nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒05‒18
eight papers chosen by
Martin Berka
University of Auckland

  1. Exchange Rate Risk, Distribution Asymmetry and Deviations from Purchasing Power Parity By Arghyrou, Michael G; Lu, Wenna; Pourpourides, Panayiotis M.
  2. The Global Transmission of U.S. Monetary Policy By Degasperi,Riccardo; Hong, Seokki Simon; Ricco, Giovanni
  3. Modelling Small Open Developing Economies in a Financialized World: A Stock-Flow Consistent Prototype Growth Model By Antoine GODIN; Sakir-Devrim YILMAZ
  4. Winners and Losers from Sovereign Debt Inflows By Fernando Broner; Alberto Martin; Lorenzo Pandolfi; Tomas Williams
  5. International confidence spillovers and business cycles in small open economies By Michał Brzoza-Brzezina; Jacek Kotłowski
  6. Sources of Macroeconomic Fluctuations in a Franc Zone Country: A Bayesian estimation By NANA DAVIES, Charles
  7. The Myth of Competitive Devaluations in the 1930s By Ljungberg, Jonas
  8. Global value chains and exchange rate pass-through: the role of non-linearities By Jan Hagemejer; Aleksandra Hałka; Jacek Kotłowski

  1. By: Arghyrou, Michael G (Department of Economics, University of Piraeus); Lu, Wenna (Cardiff School of Management, Cardiff Metropolitan University); Pourpourides, Panayiotis M. (Cardiff Business School)
    Abstract: Firstly, we show that domestic prices of net importer countries incorporate a risk premium, driven by higher moments of future nominal exchange rate returns and secondly, using US dollar exchange rates against three currencies of major net exporting countries to the US such as Canada, Japan and the European Union, we find that the skewness of the future nominal exchange rate is the major and statistically robust moment-based factor of the deviations from purchasing power parity (PPP). Our estimates further suggest that only low and moderate exchange rate risks induce risk premia that drive deviations from PPP.
    Keywords: Purchasing Power Parity, risk-aversion, exchange rate, downside risk
    JEL: G15 F31 F41
    Date: 2020–05
  2. By: Degasperi,Riccardo (University of Warwick); Hong, Seokki Simon (University of Warwick); Ricco, Giovanni (University of Warwick, CEPR, OFCE-SciencesPo and Now-Casting Economics)
    Abstract: This paper studies the transmission of US monetary shocks across the globe by employing a high-frequency identification of policy shocks and large VAR techniques, in conjunction with a large macro-financial dataset of global and national indicators covering both advanced and emerging economies. Our identification controls for the information effects of monetary policy and allows for the separate analysis of tightenings and loosenings of the policy stance. First, we document that US policy shocks have large real and nominal spillover effects that affect both advanced economies and emerging markets. Policy actions cannot fully isolate national economies, even in the case of advanced economies with flexible exchange rates. Second, we investigate the channels of transmission and find that both trade and financial channels are activated and that there is an independent role for oil and commodity prices. Third, we show that effects are asymmetric and larger in the case of contractionary US monetary policy shocks. Finally, we contrast the transmission mechanisms of countries with different exchange rates, exposure to the dollar, and capital control regimes
    Keywords: Monetary policy ; Trilemma ; Exchange Rates ; Foreign Spillovers JEL codes: E5 ; F3 ; F4 ; C3
    Date: 2020
  3. By: Antoine GODIN; Sakir-Devrim YILMAZ
    Abstract: This paper builds a stock-flow consistent growth model in continuous time in order to analyze the effects of policy rates in financial centres on a small open developing economy with an open capital account and a flexible exchange rate. Using a balance-sheet approach and explicitly modelling real-financial spheres interactions and propagation mechanisms, we show that a fall in global policy rates triggers appreciation-induced boom-bust episodes in the small open economy, driven by portfolio flows and cross-border lending. During the boom, public balances improve, unemployment and inflation fall and current account deficit widens. Our results show that the boom is larger if foreign exchange market adjustment is sluggish, expectations adjust more rapidly, banking sector is monopolistic or risk perception is less sensitive to fundamentals. In the absence of productivity growth differentials between the developing economy and the rest of the world, the balance-of payments constrained growth rate is a strong attractor and the economy gravitates towards this growth rate as financial variables and exchange rates adjust to their new levels.
    JEL: Q
    Date: 2020–02–20
  4. By: Fernando Broner (CREi and Barcelona GSE); Alberto Martin (European Central Bank, CREi, Barcelona GSE); Lorenzo Pandolfi (Università di Napoli Federico II and CSEF); Tomas Williams (George Washington University)
    Abstract: We study the transmission of sovereign debt inflow shocks on domestic firms. We exploit episodes of large sovereign debt inflows in six emerging countries which are due to the announcements of these countries’ inclusion in two major local currency sovereign debt indexes. We show that these episodes significantly reduce government bond yields and appreciate the domestic currency, and have heterogeneous spillovers on domestic firms. Financial and government-related firms experience positive abnormal returns in the days following the announcement episodes. Instead, companies operating in tradable industries exhibit negative abnormal returns after the episodes. We find that the former expansionary effect is more pronounced in countries where the government bond yields drop more in response to the announcement, while the latter recessionary effect is larger in countries where the domestic currency appreciates more. Also, we find that firms which rely more on external financing are positively affected by these events. Our findings shed novel light on the channels through which sovereign debt inflows affect firms in recipient countries. They suggest that these inflows can contribute to reshaping the domestic economy, by increasing the importance of the non-tradable sector at the expenses of the tradable one.
    Keywords: Sovereign debt; capital inflows; exchange rate; government bond yields; stock prices; emerging markets.
    JEL: F31 F32 F36 G15 G23
    Date: 2020–05–15
  5. By: Michał Brzoza-Brzezina; Jacek Kotłowski
    Abstract: The economic literature has for a long time been looking for explanations of a very strong international correlation of business cycles. This paper shows empirically that common fluctuations can to some degree be the effect of confidence shocks beeing transmitted internationally. We focus on a large (euro area) and a small, nearby economy (Poland). Our results show that euro area confidence fluctuations account for approximately 40-70% of business cycle fluctuations both in the euro area and in Poland. More importantly, their transmission happens not only via traditional channels (e.g. by confidence affecting euro area GDP and then Polish GDP via trade), but to a large extent occurs directly (e.g. by news spreading via media).
    Keywords: International spillovers, animal spirits, sentiments, business cycle
    JEL: C32 E32 F44
    Date: 2020–05
  6. By: NANA DAVIES, Charles
    Abstract: The Central African Economic and Monetary Community (CEMAC) is a constituent of the Franc Zone (FZ), whose roots may be traced back to 1901 when France created the West African Bank. Since its inception, FZ's monetary authorities' objective and monetary policy instruments have been evolving. Nevertheless, some FZ's features have endured, namely the fixed exchange rate between that monetary union's common currency (CFAF) and France's currency, the free capital mobility between Franc Zone countries (FZC) and France, the ceiling on the monetary budget financing and the obligation of FZC to entrust a share of their foreign exchange reserves to the French Treasury in exchange for the convertibility of CFAF into France's currency. Using Cameroon's data over 1979 and 2014, we estimate a DSGE model of a small open economy model that takes into account some of those features. We find that technology and fiscal shocks drive the bulk of economic fluctuations.
    Keywords: Franc Zone - Cameroon - DSGE model - Metropolis-Hasting
    JEL: C68 E32 F41 F45
    Date: 2018–09–10
  7. By: Ljungberg, Jonas (Department of Economic History, Lund University)
    Abstract: Conventional wisdom pretends that currency devaluations contributed to the Great Depression of the 1930s. This paper examines the impact of nominal exchange rates on foreign trade of 14 industrialized countries 1929-1939. If the idea of competitive devaluation holds, one should expect an increase in exports, along with a decline in imports, to trading partners against which the exchange rate epreciated. Tests show that the beggar-thy-neighbour effects of exchange rate adjustments were at most marginal. Moreover, there is evidence that currency depreciations were expansionary not only for countries that devalued but for the international economy as a whole.
    Keywords: interwar; Europe; exchange rates; trade; depression
    JEL: E31 E52 F31 N14
    Date: 2020–03–05
  8. By: Jan Hagemejer (University of Warsaw); Aleksandra Hałka (Narodowy Bank Polski); Jacek Kotłowski (SGH Warsaw School of Economics)
    Abstract: We examine the relationship between development of global value chains and changes in the exchange rate pass-through to producer prices. In contrast to the existing research we assume that the decline in ERPT resulting from the enhanced participation in GVC may be nonlinear with respect to the country’s position in the global value chain, reflecting divergent firms’ market power at various stages of vertical specialization process. We investigate a panel of 43 advanced and emerging economies using a panel smooth transition regression (PSTR) model and WIOD data and find that growing backward GVC participation of the suppliers of imported intermediate input results in the reduction of the ERPT to producer prices. We also provide evidence that this effect is non-linear. The exchange rate pass-through for countries, whose suppliers are strongly involved in the production along the global value chains is significantly (four times) smaller than for economies with suppliers not participating in GVC. We document that the decline in the aggregate ERPT in recent years has been mainly due to changes in the exchange rate pass-through for the EU members states due to increased backward GVC participation of their major trading partners. For other countries, the ERPT remained roughly the same throughout the analyzed period.
    Keywords: Global value chains, exchange rate pass-through, inflation, PSTR model
    JEL: C23 E31 F14 F62
    Date: 2020

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