nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2020‒11‒23
six papers chosen by
Martin Berka
University of Auckland

  1. Sudden Stops and Reserve Accumulation in the Presence of International Liquidity Risk By Lutz, Flora; Zessner-Spitzenberg, Leopold
  2. MULTIPRIL, a new database on multilateral price levels and currency misalignments By Cécile Couharde; Carl Grekou; Valérie Mignon
  3. Investment funds, monetary policy, and the global financial cycle By Kaufmann, Christoph
  4. Fundamental determinants of exchange rate expectations By Beckmann, Joscha; Czudaj, Robert L.
  5. Revisiting the Euro’s Trade Cost and Welfare Effects By Felbermayr, Gabriel; Steininger, Marina
  6. The Dynamic Effects of Chilean Copper Exports and Chinese Market Disturbances By Pardo Piñashca, Eduardo

  1. By: Lutz, Flora; Zessner-Spitzenberg, Leopold
    Abstract: We propose a small open economy model where agents borrow internationally and invest in liquid foreign assets to insure against liquidity shocks, which temporarily shut out the economy of short-term credit markets. Due to the presence of a pecuniary externality individual agents borrow too much and hold too little liquid assets relative to a social planner. This inefficiency rationalizes macroprudential policy interventions in the form of reserve accumulation at the central bank coupled with a tax on foreign borrowing. Unless combined with other measures, a tax on foreign borrowing is detrimental to welfare; it reduces agents' incentives to invest in liquid assets and thereby increases financial instability. Our model can quantitatively match the simultaneous depreciation of the exchange rate and contractions in output, gross trade ows, foreign liabilities and foreign reserves during sudden stop episodes.
    Keywords: international reserves,sudden stops,liquidity,macroprudential policy,pecuniary externalities
    JEL: D62 E44 F32 F34 F41
    Date: 2020
  2. By: Cécile Couharde; Carl Grekou; Valérie Mignon
    Abstract: This paper describes the new CEPII-MULTIPRIL database on Multilateral Price Levels (MPL) introduced in 2020. The MULTIPRIL database covers a wide sample of 178 countries over the 1990-2018 period, and includes relative price level series computed vis-à-vis two sets of trading partners (177 and the top 30) according to three different trade-weighting schemes. It also contains MPL-based currency misalignments series for 156 countries over the 1991-2018 period. MULTIPRIL offers the potential to improve the coverage and quality of worldwide price-competitiveness comparisons. By focusing on price level data, it usefully complements the EQCHANGE database on equilibrium exchange rates and currency misalignments derived from series in indices. Its multilateral setting provides a more comprehensive picture of relative price levels and currency misalignments compared to existing bilateral measures.
    Keywords: Multilateral price levels;Equilibrium exchange rates;Currency misalignments;Bayesian Model Averaging
    JEL: F31 C32 C82
    Date: 2020–10
  3. By: Kaufmann, Christoph
    Abstract: This paper studies the role of international investment funds in the transmission of global financial conditions to the euro area using structural Bayesian vector auto regressions. While cross-border banking sector capital ows receded significantly in the aftermath of the global financial crisis, portfolio ows of investors actively searching for yield on financial markets world-wide gained importance during the post-crisis "second phase of global liquidity" (Shin, 2013). The analysis presented in this paper shows that a loosening of US monetary policy leads to higher global investment fund in ows to euro area equities and debt. These in ows do not only imply elevated asset prices, but also coincide with increased debt and equity issuance in the euro area. The findings demonstrate the growing importance of non-bank financial intermediation over the last decade and have important policy implications for monetary and financial stability.
    Keywords: Monetary policy,international spillovers,capital ows,investment funds
    JEL: F32 F42 G11 G15
    Date: 2020
  4. By: Beckmann, Joscha; Czudaj, Robert L.
    Abstract: This paper provides a new perspective on the exchange rate disconnect puzzle by referring to the expectations building mechanism in foreign exchange markets. Therefore, we analyze the role of expectations regarding macroeconomic fundamentals for expected exchange rate changes. In doing so, we assess data for 31 economies from 2002 to 2017 and consider expectations regarding GDP growth, in ation, interest rates and current accounts. Our empirical findings identify an impact of expected fundamentals, which is not fully consistent with traditional fundamentals models. We especially highlight the relevance of the PPP theory for the expectations building mechanism due to the robust finding that in ation expectations are able to explain expected exchange rate changes in line with the purchasing power parity. We also find that the expectation building process differs remarkably between the periods prior and after the global financial crisis since the impact of GDP growth expectations clearly disappears for the second subsample period, which can be explained by the scapegoat approach. Finally, we also find that in ation expectations affect both the dispersion across forecasters and realized forecast errors.
    Keywords: Disagreement,Exchange rates,Expectations,Forecast errors,Fundamentals,Survey data
    JEL: F31 F37 G17
    Date: 2020
  5. By: Felbermayr, Gabriel; Steininger, Marina
    Abstract: When, about twenty years ago, the Euro was created, one objective was to facilitate intra-European trade by reducing transaction costs. Has the Euro delivered? Using sectoral trade data from 1995 to 2014 and applying structural gravity modeling, we conduct an ex post evaluation of the European Monetary Union (EMU). In aggregate data, we find a significant average trade effect for goods of almost 8 percent, but a much smaller effect for services trade. Digging deeper, we detect substantial heterogeneity between sectors, as well as between and within country-pairs. Singling out Germany, and embedding the estimation results into a quantitative general equilibrium model of world trade, we find that EMU has increased real incomes in all EMU countries, albeit at different rates. E. g. incomes have increased by 0.3, 0.6, and 2.1 percent in Italy, Germany, and Luxembourg, respectively.
    Keywords: Euro,trade,general equilibrium,quantitative trade models,European Union
    JEL: F15 F17 N74
    Date: 2019
  6. By: Pardo Piñashca, Eduardo
    Abstract: This research computes the variance decomposition of Chilean copper exports from 2009 to 2019. In order to evaluate fluctuations of Chilean copper exports, we introduce the Secondary Industry of China labeled as the Chinese market (that briefly involves electricity, construction, manufacturing, and mining sectors) along with other macroeconomic variables commonly used among the literature to comprehend commodity markets. Thus following Blanchard & Quah (1985) methodology we use long-run restrictions for the SVAR model. These restrictions focus on describing small open economies such as Chile. Through the variance decomposition, we found out that Chinese market disturbances have a strong linkage describing fluctuations of Chilean copper exports over the studied period. What’s more, this contribution is even greater than the international copper price and real exchange rate mainly in the long-run. Therefore, this study finds statistical proof of how relevant is the Chinese market to explain the fluctuations of Chilean copper exports even after the 2000’s commodity super cycle.
    Keywords: Copper exports, Chile, China, SVAR
    JEL: F41
    Date: 2020–10–30

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