nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒09‒13
eight papers chosen by
Martin Berka
University of Auckland

  1. A Theory of the Global Financial Cycle By J. Scott Davis; Eric van Wincoop
  2. Fiscal and exchange rate policies drive trade imbalances: New estimates By Joseph E. Gagnon; Madi Sarsenbayev
  3. Exchange rate fluctuations and the financial channel in emerging economies By Beckmann, Joscha; Comunale, Mariarosaria
  4. Commodity Prices and Global Inflation, 1851-1913 By Stefan Gerlach; Rebecca Stuart
  5. Financial Development and Economic Growth in a Microfounded Small Open Economy Model By Zhang, Bo; Zhou, Peng
  6. Globalisation and the Decoupling of Inflation from Domestic Labour Costs By Emanuel Kohlscheen; Richhild Moessner
  7. Reverse Dutch Disease with Trade Costs: Prospects for Agriculture in Africa's Oil-Rich Economies By Porteous, Obie C.
  8. Spillovers from Tax Shocks to the Euro Area By Sascha Mierzwa

  1. By: J. Scott Davis; Eric van Wincoop
    Abstract: We develop a theory to account for changes in prices of risky and safe assets and gross and net capital flows over the global financial cycle (GFC). The multi-country model features global risk-aversion shocks and heterogeneity of investors both within and across countries. Within-country heterogeneity is needed to account for the drop in gross capital flows during a negative GFC shock (higher global risk-aversion). Cross-country heterogeneity is needed to account for the differential vulnerability of countries to a negative GFC shock. The key vulnerability is associated with leverage. In both the data and the theory, leveraged countries (net borrowers of safe assets) deleverage through negative net outflows of risky assets and positive net outflows of safe assets, experience a rise in the current account and a greater than average drop in risky asset prices. The opposite is the case for non-leveraged countries (net lenders of safe assets).
    JEL: F30 F40
    Date: 2021–09
  2. By: Joseph E. Gagnon (Peterson Institute for International Economics); Madi Sarsenbayev (Peterson Institute for International Economics)
    Abstract: A 2017 PIIE analysis found that fiscal balances and foreign exchange intervention—more broadly, government purchases of foreign assets to influence exchange rates—are the most important factors behind differences in current account balances across countries and over time. The current account is the broadest measure of a country's balance of trade. It records all income received from foreigners and payments made to foreigners. It is dominated by trade in goods and services but also includes income receipts on domestically owned factors of production (capital and labor) that are employed abroad and payments to foreign-owned factors of production at home. A country’s fiscal surplus and official purchases of foreign assets tend to increase its current account balance. Net official purchases by other countries tend to reduce current account balances in the home country, especially when it issues a reserve currency. This paper updates the earlier analysis with three more years (2016–18) and roughly 40 percent more observations. New analysis of net international investment positions (which largely reflect cumulated current account balances) finds even stronger evidence for the dominant role of official reserve positions in explaining differences in current account balances across countries. An increase in a country’s official reserve position causes essentially a dollar-for-dollar increase in its net international investment position.
    Keywords: current account balance; fiscal balance; foreign exchange intervention
    JEL: F32 F41 F42
    Date: 2021–03
  3. By: Beckmann, Joscha; Comunale, Mariarosaria
    Abstract: This paper assesses the financial channel of exchange rate fluctuations for emerging countries and the link to the conventional trade channel. We analyze whether the effective exchange rate affects GDP growth, the domestic credit and the global liquidity measure as the credit in foreign currencies, and how global liquidity affects GDP growth. We make use of local projections in order to look at the shocks’ transmission covering 11 emerging market countries for the period 2000Q1–2016Q3. We find that foreign denominated credit plays an important macroeconomic role, operating through various transmission channels. The direction of effects depends on country characteristics and is also related to the policy stance among countries. We find that domestic appreciations increase demand regarding foreign credit, implying positive effects on investment and GDP growth. However, this is valid only in the short-run; in the medium-long run, an increase of credit denominated in foreign currency (for instance, due to apeiation) decreases GDP. The financial channel works mostly in the short run except for Brazil, Malaysia, and Mexico, where the trade channel always dominates. Possibly there is a substitution effect between domestic and foreign credit in the case of shocks in exchange rate.
    JEL: F31 F41 F43 G15
    Date: 2021–08–30
  4. By: Stefan Gerlach; Rebecca Stuart
    Abstract: This paper uses annual data to study the interaction of consumer and commodity prices in 15 economies over the period 1850-1913. We find that consumer price inflation in all 15 countries co-moves with a broad measure of changes in commodity prices. Consumer prices comove most strongly with changes in metal prices, in particular pig iron prices. Furthermore, changes in pig iron prices and production, which have attracted much attention in the literature on 19th century US business cycles, co-move with the international business cycle, suggesting that pig iron prices offer a transmission channel through which international business cycle movements affect inflation.
    Keywords: commodity prices, Gold standard, global inflation, pig iron
    JEL: E31 F40 N10
    Date: 2021–09
  5. By: Zhang, Bo (Beijing University of Chemical Technology); Zhou, Peng (Cardiff Business School)
    Abstract: The global financial crisis since 2008 revived the debate on whether or not and to what extent financial development contributes to economic growth. This paper reviews different theoretical schools of thought and empirical findings on this nexus, building on which we aim to develop a unified, microfounded model in a small open economy setting to accommodate various theoretical possibilities and empirical observations. The model is then calibrated to match some well-documented stylized facts. Numerical simulations show that, in the long run, the welfaremaximizing level of financial development is lower than the growth-maximizing level. In the short run, the price channel (through world interest rate) dominates the quantity-channel (through financial productivity), suggesting a vital role of international cooperation in tackling systemic risk of the global financial system.
    Keywords: economic growth; financial development; open economy; DSGE
    Date: 2021–09
  6. By: Emanuel Kohlscheen; Richhild Moessner
    Abstract: We provide novel systematic cross-country evidence that the link between domestic labour markets and CPI inflation has weakened considerably in advanced economies during recent decades. The central estimate is that the short-run pass-through from domestic labour cost changes to core CPI inflation decreased from 0.25 in the 1980s to just 0.02 in the 2010s, while the longrun pass-through fell from 0.36 to 0.03, with the estimates in the 2010s no longer significant. We show that the timing of the collapse in the pass-through coincides with a steep increase in import penetration from a group of major manufacturing EMEs around the turn of the millennium, which signals increased competition and market contestability.
    Keywords: competition, globalisation, import penetration, inflation, labour market, pass-through, wage
    JEL: E31 E50 F10 F60 J30
    Date: 2021
  7. By: Porteous, Obie C.
    Keywords: International Development, International Relations/Trade, Agricultural and Food Policy
    Date: 2021–08
  8. By: Sascha Mierzwa (Philipps-Universitaet Marburg)
    Abstract: I study the spill-over effects of legislated discretionary tax changes in the United States, Germany, and the United Kingdom to 11 Eurozone countries for the period 1980Q1–2018Q4 employing Local Projections (Jordà , 2005). In general, I find spillovers from US tax legislation to have the smallest effects on Eurozone countries’ real GDP and UK tax changes to exert the largest effect. There is substantial heterogeneity in both the sign and size of spillovers after US and German aggregated tax cuts, whereas UK tax cuts generally have beneficial effects. When I focus the analysis on the state dependent case, I do not find clear evidence of larger spillovers when the recipient country is in a recession. The sign and size of the spillovers instead depend on the origin and sign of the tax change, as well as the recipient country, rather than on the overall state of the business cycle. Moreover, German tax cuts can be contractionary when recipient countries are in a recession, as the short-term interest rate rises. US tax cuts, on the other hand, stimulate the exports of most countries regardless of the state of the business cycle.
    Keywords: Fiscal policy, tax policy, legislated tax changes, state dependence, Eurozone, fiscal spillovers, asymmetric effects, United States, Germany, United Kingdom, local projections, narrative approach
    JEL: E62 E63 F45 H20 H30 K34
    Date: 2021

This nep-opm issue is ©2021 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.