nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒11‒16
nine papers chosen by
Martin Berka
University of Auckland

  1. Unequal Exchange Rate Pass-Through across Income Groups By Hakan Yilmazkuday
  2. Production Networks and the Propagation of Commodity Price Shocks By Shutao Cao; Wei Dong
  3. The macro-financial effects of international bank lending on emerging markets By Iñaki Aldasoro; Paula Beltrán; Federico Grinberg; Tommaso Mancini-Griffoli
  4. Financial Development and Trade Liberalization By David Kohn; Fernando Leibovici; Michal Szkup
  5. The International Consequences of Bretton Woods Capital Controls and the Value of Geopolitical Stability By Lee E. Ohanian; Paulina Restrepo-Echavarria; Diana Van Patten; Mark L. J. Wright
  6. Have the driving forces of inflation changed in advanced and emerging market economies? By Güneş Kamber; Madhusudan Mohanty; James Morley
  7. Non-US global banks and dollar (co-)dependence: how housing markets became internationally synchronized By Torsten Ehlers; Mathias Hoffmann; Alexander Raabe
  8. Milton Friedman and Exchange Rates in Developing Countries By Sebastian Edwards
  9. Twin Deficits Phenomenon in the West African Economic and Monetary Union Countries: Panel Data Analysis By Kouassi Yeboua

  1. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: Exchange rate pass-through (ERPT) into prices and into income loss are shown to be enough to calculate ERPT into welfare loss by using implications of a simple model. These ERPT measures are estimated at the good level by using a unique micro-price data set from Turkey, and they are combined with income-group specific expenditure shares at the good level to obtain aggregate-level ERPT measures for alternative income groups. An exchange rate shock resulting in a real depreciation of 1% is shown to decrease welfare by about 0.80% for the average-income consumer, while this estimate ranges between 0.73% and 0.83% for consumers in the lowest and highest income quintiles, respectively, suggesting evidence for redistributive effects of an exchange rate shock. Using micro prices has further resulted in showing that traded, nondurable, flexible-price, or income-elastic goods contribute more to ERPT into welfare loss for the average-income consumer, suggesting important policy implications for filtering out the noise in the measurement of aggregate-level prices.
    Keywords: Exchange Rate Pass-Through, Welfare, Structural VAR, Micro Prices
    JEL: F31 F41
    Date: 2020–05
  2. By: Shutao Cao; Wei Dong
    Abstract: Fluctuations of commodity prices are frequently associated with the volatility of aggregate output and prices. As commodity prices rise and fall, adjustments take place in the economy, ranging from shifts in investment, employment and output to changes in interest rates and exchange rates. While these adjustments are already quite complex, one important channel often overlooked in the literature is the input-output linkages. In this paper, we examine the macro implications of commodity price shocks in a structural model with input-output linkages for a commodity-exporting small open economy. Calibrated to the Canadian economy, our model can explain a large part of the decline in real gross domestic product (GDP) that we saw in 2015 and 2016 following the sharp drop in commodity prices. We find that as the model economy adjusts to commodity price shocks, domestic downstream linkages and the export connection with the rest of the world play an important role.
    Keywords: Business fluctuations and cycles; International topics
    JEL: D57 F41
    Date: 2020–11
  3. By: Iñaki Aldasoro; Paula Beltrán; Federico Grinberg; Tommaso Mancini-Griffoli
    Abstract: Banking flows to emerging market economies (EMEs) are a potential source of vulnerability capable of generating boom-bust cycles. The causal effect of such inflows on EME macro-financial conditions is hard to pin down empirically and should be key to well-informed policy design. We provide novel empirical evidence on the effects of cross-border bank lending on EMEs macro-financial conditions. We identify causal effects by leveraging the heterogeneity in the size distribution of bilateral cross-border bank lending to construct granular instrumental variables for aggregate cross-border bank lending to 22 EMEs. We find that cross-border bank credit causes higher domestic activity in EMEs through looser financial conditions. Financial condition indices ease, nominal and real effective exchange rates appreciate, sovereign and corporate spreads narrow, and domestic interest rates fall. At the same time, real domestic credit grows, real GDP expands, imports rise, and housing prices increase as well. E ects are weaker for countries with relatively higher levels of capital inflow controls, supporting the view that these policy measures can be effective in dampening the vulnerabilities associated with external funding shocks.
    Keywords: granular instrumental variables; capital flows; emerging markets; cross-border claims; credit shocks; international banking; capital controls.
    JEL: E0 F0 F3
    Date: 2020–11
  4. By: David Kohn; Fernando Leibovici; Michal Szkup
    Abstract: We study the role of financial development on the aggregate effects and welfare implications of reducing international trade barriers on production inputs such as physical capital and intermediates. We document that financially underdeveloped economies feature a slower response of real GDP, consumption, and investment following trade liberalization episodes that improve access to imported production inputs. We set up a quantitative general equilibrium model with heterogeneous firms subject to financial constraints and estimate it to match salient features from Colombian plant-level data. We find that the adjustment to a decline of import tariffs on physical capital and intermediate inputs is significantly slower in financially underdeveloped economies in line with the empirical evidence. Moreover, we find that financial development increases the welfare gains from trade liberalization; low-income agents benefit from higher wages while exporters benefit from a depreciated real exchange rate and lower capital costs.
    Keywords: financial development; trade liberalization; welfare
    JEL: F1 F4
    Date: 2020–10
  5. By: Lee E. Ohanian; Paulina Restrepo-Echavarria; Diana Van Patten; Mark L. J. Wright
    Abstract: This paper quantifies the positive and normative effects of capital controls on international economic activity under The Bretton Woods international financial system. We develop a three region world economic model consisting of the U.S., Western Europe, and the Rest of the World. The model allows us to quantify the impact of these controls through an open economy general equilibrium capital flows accounting framework. We find these controls had large effects. Counterfactuals show that world output would have been 6% larger had the controls not been implemented. We show that the controls led to much higher welfare for the rest of the world, moderately higher welfare for Europe, but much lower welfare for the U.S. We interpret the large U.S. welfare loss as an estimate of the implicit value to the U.S. of preventing capital flight from other countries and thus promoting economic and political stability in ally and developing countries.
    Keywords: Bretton Woods; International Payments; Capital Flows
    JEL: E21 F21 F41 J20
    Date: 2020–10–21
  6. By: Güneş Kamber; Madhusudan Mohanty; James Morley
    Abstract: We construct a balanced panel dataset for 47 advanced and emerging market economies over a sample period from 1996 to 2018 to empirically investigate possible changes in the driving forces of inflation. Using an open economy hybrid Phillips curve model of inflation and formally testing for structural breaks, we find relatively little significant change in the underlying driving forces or their quantitative effects for most economies, even after the Great Financial Crisis. However, one notable change has been an increase in the average weight on expected future inflation, measured using professional forecasts, for both advanced and emerging market economies. We find very heterogeneous but significant effects of inflation expectations, domestic and foreign output gaps, exchange rate passthrough, and oil prices, with generally higher sensitivities to external driving forces for emerging market economies. Consistent with the model, the behavior of the various inflation drivers, especially what appear to be better anchored inflation expectations, can explain patterns of changes in the level and volatility of inflation across different economies.
    Keywords: open economy Phillips curve, structural breaks, inflation expectations, exchange rate passthrough, inflation volatility
    JEL: E31 F31 F41
    Date: 2020–10
  7. By: Torsten Ehlers; Mathias Hoffmann; Alexander Raabe
    Abstract: US net capital inflows drive the international synchronization of house price growth. An increase (decrease) in US net capital inflows improves (tightens) US dollar funding conditions for non-US global banks, leading them to increase (decrease) foreign lending to third-party borrowing countries. This induces a synchronization of lending across borrowing countries, which translates into an international synchronization of mortgage credit growth and, ultimately, house price growth. Importantly, this synchronization is driven by non-US global banks' common but heterogenous exposure to US dollar funding conditions, not by the common exposure of borrowing countries to non-US global banks. Our results identify a novel channel of international transmission of US dollar funding conditions: As these conditions vary over time, borrowing country pairs whose non-US global creditor banks are more dependent on US dollar funding exhibit higher house price synchronization.
    Keywords: house price synchronization, US dollar funding, global US dollar cycle, global imbalances, capital inflows, global banks, global banking network
    JEL: F34 F36 G15 G21
    Date: 2020–10
  8. By: Sebastian Edwards
    Abstract: Milton Friedman’s famous 1953 essay, “The case for flexible exchange rates,” deals entirely with advanced nations. An interesting question is what Friedman thought about exchange rate and monetary regimes in emerging economies. In this paper I investigate how his views on the subject evolved through time. I analyze speeches, articles, and interviews. I examine his archives for correspondence and unpublished manuscripts. I show that for him flexible rates were a second best solution for middle income and poor nations. I also analyze Friedman’s role in Chile’s failed attempt, during the Pinochet regime, at using a fixed exchange rate to stabilize the economy and eliminate inflation.
    JEL: B2 B22 B3 F31 F32
    Date: 2020–10
  9. By: Kouassi Yeboua (Marmara University Istanbul, Turkey)
    Abstract: For a long time, the West African Economic and Monetary Union (WAEMU) countries have been experiencing persistently high budget and current deficits. This study was undertaken to empirically test the “Twin Deficits Hypothesis” in these countries. The analysis was conducted within the framework of the Panel Vector autoregressive (VAR) approach over the period 1975–2013. In contrast to the conventional view which claims a one-way relationship between budget and current account deficits, the results show that budget deficits lead to a deterioration in the current account balance, and vice versa (bilateral relationship). We also found that budget deficits have an impact on current account balance mainly through imports.
    Date: 2020

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