nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒10‒12
six papers chosen by
Martin Berka
University of Auckland

  1. Time-varying Effect of Monetary Policy on Capital Flows in Korea By Joonyoung Hur; Kyunghun Kim
  2. The Currency Composition of International Portfolio Assets By Vahagn Galstyan; Caroline Mehigan; Rogelio V. Mercado, Jr.
  3. A Counterfactual Economic Analysis of Covid-19 Using a Threshold Augmented Multi-Country Model By Chudik, A.; Mohaddes, K.; Pesaran, M. H.; Raissi, M.; Rebucci, A.
  4. Investment Home Bias in the European Union By António Martins
  5. 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
  6. Covid-19 shocking global value chains By Eppinger, Peter S.; Felbermayr, Gabriel; Krebs, Oliver; Kukharskyy, Bohdan

  1. By: Joonyoung Hur (Department of Economics, Sogang University, Seoul); Kyunghun Kim (School of Economics, Hongik University)
    Abstract: This paper examines the effect of domestic monetary policy on capital flows after controlling for the effect of conventional push factors (global factors). We conduct a time-varying coefficient vector autoregressive (TVC-VAR) model analysis using monthly data (January 2010−July 2019) from Korea, a representative small open economy with monetary autonomy. Our empirical results show that an expansionary monetary policy shock has a short-run (1- and 3-month) negative impact on gross inflows to the equity market, which is the main driver of gross capital inflows to Korea. This negative effect increases throughout the sample period. Monetary policy easing is also associated with a decrease in outflows of equity, representing a reversal of Korean residents’ foreign equity investment as the domestic policy rate decreases. This effect dampens the negative impact on gross capital inflows, which leads to mild responses of net capital inflows in the short run. We also find a clear relationship between the level of the policy rate and its impact on gross capital inflows. The lower the policy rate, the greater the negative impact of the expansionary monetary policy shock on gross capital inflows. This time-varying effect reflects difficulties that many emerging market economies including Korea face in setting monetary policy when policy rates are low.
    Keywords: Monetary policy, Capital flows, Push factors, Time-varying effect
    JEL: F3 F4 E5
    Date: 2020
  2. By: Vahagn Galstyan (Trinity College Dublin); Caroline Mehigan (Organisation for Economic Co-Operation and Development); Rogelio V. Mercado, Jr. (The SEACEN Centre)
    Abstract: In this paper, we empirically assess the importance of gravity-type variables and measures of macroeconomic and financial volatilities in explaining portfolio holdings denominated across the main global currencies: US dollar (USD), euro (EUR), Pound sterling (GBP), Japanese yen (JPY) and Swiss franc (CHF). Our findings underscore the importance of trade ties and membership of the euro area. We also find that international positions co-move with the level of macroeconomic and financial uncertainty. Importantly, we identify heterogeneous patterns at a currency level.
    Keywords: Currency Composition, International Portfolio Assets, Trade, Volatility
    JEL: F31 F36 F41 G15
    Date: 2019–01
  3. By: Chudik, A.; Mohaddes, K.; Pesaran, M. H.; Raissi, M.; Rebucci, A.
    Abstract: This paper develops a threshold-augmented dynamic multi-country model (TG-VAR) to quantify the macroeconomic effects of Covid-19. We show that there exist threshold effects in the relationship between output growth and excess global volatility at individual country levels in a significant majority of advanced economies and in the case of several emerging markets. We then estimate a more general multi-country model augmented with these threshold effects as well as long term interest rates, oil prices, exchange rates and equity returns to perform counterfactual analyses. We distinguish common global factors from trade-related spillovers, and identify the Covid-19 shock using GDP growth forecast revisions of the IMF in 2020Q1. We account for sample uncertainty by bootstrapping the multi-country model estimated over four decades of quarterly observations. Our results show that the Covid-19 pandemic will lead to a significant fall in world output that is most likely long-lasting, with outcomes that are quite heterogenous across countries and regions. While the impact on China and other emerging Asian economies are estimated to be less severe, the United States, the United Kingdom, and several other advanced economies may experience deeper and longer-lasting effects. Non-Asian emerging markets stand out for their vulnerability. We show that no country is immune to the economic fallout of the pandemic because of global interconnections as evidenced by the case of Sweden. We also find that long-term interest rates could fall significantly below their recent lows in core advanced economies, but this does not seem to be the case in emerging markets.
    Keywords: Threshold-augmented Global VAR (TGVAR), international business cycle, Covid-19, global volatility, threshold effects
    JEL: C32 E44 F44
    Date: 2020–09–18
  4. By: António Martins
    Abstract: The creation of the European Single Market (ESM) and the adoption of the Euro elim-inated barriers for capital mobility. This paper analysis the dependency of investment on domestic savings across European Union (EU) economies over three different time frames split by major milestones in the economic history of the union. Using a panel error correction model, I find evidence of low capital mobility before the creation of the ESM and after the crisis of 2008, suggesting that a solvency constraint can bind investment to domestic savings even when barriers for capital mobility are eliminated.The estimates suggest that there is a long-run relationship between the aforementioned aggregates associated with a solvency constraint. However, this constraint does not appear to be binding between 1993 and 2007, matching with an increased spreadin the current account balances between high and low income economies among the EU.Between 2007 and 2020, restrictions on borrowing faced by some EU economies reduced capital mobility, despite the absence of capital controls and exchange rate risk.
    Keywords: Current Account, Savings, Investment, Capital Mobility, Feldstein-Horioka Puzzle
    Date: 2020–07
  5. By: Cardani, Roberta (European Commission – JRC); Hohberger, Stefan (European Commission – JRC); Pfeiffer, Philipp (European Commission); Vogel, Lukas (European Commission)
    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: 2020–07
  6. By: Eppinger, Peter S.; Felbermayr, Gabriel; Krebs, Oliver; Kukharskyy, Bohdan
    Abstract: In early 2020, the disease Covid-19 caused a drastic lockdown of the Chinese economy. We use a quantitative trade model with input-output linkages to gauge the effects of this adverse supply shock in China on the global economy through international trade and global value chains (GVCs). We find moderate welfare losses in most countries outside of China, while a few countries even gain from the shock due to trade diversion. As a key methodological contribution, we quantify the role of GVCs (in contrast to final goods trade) in transmittingthe shock. In a hypothetical world without GVCs, the welfare loss due to the Covid-19 shock in China is reduced by 40% in the median country. In several other countries, the effects aremagnified or reversed for several countries. Had the U.S. unilaterally repatriated GVCs, the country would have incurred a substantial welfare loss while its exposure to the shock would have barely changed.
    Keywords: Covid-19,quantitative trade model,input-output linkages,global value chains,supply chain contagion,shock transmission
    JEL: F11 F12 F14 F17 F62
    Date: 2020

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