nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒09‒28
thirteen papers chosen by
Martin Berka
University of Auckland

  1. The Baker Hypothesis By Anusha Chari; Peter Blair Henry; Hector Reyes
  2. When is Debt Odious? A Theory of Repression and Growth Traps By Viral V. Acharya; Raghuram G. Rajan; Jack B. Shim
  3. Winners and Losers from Sovereign Debt Inflows By Fernando Broner; Alberto Martin; Lorenzo Pandolfi; Tomas Williams
  4. Spillovers to exchange rates from monetary and macroeconomic communications events By Enzo Rossi; Vincent Wolff
  5. The COVID19-Pandemic in the EU: Macroeconomic Transmission and Economic Policy Response By Philipp Pfeiffer; Werner Roeger; Jan in ’t Veld
  6. A Global Economy Version of QUEST: Simulation Properties By Matthias Burgert; Werner Roeger; Janos Varga; Jan in 't Veld; Lukas Vogel
  7. Domestic versus foreign drivers of trade (im)balances: How robust is evidence from estimated DSGE models? By Cardani, Roberta; Hohberger, Stefan; Pfeiffer, Philipp; Vogel, Lukas
  8. Manufacturing Risk-free Government Debt By Zhengyang Jiang; Hanno Lustig; Stijn Van Nieuwerburgh; Mindy Z. Xiaolan
  9. Government debt in times of low interest rates: the case of Europe By Clemens Fuest; Daniel Gros
  10. Germany and China Have Savings Gluts, the USA Is a Sump: So What? By Lance Taylor
  11. Shale Shocked: Cash Windfalls and Household Debt Repayment By J. Anthony Cookson; Erik P. Gilje; Rawley Z. Heimer
  12. Asymmetric Effects of Exchange Rate Changes on Exports: A Sectoral Nonlinear Cointegration Analysis for Turkey By Bilgin, Cevat
  13. Common and country-specific uncertainty fluctuations in oil-producing countries : Measures, macroeconomic effects and policy challenges By Refk Selmi; Jamal Bouoiyour; Shawkat Hammoudeh

  1. By: Anusha Chari; Peter Blair Henry; Hector Reyes
    Abstract: In 1985, James A. Baker III's “Program for Sustained Growth” proposed a set of economic policy reforms including, inflation stabilization, trade liberalization, greater openness to foreign investment, and privatization, that he believed would lead to faster growth in countries then known as the Third World, but now categorized as emerging and developing economies (EMDEs). A country-specific, time-series assessment of the reform process reveals three clear facts. First, in the 10-year-period after stabilizing high inflation, the average growth rate of real GDP in EMDEs is 2.2 percentage points higher than in the prior ten-year period. Second, the corresponding growth increase for trade liberalization episodes is 2.66 percentage points. Third, in the decade after opening their capital markets to foreign equity investment, the spread between EMDEs average cost of equity capital and that of the US declines by 240 basis points. The impact of privatization is less straightforward to assess, but taken together, the three central facts of reform provide empirical support for the Baker Hypothesis and suggest a simple neoclassical interpretation of the unprecedented increase in growth that has taken place in EMDEs since 1995.
    JEL: E13 E44 F21 F43 F6 F63 O1 O38 O47
    Date: 2020–08
  2. By: Viral V. Acharya (NYU - Stern School of Business, CEPR and NBER); Raghuram G. Rajan (University of Chicago - Booth School of Business and NBER); Jack B. Shim (NYU - Stern School of Business)
    Abstract: How is a developing country affected by its governmentÕs ability to borrow in international markets? We examine the dynamics of a countryÕs growth, consumption, and sovereign debt, assuming that the governmentÕs objective is to maximize short-term, typically wasteful, expenditures. Sovereign debt can extend the governmentÕs effective horizon; the governmentÕs ability to borrow hinges on its convincing investors they will be repaid, which gives it a stake in the future. The lengthening of the governmentÕs effective horizon can incentivize it to adopt policies that result in higher steady-state household consumption than if it could not borrow. However, access to borrowing does not always improve government behavior. In a developing country that saves little, the government may engage in repressive policies to enhance its debt capacity, which only ensures that successor governments repress as well. This leads to a Ògrowth trapÓ where household steady-state consumption is lower than if the government had no access to debt. We argue that such a model can explain the well-known negative correlation between a developing economyÕs reliance on external financing and its economic growth. We also analyze the effects of instruments such as debt relief, a debt ceiling, and fiscal transfers in helping a developing economy emerge out of a growth trap, even when governed by a myopic, possibly rapacious, government.
    Keywords: Sovereign debt, government myopia, financial repression, allocation puzzle, debt ceiling
    JEL: F3 G28 H2 H3 H6
    Date: 2020
  3. By: Fernando Broner; Alberto Martin; Lorenzo Pandolfi; Tomas Williams
    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 that 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 stock market effects on domestic firms. Firms operating in tradable industries experience lower abnormal returns than firms in non-tradable industries. In addition, financial, government-related, and firms that rely more on external financing experience relatively higher abnormal returns. The effect on financial and government-related firms is stronger in countries that display larger reductions in government bond yields. The effect on tradable firms is stronger in countries where the domestic currency appreciates more. We provide a stylized model that rationalizes these results. Our findings shed novel light on the channels through which sovereign debt inflows affect firms in emerging economies.
    JEL: F3 F31 F32 F34 G15 G23
    Date: 2020–09
  4. By: Enzo Rossi; Vincent Wolff
    Abstract: We study the tightness of the link between U.S. monetary and macroeconomic communication events and the exchange rate movements against the USD of four major currencies - the euro, the Swiss franc, the Brazilian real and the Mexican peso - since the global financial crisis (GFC). We find three main results. Approximately 20 percent of the U.S. communications events were associated with statistically significant exchange rate effects. Unconventional and conventional monetary policy announcements had equal impacts. The reactions of the advanced countries' currencies were more in line with each another than with those of the emerging markets' currencies.
    Keywords: Central bank communication, macroeconomic news, exchange rates, event study
    JEL: C22 E58 F31 G14
    Date: 2020
  5. By: Philipp Pfeiffer; Werner Roeger; Jan in ’t Veld
    Abstract: This paper uses a macroeconomic model to analyse the transmission of the COVID19-pandemic and its associated lockdown and quantify the stabilising effects of the economic policy response. Our simulations identify firm liquidity problems as crucial for shock propagation and amplification. We then quantify the effects of short-term work allowances and liquidity guarantees - central policy strategies in the European Union. The measures reduce the output loss of COVID19 and its associated lockdown by about one fourth. However, they cannot prevent a sharp but temporary decline in production.
    JEL: E32 E6 F45 J08
    Date: 2020–07
  6. By: Matthias Burgert; Werner Roeger; Janos Varga; Jan in 't Veld; Lukas Vogel
    Abstract: This paper presents the structure and simulation properties of a core version of QUEST, an open-economy New Keynesian DSGE model developed and maintained by the European Commission. The multi-region model version with tradable goods, non-tradable goods and housing includes the euro area (EA), the nonEA EU plus the UK, the United States, Japan, Emerging Asia, and the rest of the world. The paper presents simulation results for a series of goods, factor, financial market, and policy shocks to illustrate how the structure of the model and its theoretical underpinnings shape the transmission of shocks to real and financial variables of the domestic economy and international spillover. In particular, the paper shows impulse responses for monetary policy, consumption, risk premia, productivity, credit, government spending, unconventional monetary policy and tariff shocks, and characterises their impact on real GDP, domestic demand components, trade, external balances, wages, employment, price levels, relative prices, interest rates, and public finances. While the scenarios are illustrative, they reflect important elements of the Global recession and the EA crisis (global risk shocks, private sector demand shocks and deleveraging) and of policy responses (fiscal policy, unconventional monetary policy) and challenges (protectionism) in recent years. In view of the macroeconomic conditions during this period, the paper shows simulations for an environment in which the zero lower bound on monetary policy is binding in addition to simulations under standard monetary policy.
    JEL: E37 E62 F47
    Date: 2020–06
  7. By: Cardani, Roberta; Hohberger, Stefan; Pfeiffer, Philipp; Vogel, Lukas
    Abstract: Estimated DSGE models tend to ascribe a significant and often predominant part of a country's trade balance (TB) dynamics to domestic drivers ("shocks"), suggesting foreign factors to be only of secondary importance. This paper revisits the result based on more agnostic approaches to shock transmission and using "agnostic structural disturbances". We estimate multi-region models for Germany and Spain as countries with very distinct TB patterns since 1999. Results suggest that domestic drivers remain dominant when theory-based restrictions on shock transmission are relaxed, although the transmission of foreign shocks is strengthened.
    Keywords: Agnostic structural disturbances, open economy DSGE model, trade balance, Germany, Spain
    JEL: F30 F32 F41 F45
    Date: 2020–03–02
  8. By: Zhengyang Jiang; Hanno Lustig; Stijn Van Nieuwerburgh; Mindy Z. Xiaolan
    Abstract: Governments face a trade-off between insuring bondholders and taxpayers. If the government decides to fully insure bondholders by manufacturing risk-free debt, then it cannot insure taxpayers against permanent macro-economic shocks over long horizons. Instead, taxpayers will pay more in taxes in bad times. Conversely, if the government fully insures taxpayers against adverse macro shocks, then the debt becomes at least as risky as un-levered equity. Only when government debt earns convenience yields, may governments be able to insure both bondholders and taxpayers, and then only if the convenience yields are sufficiently counter-cyclical.
    JEL: F34 G12 H62 H63
    Date: 2020–09
  9. By: Clemens Fuest; Daniel Gros
    Abstract: In this paper we discuss to what extent the declining difference between interest rates and growth rates (r-g) pointed out recently by Olivier Blanchard (2019) for the case of the US also characterizes the economic situation in Europe. We show that r-g has been positive on average but declining over the last decades in Europe as well. But r-g differs across considerably across European countries, and a continuation of current fiscal policies even under existing conditions would increase the debt ratios further in some countries. We conclude that the current low levels of r-g should be used to make progress in fiscal consolidation in countries with high debt levels. At the same time it would be desirable to benefit from the currently low interest rates to boost one time investment projects.
    Date: 2019
  10. By: Lance Taylor (New School for Social Research)
    Abstract: A `global saving glut` was invented by Ben Bernanke in 2005 as a label for positive net lending (imports exceeding exports) to the American economy by the rest of the world. This trading situation had already emerged around 1980, and led to the Plaza Accord in 1985. One common explanation is based on the Mundell-Fleming IS/LM/BP model. But this model cannot be valid, since the `BP` equation is not independent of `IS`. Other champions of this saving glut hypothesis rely on loanable funds theory, which is institutionally inadequate. More plausible analyses of the persistent trade imbalance can be derived from a two-country IS/LM set-up devised by Wynne Godley, a Kaleckian description of the political economy of East Asia and the United States, and dissection of the terms of trade due to W. Arthur Lewis and Luigi Pasinetti.
    Keywords: Saving glut, net lending, IS/LM/BP, Mundell-Fleming, productivity growth, terms of trade. China, Japan
    JEL: E12 E16 F32 F41
    Date: 2020–08–05
  11. By: J. Anthony Cookson; Erik P. Gilje; Rawley Z. Heimer
    Abstract: How do persistent cash flow shocks affect debt repayment across the distribution of households? Using individual data on natural gas shale royalty payments matched with credit bureau data for 215,639 consumers, we estimate that individuals repay 33 cents of debt per dollar of windfall, and that initially-subprime individuals repay approximately 5 times more debt than initially-prime individuals do. This difference in debt repayment is driven by changes to revolving debt balances. Finally, we show that debt repayment precedes durable goods consumption, particularly for households who were initially financially constrained. These results shed new light on how deleveraging affects household consumption.
    Date: 2020–09
  12. By: Bilgin, Cevat
    Abstract: This paper examines the effects of the real exchange rate changes on the selected sectoral exports of Turkey’s manufacturing industry in the context of nonlinear auto-regressive distributed lag model (NARDL). NARDL method includes short-run and long-run coefficient estimates and embraces the asymmetric effects. The previous studies generally used the linear models on the aggregated data and they offered ambiguous results. The latest studies have preferred to use the method of NARDL on the bilateral trade balance data. Instead of using bilateral data, this paper considers the data of sectoral exports, specifically the exports of the selected Turkey’s manufacturing sectors. The estimated NARDL models supply the empirical information about the asymmetric effects of the real exchange rate on the sectoral exports. Results from the model for each sector provide the evidence indicating that the depreciation and appreciation of the domestic currency have asymmetric significant effects on the sectoral exports.
    Keywords: Real exchange rate, Sectoral Export, Nonlinear Cointegration, Asymmetric Effects
    JEL: C13 C51 C52 F14 F31 F41
    Date: 2020
  13. By: Refk Selmi (ESC Pau); Jamal Bouoiyour (CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour); Shawkat Hammoudeh (Bennett S. LeBow College of Business - Department of Economics and International Business - Drexel University)
    Abstract: In the wake of recent political developments around the world, the prospects of future oil supplies have become doubtful and the uncertainty has come to play a non-negligible role in determining the dynamics of major macroeconomic variables. This study carries out a factor model with time-varying loadings to decompose the variance of a set of important macroeconomic and financial series for the top ten oil-producing countries into contributions from country-specific uncertainty and common uncertainty. The relative importance of the uncertainty estimates in explaining the volatility of production, investment, total exports, exchange rate and stock prices seems to differ over time, with evidence of alternating periods of high and low persistent uncertainties. The global uncertainty plays the primary role for output growth, investment, exports and stock prices in all countries. The globalization and trade openness contribute in amplifying the international transmission of volatility, explaining therefore the increasing importance of the global uncertainty factor.
    Keywords: Common uncertainty,country-specific uncertainty,top ten oil-producing countries,dynamic factor model
    Date: 2020

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