nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒01‒25
seventeen papers chosen by
Martin Berka
University of Auckland

  1. Specialization, Market Access and Real Income By Dominick Bartelme; Ting Lan; Andrei A. Levchenko
  2. Restructuring sovereign bonds: Holdouts, haircuts and the effectiveness of CACs By Fang, Chuck; Schumacher, Julian; Trebesch, Christoph
  3. Liquidity Traps in a World Economy By Kollmann, Robert
  4. Imported or Home Grown? The 1992-3 EMS Crisis By Eichengreen Barry; Naef Alain
  5. Dynamics and synchronization of global equilibrium interest rates By Beyer, Robert; Milivojevic, Lazar
  6. Sovereign Debt Standstills By Juan C. Hatchondo; Leonardo Martinez; César Sosa-Padilla
  7. Real Exchange Rates and Manufacturing Industry in China By Ping Hua
  8. Large devaluations and inflation inequality: evidence from Brazil By Raphael Gouvea
  9. Non-US global banks and dollar (co-)dependence: how housing markets became internationally synchronized By Torsten Ehlers; Mathias Hoffmann; Alexander Raabe
  10. The Real Exchange Rate and Development - Theory, Evidence, Issues, and Challenges By Raphael Gouvea
  11. Terms-of-trade shocks are not all alike By Di Pace, Federico; Juvenal, Luciana; Petrella, Ivan
  12. Measuring Sudden Stops in Mongolia By Batjargal, Dulamzaya; Doojav, Gan-Ochir
  13. Exchange Rates and Domestic Credit—Can Macroprudential Policy Reduce the Link? By Erlend Nier; Thorvardur Tjoervi Olafsson; Yuan Gao Rollinson
  14. Political Constraints and Sovereign Default Premia By Nirvana Mitra
  15. A Conceptual Model for the Integrated Policy Framework By Suman S Basu; Emine Boz; Gita Gopinath; Francisco Roch; Filiz D Unsal
  16. The Empirical Dimension of Overborrowing By Damián Pierri; Gabriel Montes Rojas; Pablo Mira Lambi
  17. Latent Exports: Almost Ideal Gravity and Zeros By James E. Anderson; Penglong Zhang

  1. By: Dominick Bartelme; Ting Lan; Andrei A. Levchenko
    Abstract: This paper estimates the impact of external demand shocks on real income. Our empirical strategy is based on a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows. The framework allows us to measure foreign shocks and characterize their impact on income in terms of reduced-form elasticities. We use machine learning techniques to group 4-digit manufacturing sectors into a smaller number of clusters, and show that the cluster-level elasticities of income with respect to foreign shocks can be estimated using high-dimensional statistical techniques. We find clear evidence of heterogeneity in the income responses to different foreign shocks. Foreign demand shocks in complex intermediate and capital goods have large positive impacts on real income, whereas impacts in other sectors are negligible. The estimates imply that the pattern of sectoral specialization plays a quantitatively large role in how foreign shocks affect real income, while geographic position plays a smaller role. Finally, a calibrated multi-sector production and trade model can rationalize both the average and the heterogeneity in real income elasticities to foreign shocks under reasonable values of structural parameters.
    JEL: F43 F62
    Date: 2020–12
  2. By: Fang, Chuck; Schumacher, Julian; Trebesch, Christoph
    Abstract: Sovereign debt crises are difficult to solve. This paper studies the "holdout problem", meaning the risk that creditors refuse to participate in a debt restructuring. We document a large variation in holdout rates, based on a comprehensive new dataset of 23 bond restructurings with external creditors since 1994. We then study the determinants of holdouts and find that the size of creditor losses (haircuts) is among the best predictors at the bond level. In a restructuring, bonds with higher haircuts see higher holdout rates, and the same is true for small bonds and those issued under foreign law. Collective action clauses (CACs) are effective in reducing holdout risks. However, classic CACs, with bond-by-bond voting, are not sufficient to assure high participation rates. Only the strongest form of CACs, with single-limb aggregate voting, minimizes the holdout problem according to our simulations. The results help to inform theory as well as current policy initiatives on reforming sovereign bond markets.
    Keywords: Sovereign default,debt restructuring,international financial architecture,creditor Coordination
    JEL: F34 G15 H63 K22
    Date: 2021
  3. By: Kollmann, Robert
    Abstract: This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These “expectations-driven” liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a “fundamentals-driven” liquidity trap.
    Keywords: Zero lower bound, expectations-driven and fundamentals-driven liquidity traps, domestic and international shock transmission, terms of trade, exchange rate, net exports
    JEL: E3 E4 F2 F3 F4
    Date: 2021–01–03
  4. By: Eichengreen Barry; Naef Alain
    Abstract: Using newly assembled data on foreign exchange market intervention, we construct a daily index of exchange market pressure during the 1992-3 crisis in the European Monetary System. Using this index, we pinpoint when and where the crisis was most severe. Our analysis focuses on a neglected factor in the crisis: the role of the weak dollar in intra-EMS tensions. We provide new evidence of the contribution of a falling dollar-Deutschmark exchange rate to pressure on EMS currencies.
    Keywords: European Monetary System, exchange rates, foreign exchange intervention, currency crisis.
    JEL: F31 E5 N14 N24
    Date: 2020
  5. By: Beyer, Robert; Milivojevic, Lazar
    Abstract: With the COVID-19 pandemic, the intense debate about secular stagnation will become even more important. Empirical estimates of equilibrium real interest rates are so far mostly limited to advanced economies, since no statistical procedure suitable for a large set of countries is available. This is surprising, as equilibrium rates have strong policy implications in emerging markets and developing economies as well; current estimates of the global equilibrium rate rely on only a few countries; and estimates for a more diverse set of countries can improve understanding of the drivers. This paper proposes a model and estimation strategy that decompose ex ante real interest rates into a permanent and transitory component even with short samples and high volatility. This is done with an unobserved component local level stochastic volatility model, which is used to estimate equilibrium rates for 50 countries with Bayesian methods. Equilibrium rates were lower in emerging markets and developing economies than in advanced economies in the 1980s, similar in the 1990s, and have been higher since 2000. In line with economic integration and rising global capital markets, synchronization has been rising over time and is higher among advanced economies. Equilibrium rates of countries with stronger trade linkages and similar demographic and economic trends are more synchronized.
    Keywords: equilibrium interest rate,stochastic volatility,Bayesian inference,synchronization
    JEL: E52 E43 C32
    Date: 2021
  6. By: Juan C. Hatchondo; Leonardo Martinez; César Sosa-Padilla
    Abstract: As a response to economic crises triggered by COVID-19, sovereign debt standstill proposals emphasize debt payment suspensions without haircuts on the face value of debt obligations. We quantify the effects of standstills using a standard default model. We find that a one-year standstill generates welfare gains for the sovereign equivalent to a permanent consumption increase of between 0.1% and 0.3%, depending on the initial shock. However, except when it avoids a default, the standstill also implies capital losses for creditors of between 9% and 27%, which is consistent with their reluctance to participate in these operations and indicates that this reluctance would persist even without a free-riding or holdout problem. Standstills also generate a form of "debt overhang" and thus the opportunity for a "voluntary debt exchange": complementing the standstill with haircuts could reduce creditors' losses and simultaneously increase welfare gains. Our results cast doubts on the emphasis on standstills without haircuts.
    JEL: F34 F41
    Date: 2020–12
  7. By: Ping Hua (CERDI - Centre d'Études et de Recherches sur le Développement International - Clermont Auvergne - UCA - Université Clermont Auvergne - CNRS - Centre National de la Recherche Scientifique)
    Date: 2020–07
  8. By: Raphael Gouvea (Institute for Applied Economic Research (IPEA); Department of Economics, University of Massachusetts Amherst)
    Abstract: In the aftermath of large devaluations, prices of tradable goods/lower-priced varieties increase significantly more than the prices of nontradables/higher-priced varieties. These relative price changes may lead to inflation inequality when household consumption baskets are different across the distribution of income. Using Cravino and Levchenko [2017]’s methodology, we show that inflation of poor households in Brazil was at least 11 percentage points higher than of the rich in the aftermath of the 2002 large devaluation. A detailed case study of the City of São Paulo estimates an inflation inequality ranging from 8 to 11 percentage points in the city.
    Keywords: Exchange Rate Devaluation, Pass-Through, Inflation, Inequality
    JEL: F31 F41 E31
    Date: 2020
  9. By: Torsten Ehlers (Bank for International Settlements (BIS)); Mathias Hoffmann (University of Zurich (UZH)); Alexander Raabe (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: US net capital inows drive the international synchronization of house price growth. An increase (decrease) in US net capital inows 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 inows, global banks, global banking network
    JEL: F34 F36 G15 G21
    Date: 2020–10–29
  10. By: Raphael Gouvea (Institute for Applied Economic Research (IPEA); Department of Economics, University of Massachusetts Amherst)
    Abstract: This paper surveys the theoretical and empirical literature on the effects of the real exchange rate (RER) on international trade, economic development and growth. We summarize the main conceptual issues, discuss the relevance of the RER as an instrument of development policy, provide an overview of the macroeconomic and microeconomic mechanisms that link the RER to trade and long run growth and development, analyze the challenges – especially the disconnect between theory and data -- that often arise in empirical applications, and present new avenues for future research. In the process, we present some updated estimates and illustrative figures. The mechanisms through which the RER influences long-run growth and structural change outcomes remains a promising area of research and the relevance of individual channels in different contexts deserves much more careful investigation. Greater data availability should help fill some of these gaps in our understanding.
    Keywords: Real exchange rate, Economic development, Structural change, Economic growth, International trade
    JEL: F31 F43 E2 O11 O24
    Date: 2020
  11. By: Di Pace, Federico (Bank of England); Juvenal, Luciana (International Monetary Fund); Petrella, Ivan (Warwick Business School and CEPR)
    Abstract: When analyzing terms-of-trade shocks, it is implicitly assumed that the economy responds symmetrically to changes in export and import prices. Using a sample of developing countries our paper shows that this is not the case. We construct export and import price indices using commodity and manufacturing price data matched with trade shares and separately identify export price, import price, and global economic activity shocks using sign and narrative restrictions. Taken together, export and import price shocks account for around 40% of output fluctuations but export price shocks are, on average, twice as important as import price shocks for domestic business cycles. Given that shifts in export and import prices have asymmetric effects on the economy, global economic activity shocks, which simultaneously affect export and import prices, are largely undetected in the terms of trade measure but have large effects on domestic business cycles.
    Keywords: Terms of trade; commodity prices; business cycles; world shocks
    JEL: F41 F44
    Date: 2021–01–08
  12. By: Batjargal, Dulamzaya; Doojav, Gan-Ochir
    Abstract: In this paper, we empirically examine the sudden stops in capital flows in Mongolia based on Calvo et al. (2004) approach in the past two decades. We found 5 episodes of sudden stops in capital flows and 5 episodes of sudden stops in domestic credits since 1998. Domestic sudden stops lasted longer than the external sudden stop and, in most cases, external sudden stops are followed by the domestic sudden stops. The common consequences of sudden stops on the economy are reduced investments, slack in credits, economic slowdown, the exchange rate depreciation, decline in reserves, and banking crisis/difficulties.
    Keywords: Sudden stops, Capital flows, Exchange rate volatility, Mongolia
    JEL: F0 F32 F41
    Date: 2020–06
  13. By: Erlend Nier; Thorvardur Tjoervi Olafsson; Yuan Gao Rollinson
    Abstract: This paper examines empirically the role of macroprudential policy in addressing the effects of external shocks on financial stability. In a sample of 62 economies over the period of 2000: Q1–2016: Q4, our dynamic panel regressions show that an appreciation of the local exchange rate is associated with a subsequent increase in the domestic credit gap, while a prior tightening of macroprudential policies dampens this effect. These results are strong for small open economies, and robust when we explicitly account for potential simultaneity and reverse causality biases. We also examine a feedback effect where strong domestic credit pulls in additional cross-border funding, potentially further increasing systemic risk, and find that targeted capital controls can play a complementary role in alleviating this effect.
    Keywords: Macroprudential policy;Credit gaps;Domestic credit;Capital controls;Real exchange rates;WP,exchange rate,monetary policy,currency appreciation,real GDP
    Date: 2020–09–11
  14. By: Nirvana Mitra (Department Of Economics, Shiv Nadar University)
    Abstract: I study the relationship between political constraints and the probability of sovereign default using a dynamic model of fiscal policy augmented with legislative bargaining and default. I find that the tightness of political constraints and default probability are inversely related if the output cost of default is not too high. The model government consists of legislators who bargain over multidimensional fiscal policy, including over a local public good that benefits only the regions they represent. Tighter political constraints are equivalent to more legislators with veto power over fiscal policies. In this case, a default implies that the released resources need to be distributed among more regions as local public goods. Thus, a smaller benefit accrues to each region, decreasing the incentive to default. However, if default is too costly, even relatively unconstrained governments default less frequently because the individual share of cost is too high. Empirical evidence from South American countries is consistent with this result. I calibrate the infinite horizon model to Argentina. It confirms the inverse relationship. A counterfactual exercise with even higher political constraints shows that the default by Argentina in 2001 could not be avoided.
    Keywords: Sovereign debt, Default risk, Interest rates, Political economy, Minimum winning coalition, Endogenous borrowing constraints.
    JEL: D72 E43 F34 E62 F41
    Date: 2021–01–15
  15. By: Suman S Basu; Emine Boz; Gita Gopinath; Francisco Roch; Filiz D Unsal
    Abstract: In the Mundell-Fleming framework, standard monetary policy and exchange rate flexibility fully insulate economies from shocks. However, that framework abstracts from many real world imperfections, and countries often resort to unconventional policies to cope with shocks, such as COVID-19. This paper develops a model of optimal monetary policy, capital controls, foreign exchange intervention, and macroprudential policy. It incorporates many shocks and allows countries to differ across the currency of trade invoicing, degree of currency mismatches, tightness of external and domestic borrowing constraints, and depth of foreign exchange markets. The analysis maps these shocks and country characteristics to optimal policies, and yields several principles. If an additional instrument becomes available, it should not necessarily be deployed because it may not be the right tool to address the imperfection at hand. The use of a new instrument can lead to more or less use of others as instruments interact in non-trivial ways.
    Keywords: Capital controls;Housing;Exchange rates;Currency markets;Central bank policy rate;WP,exchange rate,FX intervention,interest rate
    Date: 2020–07–07
  16. By: Damián Pierri (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET); Gabriel Montes Rojas (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET); Pablo Mira Lambi (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET)
    Abstract: Persistent current account deficits are common among low and middle income countries. When is this situation dangerous? Is there a critical value for the yearly current account deficit just before the crisis sets off? We provide a positive answer to the last question; a finding that gives rise to an empirical measure of overborrowing. We observe that countries that have increased their external indebtedness by at least 26%-31% of the GDP in a time span of 3 to 5 years are more prone to be hit by a sudden stop. The typical crisis produces a consumption drop of 4% of GDP and current account reversal of 2.5-4.5% of GDP. We also contribute to the structural characterization of sudden stops. Using a canonical model we are able to replicate these stylized facts. Moreover, we compute the ratio of net debt to GDP. This parameter is two or three times bigger than the benchmark value in the literature, a fact that improves the empirical performance of the model. From a policy perspective, our findings help to elaborate leading indicators to anticipate a sudden stop.
    Keywords: Sudden Stops, Current Account Deficits, Debt
    JEL: F32 F41
  17. By: James E. Anderson (Boston College); Penglong Zhang (Tsinghua University, School of Public Policy and Management)
    Abstract: Almost Ideal gravity associates zero trade flows with variable and fixed trade cost variation in a flexible demand system. Latent trade shares between non-partners are inferred from the Tobit estimator applied to trade among 75 countries and 25 sectors in 2006. Latent Trade Bias (LTB) is the difference between the latent trade share and the as-if-frictionless trade share. Explained LTB variance decomposition shows 52% due to variation of variable trade cost, 24% due to non-homothetic income effects, and 24% due to fixed trade cost effects. Counterfactual variable (fixed) cost reductions suggest cases of successful export promotion between non-partners.
    Keywords: Zero flows; variable cost; fixed cost; latent trade
    JEL: F10 F13 F14
    Date: 2020–12–15

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