nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒05‒03
eight papers chosen by
Martin Berka
University of Auckland

  1. Perspectives on Trade and Structural Transformation By George A. Alessandria; Robert C. Johnson; Kei-Mu Yi
  2. Testing for UIP: Nonlinearities, Monetary Announcements and Interest Rate Expectations By Christina Anderl; Guglielmo Maria Caporale
  3. The Dynamic Impact of FX Interventions on Financial Markets By Menkhoff, Lukas; Rieth, Malte; Stöhr, Tobias
  4. Three Decades of International Financial Crises: What Have We Learned and What Still Needs to be Done? By Buckley , Ross; Avgouleas, Emilios; Arner , Douglas
  5. Exchange Rates and Insulation in Emerging Markets By Eichengreen, Barry; Park, Donghyun; Ramayandi, Arief; Shin, Kwanho
  6. Methodological issues in the estimation of current account imbalances By Valerio Della Corte; Claire Giordano
  7. The Importance of External Shocks and Global Monetary Conditions for A Small-Open Economy By Gulnihal Tuzun
  8. Risky Gravity By Luciana Juvenal; Paulo Santos Monteiro

  1. By: George A. Alessandria; Robert C. Johnson; Kei-Mu Yi
    Abstract: This paper surveys macroeconomic and microeconomic perspectives on the role of international trade in structural transformation. We start by describing canonical frameworks that have been used to quantify how trade influences sectoral shares of employment and value added. We then pivot to survey micro-empirical evidence on the impact of changes in trade on the allocation of labor across sectors and productivity at the firm level. In this, we put special emphasis on the role of participation in global value chains and inward foreign direct investment in mediating these effects. Next, we evaluate evidence on the barriers to trade faced by low-income countries, with special attention to recent work that measures these costs taking firm dynamics into account. We conclude by discussing how these micro-perspectives can be integrated into macro-models to advance our understanding of structural change.
    JEL: F1 F43 O11 O4
    Date: 2021–04
  2. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper re-examines the UIP relation by estimating first a benchmark linear Cointegrated VAR including the nominal exchange rate and the interest rate differential as well as central bank announcements, and then a Cointegrated Smooth Transition VAR (CVSTAR) model incorporating nonlinearities and also taking into account the role of interest rate expectations. The analysis is conducted for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeters (the US, the Euro-Area and Switzerland) using daily data from January 2000 to December 2020. We find that the nonlinear framework is more appropriate to capture the adjustment towards the UIP equilibrium, since the estimated speed of adjustment is substantially faster and the short-run dynamic linkages are stronger. Further, interest rate expectations play an important role: a fast adjustment only occurs when the market expects the interest rate to increase in the near future, namely central banks are perceived as more credible when sticking to their goal of keeping inflation at a low and stable rate. Also, central bank announcements have a more sizeable short-run effect in the nonlinear model. Finally, UIP holds better in inflation targeting countries, where monetary authorities appear to achieve a higher degree of credibility.
    Keywords: UIP, exchange rate, nonlinearities, asymmetric adjustment, CVAR (Cointegrated VAR), CVSTAR (Cointegrated Smooth Transition VAR), interest rate expectations, interest rate announcements
    JEL: C32 F31 G15
    Date: 2021
  3. By: Menkhoff, Lukas (HU Berlin and DIW Berlin); Rieth, Malte (DIW Berlin); Stöhr, Tobias (Kiel Institute for the World Economy)
    Abstract: Evidence on the effectiveness of FX interventions is either limited to short horizons or hampered by debatable identification. We address these limitations by identifying a structural vector autoregressive model for the daily frequency with an external instrument. Applying this approach to the most important, freely floating currencies, we find that FX intervention shocks significantly affect exchange rates and that this impact persists for months. We show for Japan and the US that interest rates tend to fall in response to sales of the domestic currency, whereas stock prices of large (exporting) firms increase after devaluation of the domestic currency.
    Keywords: foreign exchange intervention; structural VAR; exchange rates; interest rates; stock prices;
    JEL: F31 F33 E58
    Date: 2019–12–04
  4. By: Buckley , Ross (University of New South Wales); Avgouleas, Emilios (University of Edinburgh); Arner , Douglas (University of Hong Kong)
    Abstract: Fragility that periodically erupts into a full-blown financial crisis appears to be an integral feature of market-based financial systems in spite of the emergence of sophisticated risk management tools and regulatory systems. If anything, the increased frequency of modern crises underscores how difficult it is to diversify away systemic risk and that perceptions of perfectly stable financial systems are normally flawed, even if the source of the next crisis remains well concealed to the expert eye. Although it is impossible to forecast a financial crisis with a high degree of accuracy and certainty, earlier crises always leave lessons useful in preparation for future crises, from whatever source. It is thus clear that the best way to deal with preventing and addressing major financial crises is to build the defenses of the financial system, including effective institutions, while at the same time trying to identify potential sources of crisis. We should take every opportunity to learn and work to build stronger and more effective financial systems. This paper compares and contrasts the three major crises of the past 3 decades, both to distill the lessons to be learned from them and to identify what more can be done to strengthen our financial systems. As the world addresses the financial impact of the COVID-19 pandemic, the centrality of these lessons is clear.
    Keywords: Asian financial crisis; COVID-19 crisis; eurozone debt crisis; financial stability; global financial crisis; systemic risk
    JEL: F31 F34 G01 G32
    Date: 2020–06–19
  5. By: Eichengreen, Barry (University of California, Berkeley); Park, Donghyun (Asian Development Bank); Ramayandi, Arief (Asian Development Bank); Shin, Kwanho (Korea University)
    Abstract: The insulating properties of flexible exchange rates have long been a highly contentious issue in emerging markets—not least in Asian emerging markets. A number of recent theoretical and empirical studies question whether a trade-off exists between rigid exchange rate regimes and insulation from foreign shocks when the degree of international capital mobility is high. On the other hand, Obstfeld, Ostry, and Qureshi (2017) find that countries with flexible exchange rate regimes experience less real and financial instability in the face of global financial volatility. We contribute to this empirical debate by significantly extending their analysis. Overall, our findings are broadly consistent with their results, suggesting that flexible exchange rate regimes are better at insulating emerging markets from external shocks. There are, however, a few subtle differences. In particular, we find somewhat less robust evidence that limited flexibility is enough to insulate emerging markets from shocks.
    Keywords: exchange rate; exchange rate regime; fixed; flexible; insulate; intermediate; shock
    JEL: F31
    Date: 2020–02–26
  6. By: Valerio Della Corte (Bank of Italy); Claire Giordano (Bank of Italy)
    Abstract: The study outlines the main challenges when setting up a “current account (CA) model” in order to measure external imbalances. This model is a reduced-form relationship between the CA balance and a set of CA fundamental and policy drivers, from which a CA “norm” may be derived and against which the actual CA balance is appraised. After having formally outlined a standard CA model similar to those developed by the main international institutions, the paper raises several concerns in CA modelling, amongst which the measurement and selection of both the dependent and explanatory variables and some technical issues in the estimation procedure. Recent trends affecting the CA balance, such as the expansion of global firms and the rise in corporate saving, as well as the outbreak of the COVID-19 pandemic, are also discussed. The paper does not prescribe fully-fledged solutions to the manifold issues discussed, but rather aims to raise awareness of the latter, as well to provide some hints on how to tackle at least some of these challenges.
    Keywords: current account balance, cyclically-adjusted current account, external imbalances
    JEL: F00 F20 F32 F41
    Date: 2021–04
  7. By: Gulnihal Tuzun
    Abstract: The purpose of this study is to assess how do the domestic and foreign shocks affect the fundamental macroeconomic variables of a small-open economy, and in particular Turkey. The domestic supply, demand and monetary policy shocks as well as their global counterparts are identified by employing a Bayesian structural VAR model with sign and zero restrictions. After a US monetary tightening shock, the results demonstrate an appreciation of US Dollar against Turkish lira, a rise in the consumer price level in the Turkish economy, a contractionary monetary policy shock accompanied by a fall in the real output level. This reaction is a strong evidence of the existence of a global interest rate contagion present in the international macroeconomics literature.
    Keywords: Bayesian VAR, Sign and zero restrictions, Shock identification, Monetary policy
    JEL: C11 C32 E52 F41
    Date: 2021
  8. By: Luciana Juvenal; Paulo Santos Monteiro
    Abstract: We consider the canonical trade model with heterogeneous firms, love for variety and trade costs, and integrate it in the consumption CAPM model. This yields a structural gravity equation that includes an additional factor related to risk premia. Empirical evidence based on firm-level data confirms the importance of cross-sectional heterogeneity in risk and time-varying risk premia to shape bilateral trade flows. The structural gravity model augmented to account for fluctuations in risk premia offers a compelling explanation for trade collapses during abrupt economic downturns.
    Keywords: Risk premia, Gravity equation, Trade collapse
    JEL: F12 F41 F44
    Date: 2021–04

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