nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒04‒06
five papers chosen by
Martin Berka
University of Auckland

  1. International credit markets and global business cycles By Patrick Pintus; Yi Wen; Xiaochuan Xing
  2. The Global Financial Resource Curse By Gianluca Benigno; Luca Fornaro; Martin Wolf
  3. Dynamic pricing and exchange rate pass-through: Evidence from transaction-level data By Nagengast, Arne J.; Bursian, Dirk; Menz, Jan-Oliver
  4. Capital Flow Waves—or Ripples? Extreme Capital Flow Movements Since the Crisis By Kristin J. Forbes; Francis E. Warnock
  5. The dynamic impact of FX interventions on financial markets By Menkhoff, Lukas; Rieth, Malte; Stöhr, Tobias

  1. By: Patrick Pintus (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Yi Wen (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Xiaochuan Xing (Yale University [New Haven])
    Abstract: This paper stresses a new channel through which global financial linkages contribute to the co‐movement in economic activity across countries. We show in a two‐country setting with borrowing constraints that international credit markets are subject to self‐fulfilling variations in the world real interest rate. Those expectation‐driven changes in the borrowing cost in turn act as global shocks that induce strong cross‐country co‐movements in both financial and real variables (such as asset prices, gross domestic product, consumption, investment, and employment). When firms around the world benefit from unexpectedly low debt repayments, they borrow and invest more, which leads to excessive supply of collateral and of loanable funds at a low interest rate, thus fueling a boom both at home and abroad. As a consequence, business cycles are synchronized internationally. Such a stylized model thus offers one way to rationalize both the existence of a world business‐cycle component, documented by recent empirical studies through dynamic factor analysis, and the factor's intimate link to global financial markets.
    Keywords: world interest rate,international co-movement,self-fulfilling equilibria
    Date: 2019–03
  2. By: Gianluca Benigno; Luca Fornaro; Martin Wolf
    Abstract: Since the late 1990s, the United States have received large capital flows from developing countries and experienced a productivity growth slowdown. Motivated by these facts, we provide a model connecting international financial integration and global productivity growth. The key feature is that the tradable sector is the engine of growth of the economy. Capital flows from developing countries to the United States boost demand for U.S. non-tradable goods. This induces a reallocation of U.S. economic activity from the tradable sector to the non-tradable one. In turn, lower profits in the tradable sector lead firms to cut back investment in innovation. Since innovation in the United States determines the evolution of the world technological frontier, the result is a drop in global productivity growth. We dub this effect the global financial resource curse. The model thus offers a new perspective on the consequences of financial globalization, and on the appropriate policy interventions to manage it.
    Keywords: global productivity growth, international financial integration, Capital flows, U.S. productivity growth slowdown, low global interest rates, Bretton Woods II, export-led growth
    JEL: E44 F21 F41 F43 F62 O24 O31
    Date: 2020–02
  3. By: Nagengast, Arne J.; Bursian, Dirk; Menz, Jan-Oliver
    Abstract: Dynamic pricing is a widely employed pricing strategy for goods and services in which firms flexibly set prices, taking into account current market conditions. This paper studies theoretically and empirically the role of this pricing strategy in explaining the heterogeneous response of consumer prices to exchange rate fluctuations. We provide a theoretical model that illustrates how foreign producers and domestic retailers adjust prices to exchange rate fluctuations for three forms of dynamic pricing. Our model predicts that pass-through increases for clearance sales and with the capacity costs of producers in periods of high demand, while it decreases for advance purchases. We find robust empirical evidence for the model predictions using a unique German transaction-level data set of package tours at the daily frequency between 2012 and 2018 featuring rich variation of prices over time.
    Keywords: exchange rate pass-through,dynamic pricing,heterogeneity,services trade,tourism
    JEL: F14 F31
    Date: 2020
  4. By: Kristin J. Forbes; Francis E. Warnock
    Abstract: Has the occurrence of “extreme capital flow movements”—episodes of sudden surges, stops, flight and retrenchment—changed since the Global Financial Crisis (GFC)? This paper addresses this question by updating and building on the dataset and methodology introduced in Forbes and Warnock (2012) to calculate the occurrence of sharp capital flow movements by foreigners and domestics into and out of individual countries. The results suggest that the occurrence of these extreme capital flow movements has not increased since the GFC. The drivers of these episodes, however, appear to have changed since the GFC. Extreme capital flow movements are less correlated with changes in global risk, and are more difficult to explain with basic global, regional and domestic variables. What used to be large global “waves” in international capital flows have more recently become idiosyncratic “ripples”.
    JEL: F3
    Date: 2020–03
  5. By: Menkhoff, Lukas; Rieth, Malte; Stöhr, Tobias
    Abstract: Evidence on the effectiveness of FX interventions is either limited to short horizons or hampered by debatable identification. We address these limitations by identifying a structural vector autoregressive model for the daily frequency with an external instrument. Generally, we find, for freely floating currencies, that FX intervention shocks significantly affect exchange rates and that this impact persists for months. The signaling channel dominates the portfolio channel. Moreover, interest rates tend to fall in response to sales of the domestic currency, whereas stock prices of large (exporting) firms increase after devaluation of the domestic currency.
    Keywords: Foreign exchange intervention,structural VAR,exchange rates,interest rates,stock prices
    JEL: F31 F33 E58
    Date: 2020

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