nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒05‒11
six papers chosen by
Martin Berka
University of Auckland

  1. News, sentiment and capital flows By Kenza Benhima; Rachel Cordonier
  2. Elusive Safety: The New Geography of Capital Flows and Risk By Laura Alfaro; Ester Faia; Ruth A. Judson; Tim Schmidt-Eisenlohr
  3. Capital account liberalisation does worsen income inequality By Li, Xiang; Su, Dan
  4. On Public Spending and Unions By Fernando Broner; Alberto Martin; Jaume Ventura
  5. Good-Bye Original Sin, Hello Risk On-Off, Financial Fragility, and Crises? By Joshua Aizenman; Yothin Jinjarak; Donghyun Park; Huanhuan Zheng
  6. Viral Shocks to the World Economy By Konstantin A. Kholodilin; Malte Rieth

  1. By: Kenza Benhima; Rachel Cordonier
    Abstract: We examine empirically the effect of two types of expectations-related shocks - "news" (increases in expected future productivity) and "sentiment" (surges in optimism unrelated to future productivity) - on gross capital flows. We find that news shocks lead to a decrease in both gross capital inflows and outflows, while sentiment shocks lead to an increase in both gross inflows and outflows. Both these shocks drive a positive correlation between gross inflows and outflows but only sentiments shocks generate procyclical gross flows. These effects are not driven by global shocks or financial shocks. They are consistent with the existence of asymmetric information between domestic and foreign investors about the country's fundamentals.
    Keywords: Capital flows, SVAR, asymmetric information
    JEL: D82 E32 F32
    Date: 2020
  2. By: Laura Alfaro; Ester Faia; Ruth A. Judson; Tim Schmidt-Eisenlohr
    Abstract: Using a unique confidential data set with industry disaggregation of official U.S. claims and liabilities, we find that dollar-denominated securities are increasingly intermediated by tax havens financial centers (THFC) and by less regulated funds. These securities are risky and respond to tax rates and prudential regulations, suggesting tax avoidance and regulatory arbitrage. Issuers are mostly intangible-intensive multinationals, that can more easily move across borders. Investors require a high Sharpe ratio, suggesting search for yield. In contrast, safe treasuries are mainly held by the foreign official sector and increased with quantitative easing policies. Facts on the privately held securities are rationalized through a model where multinationals with heterogeneous default probabilities endogenously choose to shift profits to a THFC against a cost and are funded by global intermediaries with endogenous monitoring intensity. A fall in debt costs, due to an increase in global savings channeled by low regulated intermediaries, raises firms' profits. More firms can afford to enter the THFC and, as they appear elusively safer, intermediaries reduce monitoring intensity, increasing ex post risk.
    JEL: F2 F3 F4 G15
    Date: 2020–04
  3. By: Li, Xiang; Su, Dan
    Abstract: This study examines the relationship between capital account liberalisation and income inequality. Adopting a novel identification strategy, namely a difference-in-difference estimation combined with propensity score matching between the liberalised and closed countries, we provide robust evidence that opening the capital account is associated with an adverse impact on income inequality in developing countries. The main findings are threefold. First, fully liberalising the capital account is associated with a small rise of 0.07-0.30 standard deviations in the Gini coefficient in the short-run and a rise as large as 0.32-0.62 standard deviations in the ten years after liberalisation, on average. Second, widening income inequality is the outcome of the growing income share of the rich at the cost of the poor. The long-term effect of capital account liberalisation includes a reduction in the income share of the poorest half by 2.66-3.79 percentage points and an increase in the income share of the richest 10% by 5.19-8.76 percentage points. Third, the directions and categories of capital account liberalisation matter. Inward capital account liberalisation is more detrimental to income equality than outward capital account liberalisation, and free access to the international equity market exacerbates income inequality the most, while foreign direct investment has an insignificant impact on inequality.
    Keywords: capital account liberalisation,income inequality,Gini coefficient,income share
    JEL: D63 F38
    Date: 2020
  4. By: Fernando Broner; Alberto Martin; Jaume Ventura
    Abstract: We analyze the conduct of fiscal policy in a financially integrated union in the presence of financial frictions. Frictions create a wedge between the return to investment and the union interest rate. This leads to an over-spending externality. While the social cost of spending is the return to investment, governments care mostly about the (depressed) interest rate they face. In other words, the crowding out effects of public spending are partly "exported" to the rest of the union. We argue that it may be hard for the union to deal with this externality through the design of fiscal rules, which are bound to be shaped by the preferences of the median country and not by efficiency considerations. We also analyze how this overspending externality - and the unions ability to deal with it effectively changes when the union is financially integrated with the rest of the world. Finally, we extend our model by introducing a zero lower bound on interest rates and show that, it financial frictions are severe enough, the union is pushed into a liquidity trap and the direction of the spending externality is reversed. At such times, fiscal rules that are appropriate during normal times might backre.
    Keywords: public spending, crowding out, financial frictions, fiscal union, spending externalities, fiscal coordination
    JEL: E62 F32 F34 F36 F41 F42 F45
    Date: 2020–02
  5. By: Joshua Aizenman; Yothin Jinjarak; Donghyun Park; Huanhuan Zheng
    Abstract: We analyze the sovereign bond issuance data of eight major emerging markets (EM) - Brazil, China, India, Indonesia, Mexico, Russia, Turkey and South Africa - in 1970-2018. Our analysis suggests EMs are more likely to issue local-currency sovereign bonds if their currencies appreciated before the global financial crisis of 2008 (GFC). Inflation-targeting monetary policy regime increases the likelihood of issuing local-currency debt before GFC but not after. EMs that offer higher yields are more likely to issue local-currency bond after GFC. EM bonds which are smaller in size, shorter in maturity, or lower in coupon rate are more likely to be issued in local currency. Future data will allow us to test and identify structural changes associated with the COVID-19 pandemic and its aftermath.
    JEL: F21 F31
    Date: 2020–04
  6. By: Konstantin A. Kholodilin; Malte Rieth
    Abstract: We construct a news-based viral disease index and study the dynamic impact of epidemics on the world economy, using structural vector autoregressions. Epidemic shocks have persistently negative effects, both directly and indirectly, on affected countries and on world output. The shocks lead to a significant fall in global trade, employment, and consumer prices for three quarters, and the losses are permanent. In contrast, retail sales increase. Country studies suggest that the direct effects are four times larger than the indirect effects and that demand-side dominate supply-side contractions. Overall, the findings indicate that expansionary macroeconomic policy is an appropriate crisis response.
    Keywords: Coronavirus, Covid 19, text analysis, world economy, structural vector autoregressions, epidemics
    JEL: C32 E32 F44 I18
    Date: 2020

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