nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒11‒02
nine papers chosen by
Martin Berka
University of Auckland

  1. Exports and Invoicing: Evidence from the 2015 Swiss Franc Appreciation By Auer, Raphael; Burstein, Ariel; Erhardt, Katharina; Lein, Sarah
  2. Global Flight-to-Safety Shocks By Ahmed, Rashad
  3. An Analysis of International Shock Transmission: A Multi-level Factor Augmented TVP GVAR Approach By Bahar Sungurtekin Hallam
  4. Foreign Exchange Intervention and Financial Stability By Pierre-Richard Agénor; Timothy P. Jackson; Luiz Pereira da Silva
  5. Macroeconomics Determinants of Exchange Rate Pass-through: New Evidence from the Asia-Pacific Region By Vo, Duc
  6. 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
  7. Is there consumer risk-pooling in the open economy? The evidence reconsidered By Minford, Patrick; Ou, Zhirong; Zhu, Zheyi
  8. Assessing the Scoreboard of the EU Macroeconomic Imbalances Procedure: (Machine) Learning from Decisions By João Amador; Tiago Alves; Francisco Gonçalves
  9. The interaction between macroprudential policy and monetary policy: overview By Bussière, Matthieu; Cao, Jin; de Haan, Jakob; Hills, Robert; Lloyd, Simon; Meunier, Baptiste; Pedrono, Justine; Reinhardt, Dennis; Shina, Sonalika; Sowerbutts, Rhiannon; Styrin, Konstantin

  1. By: Auer, Raphael (University of Basel); Burstein, Ariel (University of Basel); Erhardt, Katharina; Lein, Sarah
    Abstract: The Swiss National Bank's (SNB) elimination of the lower bound on the EUR/CHF exchange rate on January 15 2015 provides a unique setting to study how prices and quantities respond to changes in nominal exchange rates. In this paper, we complement the study of imports in Auer et al. (2020) by looking at how the response of Swiss export prices and export values varies across products according to the currency of invoicing at the border. The rate of pass through (measured in CHF) into export prices was much lower in industries with a higher share of CHF-invoiced export border prices. We show that industries with higher CHF-invoicing shares experienced substantially weaker export growth in the two-year period after January 2015. At short horizons, however, export quantities did not respond across industries as much as prices to the exchange rate shock.
    Keywords: Large exchange rate shocks, exchange rate pass-through, invoicing currency, expenditure switching, price-setting, nominal and real rigidities
    JEL: F11 F31 F41 L11
    Date: 2020–10–20
  2. By: Ahmed, Rashad
    Abstract: I develop a measure of changing tail risk perceptions based on global financial shocks reflecting 'flights-to-safety'. Large flight-to-safety shocks are defined as joint tail realizations of returns across major risky and safe asset classes. Flight-to-safety shocks are substantially distinct from VIX innovations, map to unexpected global events, inform future changes in world prices and interest rates, and reflect both risk sentiment and global demand. Estimating a multi-country structural VAR with country-specific heterogeneity, I show that global flight-to-safety shocks induce a sharp rise in sovereign risk and exchange market pressure, followed by a subsequent drop in economic activity in both emerging markets and the U.S. However, the macroeconomic effects of flight-to-safety shocks are far from uniform across emerging markets, with domestic financial factors moderating the transmission mechanism. Countries realizing larger sovereign risk adjustment or sharper currency depreciation from a flight-to-safety shock are subject to deeper subsequent economic contractions. The impact of flight-to-safety shocks on economic activity is four times larger for emerging markets with substantial presence in U.S. exchange traded funds. By contrast, leaning against the wind by aggressively expending international reserves limits the economic impact of global flight-to-safety shocks, with its effectiveness rising when the exchange rate is successfully stabilized.
    Keywords: Tail Risk, Risk-off, Risk Sentiment, Global Shocks, Contagion, International Spillovers, Sovereign Risk, Monetary Policy, Capital Flows, Emerging Markets
    JEL: E44 F30 F44 F60 G15
    Date: 2020–10–12
  3. By: Bahar Sungurtekin Hallam
    Abstract: We develop and apply a new methodology to study the transmission mechanisms of international macroeconomic and financial shocks in the context of emerging markets. Our approach combines aspects of factor analysis and GVAR models by replacing the cross-unit averages that serve as foreign variables in the GVAR model with macroeconomic and financial factors extracted from potentially unbalanced panels of country-level data. Factors are extracted at the country, region and global levels, with a natural hierarchical structure. Furthermore, we allow for time variation in both the model parameters and shock volatility. Our key empirical findings are as follows. First, there is substantial time-variation in the responses of our chosen emerging economies to foreign financial, interest rate and macroeconomic shocks. Second, in response to tighter global financial conditions, policy rates increase in most of our chosen emerging economies, particularly after the crisis. They appear more concerned with financial stability and capital inflows, given that they increase their short term rates more at the expense of large drops in equity prices and output. Third, financial tightening in other emerging market country groups has a loosening effect on domestic financial conditions. Fourth, as we include a global financial risk factor along with the US monetary policy rate, our results suggest that the contractionary effects of US interest rate shocks are taken over by the global financial risk shock. Lastly, we find some evidence that macroeconomic interdependencies among emerging economies have been increasing while their dependencies on advanced economies have been decreasing over time.
    Keywords: Time-varying parameter GVAR model, Factor analysis, Dual Kalman filter, Transmission channels of external shocks, Monetary policy
    JEL: C30 C32 C38 E44 F41
    Date: 2020
  4. By: Pierre-Richard Agénor; Timothy P. Jackson; Luiz Pereira da Silva
    Abstract: This paper studies the effects of sterilized foreign exchange market intervention in an open-economy model with financial frictions and imperfect capital mobility. The central bank operates a managed float regime and issues sterilization bonds that are imperfect substitutes (as a result of economies of scope) to investment loans in bank portfolios. Sterilized intervention can be expansionary through a bank portfolio effect and may therefore raise financial stability risks. The model is parameterized and used to study the macroeconomic effects of, and policy responses to, capital inflows associated with a transitory shock to world interest rates. The results show that the optimal degree of exchange market intervention is more aggressive when the central bank can choose simultaneously the degree of sterilization; in that sense, the instruments are complements. At the same time, the presence of the bank portfolio effect implies that full sterilization is not optimal. By contrast, when the central bank’s objective function depends on the cost of sterilization, in addition to household welfare, intervention and sterilization are (partial) substitutes–independently of whether exchange rate and financial stability considerations also matter.
    JEL: E32 E58 F41
    Date: 2020–09
  5. By: Vo, Duc
    Abstract: Some recent studies observe an increasing degree of exchange rate pass-through (ERPT) to domestic prices, which has raised questions about the nature of the incompleteness and decline in pass- through. This article reexamines the degree of ERPT to the import, producer, and consumer price indices in Australia, New Zealand, Japan, and Korea in the Asia-Pacific region using up-to-date data, with several important findings. First, we reveal that ERPT to domestic prices follows the distribution chain, in that exchange rate movements alter import prices in the first stage and then producer and consumer prices in the second stage. Second, we offer valid evidence of an increase in ERPT to import prices after the global financial crisis in Japan, Korea, and New Zealand and of a relatively stable ERPT in Australia. Third, the changes in ERPT elasticities are most affected by macroeconomic determinants such as inflation volatility, interest rates, and trade openness, but this varies considerably across the surveyed countries and the three price indices. All our findings make a significant contribution to the empirical literature on ERPT and have policy implications.
    Keywords: Asia-Pacific region, exchange rate pass-through (ERPT), inflation
    JEL: E31 F31 F41
    Date: 2019–01–24
  6. By: Alexander Chudik (Federal Reserve Bank of Dallas); Kamiar Mohaddes (Judge Business School and King’s College, University of Cambridge, UK); M. Hashem Pesaran (University of Southern California, USA and Trinity College, Cambridge, UK); Mehdi Raissi (International Monetary Fund, Washington DC, USA); Alessandro Rebucci (Johns Hopkins University Carey Business School, CEPR and NBER)
    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. NonAsian 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
    Date: 2020–10–20
  7. By: Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School); Zhu, Zheyi (Cardiff Business School)
    Abstract: We revisit the evidence on consumer risk-pooling and uncovered interest parity. Widely used singleequation tests are strongly biased against both. Using the full-model, Indirect Inference test, which is unbiased and has Goldilocks power by Monte Carlo experiments, we …nd that both the risk-pooling hypothesis and its weaker UIP version are generally accepted as part of a full world DSGE model.The fact that the risk-pooling hypothesis, with its implication of strong cross-border consumer linkage,has passed this test with generally the highest p-value, suggests that it deserves serious attention from policy-makers looking for a relevant model to discuss international monetary and other business cycle issues.
    Keywords: Open economy; consumer risk-pooling; UIP; full-model test; Indirect Inference
    JEL: C12 E12 F41
    Date: 2020–10
  8. By: João Amador; Tiago Alves; Francisco Gonçalves
    Abstract: This paper uses machine learning methods to identify the macroeconomic variables that are most relevant for the classification of countries along the categories of the EU Macroeconomic Imbalances Procedure (MIP). The random forest algorithm considers the 14 headline indicators of the MIP scoreboard and the set of past decisions taken by the European Commission when classifying countries along the macroeconomic imbalances categories. The algorithm identifies the current account balance, the net international investment position and the unemployment rate as key variables, mostly to classify countries that need corrective action, notably through economic adjustment programmes.
    JEL: C40 F15
    Date: 2020
  9. By: Bussière, Matthieu (Banque de France); Cao, Jin (Norges Bank); de Haan, Jakob (De Nederlandsche Bank, University of Groningen and CESifo); Hills, Robert (Bank of England); Lloyd, Simon (Bank of England); Meunier, Baptiste (Banque de France); Pedrono, Justine (Banque de France); Reinhardt, Dennis (Bank of England); Shina, Sonalika (Reserve Bank of India); Sowerbutts, Rhiannon (Bank of England); Styrin, Konstantin (Bank of Russia)
    Abstract: This paper presents the main findings of an International Banking Research Network initiative examining the interaction between monetary policy and macroprudential policy in determining international bank lending. We give an overview on the data, empirical specifications and results of the seven papers from the initiative. The papers are from a range of core and smaller advanced economies, and emerging markets. The main findings are as follows. First, there is evidence that macroprudential policy in recipient countries can partly offset the spillover effects of monetary policy conducted in core countries. Meanwhile, domestic macroprudential policy in core countries can also affect the cross‑border transmission of domestic monetary policy via lending abroad, by limiting the increase in lending by less strongly capitalised banks. Second, the findings highlight that studying heterogeneities across banks provides complementary insights to studies using more aggregate data and focusing on average effects. In particular, we find that individual bank characteristics such as bank size or G‑SIB status play a first‑order role in the transmission of these policies. Finally, the impacts differ considerably across prudential policy instruments, which also suggests the importance of more granular analysis.
    Keywords: Cross-border bank lending; financial intermediation; monetary policy; macroprudential policy; policy interactions; spillovers
    JEL: E52 F21 F30 F42 G21
    Date: 2020–10–09

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