nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒03‒23
ten papers chosen by
Martin Berka
University of Auckland

  1. Can this time be different? Policy options in times of rising debt By M.Ayhan Kose; Peter S. O. Nagle; Franziska L. Ohnsorge; Naotaka Sugawara
  2. Uncovered Interest Parity, Forward Guidance, and the Exchange Rate By Jordi Galí
  3. An estimated DSGE model with financial accelerator: the case of Tunisia By Hager Ben Romdhane
  4. Global Inflation Synchronization By Ha,Jongrim; Kose,Ayhan; Ohnsorge,Franziska Lieselotte
  5. Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default) By Cristina Arellano; Yan Bai; Gabriel Mihalache
  6. Foreign direct investment and the equity home bias puzzle By Sven Blank; Mathias Hoffmann; Moritz A. Roth
  7. Markups, Quality, and Trade Costs By Natalie Chen; Luciana Juvenal
  8. Climate policies under dynamic international economic cycles: A heterogeneous countries DSGE model By Xiao, Bowen; Guo, Xiaodan; Fan, Ying; Voigt, Sebastian; Cui, Lianbiao
  9. Global Macro-Financial Cycles and Spillovers By Jongrim Ha; M. Ayhan Kose; Christopher Otrok; Eswar S. Prasad
  10. Managing Global Liquidity as a Global Public Good. A Report of an RTI Working Party By André Icard; Philip Turner

  1. By: M.Ayhan Kose; Peter S. O. Nagle; Franziska L. Ohnsorge; Naotaka Sugawara
    Abstract: Episodes of debt accumulation have been a recurrent feature of the global economy over the past fifty years. Since 2010, emerging and developing economies have experienced another wave of historically large and rapid debt accumulation. Similar past debt buildups have often ended in widespread financial crises in these economies. This paper examines the factors that are likely to determine the outcome of the most recent debt wave, and considers policy options to help reduce the likelihood that it ends again in widespread crises. It reports two main results. First, the rapid increase in debt has made emerging and developing economies more vulnerable to shifts in market sentiment, notwithstanding historically low global interest rates. Second, policy options are available to lower the likelihood of financial crises, and to help manage the adverse impacts of crises when they do occur. These include sound debt management, strong monetary and fiscal frameworks, and robust bank supervision and regulation. The post crisis debt buildup has coincided with a period of subdued growth as well as the emergence of non-traditional creditors. As a result, policy priorities also need to ensure that debt is spent on productive purposes to improve growth prospects and that all debt related transactions are transparently reported.
    Keywords: Financial crises, currency crises, debt crises, banking crises, public debt, private debt, external debt.
    JEL: E32 E62 F34 G01 H12 H63 N20
    Date: 2020–03
  2. By: Jordi Galí
    Abstract: Under uncovered interest parity (UIP), the size of the effect on the real exchange rate of an anticipated change in real interest rate differentials is invariant to the horizon at which the change is expected. Empirical evidence using US, euro area and UK data points to a substantial deviation from that invariance prediction: expectations of interest rate differentials in the near (distant) future are shown to have much larger (smaller) effects on the real exchange rate than is implied by UIP. Some possible explanations are discussed.
    JEL: E43 E58 F41
    Date: 2020–02
  3. By: Hager Ben Romdhane (Central Bank of Tunisia)
    Abstract: This paper estimates an open economy DSGE model with financial accelerator à la Bernanke et al. (1999)2, enriched with wage rigidities and imperfect exchange rate pass through. The objective of this paper is to assess the importance of financial frictions and their role in the transmission of transitory shocks in the Tunisian Economy. The model is estimated by Bayesian technics via Metropolis Hasting algorithm. Using Tunisian data, we obtain an estimate for the external risk premium, indicating the importance of the financial accelerator and the potential balance sheet vulnerabilities for macroeconomic fluctuations. Furthermore, results of the impulse responses functions model support that the inclusion of the financial accelerator magnifies the impact of shocks thereby increasing real fluctuations.
    Keywords: DSGE, Financial frictions, Bayesian estimation
    Date: 2020–03–03
  4. By: Ha,Jongrim; Kose,Ayhan; Ohnsorge,Franziska Lieselotte
    Abstract: The paper studies the extent of global inflation synchronization using a dynamic factor model in a large set of countries over a half century. The authors'methodology allows them to account for differences across groups of countries (advanced economies and emerging market and developing economies) and to analyze commonalities in inflation synchronization across a wide range of inflation measures. The paper reports three major results. First, inflation movements have become increasingly synchronized internationally over time: a common global factor has accounted for about 22 percent of variation in national inflation rates since 2001. Second, inflation synchronization has also become more broad-based: while it was previously much more pronounced among advanced economies than among emerging market and developing economies, it has become substantial in both groups over the past two decades. In addition, inflation synchronization has become significant across all inflation measures since 2001, whereas it was previously prominent only for inflation measures that included mostly tradable goods.
    Date: 2019–03–07
  5. By: Cristina Arellano; Yan Bai; Gabriel Mihalache (State University of New York at Stony Brook)
    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.
    Keywords: Monetary policy; Inflation; Sovereign default; Interest rates
    JEL: E52 F34 F41
    Date: 2020–01–10
  6. By: Sven Blank (Deutsche Bundesbank); Mathias Hoffmann (Deutsche Bundesbank); Moritz A. Roth (Banco de España)
    Abstract: The vast macroeconomic literature trying to explain the widely observed equity home bias disregards internationally active firms. In a DSGE model that features the endogenous choice of firms to become internationally active through either exports or foreign direct investment (FDI), we find that the optimal equity holdings of agents are biased towards domestic firms. Our finding indicates that international diversification is not as bad as empirical measures of the equity home bias suggest.
    Keywords: country portfolios, multinational firms, international diversification, international trade, foreign direct investment
    JEL: F12 F21 F23 F41 G11
    Date: 2020–03
  7. By: Natalie Chen; Luciana Juvenal
    Abstract: We investigate theoretically and empirically how exporters adjust their markups across destinations depending on bilateral distance, tariffs, and the quality of their exports. Under the assumption that trade costs are both ad valorem and per unit, our model predicts that markups rise with distance and fall with tariffs, but these effects are heterogeneous and are smaller in magnitude for higher quality exports. We find strong support for the predictions of the model using a unique data set of Argentinean firm-level wine exports combined with experts wine ratings as a measure of quality.
    Date: 2020–02–21
  8. By: Xiao, Bowen; Guo, Xiaodan; Fan, Ying; Voigt, Sebastian; Cui, Lianbiao
    Abstract: In light of increased economic integration and global warming, addressing critical issues such as the role of multilateral climate policies and the strategic interaction of countries in climate negotiations becomes paramount. We thus established for this paper an open economy environmental dynamic stochastic general equilibrium model with heterogeneous production sectors, bilateral climate policies, asymmetric economies, and asymmetric stochastic shocks, using China and the EU as case studies in order to analyze the interaction and linking of international carbon markets under dynamic international economic cycles. This led us to some major conclusions. First, with various methods we verified that, due to deadweight loss, the efficiency of the separate carbon market is lower than that of the joint carbon market. Second, the intensity of the spillover effects depends partly on different climate policies. This means that, in terms of supply-side shocks, the EU's economy in a joint carbon market is more sensitive because its cross-border spillover effects are enhanced, while demand-side shocks have a stronger impact on the EU's economy under a separate carbon market. Third, the Ramsey policy rule revealed that both China's and the EU's emission quotas should be adjusted pro-cyclically under separate carbon markets. The cross-border spillover effects of the joint carbon market, however can change the pro-cyclical characteristics of foreign (EU's) optimal quotas.
    Keywords: International economic cycle,Carbon market,China,the European Union (EU),Dynamic Stochastic General Equilibrium (DSGE)
    JEL: E32 F41 Q53 Q56 Q58
    Date: 2020
  9. 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.
    JEL: C1 C32 E32 F4
    Date: 2020–02
  10. By: André Icard (former Deputy Géneral Manager of BIS); Philip Turner (National Institute of Economic and Social Research (NIESR); University of Basel)
    Abstract: The cumulative balance sheet effects of a decade of low interest rates, long as well as short, have become very large. This report (of an RTI Working Party chaired by Bernard Snoy) examines the magnitudes of such effects through the many dimensions of global liquidity. This is not purely a monetary policy phenomenon as regulatory policies, restrictive fiscal policies in some advanced economies and structural factors have all had important impacts. Several indicators suggest increased financial vulnerabilities and higher risks of destabilising market dynamics. The dollar debt of non-banks outside the United States is at a new record: currency mismatches and leverage in the private sector have increased. The dollar funding of non-US banks looks fragile. Greater reliance on international bond markets has created new, opaque risks. There is widespread unease about the domination of the dollar, and about the inadequacy of the Global Financial Safety Net. The search for alternative multi-currency arrangements continues. But the need to address the risk of a new dollar liquidity crunch is urgent. International oversight of this issue is at present too fragmented. Policy responses at national level may require action by several bodies – central banks, regulators and Treasuries. The report therefore proposes that the Financial Stability Board, with inputs from the BIS, the IMF, the OECD and others, report regularly on global liquidity to G20 Ministers and Governors so they can act in time to avert a crisis.
    Keywords: Global liquidity, lender of last resort, currency mismatches, G20, Triffin dilemma, international monetary system
    JEL: E43 E58 F33 F38 F41 F42 G15
    Date: 2019–12

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