nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒03‒09
twelve papers chosen by
Martin Berka
University of Auckland

  1. Exchange Rate Misalignment and External Imbalances: What is the Optimal Monetary Policy Response? By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  2. Corporate investment and the exchange rate : The financial channel By Banerjee, Ryan; Hofmann, Boris; Mehrotra, Aaron
  3. The Elusive Gains from Nationally-Oriented Monetary Policy By Martin Bodenstein; Giancarlo Corsetti; Luca Guerrieri
  4. Exchange rates and consumer prices: evidence from Brexit By Sampson, Thomas; Leromain, Elsa; Novy, Dennis; Breinlich, Holger
  5. Global Footprints of Monetary Policy By Silvia Miranda-Agrippino; Tsvetelina Nenova; Helene Rey
  6. The Determinants of China's International Portfolio Equity Allocations By Agarwal, Isha; Gu, Grace Weishi; Prasad, Eswar
  7. The Integration of Countries' Sovereign Bond Markets: An Empirical Illustration of a Global Financial Cycle By Kei-Ichiro Inaba
  8. Cross-Border Portfolio Flows and News Media Coverage By Guglielmo Maria Caporale; Faek Menla Ali; Fabio Spagnolo; Nicola Spagnolo
  9. Global Recessions By Kose,Ayhan; Sugawara,Naotaka; Terrones,Marco E.
  10. Different No More: Country Spreads in Advanced and Emerging Economies By Benjamin Born; Gernot Müller; Johannes Pfeifer; Susanne Wellmann; Gernot J. Müller
  11. International Spillovers and Bailouts By Marina Azzimonti; Vincenzo Quadrini
  12. Financial and fiscal interaction in the euro area crisis : this time was different By Albert Caruso; Lucrezia Reichlin; Giovanni Ricco

  1. By: Giancarlo Corsetti (European Commission; Dipartimento di Economia; Universität di Bologna; National Bureau of Economic Research; University of Cambridge; Centre for Economic Policy Research (CEPR); Yale University; Università degli Studi di Roma 3; Universität degli studi di Roma La Sapienza; European University Institute); Luca Dedola; Sylvain Leduc
    Abstract: How should monetary policy respond to capital inflows that appreciate the currency, widen the current account deficit and cause domestic overheating? Using the workhorse open-macro monetary model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, solve for the optimal targeting rules under cooperation and characterize the constrained-optimal allocation. The answer is sharp: the optimal monetary stance is contractionary if the exchange rate pass-through (ERPT) on import prices is incomplete, expansionary if ERPT is complete–implying that misalignment and exchange rate volatility are higher in economies where incomplete pass through contains the effects of exchange rates on price competitiveness.
    Keywords: Currency misalignments; trade imbalances; asset markets and risk sharing; optimal targeting rules; international policy cooperation; exchange rate pass-through
    JEL: E44 E52 E61 F41 F42
    Date: 2020–02–26
  2. By: Banerjee, Ryan; Hofmann, Boris; Mehrotra, Aaron
    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.
    JEL: E22 F31 F41 O16
    Date: 2020–02–27
  3. By: Martin Bodenstein (Federal Reserve Board); Giancarlo Corsetti (Centre for Economic Policy Research; Centre for Macroeconomics (CFM); University of Cambridge); Luca Guerrieri (Federal Reserve Board)
    Abstract: The consensus in the recent literature is that the gains from international monetary cooperation are negligible, and so are the costs of a breakdown in cooperation. However, when assessed conditionally on empirically-relevant dynamic developments of the economy, the welfare cost of moving away from regimes of explicit or implicit cooperation may rise to multiple times the cost of economic fluctuations. In economies with incomplete markets, the incentives to act non-cooperatively are driven by the emergence of global imbalances, i.e., large net-foreign-asset positions; and, in economies with complete markets, by divergent real wages.
    Keywords: Monetary ppolicy cooperation, Global imbalances, Open-loop Nash games
    JEL: E44 E61 F42
    Date: 2020–01
  4. By: Sampson, Thomas; Leromain, Elsa; Novy, Dennis; Breinlich, Holger
    Abstract: This paper studies how the depreciation of sterling following the Brexit referendum affected consumer prices in the United Kingdom. Our identification strategy uses input-output linkages to account for heterogeneity in exposure to import costs across product groups. We show that, after the referendum, inflation increased by more for product groups with higher import shares in consumer expenditure. This effect is driven by both direct consumption of imported goods and the use of imported inputs in domestic production. Our results are consistent with complete pass-through of import costs to consumer prices and imply an aggregate exchange rate pass-through of 0:29. We estimate the Brexit vote increased consumer prices by 2:9 percent, costing the average household £870 per year. The increase in the cost of living is evenly shared across the income distribution, but differs substantially across regions.
    Keywords: Brexit; exchange rate pass-through; import costs; inflation
    JEL: E31 F15 F31
    Date: 2019–12
  5. By: Silvia Miranda-Agrippino (Bank of England; CEPR; Centre for Macroeconomics (CFM)); Tsvetelina Nenova (London Business School); Helene Rey (London Business School; CEPR; NBER)
    Abstract: We study the international transmission of the monetary policy of the two world's giants: China and the US. From East to West, the channels of global transmission differ markedly. US monetary policy shocks affect the global economy primarily through their effects on integrated financial markets, global asset prices, and capital ows. EMEs in particular see both a reduction in in ows and a surge in out ows when the market tide turns as a result of a US monetary contraction. Conversely, international trade, commodity prices and global value chains are the main channels through which Chinese monetary policy transmits worldwide. AEs with a strong manufacturing sector are particularly sensitive to these disturbances.
    Keywords: Monetary policy, Global financial cycle, International pillovers, US, China
    JEL: E44 E52 F33 F42
    Date: 2020–01
  6. By: Agarwal, Isha (University of British Columbia); Gu, Grace Weishi (University of California, Santa Cruz); Prasad, Eswar (Cornell University)
    Abstract: We analyze shifts in the structure of China's capital outflows over the past decade. The composition of gross outflows has shifted from accumulation of foreign exchange reserves by the central bank to nonofficial outflows. Unlocking the enormous pool of domestic savings could have a significant impact on global financial markets as China continues to open up its capital account and as domestic investors look abroad for returns and diversification. We analyze in detail the allocation patterns of Chinese institutional investors (IIs), which constitute the main channel for foreign portfolio investment outflows. We find that, relative to benchmarks based on market capitalization, Chinese IIs underweight developed countries and high-tech sectors in their international portfolio allocations but overinvest in high-tech stocks in developed countries. To further examine Chinese IIs' joint decisions on destination country-sector pairs, we construct continuous measures of revealed relative comparative advantage and disadvantage in a sector for a country based on trade patterns. We find that, in their foreign portfolio allocations, Chinese IIs overweight sectors in which China has a comparative disadvantage. Moreover, Chinese IIs concentrate such investments in countries that have higher relative comparative advantage in those sectors. Diversification and information advantages related to foreign imports to China seem to influence patterns of foreign portfolio allocations, while yield-seeking and learning motives do not.
    Keywords: capital account liberalization, international investment position, portfolio flows, institutional investors, revealed comparative (dis)advantage
    JEL: F2 F3 F4
    Date: 2020–02
  7. By: Kei-Ichiro Inaba (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This article analyzes the developments and determinants of the country-specific dependence of sovereign bond returns on global factors for 41 advanced and emerging countries over the last decade. The dependence was cyclical and substantial: the average for the sample countries and period is around 56 percent. This is consistent with a global financial cycle hypothesis stressing the dominant role played by global factors in the synchronization of asset price changes across countries. The dependence was smaller for emerging countries than for advanced ones. Differences in the dependence among countries and over time were attributable to country-fixed effects and time-varying factors. These factors include the size and openness of domestic bond market, the variability of foreign exchange rates, the impact of macro-economic policies, and the indebtedness of the national finance. One policy implication of the hypothesis is examined, namely, the dilemma between international capital mobility and monetary policy effect.
    Keywords: Sovereign bonds, Market integration, Global financial cycle, Monetary policy, Capital control.
    JEL: F3 G1 O1
    Date: 2020–02
  8. By: Guglielmo Maria Caporale; Faek Menla Ali; Fabio Spagnolo; Nicola Spagnolo
    Abstract: This paper investigates the dynamic linkages between portfolio flows and various news indices (based on both “positive” and “negative” news headlines collected from Bloomberg), whilst also controlling for a comprehensive set of push and pull factors. The monthly panel examined comprises 49 developed and developing countries in addition to the US (the “home economy”) and covers the period from January 2007 to October 2017; the econometric model includes fixed effects. The empirical results document the important role played by the news variables. More specifically, news pessimism and intensity affect bond flows more than equity flows, and US news appears to play a leading role in these portfolio flow dynamics. By contrast, changes in news pessimism and intensity have a more significant impact on equity flows, and again US news tend to have more sizeable effects. News sentiment is generally found to be an important driver of portfolio flows, whilst only US news disagreement has a significant effect, and only on bond inflows into the US. Most results are robust to the exclusion of the six financial centres from the full sample. As for push and pull factors, most of them (equity return differentials, interest rate spreads, the VIX index, capital controls, exchange rate regimes, CDS spreads, QE episodes, financial development and commodity prices) are significant and with the expected signs.
    Keywords: Bloomberg, bond flows, equity flows, news
    JEL: F31 F32 G15
    Date: 2020
  9. By: Kose,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 gross domestic product 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.
    Date: 2020–03–03
  10. By: Benjamin Born; Gernot Müller; Johannes Pfeifer; Susanne Wellmann; Gernot J. Müller
    Abstract: Interest-rate spreads fluctuate widely across time and countries. We characterize their behavior using some 3,200 quarterly observations for 21 advanced and 17 emerging economies since the early 1990s. Before the financial crisis, spreads are 10 times more volatile in emerging economies than in advanced economies. Since 2008, the behavior of spreads has converged across country groups, largely because it has adjusted in advanced economies. We also provide evidence on the transmission of spread shocks and find it similar across sample periods and country groups. Spread shocks have become a more important source of output fluctuations in advanced economies after 2008.
    Keywords: country spreads, country risk, interest-rate shocks, financial crisis, business cycle, spread shocks, average treatment effect
    JEL: G15 F41 E32
    Date: 2020
  11. By: Marina Azzimonti; Vincenzo Quadrini
    Abstract: We study how cross-country macroeconomic spillovers caused by sovereign default affect equilibrium bailouts. Because of portfolio diversification, the default of one country causes a macroeconomic contraction in other countries. This creates a vested-interest to bailout the defaulting country. A novel insight of the paper is that, although anticipated bailouts lead to higher borrowing, this may correct for the under-issuance of debt due to the lack of cross-country policy coordination. As a result, bailouts could be Pareto improving not only ex-post (after the debt has been issued) but also ex-ante (before the issuance of the debt).
    Date: 2019
  12. By: Albert Caruso (Cofindustria, Roma, Italy); Lucrezia Reichlin (Department of Economics, London Business School); Giovanni Ricco (University of Warwick, OFCE Sciences Po)
    Keywords: Euro area, government debt, recessions, financial crises, business cycles
    JEL: C11 C32 C54 E52 E62 F45
    Date: 2019–07

This nep-opm issue is ©2020 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.