nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒07‒20
ten papers chosen by
Martin Berka
University of Auckland

  1. Global Imbalances and Policy Wars at the Zero Lower Bound By Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier
  2. The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis By Pierre-Olivier Gourinchas; Philippe Martin; Todd E. Messer
  3. Shock dependence of exchange rate pass-through: a comparative analysis of BVARs and DSGEs By Mariarosaria Comunale
  4. Global shocks and emerging economies: disentangling the commodity roller coaster By Mauro Sayar Ferreira; André Cordeiro Valério
  5. Measuring Global Macroeconomic Uncertainty By Graziano Moramarco
  6. Global Macro-Financial Cycles and Spillovers By Ha, Jongrim; Kose, Ayhan; Otrok, Christopher; Prasad, Eswar
  7. Real Exchange Rate Overshooting in Large Depreciations: Determinants and Consequences By Alexander Culiuc
  8. Global Recessions By E. Terrones, Marco; Kose, Ayhan; Sugawara, Naotaka
  9. Different no more: Country spreads in advanced and emerging economies By Born, Benjamin; Müller, Gernot; Pfeifer, Johannes; Wellmann, Susanne
  10. The Global Financial Resource Curse By Benigno, Gianluca; Fornaro, Luca; Wolf, Martin

  1. By: Caballero, Ricardo; Farhi, Emmanuel; Gourinchas, Pierre-Olivier
    Abstract: This paper explores the consequences of extremely low real interest rates in a world with integrated but heterogenous capital markets and nominal rigidities. We establish four main results: (i) Liquidity traps spread to the rest of the world through the current account, which we illustrate with a new Metzler diagram in quantities; (ii) Beggar-thy-neighbor currency and trade wars provide stimulus to the undertaking country at the expense of other countries; (iii) (Safe) public debt issuances and increases in government spending anywhere are expansionary everywhere; (iv) At the ZLB, net issuers of safe assets experience a disproportionate share of the global stagnation.
    JEL: E0 F3 F4 G1
    Date: 2020–02
  2. By: Pierre-Olivier Gourinchas; Philippe Martin; Todd E. Messer
    Abstract: Despite a formal ‘no-bailout clause’, we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal and Spain, ranging from roughly 0.5% (Ireland) to 43% (Greece) of 2011 output during the recent Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a ‘Southern view’ of the crisis (transfers did not help) and a ‘Northern view’ (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of ‘kicking the can down the road’.
    JEL: F34 F45
    Date: 2020–06
  3. By: Mariarosaria Comunale (Bank of Lithuania)
    Abstract: In this paper, we make use of the results from Structural Bayesian VARs taken from several studies for the euro area, which apply the idea of a shock-dependent Exchange Rate Pass-Through, drawing a comparison across models and also with respect to available DSGEs. On impact, the results are similar across Structural Bayesian VARs. At longer horizons, the magnitude in DSGEs increases because of the endogenous response of monetary policy and other variables. In BVARs particularly, shocks contribute relatively little to observed changes in the exchange rate and in HICP. This points to a key role of systematic factors, which are not captured by the historical shock decomposition. However, in the APP announcement period, we do see demand and exogenous exchange rate shocks countribute significantly to variations in exchange rates. Nonetheless, it is difficult to find a robust characterization across models. Moreover, the modelling challenges increase when looking at individual countries, because exchange rate and monetary policy shocks (also taken relative to the US) are common to the whole euro area. Hence, we provide a local projection exercise with common euro area shocks, identified in euro area-specific Structural Bayesian VARs and in DSGE, extrapolated and used as regressors. For common exchange rate shocks, the impact on consumer prices is the largest in some new member states, but there are a wide range of estimates across models. For core consumer prices, the coefficients are smaller. Regarding common relative monetary policy shocks, the impact is larger than for exchange rate shocks in any case. Generally, euro area monetary policy plays a big role for consumer prices, and this is especially so for new member states and the euro area periphery.
    Keywords: euro area, exchange rate pass-through, Bayesian VAR, local projections, monetary policy
    JEL: E31 F31 F45
    Date: 2020–03–26
  4. By: Mauro Sayar Ferreira (Cedeplar-UFMG); André Cordeiro Valério (EPGE-FGV)
    Abstract: Shocks in commodity prices have been viewed as a major driver of emerging economies’ business cycle. We show this is not the case for Brazil, Chile, Colombia, and Peru (all commodity exporters) after allowing for a full macro-finance linkage, at world and domestic level, in a structural VAR. To achieve our results, the international bloc of the VAR includes a measure of global GDP, an aggregate commodity price index, and a volatility index (VIX). The presence of this last variable, from which we capture global economic uncertainty shock, is responsible for modifying established results. Global demand shocks have been the main international driver of the business cycle in Brazil, Chile, and Peru, while global economic uncertainty shocks have been the most important international driver of the Colombian GDP. Aggregate shocks to the world commodity market become more relevant only when a less structured model of the global economy is in place, since commodity prices react endogenously to innovations elsewhere, playing a major role as a propagator. The econometric models also include the following domestic variables: GDP, CPI, sovereign spread, nominal exchange rate, and policy interest rate.
    Keywords: Global shocks; business cycle; uncertainty; commodity price; global activity; emerging economies; Bayesian SVAR.
    JEL: C32 E32 F41 F44 F62 F63 O54
    Date: 2020–06
  5. By: Graziano Moramarco
    Abstract: This paper provides new indices of global macroeconomic uncertainty and investigates the cross-country transmission of uncertainty using a global vector autoregressive (GVAR) model. The indices measure the dispersion of forecasts that results from parameter uncertainty in the GVAR. Relying on the error correction representation of the model, we distinguish between measures of short-run and long-run uncertainty. Over the period 2000Q1-2016Q4, global short-run macroeconomic uncertainty strongly co-moves with financial market volatility, while long-run uncertainty is more highly correlated with economic policy uncertainty. We quantify global spillover effects by decomposing uncertainty into the contributions from individual countries. On average, over 40% of country-specific uncertainty is of foreign origin.
    JEL: C15 C32 E17 D80 F44 G15
    Date: 2020–06
  6. By: Ha, Jongrim; Kose, Ayhan; Otrok, Christopher; Prasad, Eswar
    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.
    Keywords: Common Shocks; Dynamic factor models; Global business cycles; global financial cycles; International spillovers
    JEL: C1 C32 E32 F4
    Date: 2020–02
  7. By: Alexander Culiuc
    Abstract: The consequences of large depreciations on economic activity depend on the relative strength of the contractionary balance sheet and expansionary expenditure switching effects. However, the two operate over different time horizons: the balance sheet effect hits almost immediately, while expenditure switching is delayed by nominal rigidities and other frictions. The paper hypothesizes that the overshooting phase—observed early in the depreciation episode and driven by the balance sheet effect—is largely irrelevant for expenditure switching, which is more closely aligned with ex-post equilibrium depreciation. Given this, larger real exchange rate overshooting should signal a relatively stronger balance sheet effect. Empirical findings support this hypothesis: (i) overshooting is driven by factors associated with the balance sheet effect (high external debt, low reserves, low trade openness), (ii) overshooting-based measures of the balance sheet effect foreshadow post-depreciation output losses, and (iii) the balance sheet effect is strongest early on, while expenditure switching strengthens over the medium term.
    Keywords: Financial crises;Balance sheets;Exchange rate shocks;Developing countries;Real exchange rates;Exchange Rate,External Debt,Open Economy Growth,WP,overshoot,capita,section II,ex-post,real exchange rate
    Date: 2020–05–22
  8. By: E. Terrones, Marco; Kose, Ayhan; Sugawara, Naotaka
    Abstract: The world economy has experienced four global recessions over the past seven decades: in 1975, 1982, 1991, and 2009. During each of these episodes, annual real per capita global GDP contracted, and this contraction was accompanied by weakening of other key indicators of global economic activity. The global recessions were highly synchronized internationally, with severe economic and financial disruptions in many countries around the world. The 2009 global recession, set off by the global financial crisis, was by far the deepest and most synchronized of the four recessions. As the epicenter of the crisis, advanced economies felt the brunt of the recession. The subsequent expansion has been the weakest in the post-war period in advanced economies as many of them have struggled to overcome the legacies of the crisis. In contrast, most emerging market and developing economies weathered the 2009 global recession relatively well and delivered a stronger recovery than after previous global recessions.
    Keywords: financial markets; global economy; global expansion; global recovery; Real activity; synchronization of cycles
    JEL: E32 F44 N10 O47
    Date: 2020–02
  9. By: Born, Benjamin; Müller, Gernot; Pfeifer, Johannes; Wellmann, Susanne
    Abstract: Interest-rate spreads fluctuate widely across time and countries. We characterize their behavior using some 3,200 quarterly observations for 21 advanced and 17 emerging economies since the early 1990s. Before the financial crisis, spreads are 10 times more volatile in emerging economies than in advanced economies. Since 2008, the behavior of spreads has converged across country groups, largely because it has adjusted in advanced economies. We also provide evidence on the transmission of spread shocks and find it similar across sample periods and country groups. Spread shocks have become a more important source of output fluctuations in advanced economies after 2008.
    Keywords: Average treatment effect; Business cycle; Country risk; Country spreads; financial crisis; Interest-rate shocks; Spread shocks
    JEL: E32 F41 G15
    Date: 2020–02
  10. By: Benigno, Gianluca; Fornaro, Luca; Wolf, Martin
    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: Bretton Woods II; Capital Flows; export-led growth; global productivity growth; International financial integration; low global interest rates; U.S. productivity growth slowdown
    JEL: E44 F21 F41 F43 F62 O24 O31
    Date: 2020–02

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