nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒09‒21
ten papers chosen by
Martin Berka
University of Auckland

  1. China’s Overseas Lending By Horn, Sebastian; Reinhart, Carmen M.; Trebesch, Christoph
  2. Sovereign Bonds since Waterloo By Meyer, Josefin; Reinhart, Carmen M.; Trebesch, Christoph
  3. Coping with Disasters: Two Centuries of International Official Lending By Horn, Sebastian; Reinhart, Carmen M.; Trebesch, Christoph
  4. Global Business and Financial Cycles: A Tale of Two Capital Account Regimes By Julien Acalin; Alessandro Rebucci
  5. Country default in a monetary union By Lovleen Kushwah
  6. Exchange Rate Predictability, Risk Premiums, and Predictive System By Yuhyeon Bak; Cheolbeom Park
  7. Monetary rules in an open economy with distortionary subsidies and inefficient shocks: A DSGE approach for Bolivia By Jemio Hurtado, Valeria
  8. International Evidence on Shock-Dependent Exchange Rate Pass-Through By Kristin Forbes; Ida Hjortsoe; Tsvetelina Nenova
  9. Empirical test of the Balassa-Samuelson effect in selected African countries By Eita, Joel Hinaunye; Khumalo, Zitsile Zamantungwa; Choga, Ireen
  10. Real exchange rate movements and export growth: Nigeria, 1960—1990 By Oluremi Ogun

  1. By: Horn, Sebastian; Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: Compared with China's pre-eminent status in world trade, its role in global finance is poorly understood. This paper studies the size, characteristics, and determinants of China's capital exports building a new database of 5000 loans and grants to 152 countries, 1949-2017. We find that 50% of China's lending to developing countries is not reported to the IMF or World Bank. These "hidden debts" distort policy surveillance, risk pricing, and debt sustainability analyses. Since China's overseas lending is almost entirely official (state-controlled), the standard "push" and "pull" drivers of private cross-border flows do not apply in the same way.
    Keywords: China,trade finance,external debt,international capital flows,official lending,hidden debts,sovereign risk,Belt and Road initiative
    JEL: F21 F34 F42 F6 G15 H63 N25
    Date: 2020
  2. By: Meyer, Josefin; Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: This paper studies external sovereign bonds as an asset class. We compile a new database of 220,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns averaged 7% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. The observed returns are hard to reconcile with canonical theoretical models and with the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median haircut is below 50%.
    Keywords: sovereign debt,default,risk premiums,investor returns,interest rates,portfolio,yields,coupons,recovery
    JEL: F30 F34 G12 G15 N10 N20
    Date: 2019
  3. By: Horn, Sebastian; Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: Official (government-to-government) lending is much larger than commonly known, often surpassing total private cross-border capital flows, especially during disasters such as wars, financial crises and natural catastrophes. We assemble the first comprehensive long-run dataset of official international lending, covering 230,000 loans, grants and guarantees extended by governments, central banks, and multilateral institutions in the period 1790-2015. Historically, wars have been the main catalyst of government-to-government transfers. The scale of official credits granted in and around WW1 and WW2 was particularly large, easily surpassing the scale of total international bailout lending after the 2008 crash. During peacetime, development finance and financial crises are the main drivers of official crossborder finance, with official flows often stepping in when private flows retrench. In line with the predictions of recent theoretical contributions, we find that official lending increases with the degree of economic integration. In crises and disasters, governments help those countries to which they have greater trade and banking exposure, hoping to reduce the collateral damage to their own economies. Since the 2000s, official finance has made a sharp comeback, largely due to the rise of China as an international creditor and the return of central bank cross-border lending in times of stress, this time in the form of swap lines.
    Keywords: International capital flows,disaster response,global financial safety net,bail-outs
    JEL: E42 F33 F34 F35 F36 G01 G20 N1 N2
    Date: 2020
  4. By: Julien Acalin; Alessandro Rebucci
    Abstract: Using a new equity price-based measure of the global financial cycle, this paper evaluates the relative importance of global financial shocks for quarterly equity returns and output growths in a large sample of advanced and emerging economies, as well as in South Korea and China--two countries on different sides of the trilemma triangle of international finance. We document that global financial shocks in both China and South Korea explain a substantial share of equity return variability (20 and 50 percent of the total variance, respectively), but a much smaller portion of real output fluctuations (less than 10 percent in Korea and negligible in the case of China). We also find that the combination of a closer capital account and a more rigid exchange rate regime, as in China, is associated with some costs in terms of diversification opportunities quantified by very large exposures to domestic financial and real shocks, dwarfing the contribution of any other shock in the model. More surprisingly, the combination of a relatively open capital account and a flexible exchange rate, as in South Korea, not only is associated with higher exposure to the global financial cycle than in China but also with a significant incidence of domestic financial shocks on output fluctuations.
    JEL: C38 E42 F44 G15
    Date: 2020–08
  5. By: Lovleen Kushwah
    Abstract: We develop a simple model of borrowing and lending within the monetary union. We characterize the default decision of the borrowing country and explore the impact that the monetary union has on the amount of borrowing, the rate of interest and the default probability. The key assumptions of the modelling strategy are that in the monetary union, the lender is risk averse with monopoly power rather than risk neutral with perfect competition. We find that the borrowing member country of the monetary union borrows more at cheaper cost vis-`a-vis a standalone borrowing country. Further, we find that forming a monetary union with high initial income disparity between the member countries leads to more and cheaper borrowing and higher default probabilities.
    JEL: F45 F41 F34 F33 E43
    Date: 2020–09
  6. By: Yuhyeon Bak (Department of Economics, Korea University, 145 Anamro, Seongbuk-gu, Seoul, Korea 02841); Cheolbeom Park (Department of Economics, Korea University, 145 Anamro, Seongbukgu, Seoul, Korea 02841)
    Abstract: Uncovered interest rate parity is known to perform poorly in forecasting exchange rate movements, especially in the short run. One possible reason for this failure is the existence of unobservable risk premium. We estimate the unobservable risk premium with a predictive system using the implied volatility of at-the-money currency options as an imperfect predictor. We find that expected exchange rate changes, constructed from forward-spot differentials and estimated risk premiums, track actual exchange rate changes more closely than do the fitted values of the Fama regression. When we add the estimated risk premium from the predictive system in the Fama regression, the UIP puzzle becomes weakened. An out-of-sample analysis reveals that adding the estimated risk premium greatly improves the short-run predictability of exchange rates.
    Keywords: exchange rate, Bayesian approach, predictive system, risk premium
    JEL: F31 F47
    Date: 2020
  7. By: Jemio Hurtado, Valeria
    Abstract: Through an estimated and calibrated DSGE model with imperfect competition and nominal rigidities, this work aims to assess the dynamic effects of exogenous perturbations in a small open economy to provide a prescription of a simple monetary policy rule associated with the minimal welfare losses in the case of Bolivia. Following Gali and Monacelli (2005) and De Paoli (2009), I display the baseline model in a canonical representation. Yet, unlike them, I consider the presence of efficient and inefficient perturbations, namely government spending, productivity, foreign demand, and cost-push shocks, to analyze its effects in terms of observable variables but also on the relevant output gap. Moreover, considering the significance of raw materials as a proportion of the Bolivian exports, I extend the model by taking into account a distortionary subsidy on consumption financed by the positive profits of the commodity sector, Further, in the style of Gali and Monacelli (2005), I compare the welfare implications under two scenarios: A monetary rule focus on maintain a nominal exchange rate peg (fixed) regime and a Taylor rule. The main results reveal that the latter outperforms the former when the full set of shocks occurs simultaneously, showing the importance of inflation targeting. Yet, by focusing only on inefficient exogenous perturbations, and taking into account a pegged regime and a simple Taylor rule based on consumer and producer price inflation, the ranking of monetary policy aligns in the first place an exchange rate peg. This scenario shows the potential success of alternative simple monetary rules under these circumstances.
    Keywords: Macroeconomics; Monetary Policy; Business Cycles; Bayessian Estimation
    JEL: C11 C13 C15 E0 E12 E32 E52 E58 F41 F44
    Date: 2020–07–14
  8. By: Kristin Forbes; Ida Hjortsoe; Tsvetelina Nenova
    Abstract: We analyse the economic conditions (the “shocks”) behind currency movements and show how that analysis can help address a range of questions, focusing on exchange rate pass-through to prices. We build on a methodology previously developed for the United Kingdom and adapt this framework so that it can be applied to a diverse sample of countries using widely available data. The paper provides three examples of how this enriched methodology can be used to provide insights on pass-through and other questions. First, it shows that exchange rate movements caused by monetary policy shocks consistently correspond to significantly higher pass-through than those caused by demand shocks in a cross-section of countries, confirming earlier results for the UK. Second, it shows that the underlying shocks (especially monetary policy shocks) are particularly important for understanding the time-series dimension of pass-through, while the standard structural variables highlighted in previous literature are most important for the cross-section dimension. Finally, the paper explores how the methodology can be used to shed light on the effects of monetary policy and the debate on "currency wars": it shows that the role of monetary policy shocks in driving the exchange rate has increased moderately since the global financial crisis in advanced economies.
    JEL: E31 E37 E52 F47
    Date: 2020–08
  9. By: Eita, Joel Hinaunye; Khumalo, Zitsile Zamantungwa; Choga, Ireen
    Abstract: The purpose of this study investigates the validity of the Balassa-Samuelson effect in selected African countries. The kernel of the Balassa-Samuelson (BS) effect is the relationship between productivity and real exchange rate. The study therefore, estimates the equilibrium real exchange with total factor productivity as the main explanatory variable. The results revealed that Balassa-Samuelson effect holds in the selected African countries. The results show a positive relationship between real exchange rate and productivity. An increase in total factor productivity causes real exchange rate appreciation. An improvement in productivity can cause countries to experience an increase in prices of their products relative to trading partners. The study recommends that the selected African countries should pursue policies that maintain competitive real exchange rate.
    Keywords: Real exchange rate, productivity, Balassa-Samuelson effect
    JEL: C33 F00 F30 F39
    Date: 2020–06–15
  10. By: Oluremi Ogun (UNiversity of Ibadan)
    Abstract: This report analyses the effects of real exchange rate (RER) movements (defined in terms of misalignment and volatility) on the growth of non-oil exports in Nigeria over the period 1960—1990. RER is defined as the relative price of tradeables to non-tradeables, and RER misalignments are derived using a model based approach and the purchasing power parity (PPP) approach. Under both frameworks, RER volatility is defined in terms of the coefficient of variations of the RER. The results show that irrespective of the misalignment generating framework adopted, both RER misalignment and volatility adversely affected the country's non-oil export growth. However, the results under the model based approach appear to be relatively more credible.

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