nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒04‒20
thirteen papers chosen by
Martin Berka
University of Auckland

  1. Invoicing and Pricing-to-market: Evidence on international pricing by UK exporters By Giancarlo Corsetti; Meredith Crowley; Lu Han
  2. A Fisherian Approach to Financial Crises: Lessons from the Sudden Stops Literature By Javier Bianchi; Enrique G. Mendoza
  3. Interest Rate Uncertainty as a Policy Tool By Fabio Ghironi; Galip Kemal Ozhan
  4. Does Inflation Targeting Always Matter for the ERPT? A robust approach By Antonia Lopez Villavicencio; Marc Pourroy
  5. The corporate sector and the current account By Behringer, Jan; van Treeck, Till
  6. The Political-Economy Trilemma By Joshua Aizenman; Hiro Ito
  7. Home sweet host: Prudential and monetary policy spillovers through global banks By Stefan Avdjiev; Bryan Hardy; Patrick McGuire; Goetz von Peter
  8. The Dominant Currency Financing Channel of External Adjustment By Camila Casas; Sergii Meleshchuk; Yannick Timmer
  9. Longer-run Economic Consequences of Pandemics By Òscar Jordà; Sanjay R. Singh; Alan M. Taylor
  10. Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach By Gianluca Benigno; Andrew Foerster; Christopher Otrok; Alessandro Rebucci
  11. The effects of external shocks on the business cycle in China: A structural change perspective By Murach, Michael; Wagner, Helmut
  12. The micro-foundations of an open economy money demand: An application to the Central and Eastern European countries By Claudiu Tiberiu Albulescu; Dominique Pépin; Stephen Miller
  13. Globalization in the Time of COVID-19 By Alessandro Sforza; Marina Steininger

  1. By: Giancarlo Corsetti; Meredith Crowley; Lu Han
    Abstract: Using administrative data on export transactions, we show that UK firms invoice in multiple currencies — even when shipping the same product to the same destination — and switch invoicing currencies over time. We then provide microeconometric evidence that the currency in which a cross-border sale is invoiced predicts systematic differences in exchange rate pass-through and destination-specific markup adjustment, at the granular level of firm-productdestination and time. Based on an event study around the 2016 Brexit depreciation and econometric analysis of a longer period (2010-2017), we examine the export price elasticity to the exchange rate measured in sterling to find that this is low for transactions invoiced in producer currency and comparably high for sales invoiced either in a vehicle or in the destination market currency. However, our analysis of markup elasticities reveals that firms price-to-market only when they invoice sales in the destination market currency. Altogether, our findings imply that currency movements may cause significant short-run deviations from the law of one price not only across but also within borders; these are systematically linked to the firm’s choice of invoicing currencies. Dynamically, we find that the stark differences in price changes across invoicing currencies that emerged in the aftermath of the Brexit depreciation atrophied within six quarters, as all prices came to align broadly with the weaker pound. These findings enrich our understanding of the ‘international price system’ underpinning the international transmission of shocks (Gopinath (2015)), with crucial implications for open macro modelling and policy design.
    Keywords: exchange rates, pass through, law of one price, markup elasticity, vehicle currency, dominant currency, firm level data
    JEL: F31 F41
    Date: 2020–03
  2. By: Javier Bianchi; Enrique G. Mendoza
    Abstract: Sudden Stops are financial crises defined by a large, sudden current-account reversal. They occur in both advanced and emerging economies and result in deep recessions, collapsing asset prices, and real exchange-rate depreciations. They are preceded by economic expansions, current-account deficits, credit booms, and appreciated asset prices and real exchange rates. Fisherian models (i.e. models with credit constraints linked to market prices) explain these stylized facts as an outcome of Irving Fisher's debt-deflation mechanism. On the normative side, these models feature a pecuniary externality that provides a foundation for macroprudential policy (MPP). We review the stylized facts of Sudden Stops, the evidence on MPP use and effectiveness, and the findings of the literature on Fisherian models. Quantitatively, Fisherian amplification is strong and optimal MPP reduces sharply the size and frequency of crises, but it is also complex and potentially time-inconsistent, and simple MPP rules are less effective. We also provide a new MPP analysis incorporating investment. Using a constant debt-tax policy, we construct a crisis probability-output frontier showing that there is a tradeoff between financial stability and long-run output (i.e., reducing the probability of crises reduces long-run output).
    JEL: E3 E37 E44 F41 G01 G18
    Date: 2020–03
  3. By: Fabio Ghironi; Galip Kemal Ozhan
    Abstract: We study a novel policy tool—interest rate uncertainty—that can be used to discourage inefficient capital inflows and to adjust the composition of external account between shortterm securities and foreign direct investment (FDI). We identify the trade-offs faced in navigating between external balance and price stability. The interest rate uncertainty policy discourages short-term inflows mainly through portfolio risk and precautionary saving channels. A markup channel generates net FDI inflows under imperfect exchange rate passthrough. We further investigate new channels under different assumptions about the irreversibility of FDI, the currency of export invoicing, risk aversion of outside agents, and effective lower bound in the rest of the world. Under every scenario, uncertainty policy is inflationary.
    Keywords: International financial markets; Monetary policy framework; Uncertainty and monetary policy
    JEL: E32 F32 F38 G15
    Date: 2020–04
  4. By: Antonia Lopez Villavicencio (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Marc Pourroy (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: This paper estimates the effects of different forms of inflation targeting (IT) in the exchange rate pass-through (ERPT). To this end, we first estimate the ERPT for a large sample of countries using state-space models. We then consider the adoption of an inflation targeting framework by a country as a treatment to find suitable counterfactuals to the actual targeters. By controlling for self-selection bias and endogeneity of the monetary policy regime, we confirm that the ERPT tends to be lower for countries adopting explicit IT. However, we uncover that older regimes, adopting a range or point with tolerance band and keeping inflation close to the target, outperform other IT regimes. We also show that IT is effective even with a relatively high inflation target or low central bank independence.
    Keywords: inflation targeting,exchange rate pass-through,propensity score matching,state-space model
    Date: 2019–06
  5. By: Behringer, Jan; van Treeck, Till
    Abstract: In this paper, we analyze how corporate sector behavior has affected national current account balances in a sample of 25 countries for the period 1980-2015. A consistent finding is that an increase (decrease) in corporate net lending leads to an increase (decrease) in the current account, controlling for standard current account determinants. We disentangle the current account effects of corporate saving and investment and we explore a number of alternative explanations of our results, including incomplete piercing of the "corporate veil" by households, foreign direct investment activities, a temporary crisis phenomenon, and changes in income inequality. We conclude that corporate sector saving is an important driver of macroeconomic trends and that the rise of corporate net lending especially in a number of current account surplus countries has contributed considerably to global current account imbalances.
    Keywords: Corporate sector,sectoral financial balances,current account determinants
    JEL: E21 F41 G35
    Date: 2019
  6. By: Joshua Aizenman; Hiro Ito
    Abstract: This paper investigates Rodrik’s political-economy trilemma: policy makers face a trade-off of choosing two out of three policy goals or governance styles, namely, (hyper-) globalization, national sovereignty, and democracy. We develop a set of indexes that measure the extent of attainment of the three factors for 139 countries in the period of 1975-2016. Using these indexes, we examine the validity of the hypothesis of the political-economy trilemma by testing whether the three trilemma variables are linearly related. We find that, for industrialized countries, there is a linear relationship between globalization and national sovereignty (i.e., a dilemma), and that for developing countries, all three indexes are linearly correlated (i.e., a trilemma). We also investigate whether and how three political-economic factors affect the degree of political and financial stability. The results indicate that more democratic industrialized countries tend to experience more political instability while developing countries tend to be able to stabilize their politics if they are more democratic. The lower level of national sovereignty an industrialized country attains, the more stable its political situation tends to be, while a higher level of sovereignty helps a developing country to stabilize its politics. Globalization brings about political stability for both groups of countries. Furthermore, more globalized countries, whether industrial or developing, tend to experience more financial stability. Future data will allow us to test the possibility of regime changes associated with the post-2016 dynamics.
    JEL: F36 F41
    Date: 2020–03
  7. By: Stefan Avdjiev; Bryan Hardy; Patrick McGuire; Goetz von Peter
    Abstract: Prudential regulation of banks is multi-layered: policy changes by home-country authorities affect banks' global operations across many jurisdictions; changes by host-country authorities shape banks' operations in the host jurisdiction regardless of the nationality of the parent bank. Which layer matters most? Do these policies create cross-border spillovers? And how does monetary policy alter these spillovers? This paper examines the effect that changes in home- and hostcountry prudential measures have on cross-border credit, and how these interact with monetary policy. We use a novel approach to decompose growth in cross-border bank lending into separate home, host and common components, and then match each with the home or host policies that affect this component. Our results suggest that prudential policies can have spillover effects, which depend on the instrument used and on whether a bank's home or host country implemented them. Home policies tend to have larger spillovers on cross-border US dollar lending than host policies, primarily through substitution effects. We also find that a tightening of US monetary policy can compound the spillovers of certain prudential measures.
    Keywords: international banking, prudential policy, international policy coordination and transmission, currencies, international spillovers
    JEL: F42 G21 L51
    Date: 2020–04
  8. By: Camila Casas (Banco de la República de Colombia); Sergii Meleshchuk; Yannick Timmer
    Abstract: We provide evidence on a new transmission channel of exchange rate movements to net exports. Using a novel identification strategy by exploiting firms’ foreign currency debt and debt maturity structure in Colombia, we analyze the trade response of firms that are financially more exposed to a depreciation through a debt revaluation channel. We show that while exports are unaffected by the debt revaluation, imports contract more sharply for firms with larger financial exposure to the depreciation. However, the import response is exclusively driven by firms that import but do not export. The results can be rationalized by a model where exporters are shielded from debt revaluation as they have revenues in foreign currency. We conclude that dominant currency financing strengthens the expansionary impact of a depreciation on the trade balance. **** RESUMEN: En este documento presentamos evidencia de un nuevo mecanismo de transmisión de movimientos de la tasa de cambios a la balanza comercial. Utilizamos una estrategia de identificación novedosa que aprovecha las diferencias en la deuda en moneda extranjera de las firmas colombianas y en las fechas de vencimiento de estos créditos para analizar los cambios en las exportaciones y las importaciones de las firmas con diferentes niveles de exposición financiera a una depreciación de la moneda a través de la revaluación de su deuda. Demostramos que una revaluación de la deuda no tiene efecto sobre las exportaciones, pero la contracción de las importaciones es más fuerte para aquellas firmas que están más expuestas financieramente a una depreciación. Sin embargo, la respuesta de las importaciones se explica únicamente por firmas importadoras que no exportan. Estos resultados se pueden racionalizar con un modelo en el que los exportadores están protegidos de revaluaciones de la deuda a través de ingresos en moneda extranjera. Concluimos que la financiación de las firmas en una moneda dominante refuerza el efecto expansivo de una depreciación en la balanza comercial.
    Keywords: Imports, Exports, Exchange Rates, Foreign Currency Exposure, Capital Structure, Debt Revaluation, importaciones, exportaciones, tasa de cambio, descalces cambiarios, estructura del capital, revaluación de la deuda.
    JEL: F31 F32 F41 G32
    Date: 2020–04
  9. By: Òscar Jordà; Sanjay R. Singh; Alan M. Taylor
    Abstract: How do major pandemics affect economic activity in the medium to longer term? Is it consistent with what economic theory prescribes? Since these are rare events, historical evidence over many centuries is required. We study rates of return on assets using a dataset stretching back to the 14th century, focusing on 15 major pandemics where more than 100,000 people died. In addition, we include major armed conflicts resulting in a similarly large death toll. Significant macroeconomic after-effects of the pandemics persist for about 40 years, with real rates of return substantially depressed. In contrast, we find that wars have no such effect, indeed the opposite. This is consistent with the destruction of capital that happens in wars, but not in pandemics. Using more sparse data, we find real wages somewhat elevated following pandemics. The findings are consistent with pandemics inducing labor scarcity and/or a shift to greater precautionary savings.
    JEL: E43 F41 N10 N30 N40
    Date: 2020–04
  10. By: Gianluca Benigno; Andrew Foerster; Christopher Otrok; Alessandro Rebucci
    Abstract: We estimate a workhorse DSGE model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico's business cycle and financial crisis history since 1981. The estimated model fits the data well, identifying three crisis episodes of varying duration and intensity: the Debt Crisis in the early-1980s, the Peso Crisis in the mid-1990s, and the Global Financial Crisis in the late-2000s. The crisis episodes generated by the estimated model display sluggish and long-lasting build-up and stagnation phases driven by plausible combinations of shocks. Different sets of shocks explain different variables over the business cycle and the three historical episodes of sudden stops identified.
    JEL: C11 E30 F41 G01
    Date: 2020–04
  11. By: Murach, Michael; Wagner, Helmut
    Abstract: We study the effects of external shocks on the business cycle in China and its sectors (agriculture, industry, and services) in terms of real GDP growth using several small dimensional VAR models with Cholesky identification for the period 1996--2014. We show that China - in particular its industrial sector - is susceptible to shocks, which can be related to a trade channel, a financial channel, and a confidence channel of business cycle transmission from major trading partner countries to the Chinese economy. We extend the previous literature by explicitly focusing on response of the Chinese economy at the sectoral level and investigating the presence of confidence channels by analyzing the reaction in Chinese business and consumer confidence. If interpreted from the perspective of ongoing structural change and rebalancing in China, our findings can be interpreted as the result of a still very dominant industrial sector, and a previously export- and investment-driven growth model. Tertiarization in China could be one way of increasing the economy's future resilience to external shocks. However, the future structure of both the industrial and service sectors may be very decisive.
    Keywords: International transmission channels,Transmission of shocks,Structural vector autoregression,Structural change
    JEL: F43 F44 C32
    Date: 2019
  12. By: Claudiu Tiberiu Albulescu (UPT - Politehnica University of Timisoara - Politehnica University of Timisoara); Dominique Pépin (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers); Stephen Miller (WGU Nevada - University of Nevada [Las Vegas])
    Abstract: This paper investigates and compares currency substitution between the currencies of Central and Eastern European (CEE) countries and the euro. In addition, we develop a model with microeconomic foundations, which identifies difference between currency substitution and money demand sensitivity to exchange rate variations. More precisely, we posit that currency substitution relates to money demand sensitivity to the interest rate spread between the CEE countries and the euro area. Moreover, we show how the exchange rate affects money demand, even absent a currency substitution effect. This model applies to any country where an international currency offers liquidity services to domestic agents. The model generates empirical tests of long-run money demand using two complementary cointegrating equations. The opportunity cost of holding the money and the scale variable, either household consumption or output, explain the long-run money demand in CEE countries.
    Keywords: currency substitution,cointegration,money demand,open economy model,CEE countries
    Date: 2019–06
  13. By: Alessandro Sforza; Marina Steininger
    Abstract: The economic effects of a pandemic crucially depend on the extend to which countries are connected in global production networks. In this paper we incorporate production barriers induced by COVID-19 shock into a Ricardian model with sectoral linkages, trade in intermediate goods and sectoral heterogeneity in production. We use our model to quantify the welfare effect of the disruption in production that started in China and then quickly spread across the world. We find that the COVID-19 shock has a considerable impact on most economies in the world, especially when a share of the labor force is quarantined. Moreover, we show that global production linkages have a clear role in magnifying the effect of the production shock. Finally, the economic effects of the COVID-19 shock are heterogeneous across sectors, regions and countries, depending on the geographic distribution of industries in each region and country and their degree of integration in the global production network.
    Keywords: COVID-19 shock, globalization, production barrier, sectoral interrelations, computational general equilibrium
    JEL: F10 F11 F14 F60
    Date: 2020

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