nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒05‒31
ten papers chosen by
Martin Berka
University of Auckland

  1. Liquidity Traps in a Monetary Union By Kollmann, Robert
  2. Global Business and Financial Cycles: A Tale of Two Capital Account Regimes By Acalin, Julien; Rebucci, Alessandro
  3. Currency-Induced External Balance Sheet Effects at the Onset of the COVID-19 Crisis By Hale, Galina B; Juvenal, Luciana
  4. Exchange rate misalignments and current accounts in BRICS countries By Rikhotso, Prayer; Bonga-Bonga, Lumengo
  5. To What Extent Are Tariffs Offset By Exchange Rates? By Jeanne, Olivier; Son, Jeongwon
  6. Italy in the Eurozone By Keuschnigg, Christian; Kirschner, Linda; Kogler, Michael; Winterberg, Hannah
  7. Heterogeneous Global Booms and Busts By Maryam Farboodi; Péter Kondor
  8. 50 years of capital mobility in the Eurozone: breaking the Feldstein-Horioka Puzzle By Mariam Camarero; Alejandro Munoz; Cecilio Tamarit
  9. A Quantitative Model for the Integrated Policy Framework By Adrian, Tobias; Erceg, Christopher J.; Lindé, Jesper; Zabczyk, Pawel; Zhou, Jianping
  10. Systemic Risk Spillovers Across the EURO Area By Alexandros Skouralis

  1. By: Kollmann, Robert
    Abstract: The closed economy macro literature has shown that a liquidity trap can result from the self-fulfilling expectation that future inflation and output will be low (Benhabib et al. (2001)). This paper investigates expectations-driven liquidity traps in a two-country New Keynesian model of a monetary union. In the model here, country-specific productivity shocks induce synchronized responses of domestic and foreign output, while country-specific aggregate demand shocks trigger asymmetric domestic and foreign responses. A rise in government purchases in an individual country lowers GDP in the rest of the union. The result here cast doubt on the view that, in the current era of ultra-low interest rates, a rise in fiscal spending by Euro Area (EA) core countries would significantly boost GDP in the EA periphery (e.g. Blanchard et al. (2016)).
    Keywords: Euro Area; international fiscal spillovers; liquidity trap; monetary union; terms of trade; zero lower bound
    JEL: E3 E4 F2 F3 F4
    Date: 2020–08
  2. By: Acalin, Julien; Rebucci, Alessandro
    Abstract: Using a new equity price-based measure of the global financial cycle, this paper evaluates the relative importance of global financial shocks for quarterly equity returns and output growths in a large sample of advanced and emerging economies, as well as in South Korea and China--two countries on different sides of the trilemma triangle of international finance. We document that global financial shocks in both China and South Korea explain a substantial share of equity return variability (20 and 50 percent of total variance, respectively), but a much smaller portion of real output fluctuations (less than 10 percent in Korea and negligible in the case of China). We also find that the combination of a closer capital account and a more rigid exchange rate regime, as in China, is associated with some costs in terms of diversification opportunities quantified by very large exposures to domestic financial and real shocks, dwarfing the contribution of any other shock in the model. More surprisingly, the combination of a relatively open capital account and a flexible exchange rate, as in South Korea, not only is associated with a higher exposure to the global financial cycle than in China but also with a significant incidence of domestic financial shocks on output fluctuations.
    Keywords: business cycles; China; Factor-models; Global financial cycle; Panel VARs; South Korea
    JEL: C38 E44 F44 G15
    Date: 2020–08
  3. By: Hale, Galina B; Juvenal, Luciana
    Abstract: At the onset of the COVID-19 economic crisis, as in other crisis episodes, the flight to safety was accompanied by a rapid appreciation of "safe haven" currencies. We quantify the aggregate external balance sheet effects of this episode using new data on the currency composition of cross-border portfolio debt and other investment (which mostly represents banking positions) for 48 countries. We find that, while currency mismatch was present on many countries' external balance sheets at the onset of the current crisis, the magnitude of this mismatch was modest and the resulting external balance sheet losses at the aggregate level are small. To account for the potential mismatch that may have resulted from domestic investments by financial intermediaries borrowing abroad, we compute an upper bound for possible losses and find that they might be quite sizable for a number of countries. These results highlight the importance of accounting for domestic assets when assessing currency-induced balance sheet effects.
    Keywords: Balance sheet effects; Coronavirus; COVID-19; currency mismatch; Flight to safety
    JEL: F32 F34 G15
    Date: 2020–08
  4. By: Rikhotso, Prayer; Bonga-Bonga, Lumengo
    Abstract: This paper assesses the impact of misalignment on the current accounts of BRICS countries using the empirical approaches that address the issue of model uncertainty and asymmetry. The results of the empirical analysis empirical confirm that the relationship between misalignment and current account is asymmetric in that overvaluation of BRICS currencies deteriorate the current account and undervaluation does improve it. Moreover, the results of the empirical analysis advocate the use of real effective exchange rate as an effective macroeconomic policy instrument to enhance relative export competitiveness in BRICS. Further studies in this area should examine the impact of marginal propensity to import and how each country’s propensity to import affects the current balance given episodes of overvaluation and undervaluation.
    Keywords: currency misalignment, current account, feasible generalised least square
    JEL: C11 C5 C51 F14 F32
    Date: 2021–05–12
  5. By: Jeanne, Olivier; Son, Jeongwon
    Abstract: In theory, we should expect tariffs to be partially offset by a currency appreciation in the tariff-imposing country or by a depreciation in the country on which the tariff is imposed. We find, based on a calibrated model, that the tariffs imposed by the US in 2018-19 should not have had a large impact on the dollar but may have significantly depreciated the renminbi. This prediction is consistent with a high-frequency event analysis looking at the impact of tariff-related news on the dollar and the renminbi. We find that tariffs explained at most one fifth of the dollar effective appreciation but around two thirds of the renminbi effective depreciation observed in 2018-19.
    Keywords: Dollar; Exchange Rates; Renminbi; tariffs
    JEL: F31 F41
    Date: 2020–08
  6. By: Keuschnigg, Christian; Kirschner, Linda; Kogler, Michael; Winterberg, Hannah
    Abstract: Using a DSGE model with nominal wage rigidity, we investigate two scenarios for the Italian economy. The first considers sustained policy commitment to reform. The results indicate the possibility of `growing out of bad initial conditions', if fiscal consolidation is combined with a program for bank recovery and for competitiveness and growth. The second scenario involves a strong asymmetric recession. It is likely to be very severe under the restrictions of the currency union. A benign exit from the Eurozone with stable investor expectations could substantially dampen the short-run impact. Stabilization is achieved by monetary expansion, combined with exchange rate depreciation. However, investor panic may lead to escalation. Capital market reactions would offset the benefits of monetary autonomy and much delay the recovery.
    Keywords: bad loans; Bank Recapitalization; competitiveness; eurozone crisis; Italy; Sovereign debt
    JEL: E42 E44 E60 F30 F36 F45 G15 G21
    Date: 2020–07
  7. By: Maryam Farboodi; Péter Kondor
    Abstract: We investigate the heterogeneous boom and bust patterns across countries that emerge as a result of global shocks. Our analysis sheds light on the emergence of core and periphery countries, and the joint determination of the depth of recessions and tightness of credit markets across countries. The model implies that interest rates are similar across core and periphery countries in booms, with larger credit and output growth in periphery countries. However, a common global shock that leads to a credit crunch across the globe gives rise to a sharper spike in interest rates and a deeper recession in periphery countries, while a credit flight to the core alleviates the adverse consequences in these countries. We explore the implication of the model about credit spreads, portfolio rebalancing, investment, non-performing debt and concentration of debt ownership during booms and busts, both in the time series and in the cross-section, and connect them to existing stylized facts. We further demonstrate how the anatomy of the global economy evolves as a result of aggregate demand and supply shocks to financing, such as a global saving glut.
    JEL: F4 F44 G15
    Date: 2021–05
  8. By: Mariam Camarero (University Jaume I, University of Valencia, University of Valencia); Alejandro Munoz; Cecilio Tamarit
    Abstract: This paper assesses capital mobility for the Eurozone countries by studying the long-run relationship between domestic investment and savings for the period 1970-2019. Our main goal is to analyze the impact of economic events on capital mobility during this period. We apply the cointegration methodology in a setting that allows us to identify endogenous breaks in the long-run saving-investment relationship. Specifically, the breaks coincide with relevant economic events. We find a downward trend in the saving-investment retention since the 70s for the so-called “core countries†, whereas this trend is not so clear in the peripheral, where the financial and sovereign crises have had a more substantial impact. Our analysis captures other economic events: the Exchange Rate Mechanism (ERM) crisis, the German reunification, the European financial assistance program, and the post-crisis period. Our results also indicate that the original euro design had some caveats that remain unsolved.
    Keywords: Capital mobility; Feldstein-Horioka puzzle; Multiple Structural Breaks; Cointegration, unit roots
    JEL: F
    Date: 2021
  9. By: Adrian, Tobias; Erceg, Christopher J.; Lindé, Jesper; Zabczyk, Pawel; Zhou, Jianping
    Abstract: Many central banks have relied on a range of policy tools, including foreign exchange intervention (FXI) and capital flow management tools (CFMs), to mitigate the effects of volatile capital flows on their economies. We develop an empirically-oriented New Keynesian model to evaluate and quantify how using multiple policy tools can potentially improve monetary policy tradeoffs. Our model embeds nonlinear balance sheet channels and includes a range of empirically-relevant frictions. We show that FXI and CFMs may improve policy tradeoffs under certain conditions, especially for economies with less well-anchored inflation expectations, substantial foreign currency mismatch, and that are more vulnerable to shocks likely to induce capital outflows and exchange rate pressures.
    Keywords: Capital Flow Measures; DSGE model; emerging economies; FX intervention; monetary policy
    JEL: C54 E52 E58 F41
    Date: 2020–07
  10. By: Alexandros Skouralis
    Abstract: The high degree of financial contagion across the Euro area during the sovereign debt crisis highlighted the importance of systemic risk. In this paper we employ a Global VAR (GVAR) model to analyse the systemic risk spillovers across the Euro area and to assess their role in the transmission of monetary policy. The results indicate a strong interconnectedness among core countries and also that peripheral economies have a disproportionate importance in spreading systemic risk. A systemic risk shock results in economic slowdown domestically and causes negative spillovers to the rest of the EMU economies. To examine how monetary policy impacts systemic risk, we incorporate high-frequency monetary surprises into the model. We find evidence of the risk-taking channel during normal times, whereas the relationship is reversed in the period of the ZLB with expansionary shocks to result in a more stable financial system. Our findings indicate that the signalling channel is the main driver of this effect and that the initiation of the QE program boosts the economic activity but results in higher systemic risk. Finally, our results suggest that spillovers play an important role in the transmission of the monetary policy and that there is evidence of significant heterogeneity amongst countries’ responses with core countries to benefit the most from changes in monetary policy.
    Keywords: Systemic risk, Global VAR model, Eurozone, High-frequency monetary policy shocks
    JEL: C32 E44 F36 F45
    Date: 2021

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