nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒01‒04
eleven papers chosen by
Martin Berka
University of Auckland

  1. Dominant Currencies and External Adjustment By Gustavo Adler; Camila Casas; Luis M. Cubeddu; Gita Gopinath; Nan Li; Sergii Meleshchuk; Carolina Osorio Buitron; Damien Puy; Yannick Timmer
  2. Oil prices, exchange rates and interest rates By Kilian, Lutz; Zhou, Xiaoqing
  3. Common Trade Exposure and Business Cycle Comovement By Oscar Avila-Montealegre; Carter Mix
  4. Testing the Dutch disease: the impact of natural resources extraction on the manufacturing sector By Donny Harrison Pasaribu
  5. A Model of the Euro Area, China and the United States: Trade Links and Trade Wars By Volha Audzei; Jan Bruha
  6. Product Innovations, Process Innovations and Foreign Direct Investment: New Theoretical Aspects and Empirical Findings By Paul J.J. Welfens
  7. The Fata Morgana of Exchange Rate Regimes: Reconciling the LYS and the RR classifications By Cécile Couharde; Carl Grekou
  8. Capital flows during the pandemic: lessons for a more resilient international financial architecture By Fernando Eguren Martin; Mark Joy; Claudia Maurini; Alessandro Moro; Valerio Nispi Landi; Alessandro Schiavone; Carlos van Hombeeck
  9. Climate Risk and Commodity Currencies By Felix Kapfhammer; Vegard H. Larsen; Leif Anders Thorsrud
  10. How to reduce Germany's current account surplus? By Jan Behringer; Till van Treeck; Achim Truger
  11. Digital Money as a Unit of Account and Monetary Policy in Open Economies By Daisuke Ikeda

  1. By: Gustavo Adler; Camila Casas; Luis M. Cubeddu; Gita Gopinath; Nan Li; Sergii Meleshchuk; Carolina Osorio Buitron; Damien Puy; Yannick Timmer
    Abstract: The extensive use of the US dollar when firms set prices for international trade (dubbed dominant currency pricing) and in their funding (dominant currency financing) has come to the forefront of policy debate, raising questions about how exchange rates work and the benefits of exchange rate flexibility. This Staff Discussion Note documents these features of international trade and finance and explores their implications for how exchange rates can help external rebalancing and buffer macroeconomic shocks.
    Keywords: Currencies;Exchange rates;Exports;Depreciation;Imports;SDN,currency pricing,financing currency,Colombian peso,currency financing,expenditure switching
    Date: 2020–07–20
  2. By: Kilian, Lutz; Zhou, Xiaoqing
    Abstract: There has been much interest in the relationship between the price of crude oil, the value of the U.S. dollar, and the U.S. interest rate since the 1980s. For example, the sustained surge in the real price of oil in the 2000s is often attributed to the declining real value of the U.S. dollar as well as low U.S. real interest rates, along with a surge in global real economic activity. Quantifying these effects one at a time is difficult not only because of the close relationship between the interest rate and the exchange rate, but also because demand and supply shocks in the oil market in turn may affect the real value of the dollar and real interest rates. We propose a novel identification strategy for disentangling the causal effects of traditional oil demand and oil supply shocks from the effects of exogenous variation in the U.S. real interest rate and in the real value of the U.S. dollar. Our approach exploits a combination of sign and zero restrictions and narrative restrictions motivated by economic theory and extraneous evidence. We empirically evaluate popular views about the role of exogenous real exchange rate shocks in driving the real price of oil, and we examine the extent to which shocks in the global oil market drive the U.S. real exchange rate and U.S. real interest rates. Our evidence for the first time provides direct empirical support for theoretical models of the link between these variables.
    Keywords: exchange rate,market rate of interest,oil price,global real activity,commodity
    JEL: E43 F31 F41 Q43
    Date: 2020
  3. By: Oscar Avila-Montealegre; Carter Mix
    Abstract: A large empirical literature has shown that countries that trade more with each other have more correlated business cycles. We show that previous estimates of this relationship are biased upward because they ignore common trade exposure to other countries. When we account for common trade exposure to foreign business cycles, we find that (1) the effect of bilateral trade on business cycle comovement falls by roughly 25 percent and (2) common exposure is a significant driver of business cycle comovement. A standard international real business cycle model is qualitatively consistent with these facts but fails to reproduce their magnitudes. Past studies have used models that allow for productivity shock transmission through trade to strengthen the relationship between trade and comovement. We find that productivity shock transmission increases business cycle comovement largely because of a country-pair's common trade exposure to other countries rather than because of bilateral trade. When we allow for stronger transmission between small open economies than other country-pairs, comovement increases both from bilateral trade and common exposure, similar to the data. **** La literatura empírica ha mostrado que países que comercian más entre ellos tienen ciclos económicos más correlacionados. En este artículo mostramos que las estimaciones previas de la relación comercio-sincronización están sesgados al alza pues ignoran el hecho de que los países están expuestos a socios comerciales comunes. Cuando incluímos el efecto de la exposición comercial común a ciclos comerciales externos, encontramos que 1) el efecto del comercio bilateral se reduce cerca del 25 % y 2) la exposición común es un factor importante para la sincronización de ciclos económicos. Un modelo estándar de ciclos económicos reales es cuantitativamente consistente con estas relaciones pero falla al momento de reproducir sus magnitudes. Encontramos que la transmisión de choques de productividad aumenta la sincronización del ciclo económico principalmente a través de la exposición comercial común de los países, más allá del comercio bilateral. Cuando permitimos una mayor transmisión de productividad entre economías pequeñas, la sincronización aumenta tanto por comercio bilareral como por exposición común, consistente con la evidencia empírica.
    Keywords: trade, business cycles, open economy macroeconomics, Comercio internacional, ciclos económicos, macroeconomía abierta
    JEL: F1 E32 F41 F44
    Date: 2020–12
  4. By: Donny Harrison Pasaribu
    Abstract: According to the Dutch disease theory, natural resource extractions can have an adverse effect on the manufacturing sector. However, the empirical evidence for the total effect of natural resources extraction on manufacturing has been inconclusive. Other factors such as backward and forward linkages and productivity spillover can also affect the manufacturing sector. This topic is important because many developing countries are still reliant on natural resources extraction while unable to develop their manufacturing sector. This study measures the total impact of natural resource rents on manufacturing value added in a cross-country setting. This is done using an instrumental variable method that utilises fluctuations in world resource prices, weighted by each country’s resource exports. The estimates use data from 149 countries over the period 1970-2014, covering the last two global resource booms (1970s oil boom and 2000s China-driven commodity boom). The study finds that increases in natural resource rent have a mild positive impact on manufacturing value added. The findings are then compared with the experience of resource-dependent Asia-Pacific countries such as Indonesia and Australia.
    Keywords: Dutch disease, natural resources, manufacturing
    JEL: Q32 Q33 O13 O14 O57
    Date: 2020
  5. By: Volha Audzei; Jan Bruha
    Abstract: In this paper we develop a dynamic stochastic general equilibrium model featuring the euro area, the United States and China, with an exogenous rest of the world. The countries in the model are linked through trade and international bond purchases. Having estimated the model, we study several scenarios of trade wars between the countries. Our findings suggest that no country benefits from imposing tariffs in the long run. The degree to which a particular country is hurt depends on the strength of its import and export links.
    Keywords: Bayesian estimation, China, multi-country DSGE, trade wars
    JEL: C11 E37 F13 F41
    Date: 2020–12
  6. By: Paul J.J. Welfens (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))
    Abstract: The distinction between product innovations and process innovations is crucial for industrialized countries as well as for newly industrialized countries - and only a distinct consideration of product innovations in macroeconomic modeling allows to fully understand Schumpeterian innovation dynamics and their national and international impact. With this focus, initially a simple microeconomic modelling of product versus process innovation is considered in a setting with both inward and outward foreign direct investment, largely following the Bertschek approach. Results from the European Union's Community Innovation Survey are considered as well as relative export unit values - relative to the US EUV - which are a proxy for product innovations in the tradables sector. Regression results show that inward FDI raise both product innovations and process innovations in the EU. The key aspects of both process innovations and product innovations are then considered in an open economy macro model which brings many new insights, including a much better understanding of the links between innovation dynamics, the current account, FDI, the real exchange rate, output and inflation. Product innovations have a different impact on the real exchange rate than process innovations and a dynamic view of the Vernon product cycle is required for an adequate analysis. As regards the demand for money, product innovations affect this demand in a different way to process innovations. Optimal product innovations are also considered. Innovations in Schumpeterian macroeconomics thus gets crucial new perspectives.
    Keywords: Innovation, product innovation, foreign direct investment, macro modeling, US, EU
    JEL: C6 F21 O30 O31
    Date: 2020–12
  7. By: Cécile Couharde; Carl Grekou
    Abstract: This paper provides a comprehensive analysis of the disagreements between the two most popular but also discordant de facto exchange rate regime classifications: the Reinhart and Rogoff and the Levy-Yeyati and Sturzenegger classifications. We estimate probabilities of disagreement between the two classifications for the different exchange rate regime categories, and derive a de facto synthesis classification, using the Receiver Operating Characteristic analysis. We show that more than a third of the observations are not directly comparable, and relatively few disagreements are directly attributable to the classifications’ key variables. Most of the disagreements originate from the different thresholds used by the classifications in the definition of the ERR categories and the interactions between several variables. Given these complexities, the synthesis classification provides a useful framework in terms of greater comparability.
    Keywords: Exchange rate regimes; Probit model; ROC analysis.
    JEL: E52 F33 F4 O24
    Date: 2020
  8. By: Fernando Eguren Martin (Bank of England); Mark Joy (Bank of England); Claudia Maurini (Bank of Italy); Alessandro Moro (Bank of Italy); Valerio Nispi Landi (Bank of Italy); Alessandro Schiavone (Bank of Italy); Carlos van Hombeeck (Bank of England)
    Abstract: This paper studies the sudden stop in capital flows that emerging markets have experienced throughout the first months of the pandemic. First, we find that the sudden stop in capital flows has been strongly affected by lower portfolio investments of non-bank financial intermediaries: for many emerging markets, the magnitude of the sudden stop has exceeded that of the Global Financial Crisis. Second, we show that emerging markets have adopted expansionary fiscal and monetary policies to face the sudden stop and the resultant recession; moreover, the use of macroprudential measures and unconventional monetary policy document a wider policy toolkit, compared to other crises. Third, we estimate the adequacy of current IMF resources if emerging markets were hit by a further global sudden stop: we find that the IMF resources are adequate, in case of a moderate sudden stop; in case of a more severe scenario, financing needs of emerging markets could go beyond the IMF’s lending capacity, even after the other layers of the global financial safety net have been deployed.
    Keywords: International Finance, International Financial Data, Foreign Exchange Reserves, Capital Flow, IMF
    JEL: F31 F32 F33
    Date: 2020–12
  9. By: Felix Kapfhammer; Vegard H. Larsen; Leif Anders Thorsrud
    Abstract: The positive relationship between real exchange rates and natural resource income is well understood and studied. However, climate change and the transition to a lower-carbon economy now challenges this relationship. We document this by proposing a novel news media-based measure of climate change transition risk and show that when such risk is high, major commodity currencies experience a persistent depreciation and the relationship between commodity price fluctuations and currencies tends to become weaker.
    Keywords: exchange rates, climate, risk, commodities
    JEL: C11 C53 D83 D84 E13 E31 E37
    Date: 2020
  10. By: Jan Behringer (Macroeconomic Policy Institute (IMK)); Till van Treeck (Institute for Socio-Economics (ifso)); Achim Truger (Institute for Socio-Economics (ifso))
    Abstract: Germany has had a large and persistent current account surplus for the past almost two decades. We review different theoretical explanations of this phenomenon and conclude from the empirical litera-ture that Germany’s external surplus reflects an imbalance that is a threat to macroeconomic stability at both the national and the international level. Interestingly, although intertemporal general equilibrium models highlight the role of private households in determining national current account positions, the increase in Germany’s external balance for the most part is the reflection of larger financial balances of the corporate sector and the government. While the share of the national income going to the private household sector has declined dramatically since the early 2000s, the corresponding increase in the income share of the private corporate sector and the government was not accompanied by higher spending by these sectors on goods and services as a percentage of GDP. We discuss how the exter-nal surplus might be reduced through (a combination of) higher public and private demand for goods and services and shorter working hours.
    Keywords: current account, external adjustment, sectoral balances, income distribution
    JEL: D31 D33 E21 F32 F41
    Date: 2020–12
  11. By: Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Further progress in digital money, electronically stored monetary value, may enable pricing in units of any currency in any country. This paper studies monetary policy in such a world, using a two- country open economy model with nominal rigidities. The findings are three-fold. First, domestic monetary policy becomes less effective as digital dollarization - pricing using digital money, denominated in and pegged to a foreign currency - deepens. Second, digital dollarization is more likely to occur in a smaller country that is more open to trade and has a greater tradable sector and stronger input-output linkages. Third, monetary policy can facilitate or discourage digital dollarization depending on its stance on the stabilization of macroeconomic variables.
    Keywords: Digital money, monetary policy, dollarization
    JEL: E52 F41
    Date: 2020–12

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