nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒02‒08
eight papers chosen by
Martin Berka
University of Auckland

  1. The Story of the Real Exchange Rate By Oleg Itskhoki
  2. Exchange arrangements entering the twenty-first century: which anchor will hold? By Ilzetzki, Ethan; Reinhart, Carmen M.; Rogoff, Kenneth S.
  3. A Guide to Sovereign Debt Data By S. M. Ali Abbas; Kenneth Rogoff
  4. House Prices, Collateral Effects and Sectoral Output Dynamics in Emerging Market Economies By Berrak Bahadir; Inci Gumus
  5. Globalization and pandemics By Pol Antràs; Stephen J. Redding; Esteban Rossi-Hansberg
  6. Current account sustainability and capital mobility in Latin American and Caribbean countries By Yersh, Valeryia
  7. Paving the Way for an Economic Crisis with High Leverage and Currency Mismatches: 2018-19 Crisis in Turkey By Ozatay, Fatih
  8. Financial Openness and Capital Inflows to Emerging Markets: In Search of Robust Evidence By Diego A. Cerdeiro; Andras Komaromi

  1. By: Oleg Itskhoki
    Abstract: The real exchange rate (RER) measures relative price levels across countries, capturing deviations from purchasing power parity (PPP). RER is a key variable in international macroeconomic models as it is central to equilibrium conditions in both goods and asset markets. It is also one of the most starkly-behaved variables empirically, tightly co-moving with the nominal exchange rate and virtually uncorrelated with most other macroeconomic variables, nominal or real. This survey lays out an equilibrium framework of RER determination, focusing separately on each building block and discussing corresponding empirical evidence. We emphasize home bias and incomplete pass-through into prices with expenditure switching and goods market clearing, imperfect international risk sharing, country budget constraint and monetary policy regime. We show that RER is inherently a general-equilibrium variable, which depends on the full model structure and policy regime, and therefore partial theories like PPP are insufficient to explain it. We also discuss issues of stationarity and predictability of exchange rates.
    JEL: E31 F31 F41 G15
    Date: 2020–12
  2. By: Ilzetzki, Ethan; Reinhart, Carmen M.; Rogoff, Kenneth S.
    Abstract: This article provides a comprehensive history of anchor or reference currencies, exchange rate arrangements, and a new measure of foreign exchange restrictions for 194 countries and territories over 1946-2016. We find that the often cited post-Bretton Woods transition from fixed to flexible arrangements is overstated; regimes with limited flexibility remain in the majority. Even if central bankers' communications jargon has evolved considerably in recent decades, it is apparent that many still place a large implicit weight on the exchange rate. The U.S. dollar scores as the world's dominant anchor currency by a very large margin. By some metrics, its use is far wider today than 70 years ago. In contrast, the global role of the euro appears to have stalled. We argue that in addition to the usual safe assets story, the record accumulation of reserves since 2002 may also have to do with many countries' desire to stabilize exchange rates in an environment of markedly reduced exchange rate restrictions or, more broadly, capital controls: an important amendment to the conventional portrayal of the macroeconomic trilemma.
    JEL: N20 F40 F30 E50
    Date: 2019–05–01
  3. By: S. M. Ali Abbas; Kenneth Rogoff
    Abstract: The last decade or so has seen a mushrooming of new sovereign debt databases covering long time spans for several countries. This represents an important breakthrough for economists who have long sought to, but been unable to tackle, first-order questions such as why countries have differential debt tolerance, and how debt levels affect the scope for countercyclical policy in recessions and financial crises. This paper backdrops these recent data efforts, identifying both the key innovations, as well as caveats that users should be aware of. A Directory of existing publicly-available sovereign debt databases, featuring compilations by institutions and individual researchers, is also included.
    Keywords: Public debt;Domestic debt;Financial crises;External debt;Emerging and frontier financial markets;WP,country,debt,government,debt data,holder information
    Date: 2019–09–13
  4. By: Berrak Bahadir (Department of Economics, Florida International University); Inci Gumus (Faculty of Arts and Social Sciences, Sabanci University)
    Abstract: This paper studies the channels through which house prices affect sectoral output in emerging market economies, focusing on the role of collateral and borrowing dynamics. We first show that relative to the tradable sector, nontradable sector output is more strongly correlated with house prices and its response to a house price shock in a Panel VAR is larger for a sample of emerging market economies. Then, we study the model dynamics generated by shocks to housing demand in a two-sector small open economy real business cycle model. The results show that housing demand shocks lead to a sectoral reallocation by inducing an expansion in the nontradable sector and a contraction in the tradable sector. The model successfully generates the comovement between the cycle and house prices, matching the strong positive correlation of house prices and nontradable output. We also study the importance of collateral effects for the model dynamics and show that the collateral channel is key to generating the correlations between house prices and sectoral output observed in the data.
    Keywords: House Prices, Collateral Effects, Housing Demand Shocks, Sectoral Output
    JEL: E32 E44 F34 F41
    Date: 2021–01
  5. By: Pol Antràs; Stephen J. Redding; Esteban Rossi-Hansberg
    Abstract: We develop a model of human interaction to analyze the relationship between globalization and pandemics. Our framework provides joint microfoundations for the gravity equation for international trade and the Susceptible-Infected-Recovered (SIR) model of disease dynamics. We show that there are cross-country epidemiological externalities, such that whether a global pandemic breaks out depends critically on the disease environment in the country with the highest rates of domestic infection. A deepening of global integration can either increase or decrease the range of parameters for which a pandemic occurs, and can generate multiple waves of infection when a single wave would otherwise occur in the closed economy. If agents do not internalize the threat of infection, larger deaths in a more unhealthy country raise its relative wage, thus generating a form of general equilibrium social distancing. Once agents internalize the threat of infection, the more unhealthy country typically experiences a reduction in its relative wage through individual-level social distancing. Incorporating these individual-level responses is central to generating large reductions in the ratio of trade to output and implies that the pandemic has substantial effects on aggregate welfare, through both deaths and reduced gains from trade.
    Keywords: Globalization, Pandemics, Gravity Equation, SIR Model
    JEL: F15 F23 I10
    Date: 2020–09
  6. By: Yersh, Valeryia
    Abstract: This study examines two issues, namely, the degree of current account deficit (CAD) sustainability and the degree of capital mobility in 24 Latin American and Caribbean countries and three regional agreements: Andean Community, MERCOSUR and SICA. To this end, the paper investigates the long-run relationship between saving and investment along with short-run dynamics by applying common correlated effects mean group (CCEMG) estimator to a panel error-correction model. Findings indicate that CAD is weakly sustainable in the Latin American and Caribbean region, MERCOSUR, and SICA while it’s strongly unsustainable in the Andean Community. The sub-period analysis reveals that CAD has been adversely affected by the 2008 crisis. However, in the post-crisis period, CAD has been slowly decreasing in the Latin American and Caribbean region and Andean Community whereas it has continued increasing in MERCOSUR and SICA. Further, the estimates of error-correction terms and short-run coefficients indicate that the Andean Community and MERCOSUR observe higher degree of long-run and short-run capital mobility than SICA. Finally, the study provides policy implications.
    Keywords: Saving-investment relationship, Capital mobility, Feldstein-Horioka puzzle, Current account sustainability, CAD, CCEMG, Panel cointegration, Latin America and the Caribbean.
    JEL: C30 F21 F32 F34 F40
    Date: 2020–12
  7. By: Ozatay, Fatih
    Abstract: In the aftermath of the global financial crisis monetary policies in advanced economies caused a surge in cross-border lending to emerging market economies (EMEs). Policymakers of EMEs criticized those policies on the grounds that they pave the way for financial imbalances in EMEs and called for international policy coordination. Up to mid-2018 leverage of banks and foreign currency exposure of nonfinancial corporates increased sharply in Turkey. Under these conditions, a shock that causes a stop in capital flows can trigger crisis in EMEs. The Turkish economy was hit by several external shocks and entered a recession in the third quarter of 2018. This study aims at analyzing the role of financial vulnerabilities and domestic policies in Turkey’s 2018-19 crisis and draw policy lessons. We argue that, notwithstanding complaints regarding lack of international policy coordination, domestic policy mistakes played an important role in paving the way for the crisis.
    Keywords: Crisis, cross-border lending, currency mismatches, leverage
    JEL: E32 E52 F34 F42 G01 G38
    Date: 2020–12–25
  8. By: Diego A. Cerdeiro; Andras Komaromi
    Abstract: We reassess the connection between capital account openness and capital flows in an empirical framework that is grounded in theory and makes use of previously unexplored variation in the data. We demonstrate how our theory-consistent regressions may overcome some ubiquitous measurement problems in the literature by relying on interaction terms between financial openness and traditional push-pull factors. Within our proposed framework, we ask: what can be said robustly about the effect of capital account restrictions on capital flows? Our results warrant against over-interpreting the existing cross-country evidence as we find very few robust relationships between capital account restrictiveness and various types of capital inflows. Countries with a higher degree of financial openness are more susceptible to some, but by no means all, push and pull factors. Overall, the results are still consistent with a complex set of tradeoffs faced by policymakers, where the ability to shield the domestic economy from volatile capital flow cycles must be weighed against the sources of exogenous risks and potential long run growth effects.
    Keywords: Capital flows;Capital inflows;Capital account;Financial account;Fiscal accounting and reporting;WP,open economy,fed funds rate,GDP
    Date: 2019–09–13

This nep-opm issue is ©2021 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.