nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒04‒19
ten papers chosen by
Martin Berka
University of Auckland

  1. Global Supply Chains in the Pandemic By BarthŽlŽmy Bonadio; Zhen Huo; Andrei A. Levchenko; Nitya Pandalai-Nayar
  2. International medium-term business cycles By Hirschbühl, Dominik; Spitzer, Martin
  3. Risk Sharing in Currency Unions: The Migration Channel By Wilhelm Kohler; Gernot Müller; Susanne Wellmann
  4. Macroeconomic Effects of Global Policy and Financial Risks By OGAWA Eiji; Pengfei LUO
  5. Structural Reforms in DSGE Model By Vahagn Davtyan; Haykaz Igityan
  6. Exchange Rate Pass-through in Armenia By Stella Mnoyan
  7. A medium-scale Bayesian DSGE model for Kazakhstan with incomplete exchange rate pass through By Nurdaulet Abilov
  8. Output volatility and exchange rates: New evidence from the updated de facto exchange rate regime classifications By Dąbrowski, Marek A.; Papież, Monika; Śmiech, Sławomir
  9. The Global Monetary System and the Use of Local Currencies in ASEAN+3 By ITO Hiroyuki; KAWAI Masahiro
  10. Do Remittances Worsen Export Diversification? By Erik Vardanyan

  1. By: BarthŽlŽmy Bonadio (University of Michigan); Zhen Huo (Yale University); Andrei A. Levchenko (University of Michigan, NBER, & CEPR); Nitya Pandalai-Nayar (University of Texas, Austin. & NBER)
    Abstract: We study the role of global supply chains in the impact of the Covid-19 pandemic on GDP growth using a multi-sector quantitative framework implemented on 64 countries. We discipline the labor supply shock across sectors and countries using the fraction of work in the sector that can be done from home, interacted with the stringency with which countries imposed lockdown measures. One quarter of the total model-implied real GDP decline is due to transmission through global supply chains. However, ÒrenationalizationÓ of global supply chains does not in general make countries more resilient to pandemic-induced contractions in labor supply. This is because eliminating reliance on foreign inputs increases reliance on the domestic inputs, which are also disrupted due to nationwide lockdowns. In fact, trade can insulate a country imposing a stringent lockdown from the pandemic-shock, as its foreign inputs are less disrupted than its domestic ones. Finally, unilateral lifting of the lockdowns in the largest economies can contribute as much as 2.5% to GDP growth in some of their smaller trade partners.
    Keywords: production networks, international transmission, pandemic, Covid-19
    JEL: F41 F44
    Date: 2021–04
  2. By: Hirschbühl, Dominik; Spitzer, Martin
    Abstract: Foreign driven medium-term oscillations that originate from fluctuations in technological frontier countries gained widespread attention among policymakers. To study this phenomenon in the context of domestic and other foreign drivers of the euro area business cycle, we develop a medium-scale, two-economy dynamic stochastic general equilibrium model with endogenous growth and estimate it with Bayesian methods for the United States and the euro area for the period from 1984:Q1 to 2017:Q4. The framework suggests that foreign shocks can be a substantial source of medium-term oscillations that contribute to pro-cyclicality of real GDP across countries. Notably, US shocks to liquidity preference and trade demand explain more than a third of the euro area downturn during the Great Recession. JEL Classification: E2, E5, F1, F4, O4
    Keywords: Bayesian estimation, endogenous growth, R&D, resilience, two-economy DSGE
    Date: 2021–04
  3. By: Wilhelm Kohler; Gernot Müller; Susanne Wellmann
    Abstract: Country-specific business cycle fluctuations are potentially very costly for member states of currency unions because they lack monetary autonomy. The actual costs depend on the extent to which consumption is shielded from these fluctuations and thus on the extent of risk sharing across member states. The literature to date has focused on financial and credit markets as well as on transfer schemes as channels of risk sharing. In this paper, we show how the standard approach to quantify risk sharing can be extended to account for migration as an additional channel of cross-country risk sharing. In theory, migration should play a key role when it comes to insulating per capita consumption from aggregate fluctuations, and our estimates show that it does so indeed for US states, but not for the members of the Euro area (EA). Consistent with these results, we also present survey evidence which shows that migration rates are about 20 times higher in the US. Lastly, we find, in line with earlier work, that risk sharing is generally much more limited across EA members.
    Keywords: risk sharing, currency unions, labour migration, migration rates, Euro area
    JEL: F41 F22 G15 J61
    Date: 2021
  4. By: OGAWA Eiji; Pengfei LUO
    Abstract: Globalization has brought larger spillovers of global risks across borders since the 2000s. Specifically, global policy risk has sharply increased due to policy uncertainty in major countries in the recent decade, as seen in Brexit, US-China trade friction, and the COVID-19 pandemic. This paper empirically investigates the effects of both global policy risk and global financial risk on macroeconomy and financial markets in eight major countries from January 1997 to June 2020. We employed a Vector Autoregressive (VAR) framework to obtain interesting empirical results. First, global risks have recessionary effects on the macroeconomy, reducing production, deteriorating employment, lowering long-term interest rates, depressing prices, and reducing global trade. Second, global risks also have recessionary effects on financial markets, reducing stock prices, appreciating safe-haven currencies, and depreciating the other currencies. Third, the macroeconomies and the financial markets respond to global financial risk more significantly than global policy risk. Fourth, the recessionary effects of global risks vary depending on countries.
    Date: 2021–03
  5. By: Vahagn Davtyan (Monetary Policy Department, Central Bank of Armenia); Haykaz Igityan (Monetary Policy Department, Central Bank of Armenia)
    Abstract: This paper develops a DSGE model for a small open economy dividing it into tradable and non-tradable sectors in order to evaluate the impact of structural reforms on the economy for developing countries. The model is constructed and solved in a way that the steady state level of each sector’s employment rate is a function of its sector subsidy level. The economic meaning of such a result is that when a government subsidizes one of the sectors can become over employed. We also discuss the effects of exchange rate depreciation as an unconventional monetary policy tool when there is a ZLB problem or as a tool to boost the economy and to improve the current account. The results show that directly subsidizing the tradable sector can be a better policy than the depreciation of nominal exchange rate for making the economy more export oriented. The reason of such outcomes is the price stickiness of the sectors, which was validated by checking the sensitivity of the model with respect to its structural parameters. To conclude, for closing current account deficit or simply, for improving it the government should implement policies aimed at changing the structure of the economy.
    Keywords: small open economy, DSGE, monetary policy, taxes and subsidies, foreign exchange
    JEL: E12 E37 E52 E65 F31 H25
    Date: 2021–02
  6. By: Stella Mnoyan (Monetary Policy Department, Central Bank of Armenia)
    Abstract: In this paper, we develop a semi-structural macroeconomic model to estimate the Exchange Rate Pass-through in Armenia using Bayesian estimation. The pass-through both to import prices and core inflation is somewhat lower than the average results for comparable emerging economies reported in the literature. As we calculate time-varying pass-through rates we also explore critical factors causing shifts over time. The macroeconomic view of exchange rate pass-through incompleteness, especially the monetary policy credibility factor, plays a significant role.
    Keywords: Purchasing Power, Taylor Rule, Risk Premia, Exchange Rates, Exchange Rate Pass-through, Output Inflation, Bayesian Analysis, Econometric Modeling, Simulation
    JEL: F31 E31 E37 C11
    Date: 2019–10
  7. By: Nurdaulet Abilov (NAC Analytica, Nazarbayev University)
    Abstract: The paper analyzes the sources of business cycle fluctuations in Kazakhstan and the relevance of various frictions in the economy using a medium-scale DSGE model with imperfect exchange rate pass through. We estimate the model via Bayesian methods and present estimates of structural parameters of the model and highlight the role of various shocks in explaining the actual dynamics of observed variables. In the absence of quality and deseasonalized data we show that the DSGE model with time-varying markups possesses a reasonable level of accuracy as the one-sided Kalman filter predictions match the dynamics of the observable variables. Posterior estimates of the model show that the long-run growth rate of output is 4.5% per annum and the exchange rate pass through to domestic prices is between 33% and 40% within a quarter. We also find that risk premium shocks have played an important role in determining the inflation rate, the interest rate and the real exchange rate in the economy since 2015.
    Keywords: DSGE model; Incomplete exchange rate pass through; Bayesian estimation; Emerging economy; Kazakhstan.
    JEL: C11 E30 E32 E37
    Date: 2020–12
  8. By: Dąbrowski, Marek A.; Papież, Monika; Śmiech, Sławomir
    Abstract: This paper raises the question of whether the exchange rate regime matters for output volatility. Using the two de facto exchange rate regime classifications, it is demonstrated that the answer to this question is conditional ‘yes’. The key finding is that the exchange rate regime modifies the importance of determinants of output volatility rather than impacts it directly. This point is explained within a macroeconomic model of an open economy and is corroborated with empirical evidence for 48 advanced and emerging market economies. It is found that under the pegged regime the trade openness contributes to a reduction in output volatility, whereas the financial development has an opposite effect. Moreover, bigger economies experience lower output volatility irrespective of the exchange rate regime, albeit the beneficial size effect is stronger under floating regimes. The results do not depend on the classification employed to identify de facto pegs and floats.
    Keywords: exchange rate regime; output volatility; open economy macroeconomics; panel regressions
    JEL: C23 F33 F41
    Date: 2021–04–11
  9. By: ITO Hiroyuki; KAWAI Masahiro
    Abstract: When the new corona virus (COVID-19) pandemic triggered the global economic crisis in March 2020, the US dollar appreciated while the prices of many other financial assets plunged. The US dollar also appreciated in the immediate aftermath of the Global Financial Crisis (GFC) in 2008. These two episodes signify the important role the US dollar plays as an international currency and the dominant role of the US dollar and the limited use of the local currencies for international transactions, especially in Asia. Using a wide variety of data on the use of currencies for international transactions, we find that the US dollar is the predominantly important currency in the Asian region for cross-border trade, investment, finance, international reserve holding and exchange rate management. In many aspects of international transactions, the use of local currencies in the ASEAN+3 countries is underdeveloped. Recently, the Chinese renminbi is on its way to becoming one of the major international currencies. However, it is still a long way for the renminbi to become a major currency even in the Asian region.
    Date: 2021–03
  10. By: Erik Vardanyan (Economic Research Department, Central Bank of Armenia)
    Abstract: The paper explores the impact of workers’ remittances on the level of export diversification. The hypothesis is that significant inflow of remittances causes overvaluation of real exchange rate, which in turn deteriorates diversity of export. The theoretical base is in line with the Dutch disease phenomenon. The paper uses annual cross-national panel data over 2000-2016 period and System GMM methodology. The evidence suggests that indeed large inflow of remittances is associated with less diversified export. The economic intuition behind is that remittance-caused real exchange rate appreciation unevenly suppresses export of goods: some goods "suffer" more than others do. In terms of the number of product-names, a percentage point increase in remittances to GDP sent home "reduces" variety of export by approximately five active lines. There are other interesting findings as well. An improvement of government effectiveness facilitates overall export diversification; terms of trade improvement and rise of real exchange rate volatility mostly increase export concentration rather than alter number of exported product-names.
    Keywords: remittances, export diversification, export concentration, export variety, real exchange rate, System GMM
    JEL: F14 F24 F31
    Date: 2019–08

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