nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒04‒05
sixteen papers chosen by
Martin Berka
University of Auckland

  2. Credit Cycles, Fiscal Policy, and Global Imbalances By Callum Jones; Pau Rabanal
  3. Imperfect Exchange Rate Pass-through: Empirical Evidence and Monetary Policy Implications By Maryam Mirfatah; Vasco J. Gabriel; Paul Levine
  4. The interaction of forward guidance in a two-country new Keynesian model By Ida, Daisuke; Iiboshi, Hirokuni
  5. The interaction between macroprudential and monetary policies: The cases of Norway and Sweden By Jin Cao; Valeriya Dinger; Anna Grodecka-Messi; Ragnar Juelsrud; Xin Zhang
  6. Exchange Rate Pass-Through to Consumer Prices in Turkey: Nonparametric Kernel Estimation Evidence By Yilmaz, Nejat; Yucel, Eray
  7. Labor and Product Market Reforms and External Imbalances: Evidence from Advanced Economies By Romain A Duval; Davide Furceri; João Tovar Jalles
  8. Real Exchange Rates and the Earnings of Immigrants By Christian Dustmann; Hyejin Ku; Tanya Surovtseva
  9. Globalization, Trade Imbalances, and Labor Market Adjustment. By Rafael Dix-Carneiro; João Paulo Pessoa; Ricardo Reyes-Heroles; Sharon Traiberman
  10. Exchange Rate Parities and Taylor Rule Deviations By Christina Anderl; Guglielmo Maria Caporale
  11. Structural Changes in Investment and the Waning Power of Monetary Policy By Bloesch, Justin; Weber, Jacob P.
  12. How Does Profit Shifting Affect the Balance of Payments? By Shafik Hebous; Alexander D Klemm; Yuou Wu
  13. Sovereign Debt Ratchets and Welfare Destruction By Peter M. DeMarzo; Zhiguo He; Fabrice Tourre
  14. Regulatory and Bailout Decisions in a Banking Union By Andreas Haufler
  15. Cross-Country Unemployment Insurance, Transfers, and Trade-Offs in International Risk Sharing By Zeno Enders; David A. Vespermann
  16. The Impact of Remittance Flow on Real Effective Exchange Rate: Empirical Evidence from The Gambia By Joof, Foday; Touray, Sheriff

  1. By: Luisito BERTINELLI; Olivier CARDI; Romain RESTOUT
    Abstract: Motivated by recent evidence pointing at an increasing contribution of asymmetric shocks across sectors to economic fluctuations, we explore the labor market effects of technology shocks biased toward the traded sector. Our VAR evidence for seventeen OECD countries reveals that the non-traded sector alone drives the increase in total hours worked following a technology shock that increases permanently traded relative to non-traded TFP. The shock gives rise to a reallocation of labor which contributes to 35% on average of the rise in non-traded hours worked. Both labor reallocation and variations in labor income shares are found empirically connected with factor-biased technological change. Our quantitative analysis shows that a two-sector open econ- omy model with flexible prices can reproduce the labor market effects we document empirically once we allow for technological change biased toward labor together with additional specific elements. When calibrating the model to country-specific data, its ability to account for the cross-country reallocation and redistributive effects we esti- mate increases once we let factor-biased technological change vary between sectors and across countries..
    Keywords: Sector-biased technology shocks; Factor-augmenting effciency; Open economy; Labor reallocation; CES production function; Labor income share.
    JEL: E25 E32 F11 F41
    Date: 2021
  2. By: Callum Jones; Pau Rabanal
    Abstract: We study the role that changes in credit and fiscal positions play in explaining current account fluctuations. Empirically, the current account declines when credit increases, and when the fiscal balance declines. We use a two-country model with financial frictions and fiscal policy to study these facts. We estimate the model using annual data for the U.S. and “a rest of the world” aggregate that includes main advanced economies. We find that about 30 percent of U.S. current account balance fluctuations are due to domestic credit shocks, while fiscal shocks explain about 14 percent. We evaluate simple macroprudential policy rules and show that they help reduce global imbalances. By taming the financial cycle, macroprudential rules that react to domestic credit conditions or to domestic house prices would have led to a smaller and less volatile U.S. current account deficit. We also show that a countercylical fiscal policy rule that stabilizes output growth reduces the level and volatility of the U.S. current account deficit.
    Date: 2021–02–19
  3. By: Maryam Mirfatah (University of Surrey and CIMS); Vasco J. Gabriel (University of Surrey and NIPE-UM); Paul Levine (University of Surrey and CIMS)
    Abstract: We construct a small open economy (SOE) DSGE model interacting with the rest of the world (ROW). We depart from the standard SOE model along several dimensions. Firstly, we nest two different pricing paradigms: local currency pricing (LCP) alongside producer currency pricing (PCP). Second, the production function incorporates capital and intermediate inputs produced domestically and abroad. Finally, international asset markets are incomplete. Using US and Canadian data, we explore the empirical evidence for PCP vs LCP pricing paradigms through a Bayesian estimation likelihood race and a comparison with the second moments of the data. We then examine the implications of these two paradigms for the conduct of monetary policy using optimized Taylor-type inertial interest rate rules with a zero lower bound constraint. The main results are: first, in a likelihood race LCP easily beats PCP and fits reasonably the second moments of the data; second, whereas for the closed economy ROW the price-level rule closely mimics the optimized general inflation-output rule, for the SOE the corresponding result requires a nominal income rule.
    Date: 2021–03
  4. By: Ida, Daisuke; Iiboshi, Hirokuni
    Abstract: Using the method of Haberis and Lipinska (2020), this paper explores the effect of forward guidance (FG) in a two-country New Keynesian (NK) economy under the zero lower bound (ZLB). We simulate the effect of different lengths of FG or the zero interest rate policy under the circumstance of the global liquidity trap. We show that the size of the intertemporal elasticity of substitution plays an important role in determining the beggar-thy-neighbor effect or the prosper-thy-neighbor effect of home FG policy on the foreign economy. And in the former case, by targeting a minimum welfare loss of the individual country alone but not global welfare loss, two central banks can perform interesting FG bargaining in which they cooperatively adopt the same length of FG or strategically deviate from cooperation.
    Keywords: Forward guidance; Zero lower bound on nominal interest rates; Two-country new-Keynesian model; Taylor rule
    JEL: E52 E58 F41
    Date: 2021–03–22
  5. By: Jin Cao; Valeriya Dinger; Anna Grodecka-Messi; Ragnar Juelsrud; Xin Zhang
    Abstract: To shed light on the interaction between macroprudential and monetary policies, we study the inward transmission of foreign monetary policy in conjunction with domestic macroprudential and monetary policies in Norway and Sweden. Using detailed bank-level data we show how Norwegian and Swedish banks' lending reacts to monetary policy surprises arising abroad, controlling for the domestic macroprudential stance and the interaction between monetary and macroprudential policies. In both countries, the domestic macroprudential policy helps mitigate the effects arising after foreign monetary surprises.
    Keywords: monetary policy, macroprudential policy, policy interactions, bank lending, inward transmission, international bank lending channel
    JEL: E43 E52 E58 F34 F42 G21 G28
    Date: 2020–07–04
  6. By: Yilmaz, Nejat; Yucel, Eray
    Abstract: Exchange rate pass-through (ERPT) in the Turkish economy appeared again, especially after mid-2018 when policies to re-balance and soft-land the economy failed to a wide extent. Such re-appearance of the feedback from exchange rates to domestic prices deserves investigative efforts, having recalled that part of the stabilization success of the Central Bank of Turkey in early 2000s directly stemmed from its ability to reduce ERPT. In this paper, we aim to contribute to current policy discussions on Turkey by presenting our nonparametric kernel-based density function and regression estimates of the pass-through effect. Our findings are indicative not only of a sizable level of ERPT but also of its dependence on the size of currency depreciation.
    Keywords: Exchange Rate; Currency Depreciation; Pass-through to Inflation; Consumer Prices; Monetary Policy; Inflation Targeting; Central Bank Performance
    JEL: C51 E52 E58
    Date: 2021–02–08
  7. By: Romain A Duval; Davide Furceri; João Tovar Jalles
    Abstract: We explore the impact of major labor and product market reforms on current account dynamics using a new “narrative” database of major changes in employment protection for regular workers and product market regulation for non-manufacturing industries covering 26 advanced economies over the past four decades. Our main finding is that product market deregulation is associated with a weakening of the current account, while labor market deregulation is associated with an improvement. These effects are transitory and driven by both saving and investment responses. Labor and product market reforms both have a more positive impact on the current account balance when implemented under weak macroeconomic conditions. Our results are broadly consistent with predictions from recent DSGE models with endogenous producer entry and labor market frictions.
    Date: 2021–02–26
  8. By: Christian Dustmann (University College London, Department of Economics and CReAM); Hyejin Ku (University College London, Department of Economics and CReAM); Tanya Surovtseva (Universitat Pompeu Fabra, Department of Economics and Business and CReAM)
    Abstract: Higher price levels in the destination relative to the origin increase the effective real wages of immigrants, thereby affecting immigrants’ reservation and entry wages as well as their subsequent career trajectories. Based on micro-level longitudinal administrative data from Germany and exploiting within-country and across-cohort variations in the real exchange rate (RER) between Germany and countries that newly joined the European Union in the 2000s, we find that immigrants arriving with high RERs initially settle for lower paying jobs than comparable immigrants arriving with low RERs. In subsequent periods, however, wages of high RER arrivals catch up to that of their low RER counterparts, convergence achieved primarily through changes to better paying occupations and firms. Our findings thus point to the persistent regional price differences as one possible reason for immigrants’ downgrading, with implications for immigrants’ career profiles and the assessment of labor market impacts of immigration.
    Keywords: real exchange rate, reservation wage, immigrant downgrading, earnings assimilation
    JEL: J24 J31 J61 O15 O24
    Date: 2021–03
  9. By: Rafael Dix-Carneiro (Duke University and NBER); João Paulo Pessoa (São Paulo School of Economics); Ricardo Reyes-Heroles (Federal Reserve Board); Sharon Traiberman (New York University)
    Abstract: We study the role of global trade imbalances in shaping the adjustment dynamics in response to trade shocks. We build and estimate a general equilibrium, multicountry, multisector model of trade with two key ingredients: 1) consumption-saving decisions in each country commanded by representative households, leading to endogenous trade imbalances, and 2) labor market frictions across and within sectors, leading to unemployment dynamics and sluggish transitions to shocks. We use the estimated model to study the behavior of labor markets in response to globalization shocks, including shocks to technology, trade costs, and intertemporal preferences (savings gluts). We find that modeling trade imbalances changes both qualitatively and quantitatively the short- and long-run implications of globalization shocks for labor reallocation and unemployment dynamics. In a series of empirical applications, we study the labor market effects of shocks accrued to the global economy, their implications for the gains from trade, and we revisit the “China Shock” through the lens of our model. We show that the U.S. enjoys a 2.2 percent gain in response to globalization shocks. These gains would have been 73 percent larger in the absence of the global savings glut, but they would have been 40 percent smaller in a balanced-trade world.
    Keywords: Globalization, Trade Imbalances, Labor Markets, Unemployment
    JEL: F16
    Date: 2021–03
  10. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper investigates the PPP and UIP conditions by taking into account possible nonlinearities as well as the role of Taylor rule deviations under alternative monetary policy frameworks. The analysis is conducted using monthly data from January 1993 to December 2020 for five inflation-targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeting ones (the US, the Euro-Area and Switzerland). Both a benchmark linear VECM and a nonlinear Threshold VECM are estimated; the latter includes Taylor rule deviations as the threshold variable. The results can be summarised as follows. First, the nonlinear specification provides much stronger evidence for the PPP and UIP conditions, the estimated adjustment speed towards equilibrium being twice as fast. Second, Taylor rule deviations play an important role: the adjustment speed is twice as fast when deviations are small and the credibility of the central bank is higher. Third, inflation targeting tends to generate a higher degree of credibility for the monetary authorities thereby reducing deviations of the exchange rate from the PPP- and UIP-implied equilibrium.
    Keywords: PPP, UIP, nonlinearities, Taylor rules deviations, inflation targeting
    JEL: C32 F31 G15
    Date: 2021
  11. By: Bloesch, Justin; Weber, Jacob P.
    Abstract: We argue that secular change in both the production and composition of investment goods has weakened private investment's role in the transmission of monetary policy to labor earnings and consumption. We show analytically that fluctuations in the production of investment goods amplify the response of consumption to monetary policy shocks by varying labor income for hand-to-mouth agents. We document three secular changes that weaken this channel: (i) labor's share of value added in investment goods production has declined, (ii) the import share of investment goods has risen, and (iii) the composition of investment has shifted towards components that are less responsive to monetary policy. A small open economy, two agent New Keynesian model calibrated to match these facts implies a 38% and 26% weaker response of labor income and aggregate consumption, respectively, to real interest rate shocks in a 2010's economy relative to a 1960's economy.
    Date: 2021–03–22
  12. By: Shafik Hebous; Alexander D Klemm; Yuou Wu
    Abstract: Profit shifting by multinational enterprises—through manipulation of transfer prices of related-party trade, intragroup lending, or the location of intangibles—affects international flows, raising the question of its impact on the current account and external balances. This paper approaches this question theoretically and empirically. In theory, profit shifting distorts the components of the current account and bilateral current account balances but leaves a country’s aggregate net balance unaffected. There is, however, a real effect on current account balances, because taxes are paid to different jurisdictions. Moreover—in practice—the measured current account could change, because not all transactions are equally easy to track. Our panel empirical results broadly confirm that the current account balance tends to be, on average, unaffected by profit shifting, but taking heterogeneity into account we find that both the real tax effect and mismeasurement strengthen income balances—and thus the current account—in investment hubs.
    Date: 2021–02–19
  13. By: Peter M. DeMarzo; Zhiguo He; Fabrice Tourre
    Abstract: An impatient and risk-neutral government can sell bonds at any time to a more patient group of competitive lenders. The key problem: the government cannot commit to either a particular financing strategy, or a default strategy. Despite risk-neutrality, in equilibrium debt adjusts slowly towards a target debt-to-income level, exacerbating booms and busts. Most strikingly, for any debt maturity structure, the gains from trade are entirely dissipated when trading opportunities are continuous, as lenders compete with each other and the government competes with itself. Moreover, citizens who are more patient than their government are strictly harmed by the unrestricted borrowing. We fully characterize debt dynamics, ergodics, and comparative statics when income follows a geometric Brownian motion, and analyze several commitment devices that allow the sovereign to recapture some gains from trade: self-imposed restrictions on debt issuances and levels, as well as “market-imposed” discipline.
    JEL: C73 F32 F38 F43 F51 G12
    Date: 2021–03
  14. By: Andreas Haufler
    Abstract: We model a banking union of two countries whose banking sectors differ in their average probability of failure and externalities between the two countries arise from cross-border bank ownership. The two countries face (i) a regulatory decision of which banks are to be shut down before they can go bankrupt, and (ii) a loss allocation – or bailout – decision of who pays for banks that have failed despite regulatory oversight. Each of these choices can either be taken in a centralized or in a decentralized way. In our benchmark model the two countries always agree on a centralized regulation policy. In contrast, bailout policies are centralized only when international spillovers from cross-border bank ownership are strong, and banking sectors are highly profitable.
    Keywords: banking union, bank regulation, bailout policies
    JEL: G28 F33 H87
    Date: 2021
  15. By: Zeno Enders; David A. Vespermann
    Abstract: We assess to which degree an international transfer mechanism can enhance consumption risk sharing as well as allocative efficiency and apply our results to the implicit transfers generated by a potential European unemployment benefit scheme (EUBS). Specifically, we first develop a simple model with nominal rigidities to build intuition by deriving analytical results. We then use a rich DSGE model, calibrated to the Core and the Periphery of the euro area, to quantitatively analyze the changing dynamics that a EUBS brings about. We find that a EUBS can provide risk sharing by stabilizing relative consumption as well as unemployment differentials. Following supply shocks, however, the cross-country transfer embodied in the unemployment benefits is spent to a large degree on relatively inefficiently produced goods in the receiving countries. This renders the allocation even more inefficient by opening country-specific labor wedges further, also after government-spending shocks. Yet, since this trade-off between allocative efficiency and consumption risk sharing does not exist after certain demand shocks, the welfare effects of a EUBS depend on the cause for international unemployment differentials. A EUBS that is only active after specific shocks would therefore maximize overall welfare. Even without this feature, a EUBS would raise Core’s welfare in the quantitative model, leaving Periphery’s welfare almost unchanged.
    Keywords: cross-country transfers, international unemployment insurance, EMU European business cycles, optimum currency area, structural reforms
    JEL: F45 F44 E32
    Date: 2021
  16. By: Joof, Foday; Touray, Sheriff
    Abstract: The paper investigates the impact of remittance on real effective exchange rate in The Gambia. The Fully Modified OLS and Dynamic OLS are used on a monthly data from 2009M1 to 2019M12. FMOLS and DOLS estimations revealed that remittance has a positive significant impact on real effective exchange rate in The Gambia, implying that 1% increment in remittance leads to a real appreciation of the Gambian Dalasi (GMD) against the major currencies by 1.5%. Likewise, inflation is positively associated with REER, while the relationship amid foreign reserves and REER is inconclusive. Contrarily, money supply and monetary policy rate were found to have a depreciating impact on REER in both models.
    Keywords: Remittance, Real effective exchange rate, FMOLS, DOLS, The Gambia
    JEL: C1 E6
    Date: 2021–02–11

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