nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒09‒20
thirteen papers chosen by
Martin Berka
University of Auckland

  1. A Theory of the Global Financial Cycle By J. Scott Davis; Eric Van Wincoop
  2. The Effects of Money-financed Fiscal Stimulus in a Small Open Economy By Okano, Eiji; Eguchi, Masataka
  3. Current Account Dynamics: On Income and Trade Balance By YOSHIDA Yushi; Weiyang ZHAI
  4. Structural Change Ramifications of Consumer Credit Expansion in a Two Sector Growth Model By Esra Nur Ugurlu
  5. The IMF’s role in sovereign debt restructurings By global financial governance issues, IRC Task Force on IMF
  6. The Mortgage Cash Flow Channel of Monetary Policy Transmission: A Tale of Two Countries By Daniel H. Cooper; Vaishali Garga; Maria Jose Luengo-Prado
  7. The Structural Outcomes of Investment Surges By Mateo Hoyos; Emiliano Libman; Arslan Razmi
  8. The impact of COVID-19 on directions and structure of international trade By Christine Arriola; Przemyslaw Kowalski; Frank van Tongeren
  9. Wages and inflation in Mexican manufacturing. A two-period comparison: 1994-2003 and 2007-2016 By Carbajal-De-Nova, Carolina
  10. ECB euro liquidity lines By Silvia Albrizio; Iván Kataryniuk; Luis Molina; Jan Schäfer
  11. Global Value Chains and Unequal Exchange- Market Power and Monopoly Power By Deepankar Basu; Ramaa Vasudevan
  12. Interdependence Between States and Economies By Maxime Delabarre
  13. Asymmetric monetary policy rules for the euro area and the US By Maih, Junior; Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka

  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).
    Keywords: Global Financial Cycle; Capital Flows; Current Account
    JEL: F30 F40
    Date: 2021–09–09
  2. By: Okano, Eiji; Eguchi, Masataka
    Abstract: In this paper, we analyze the effects of money-financed (MF) fiscal stimulus and compare them with those resulting from a conventional debt-financed (DF) fiscal stimulus in a small open economy. We find that in normal times which is a period when a zero lower bound (ZLB) on the nominal interest rate is not applicable, MF fiscal stimulus is effective in increasing output. In a liquidity trap where the ZLB is applicable, even though the decrease in both consumer price index (CPI) inflation and output is more severe than in a closed economy when there is no fiscal response, MF fiscal stimulus is effective in stabilizing both. Accordingly, we show that even in an imperfect pass-through environment including a liquidity trap, an increase in government expenditure under MF fiscal stimulus is effective. In contrast, our policy implications concerning an increase in government expenditure under DF fiscal stimulus lie opposite to Gali, Jordi (2020), “The Effects of a Money-financed Fiscal Stimulus,” Journal of Monetary Economics, 115, 1-19, assuming a closed economy. In normal times, an increase in government expenditure under the DF scheme in a small open economy is more effective than in a closed economy, although Gali (2020) argues that it is much less effective. In a liquidity trap, an increase in government expenditure under the DF scheme is less effective, also in contrast to Gali (2020). We find that even in an imperfect pass-through environment, an increase in government expenditure under DF fiscal stimulus is not effective. Thus, in a small open economy, MF fiscal stimulus is not always essential in normal times, and in a liquidity trap, MF fiscal stimulus is more important than what Gali (2020) suggests because DF fiscal stimulus is not effective, irrespective of nominal exchange rate pass-through.
    Keywords: Fiscal Stimulus; Money Financing; Debt Financing; Zero Lower Bound; Imperfect Pass-through
    JEL: E31 E32 E52 E62 F41
  3. By: YOSHIDA Yushi; Weiyang ZHAI
    Abstract: We investigate the dynamics of Japan's income and trade balance between 1996:Q1 and 2019:Q4 via a structural VAR model. The two most important constituents of the current account (trade balance and income balance) and seven other macroeconomic variables are entered in our VAR model. We implement a shadow rate for the measure of monetary policy under the unconventional monetary policy regime, including a zero lower bound interest rate. By using a standard SVAR model from the literature, we find that world shocks dominate and rule the dynamics of Japan's current account. Through additional short-run zero restrictions, we also find that exogenous exchange rate shocks affect the current account.
    Date: 2021–09
  4. By: Esra Nur Ugurlu (Department of Economics, University of Massachusetts Amherst)
    Abstract: This paper analyzes the structural change implications of consumer credit expansions in a dual-sector open economy growth model. Policy-induced increases in banks’ willingness and ability to lend result in new consumer lending, boosting consumption demand and average wages in the nontradable sector. Under the assumptions of fixed relative wages and mark-up pricing, wage pressures translate into inflationary pressures. The central bank, acting under the sole target of controlling inflation, raises the interest rate to contain inflationary pressures. This intervention causes a real exchange rate appreciation, followed by a loss of international competitiveness in the tradable sector. This way, the model illustrates that consumer credit expansions can trigger premature deindustrialization, shifting sectoral structure in favor of the nontradable sector. The formal model is inspired by the Turkish economy that experienced a notable expansion of consumer credit between 2002-2013.
    Keywords: Consumer credit, structural change, economic growth, inflation targeting, real exchange rate
    JEL: E58 F43 L16 O11 O41
    Date: 2021
  5. By: global financial governance issues, IRC Task Force on IMF
    Abstract: The global recession caused by the COVID-19 pandemic and the resulting deterioration in many countries’ public finances have increased the risk of sovereign debt crises. Although crisis prevention remains paramount, these developments have made it imperative to re-examine the adequacy of the current toolkit for crisis management and resolution, in a context where changes in the creditor base and in the composition of public debt instruments have brought about new challenges in terms of reduced transparency and additional barriers to achieving inter-creditor equity. This report focuses on the international architecture for sovereign debt restructurings (SODRs), as seen through the lenses of the International Monetary Fund (IMF or “the Fund”) and with a special attention to the role that the Fund can play in facilitating orderly restructuring processes. It provides a set of findings and recommendations in relation to certain key elements of the Fund’s lending framework that have important ramifications on SODR processes, namely debt sustainability assessments (DSAs), the exceptional access policy (EAP) for financing above normal access limits, and the criteria for lending to countries with payments arrears to private creditors (LIA) or official bilateral creditors (LIOA). It also considers other indirect channels through which the Fund can affect SODRs, including its support for enhancing the transparency and public disclosure of sovereign debt information, its collaboration with the Paris Club and the G20 debt-related initiatives, the promotion of contractual standards for sovereign debt, and the monitoring of relevant legislative developments. JEL Classification: F34, F55, H63
    Keywords: debt restructuring regime, International Monetary Fund, sovereign debt, sovereign default
    Date: 2021–09
  6. By: Daniel H. Cooper; Vaishali Garga; Maria Jose Luengo-Prado
    Abstract: We study the mortgage cash flow channel of monetary policy transmission under fixed-rate mortgage (FRM) versus adjustable-rate mortgage (ARM) regimes by comparing the United States with primarily long-term FRMs and Spain with primarily ARMs that automatically reset annually. We find a robust transmission of mortgage rate changes to spending in both countries but surprisingly a larger effect in the United States—and provide two explanations for this finding. First, there are channels of transmission other than the mortgage cash flow effect since other interest rates co-move with the mortgage rate. Second, while mortgage resets in Spain are automatic and typically small, mortgagors in the United States must actively refinance to lock in lower rates. As a result, the mortgage cash flow effect in Spain is homogeneous across mortgagors and symmetric for rate increases and decreases, whereas in the United States the effect is largest when rates decline, especially for households identified as likely refinancers.
    Keywords: consumption; intertemporal household choice; monetary policy transmission; adjustable-rate mortgages; fixed-rate mortgages
    JEL: D15 E21 E52
    Date: 2021–08–01
  7. By: Mateo Hoyos (Department of Economics, University of Massachusetts Amherst); Emiliano Libman (University of General San Martín); Arslan Razmi (Department of Economics, University of Massachusetts Amherst)
    Abstract: We study the extent to which countries undergo structural change during and after episodes of sustained investment surges. In particular, we explore the evolution of trade flows, considering (i) exports sophistication or complexity, (ii) exports diversification, and (iii) capital goods imports. Using the episodes identified by Libman et al. (2019), we document the heterogeneous nature of these episodes and find that, while imports of capital goods increase, they are not systematically related to changes in sophistication, complexity and diversification of exports, at least for the available sample of 130 episodes over the period 1962-2014. High investment may often be a necessary but not sufficient condition for structural change.
    Keywords: Capital accumulation, diversification, economic complexity, development.
    JEL: E22 F41 O11
    Date: 2021
  8. By: Christine Arriola; Przemyslaw Kowalski; Frank van Tongeren
    Abstract: 2020 marked some of the largest reductions in trade and output volumes since WWII. Focusing on the COVID-19 pandemic and using the latest monthly and quarterly data on international trade of selected countries and products, this paper documents key shifts in geographical direction and product composition of international trade in 2020. Trade in services declined by more than twice as much as trade in goods and its recovery has also been slower. While the size of the drop in global trade relative to the drop in output in 2020 was smaller than during the Global Financial Crisis (GFC), this was not related to the overall size of the trade impacts in 2020, but rather reflects the significant heterogeneity of trade and production impacts across specific goods, services and trade partners from COVID-19. Trade in several types of goods plummeted, while that in others increased markedly. As a result, the variation in trade impacts across the different product categories in 2020 was not only larger than during the GFC, but also larger than in any other year during the past two decades. The product structure of countries’ goods trade also changed significantly in 2020, indicating large adjustments. While some international supply chains came under pressure in early months of the pandemic, the data also show that supply chains were instrumental in the resumption of economic activity. The distance travelled by imported products actually continued to increase in 2020, largely as a result of China and other Asian countries filling supply gaps resulting from lockdowns and demand changes in other regions. These shifts occurred in the context of significant perturbations in the international transport sector. While it is not known which of the changes in 2020 will be only short-lived, some seem to show signs of longer-term shifts or are likely to result in long-term adjustments. Above all, the unprecedented heterogeneity of changes in trade flows across products, sources and destinations seen in 2020 suggests high uncertainty and adjustment costs, and implies an increased need ‒ and incentives ‒ for consumers, firms and governments to adopt new or intensify existing risk mitigation strategies.
    Keywords: COVID-19, Globalisation, International supply chains, International trade, Statistics
    JEL: F10 F14 F40 F61
    Date: 2021–09–20
  9. By: Carbajal-De-Nova, Carolina
    Abstract: The effect of wages on price inflation has been a foremost subject in economics. This paper evaluates the effect in Mexican manufacturing for two sets of periods. The first one, from 1994 to 2003, covers an initial period of the North American Free Trade Agreement (NAFTA). The second period encompass from 2007 to 2016, comprising the Great Recession. For both periods, data is available on a monthly frequency. A first equation deals with wages and bilateral nominal exchange rate impacts on the producer price inflation. A second equation measures the effect of this last variable, besides a bilateral nominal exchange rate and the wage effect on consumer price inflation. These equations follow Pujol and Griffiths (1997), using an error correction model and Granger causality tests. The results for the mentioned periods expose those wages have an almost null effect in both the inflation of producer and consumer prices.
    Keywords: wages; consumer price inflation; producer price inflation; bilateral nominal exchange rate.
    JEL: J00 J3
    Date: 2021–02–20
  10. By: Silvia Albrizio (Banco de España); Iván Kataryniuk (Banco de España); Luis Molina (Banco de España); Jan Schäfer (CEMFI)
    Abstract: The use of central bank liquidity lines has gained momentum since the global financial crisis in order to provide liquidity in foreign exchange markets, while at the same time preventing threats to financial stability and negative spillbacks. US dollar swap lines are well studied, but much less is known about the effects of liquidity lines in euros. We use a difference-in-differences strategy to show that the announcement of ECB euro liquidity lines has a direct positive signalling effect since the premium paid by foreign agents to borrow euros in FX markets decreases up to 76 basis points relative to currencies not covered by these facilities. Additionally, the paper provides suggestive evidence that these facilities generate positive spillbacks to the euro area since domestic bank equity prices increase by 6.7% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines.
    Keywords: liquidity facilities, central banks swap and repo lines, spillbacks
    JEL: E44 E58 F33 G15
    Date: 2021–08
  11. By: Deepankar Basu (Department of Economics, University of Massachusetts Amherst); Ramaa Vasudevan (Department of Economics, Colorado State University.)
    Abstract: We revisit the hypotheses of unequal exchange and deteriorating terms of trade in the specific context of import-intensive, export- led strategies of developing countries which rely on integration into GVCs for access to markets in developed countries using a stylized two-country two-commodity Classical- Marxian trade model. Two sources of asymmetry can be distinguished: market power arising from the competition between suppliers that depresses the prices at which the final good is supplied; and monopoly power arising from the lead firms control and ownership of intangible assets including brand and design. The model explores some implications of these two sources of asymmetry.
    Keywords: Unequal Exchange, Global Value Chains, Classical Trade Model
    JEL: F02 F23 O19
    Date: 2021
  12. By: Maxime Delabarre (Sciences Po - Sciences Po)
    Abstract: Through a review of the different forms of interdependence between states and economies, this essay argues that an international response resulting from further global cooperation is the way forward. As interdependence is now weaponized to serve countries' interests, coordination is needed across global players. Specifically, trade and economic negotiations have to take place. However, one needs also to consider deep modifications to the current international framework, strongly unbalanced. International taxation, global public goods, climate change, and global value chain are among the subjects needed to be reconsidered.
    Date: 2021–09–04
  13. By: Maih, Junior; Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka
    Abstract: We analyse the implications of asymmetric monetary policy rules by estimating Markov-switching DSGE models for the euro area (EA) and the US. The estimations show that until mid-2014 the ECB’s response to inflation was more forceful when inflation was above 2% than below 2%. Since then, the ECB’s policy can be characterised as symmetric, and we quantify the macroeconomic implications of this policy change. We uncover asymmetries also in the Fed’s policy, which has responded more strongly in times of crisis. We compute an optimal simple rule for the EA and the US in an environment with the effective lower bound and a low neutral real rate, and find that it prescribes a stronger response to inflation and the output gap when inflation is below target compared to when it is above target. We document its stabilisation properties had this optimal rule been implemented over the last two decades. JEL Classification: E52, E58, E31, E32
    Keywords: Bayesian Estimation, effective lower bound, Inflation targeting, Markov-switching DSGE, optimal monetary policy
    Date: 2021–09

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