nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒10‒26
seven papers chosen by
Martin Berka
University of Auckland

  1. Monetary spillovers and real exchange rate misalignments in emerging markets By Krittika Banerjee; Ashima Goyal
  2. External imbalances from a GVAR perspective By Mariam Camarero Author-X-Name-Mariam; Josep Lluís Carrión-i-Silvestre; Cecilio Tamarit
  3. A Counterfactual Economic Analysis of COVID-19 Using a Threshold Augmented Multi-Country Model By Alexander Chudik; Kamiar Mohaddes; M. Hashem Pesaran; Mehdi Raissi; Alessandro Rebucci
  4. Dominant Currencies: How Firms Choose Currency Invoicing and Why it Matters By Mary Amiti; Oleg Itskhoki; Jozef Konings
  5. Cross-Border Regulatory Spillovers and Macroprudential Policy Coordination By Pierre-Richard Agénor; Timothy P. Jackson; Luiz Pereira da Silva
  6. The Micro Anatomy of Macro Consumption Adjustments By Rafael Guntin; Pablo Ottonello; Diego Perez
  7. Optimal Foreign Reserves and Central Bank Policy Under Financial Stress By Luis Felipe Céspedes; Roberto Chang

  1. By: Krittika Banerjee (Indira Gandhi Institute of Development Research); Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: After the adoption of unconventional monetary policies (UMP) in advanced economies (AEs) there weremany studies of monetary spillovers to asset prices in emerging market economies (EMEs) but the extentof contribution of EMEs and AEs respectively in real exchange rate (RER) misalignments has not been addressed. Using fixed effects, pooled mean group and common correlated effects we address the gap ina cross-country panel set-up with country specific controls. Multi-way clustering is used to ensure robust statistical inferences. Robust evidence is found for significant monetary spillovers over 1998-2017 in the form of RER overvaluation of EMEs against AEs especially through the portfolio rebalancing channel. EME RER against US saw significantly more overvaluation in UMP years indicating greater role of US in monetary spillovers. However, in the long run monetary neutrality holds. EMEs did pursue mercantilist and precautionary policies that undervalued their RERs. Precautionary undervaluation is more evident with bilateral EME US RER. Export diversification reduces EME mercantilist motives against US. That AE monetary policy significantly appreciates EMERER should be kept in mind for future policy cooperation between EMEs and AEs.
    Keywords: Unconventional monetary policies, monetary spillovers, mercantilist, precautionary, pooled mean group, common correlated effects, cluster robust
    JEL: E4 E5 F3 F42
    Date: 2020–09
  2. By: Mariam Camarero Author-X-Name-Mariam (Department of Economics, University Jaume I and INTECO); Josep Lluís Carrión-i-Silvestre (Department of Econometrics, Statistics and Spanish Economy, University of Barcelona); Cecilio Tamarit (Department of Applied Economics II, University of Valencia and INTECO)
    Abstract: In this paper we study the drivers governing external disequilibria through a Global VAR (GVAR) analysis applied to a group of 24 countries during the period 1972-2017. The GVAR methodology is particularly well suited for our research question. First, it permits to measure the effects of both, domestic and foreign country-specific shocks. Second, it allows to analyze not only the long-run relationships, but also the dynamics through generalized impulse-response functions. Third, it enables to test many hypotheses from a macroeconomic perspective and the existence of spillovers. Our results show evidence of international financial integration in terms of the fulfillment of the real interest rate parity. Concerning the Twin Deficit hypothesis, we find no linkages between domestic current account and fiscal fiscal defficit. In addition, we show how German fiscal policy has relevant spillover effects on other European countries (such as France, Spain and the Netherlands) as well as on the US and India. Finally, the global shocks have long-lasting effects in most of the countries analyzed, especially through the real oil prices. These results provide some clues about how to implement a more symmetrical external adjustment, especially inside the euro area.
    Keywords: Current account, net foreign assets, twin deficit, panel data, Global VAR
    JEL: F32 F41 C23
    Date: 2020–09
  3. By: Alexander Chudik; Kamiar Mohaddes; M. Hashem Pesaran; Mehdi Raissi; Alessandro Rebucci
    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 is 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: 2020–10–02
  4. By: Mary Amiti; Oleg Itskhoki; Jozef Konings
    Abstract: Using new data on currency invoicing for Belgian firms, we analyze how firms make their currency choice, for both exports and imports, and the implications of this choice for exchange rate pass-through into prices and quantities. We derive our estimating equations from a theoretical framework featuring variable markups, international input sourcing, and staggered price setting with endogenous currency choice. Our structural specification provides a new test of the allocative consequences of nominal rigidities, by estimating the treatment effect of foreign-currency price stickiness on the dynamic response of prices and quantities, controlling for the endogeneity of the firm's currency choice. We show that flexible-price determinants of exchange rate pass-through are also the key firm characteristics that determine currency choice. In particular, small non-importing firms tend to price their exports in euros (producer currency) and exhibit complete exchange-rate pass-through into destination prices at all horizons. In contrast, large import-intensive firms tend to denominate their exports in foreign currencies, especially in the US dollar, exhibiting a lower pass-through of the euro-destination exchange rate and a pronounced sensitivity to the dollar-destination exchange rate. The effects of foreign-currency price stickiness are still significant beyond the one-year horizon, but gradually dissipate in the long run.
    JEL: E31 F31 F41
    Date: 2020–10
  5. By: Pierre-Richard Agénor; Timothy P. Jackson; Luiz Pereira da Silva
    Abstract: A two-region, core-periphery model with financial frictions, imperfect financial integration, and cross-border banking is used to assess the gains from international macroprudential policy coordination. A core global bank lends to its affiliates in the periphery and banks are subject to a risk-sensitive capital regulatory regime. An expansionary monetary policy in the core is used to illustrate how lending costs, countercyclical capital buffers (which respond to real credit growth), and regulatory arbitrage affect cross-border bank capital flows, under both economies and diseconomies of scope in domestic and foreign lending by the global bank. Welfare gains are calculated for three policy regimes: independent policies (Nash), coordination, and reciprocity–where capital ratios set in the core region are also imposed in the periphery. Coordination generates significant gains at the level of the world economy, and these gains increase with the degree of international financial integration. However, their distribution tends to be highly asymmetric. Under certain circumstances, reciprocity may generate higher gains than independent policies for the world economy, despite the reciprocating jurisdiction (the periphery) being invariably worse off.
    JEL: E58 F42 F62
    Date: 2020–09
  6. By: Rafael Guntin; Pablo Ottonello; Diego Perez
    Abstract: We study crises characterized by large adjustments of aggregate consumption through their microlevel patterns. We show that leading theories designed to explain aggregate consumption dynamics differ markedly in their cross-sectional predictions. While theories based on financial frictions predict that rich households with liquid assets should be able to smooth consumption during bad times, neoclassical theories predict that these agents would optimally adjust their consumption if crises severely affect their permanent income. Using microlevel data on several episodes of large aggregate-consumption adjustment, we document that rich households significantly adjust consumption relative to their income, consistent with the permanent-income hypothesis of consumption during crises. We discuss our findings' implications for the effectiveness of stabilization policies that target consumption during crises.
    JEL: E21 E60 F41 F44
    Date: 2020–10
  7. By: Luis Felipe Céspedes; Roberto Chang
    Abstract: We study the interaction between optimal foreign reserves accumulation and central bank international liquidity provision in a small open economy under financial stress. Firms and households finance investment and consumption by borrowing from domestic financial intermediaries (banks), which in turn borrow from abroad. Binding financial constraints can cause the domestic rate of interest to rise above the world rate and the real exchange rate to depreciate, leading to inefficiently low investment and consumption. A role then emerges for a central bank that accumulates reserves in order to provide liquidity if financial frictions bind. The optimal level of international reserves in this context depends, among other variables, on the term premium, the depth of financial markets, ex ante financial uncertainty and the precise way the central bank intervenes. The model is consistent with both the increase in international reserves observed during the period 2004-2008 and with policy intervention after the Lehman bankruptcy.
    JEL: E5 F3 F4
    Date: 2020–10

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