms. First, we highlight the role of opportunity costs by showing that opium profitability positively affects household living standards. Second, by using data on the drug production process, ethnic homelands, and Taliban versus pro-government influence, we show that, on average, opportunity cost effects dominate contest effects. Contest effects depend on the degree of group competition over valuable resources. The conflict-reducing effect of higher prices is higher in areas that are more plausibly dominated by one group.
    Keywords: Resources, resource curse, conflict, drugs, illicit economy, illegality, geography of conflict, Afghanistan, Taliban JEL Classification: D74, K4, O53, Q1
    Date: 2018–11
  11. By: Lian An; Mark A. Wynne (Rice University); Ren Zhang
    Abstract: This paper studies shock-dependent exchange rate pass-through for Japan with a Bayesian structural vector autoregression model. We identify the shocks by complementing the traditional sign and zero restrictions with narrative sign restrictions related to the Plaza Accord. We find that the narrative sign restrictions are highly informative, and substantially sharpen and even change the inferences of the structural vector autoregression model originally identified with only the traditional sign and zero restrictions. We show that there is a significant variation in the exchange rate pass-through across different shocks. Nevertheless, the exogenous exchange rate shock remains the most important driver of exchange rate fluctuations. Finally, we apply our model to “forecast” the dynamics of the exchange rate and prices conditional on certain foreign exchange interventions in 2018, which provides important policy implications for our shock-identification exercise.
    Keywords: Inflation Forecasting; Narrative Sign Restrictions; Exchange Rate Pass-Through; Structural Scenario Analysis
    JEL: E31 F31 F41
    Date: 2020–02–12
  12. By: Ho, Sy-Hoa; Hafrad, Idir
    Abstract: Exchange rate pass-through always deserves interest of policy makers and economists. In this paper, we study the measure of exchange rate pass-through on consumer price for Vietnam by using Nonlinear Autoregressive Dynamic Lag in the period from 2000Q4 to 2018Q2. Our findings can be summarized as follow: (i) we demonstrates the existence of asymmetric effect of exchange rate to domestic price in both short run and long run; (ii) the exchange rate pass-through is high; (iii) impact of exchange rate depreciation on domestic price is stronger than appreciation; (iv) the exchange rate pass-through is higher in the long-run than in the short run; (v) foreign competitor price plays an important role for domestic price movement.
    Keywords: Exchange rate pass-through; Asymmetric exchange rate; ARDL models; NARDL models
    JEL: C22 E52
    Date: 2020–02–15
  13. By: Dadam,Vincent; Hanusch,Marek; Viegi,Nicola
    Abstract: This paper investigates cross-sectoral productivity differentials in South African industry and their distributional consequences. The analysis shows that typically, traded sectors have experienced low productivity growth over the past decade, while skill intensive service sectors have had significant productivity growth. This is the inverse of the traditional Balassa-Samuelson sectoral transformation hypothesis, where high wages in high-productivity traded sectors increase wages throughout the economy, thus increasing prices on non-traded goods and revaluing the country's real exchange rate. Instead, the higher productivity of non-traded sectors experienced in South Africa induces a devaluation of the real exchange rate and a contraction of the traded sectors. The results of the estimation show evidence of this"inverse"Balassa-Samuelson effect for agriculture and manufacturing and in particular mining. This"inverse"Balassa-Samuelson effect has important distributional consequences: the high-productivity sectors are associated with cheaper goods and services for wealthy households. This in turn burdens poor households, which are more dependent on traded goods, with higher prices, which are a consequence of low productivity and high markups.
    Keywords: Construction Industry,Common Carriers Industry,Food&Beverage Industry,Plastics&Rubber Industry,Business Cycles and Stabilization Policies,General Manufacturing,Pulp&Paper Industry,Textiles, Apparel&Leather Industry,Mining&Extractive Industry (Non-Energy),International Trade and Trade Rules,Food Security
    Date: 2019–07–22

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