nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒10‒05
eight papers chosen by
Martin Berka
University of Auckland

  1. Exchange Rates and Endogenous Productivity By Nils Gornemann; Pablo Guerron-Quintana; Felipe Saffie
  2. Globalization and Pandemics By Pol Antràs; Stephen J. Redding; Esteban Rossi-Hansberg
  3. One Rule Fits All ? Heterogeneous Fiscal Rules for Commodity Exporters When Price Shocks Can Be Persistent: Theory and Evidence By Galego Mendes,Arthur; Pennings,Steven Michael
  4. Infrastructures and the real exchange rate By Florian Morvillier
  5. Nontradable Goods and Fiscal Multipliers By Christian Glocker; Jesus Crespo Cuaresma
  6. The Law of One Food Price By Vo, Long; Clements, Ken; Si, Jiawei
  7. The structural adjustment of the Portuguese economy in the context of the economic reform of the Eurozone By Marta Silva; João Carlos Lopes
  8. Avoiding Sovereign Default Contagion: A Normative Analysis By Sergio De Ferra; Enrico Mallucci

  1. By: Nils Gornemann; Pablo Guerron-Quintana; Felipe Saffie
    Abstract: Real exchange rates (RERs) display sizable uctuations not only over the business cycle, but also at lower frequencies, resulting in large and persistent swings over decades|facts that many business cycle models struggle to match. We propose an international macroeconomics model with endogenous productivity to rationalize these facts. In the model, endogenous growth amplifies stationary uctuations generating persistent productivity differences between countries that trigger low-frequency cycles in the RER. The estimated model effortlessly replicates the empirical spectrum, autocorrelation, and half-life of the RER. In addition, we document that low frequency movements in aggregate trade ows are crucial to discipline the RER cycles. Finally, we validate the model-implied co-movement between relative prices and technology differentials using a panel of cross industry-country data on patent and industry prices.
    Keywords: Real exchange rate; Endogenous growth; RBC
    JEL: F31 F41 F43 F44
    Date: 2020–09–18
  2. By: Pol Antràs; Stephen J. Redding; Esteban Rossi-Hansberg
    Abstract: We develop a model of human interaction to analyze the relationship between globalization and pandemics. Our framework provides joint microfoundations for the gravity equation for international trade and the Susceptible-Infected-Recovered (SIR) model of disease dynamics. We show that there are cross-country epidemiological externalities, such that whether a global pandemic breaks out depends critically on the disease environment in the country with the highest rates of domestic infection. A deepening of global integration can either increase or decrease the range of parameters for which a pandemic occurs, and can generate multiple waves of infection when a single wave would otherwise occur in the closed economy. If agents do not internalize the threat of infection, larger deaths in a more unhealthy country raise its relative wage, thus generating a form of general equilibrium social distancing. Once agents internalize the threat of infection, the more unhealthy country typically experiences a reduction in its relative wage through individual-level social distancing. Incorporating these individual-level responses is central to generating large reductions in the ratio of trade to output and implies that the pandemic has substantial effects on aggregate welfare, through both deaths and reduced gains from trade.
    JEL: F1 F2 F4 F6 I1
    Date: 2020–09
  3. By: Galego Mendes,Arthur; Pennings,Steven Michael
    Abstract: Commodity-exporting developing economies are often characterized as having needlessly procyclical fiscal policy: spending when commodity prices are high and cutting back when prices fall. The standard policy advice is instead to save during price windfalls and maintain spending during price busts. This paper questions this characterization and policy advice. Using a New Keynesian model, it finds that optimal fiscal policy is heterogeneous depending on the commodity exported and exchange rate regime. Optimal fiscal policy is often procyclical in countries with floating exchange rates because many commodity price shocks are highly persistent, and so they should be spent according to the permanent income hypothesis. In contrast, in countries with fixed exchange rates, optimal fiscal policy becomes countercyclical to smooth the business cycle. Empirically, the paper introduces a new measure of fiscal cyclicality, the marginal propensity to spend (MPS) an extra dollar of commodity revenues, and shows that it is moderately procyclical overall but highly heterogeneous across countries depending on their characteristics. Consistent with theory, the MPS is more procyclical in countries with floating exchange rates than those with fixed exchange rates. Moreover, in countries with floating exchange rates, the MPS is higher in countries facing more persistent commodity price shocks.
    Date: 2020–09–15
  4. By: Florian Morvillier
    Abstract: This paper investigates the nonlinear relationship between infrastructures and the Real Effective Exchange Rate (REER). Applying a Panel Smooth Transition Regression (PSTR) model to a sample of 31 countries over the period 1973-2014, we find strong evidence of a nonlinear impact of Electricity Generating Capacity (EGC) and telecommunications on the REER dynamics. When the network is not completed or the stock of infrastructures is low, an increase in EGC and telecommunications depreciates the REER, while the additional depreciation is lower or inexistent once the network is established. Finally, turning to power grid quality, we show that higher electric power losses are associated with a REER depreciation that is particularly marked when the former are high.
    Keywords: Infrastructures, Panel Smooth Transition Regression, Real Exchange Rate
    JEL: F31 F41
    Date: 2020
  5. By: Christian Glocker; Jesus Crespo Cuaresma
    Abstract: We assess the role that nontradable goods play as a determinant of fiscal spending multipliers, making use of a two-sector model. While fiscal multipliers increase with the share of nontradable goods, an inverted U-shaped relationship exists between multiplier size and the import share. Employing an interacted panel VAR model for EU countries, we estimate the effect of the share of nontradable goods on fiscal spending multipliers. Our empirical results provide strong evidence for the predictions of the theoretical model. They imply that the drag of fiscal consolidations is on average smaller in countries with a low share of nontradable goods.
    Keywords: fiscal spending multiplier, nontradable goods, openness, DSGE model, interacted panel VAR model
    JEL: E62 F41 C23
    Date: 2020
  6. By: Vo, Long; Clements, Ken; Si, Jiawei
    Abstract: An efficient market allocates resources to equalise prices of the same good. Are food prices – important to literally everyone in the world, and especially the poor – equalised across countries? In view of the substantial distortions to international trade in agriculture and the large swings of currencies away from long-term equilibrium values, equalisation would seem an unlikely proposition. But the forces of arbitrage – buying low and selling high – could still govern a tendency towards food prices equalisation over the long term. In this paper, we ask, are these forces sufficiently strong to more or less overcome trade barriers and currency volatility, thereby equalising changes in food prices over the longer term? Despite the fall in average tariffs globally after nine rounds of WTO trade negotiations, non-tariff distortions to agricultural trade remain significant. Examples include the long-standing import restrictions of Japan resulting in many food prices substantially above world prices, and Europe’s massive export subsidies under the Common Agricultural Policy. Add to this is the pronounced gyrations of currency values, large transport and distribution costs, trade taxes and other wedges, and it would seem that segmented food markets with different prices in different countries would be the norm, at least in the short term. What of the long-run situation? To investigate the validity of the law of one food price (LOFP), we employ the prices of food and agricultural products in cross-sectional regressions, panel unit root and panel co-integration tests. We also use impulse response functions and simulations of prices within a vector error-correction framework. We find considerable support for LOFP. This result is obtained in three basic ways. First, retail prices from the International Comparisons Program (World Bank, 2013, unpublished) were used in cross-country and cross-commodity regressions for a large number of food items and countries. Second, producer prices over time, countries and products from the Food and Agriculture Organisation (2018) were employed in panel unit-roots tests. Third, a vector error-correction approach was used for wheat prices in Australia and the US to examine in detail the dynamics of the adjustment process of prices and exchange rates. We found that variations in the exchange rate were relatively more important than wheat prices in bringing about adjustments to LOFP. Given the apparently stringent requirements for LOFP to hold, the results are surprising, but they need careful interpretation. We do not claim LOFP holds in the short run, nor that it holds for all commodities, but only as a long-run tendency for the majority of commodities in the sense that departures from parity are short-lived. It takes time for prices to be arbitraged across countries because of three reasons. First, there can be difficulties in collecting reliable market information and for participants to be convinced price divergences are worthwhile acting upon, especially when driven by currency movements (are they likely to reverse direction?). Second, some trade costs are essentially fixed, and so overcoming this hurdle is also likely to be time-consuming (if, for example, local agents have to be engaged to deal with importing-country regulations). Third, food and agricultural prices can have costly nontraded components, and devising innovative ways to deal with these costs (such as bypassing the traditional retail model with on-line sales technologies) can incur significant trial-and-error learning costs, further adding to delays.
    Keywords: Food Consumption/Nutrition/Food Safety
    Date: 2020–09–16
  7. By: Marta Silva; João Carlos Lopes
    Abstract: This paperaims at analyzing the structural changes that occurred in the Portuguese economy after the 2010/2013 sovereign debt crisis, compared with what occurred in Germany and using the current debate surrounding the new reform of the Eurozone as a backdrop. We thus intend to find out whether a peripheral southern economy like Portugal and the Eurozone’s nuclear economy (Germany) have become closer and, if so, what that means in terms of the sustainability of the Eurozone as a set of different economies sharing the same currency. The study will be framed in the varieties of capitalism theory and in the theory of growth regimes.
    Keywords: sovereign debtcrisis, growth regimes, realconvergence, economic structure, varieties of capitalism, Eurozone, Portugal, Germany
    JEL: F45 O11 O47 O52 O57
    Date: 2020–09
  8. By: Sergio De Ferra; Enrico Mallucci
    Abstract: Sovereign debt crises happen in waves, spreading from one country to the other. The euro-area debt crisis of 2011-12 is a good example of that. Stress in the sovereign debt market quickly spread from Greece and Ireland to Portugal, Spain, and Italy.
    Date: 2020–09–21

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