nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒04‒26
ten papers chosen by
Martin Berka
University of Auckland

  1. Barriers to Global Capital Allocation By Bruno Pellegrino; Enrico Spolaore; Romain Wacziarg
  2. Exchange rate policy and firm dynamics By Masahige Hamano; Francesco Pappadà
  3. Explaining the Volatility of the Real Exchange Rate in Emerging Markets By Manuel Agosin; Juan D. Díaz
  4. The International Monetary and Financial System By Gourinchas, PO; Rey, H; Sauzet, M
  5. Population aging, relative prices and capital flows across the globe By Andrea Papetti
  6. Dominant currency paradigm† By Gopinath, G; Boz, E; Casas, C; Díez, FJ; Gourinchas, PO; Plagborg-Møller, M
  7. Output falls and the international transmission of crises By Brinca, Pedro; João, Costa-Filho
  8. Monetary-Fiscal Interactions and Redistribution in Small Open Economies By Gergo Motyovszki
  9. Exploring the Macroeconomic Drivers of International Bilateral-Remittance Flows: A Gravity-Model Approach By Giorgio Fagiolo; Tommaso Rughi
  10. Robert Mundell, 1932-2021: Ahead of his Time By Xafa, Miranda

  1. By: Bruno Pellegrino; Enrico Spolaore; Romain Wacziarg
    Abstract: We quantify the impact of barriers to international investment, using a novel multi-country dynamic general equilibrium model with heterogeneous investors and imperfect capital mobility. Our model yields a gravity equation for bilateral foreign asset positions. We estimate this gravity equation using recently-developed foreign investment data that have been restated to account for offshore investment and financing vehicles. We show that a parsimonious implementation of the model with four barriers (geographic distance, cultural distance, foreign investment taxation, and political risk) accounts for a large share of the observed variation in bilateral foreign investment positions. Our model predicts (out of sample) a significant home bias, higher rates of return on capital in emerging markets, as well as “upstream” capital flows. In our benchmark calibration, we estimate that the capital misallocation induced by these barriers reduces World GDP by 7%, compared to a situation without barriers. We also find that barriers to global capital allocation contribute significantly to cross-country inequality: the standard deviation of log capital per employee is 80% higher than it would be in a world without barriers to international investment, while the dispersion in output per employee is 42% higher.
    JEL: E22 E44 F2 F3 F4 G15 O4
    Date: 2021–04
  2. By: Masahige Hamano (Waseda University); Francesco Pappadà (Paris School of Economics and Banque de France)
    Abstract: This paper examines the exchange rate policy in a two-country model with nom- inal wage rigidities and firm dynamics. We show that a exible exchange rate is unable to replicate the exible price allocation under incomplete financial markets. In our setting with heterogeneous firms, a monetary intervention dampens nominal exchange rate uctuations and stabilizes the firm selection in the export market. The reduction in wage setting uncertainty ensured by a fixed exchange rate is par- ticularly relevant when firms are small and homogeneous, thus providing a rationale for currency manipulation in exchange rate policies.
    Keywords: exchange rate policy, firm heterogeneity, nominal rigidities
    JEL: F32 F41 E40
  3. By: Manuel Agosin; Juan D. Díaz
    Abstract: This paper attempts to explain real effective exchange rate (REER) volatility in the world economy and particularly in emerging economies. Our first finding is that REER volatility is significantly higher in emerging and other developing countries than it is in advanced economies. The second, and perhaps the most important contribution of the paper, is that the variable that explains a significant percentage of the variability of REER volatility is the correlation between gross capital inflows (increases in liabilities with the rest of the world) and the return of gross capital outflows (decreases in assets held by domestic agents in the rest of the world). This correlation (with increases both in foreign liabilities and declines in assets held abroad expressed as positive magnitudes) is much higher in advanced economies – where, in fact, it approaches unity – than in emerging and other developing economies. The correlation between gross capital outflows and gross capital inflows is negatively and significantly associated with REER volatility. This result is robust to three types of estimation procedures: panel regressions of advanced and emerging economies; a dynamic panel data model that considers the persistence of REER volatility over time; and a logistic regression to model the propensity of having high REER volatility. All three procedures use a variety of control variables such as the exchange rate regime, the inflation rate, the real interest rate, and the volatility in the terms of trade. The major policy conclusion is that, regardless of their exchange rate regime, emerging economies that wish to open their financial account and do not have large institutional investors with assets abroad would do well to maintain sufficient cushions of foreign exchange reservesin order to counteract the negative effects of sudden capital flight. Another interesting finding of the paper is that countries adopting a floating exchange rate regime experience larger REER volatility that those who adhere to other regimes.
    Date: 2020–11
  4. By: Gourinchas, PO; Rey, H; Sauzet, M
    Abstract: International currencies fulfill different roles in the world economy, with important synergies across those roles. We explore the implications of currency hegemony for the external balance sheet of the United States, the process of international adjustment, and the predictability of the US dollar exchange rate. We emphasize the importance of international monetary spillovers and of the exorbitant privilege, and we analyze the emergence of a new Triffin dilemma.
    Date: 2019–08–02
  5. By: Andrea Papetti (Bank of Italy)
    Abstract: This paper develops a multi-country two-sector overlapping-generations model to study the impact of demographic change on the relative price of nontradables and current account balances. An aging population expands the relative demand for nontradables, exerting upward pressure on their relative price (structural transformation), and entails a willingness to save more, as households discount higher survival probabilities, and invest less, as firms face increasing labor scarcity. The general equilibrium reduction of the real interest rate (secular stagnation) dampens the increase in the relative price as savings become less profitable, thus lowering consumption at older ages. The model robustly predicts that faster-aging countries will face greater increases in the relative price of nontradables and unprecedented accumulations of net foreign asset positions (global imbalances) over the twenty-first century.
    Keywords: population aging, relative prices, capital flows, overlapping generations, tradable nontradable, secular stagnation, structural transformation, global imbalances
    JEL: E21 F21 J11 O11 O14
    Date: 2021–04
  6. By: Gopinath, G; Boz, E; Casas, C; Díez, FJ; Gourinchas, PO; Plagborg-Møller, M
    Abstract: We propose a “dominant currency paradigm” with three key features: dominant currency pricing, pricing complementarities, and imported inputs in production. We test this paradigm using a new dataset of bilateral price and volume indices for more than 2,500 country pairs that covers 91 percent of world trade, as well as detailed firm-product-country data for Colombian exports and imports. In strong support of the paradigm we find that (i) noncommodities terms-of-trade are uncorrelated with exchange rates; (ii) the dollar exchange rate quantitatively dominates the bilateral exchange rate in price pass-through and trade elasticity regressions, and this effect is increasing in the share of imports invoiced in dollars; (iii) US import volumes are significantly less sensitive to bilateral exchange rates, compared to other countries’ imports; (iv) a 1 percent US dollar appreciation against all other currencies predicts a 0.6 percent decline within a year in the volume of total trade between countries in the rest of the world, controlling for the global business cycle. We characterize the transmission of, and spillovers from, monetary policy shocks in this environment.
    Keywords: Economics, Commerce, Management, Tourism and Services, Commerce, Management, Tourism and Services
    Date: 2020–03–01
  7. By: Brinca, Pedro; João, Costa-Filho
    Abstract: Economic crises are usually transmitted across countries via either price or quantity shocks on the balance of payments. This paper complements the literature on international trade and business cycles by analyzing the role of imported intermediates goods inputs during the Great Financial Crisis in small open economies. We find that in an increasingly integrated world, intra-industry international trade is an important channel of propagation of shocks. A depreciation of the real exchange rate rises to costs of intermediate output, which decreases production. Our quantitative model is able to reproduce both the intensity and the velocity of the crisis in Mexico.
    Keywords: Great Recession, Intermediate goods, Business Cycle Accounting
    JEL: E27 E30 E32 E37
    Date: 2021–04–20
  8. By: Gergo Motyovszki
    Abstract: Ballooning public debts in the wake of the covid-19 pandemic can present monetary-fiscal policies with a dilemma if and when neutral real interest rates rise, which might arrive sooner in emerging markets: policymakers can stabilize debts either by relying on fiscal adjustments (AM-PF) or by tolerating higher inflation (PM-AF). The choice between these policy mixes affects the efficacy of the fiscal expansion already today and can interact with the distributive properties of the stimulus across heterogeneous households. To study this, I build a two agent New Keynesian (TANK) small open economy model with monetary-fiscal interactions. Targeting fiscal transfers more towards high-MPC agents increases the output multiplier of a fiscal stimulus, while raising the degree of deficit-financing for these transfers also helps. However, precise targeting is much more important under the AM-PF regime than the question of financing, while the opposite is the case with a PM-AF policy mix: then deficit-spending is crucial for the size of the multiplier, and targeting matters less. Under the PM-AF regime fiscal stimulus entails a real exchange rate depreciation which might offset "import leakage" by stimulating net exports, if the share of hand-to-mouth households is low and trade is price elastic enough. Therefore, a PM-AF policy mix might break the Mundell-Fleming prediction that open economies have smaller fiscal multipliers relative to closed economies.
    Keywords: monetary-fiscal interactions, small open economy, hand-to-mouth agents, redistribution, public debt, Ricardian equivalence
    Date: 2021
  9. By: Giorgio Fagiolo; Tommaso Rughi
    Abstract: This paper investigates the macroeconomic determinants of global bilateral remittances flows. Using data covering 216 World countries over the 2010-2017 period, we employ a gravity-model approach to explore the role payed by dyadic and country-specific covariates in explaining remittances. Robustly across alternative estimation techniques and specifications, we find that remittance flows are strongly impacted by size effects (i.e., number of migrants in the host country and population at home); transaction costs; common social, political and cultural ties; output growth rate and financial development in the home country. We also document the existence of a robust non-linear relationship between per-capita income at home and remittance flows, which we study both in the aggregate and in subsamples where home and host countries are categorized according to their income group. Overall, our results suggest that altruistic and self-interested motives non-trivially interact and may change across both host/home income groups and the level of income at home.
    Keywords: International remittances; International migration; Gravity Models.
    Date: 2021–04–14
  10. By: Xafa, Miranda (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: I met Bob Mundell in Washington in 1982, when I was already working at the International Monetary Fund, at a conference on the international monetary system. My first impression was the absolute confidence with which he expressed his views. When one of the participants in his panel claimed that the data did not confirm his views, he responded: "If the data do not confirm my views, then the data are wrong." I had the chance to follow his life and career, and to participate in the conferences he organized and chaired in the last two decades in his beloved Palazzo Mundell in Tuscany where he lived. Mundell pioneered the theory that serves as the basis for the design and implementation of economic policies in open economies. He extended the Keynesian closed-economy model, which focused on the relationship between interest rates and output, to open economies by introducing a third dimension: the exchange rate and capital mobility. It is hard to appreciate today his pathbreaking thinking on economic issues that had yet to emerge, at a time when the world was dominated by fixed exchange rates and capital controls. His research formed the foundation of international macroeconomics. In awarding him the 1999 Nobel prize in economics, the Swedish Academy of Sciences notes that: " His contribution to monetary theory and optimum currency areas remains outstanding and has inspired generations of researchers. Mundell chose the problems he analyzed with almost prophetic accuracy, predicting the future course of the international monetary system and international capital markets".
    Date: 2021–04

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