nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒10‒04
nine papers chosen by
Martin Berka
University of Auckland

  1. Fiscal Policy in the Age of COVID: Does it ‘Get in all of the Cracks?’ By Pierre-Olivier Gourinchas; Ṣebnem Kalemli-Özcan; Veronika Penciakova; Nick Sander
  2. A song of ice and fire: Competitiveness in an export-led growing economy By Dávila-Fernández, Marwil; Oreiro, José
  3. Monetary Policy and Exchange Rate Response: Evidence from Shock-based SVAR with Uncertainty Measures? By Cheolbeom Park; Seungyoo Shin
  4. Unilateral tax policy in the open economy By Kohl, Miriam; Richter, Philipp M.
  5. Emerging market capital flows: the role of fund manager portfolio allocation By Georgia Bush; Carlos Iván Cañón Salazar; Daniel Gray
  6. Sovereign Debt and Supersanctions in Emerging Markets: Evidence from Four Southeast European Countries, 1878-1913 By Andreea-Alexandra Maerean; Maja Pedersen; Paul Sharp
  7. Sovereign debt crisis, fiscal consolidation, and active central bankers in a monetary union By Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  8. International Reserve Management, Global Financial Shocks, and Firms’ Investment in Emerging Market Economies By Joshua Aizenman; Yin-Wong Cheung; Xingwang Qian
  9. 60%, -4% and 6%, a tale of thresholds for EU fiscal and current account developments By António Afonso; José Carlos Coelho

  1. By: Pierre-Olivier Gourinchas; Ṣebnem Kalemli-Özcan; Veronika Penciakova; Nick Sander
    Abstract: We study the effects of fiscal policy in response to the COVID-19 pandemic at the firm, sector, country and global level. First, we estimate the impact of COVID-19 and policy responses on small and medium sized enterprise (SME) business failures. We combine firm-level financial data from 50 sectors in 27 countries, a detailed I-O network, real-time data on lockdown policies and mobility patterns, and a rich model of firm behavior that allows for several dimensions of heterogeneity. We find: (a) Absent government support, the failure rate of SMEs would have increased by 9 percentage points, significantly more so in emerging market economies (EMs). With policy support it only increased by 4.3 percentage points, and even decreased in advanced economies (AEs). (b) Fiscal policy was poorly targeted: most of the funds disbursed went to firms who did not need it. (c) Nevertheless, we find little evidence of the policy merely postponing mass business failures or creating many ‘zombie’ firms: failure rates rise only slightly in 2021 once policy support is removed. Next, we build a tractable global intertemporal general equilibrium I-O model with fiscal policy. We calibrate the model to 64 countries and 36 sectors. We find that: (d) a sizable share of the global economy is demand-constrained under COVID-19, especially so in EMs. (e) Globally, fiscal policy helped offset about 8% of the downturn in COVID, with a low ‘traditional’ fiscal multiplier. Yet it significantly reduced the share of demand- constrained sectors, preserving employment in these sectors. (f) Fiscal policy exerted small and negative spillovers to output in other countries but positive spillovers on employment. (g) A two-speed recovery would put significant upwards pressure on global interest rates which imposes an additional headwind on the EM recovery. (h) Corporate and sovereign spreads rise when global rates increase, suggesting that EM may face challenging external funding conditions as AEs economies normalize.
    JEL: C67 D2 E62 E65 F32 F41 G33
    Date: 2021–09
  2. By: Dávila-Fernández, Marwil; Oreiro, José
    Abstract: The role of the real exchange rate in explaining long-run processes of catching-up and falling-behind continues to be a question of central importance among alternative theories of growth and distribution. Existing empirical evidence suggests a positive association between exchange rates in levels and growth, especially in developing countries, though a currency depreciation has adverse effects. While these two elements have been separately incorporated into demand-led growth theories, a comprehensive assessment of the dynamic interaction between them is still missing. This article attempts to fill such a gap in the literature by developing an export-led growth model in which price and non-price competitiveness respond to the level and variation of the real exchange rate. In equilibrium, relative prices and the fundamentals of the productive structure are simultaneously determined. A more depreciated exchange rate and higher non-price competitiveness are associated with a higher rate of growth. It is shown that the interplay between a destabilising force from the goods market, and a stabilising mechanism from the labour market, might give rise to persistent and endogenous long-run cycles of structural change. Furthermore, the introduction of periodic Schumpeterian innovation waves generate irregular fluctuations similar to those observed in real data.
    Keywords: Structural change; Demand-led growth; Competitiveness; Real exchange rate
    JEL: F43 O11 O40
    Date: 2021–09–01
  3. By: Cheolbeom Park (Department of Economics, Korea University, Seoul, Republic of Korea); Seungyoo Shin (Department of Economics, Boston University, Boston, Massachusetts, US?)
    Abstract: We examine the response of the exchange rate to monetary policy shocks using structural vector autoregression (SVAR). The SVAR approach employed in this study differs from the approaches used in previous studies in that we add uncertainty measures and employ shock-based identification constraints. Using structural shocks that are in accordance with the event and external variable constraints, we demonstrate that the US real effective exchange rate appreciates immediately in response to contractionary monetary policy shocks, with the maximum appreciation occurring within 1 to 2 quarters. We also provide evidence that recursive identification restrictions or the exclusion of any one of the two types of uncertainty measure can generate anomalous responses by the exchange rate. We further show via variance decomposition that monetary policy shocks explain a substantial portion of exchange rate variability, although they are not the most dominant driving force behind this variability.
    Keywords: Exchange rate, Monetary policy, Structural vector autoregressive, Uncovered interest rate parity
    JEL: C32 E52 F31 F41
    Date: 2021
  4. By: Kohl, Miriam; Richter, Philipp M.
    Abstract: This paper examines the effects of a unilateral reform of the redistribution policy in an economy open to international trade. We set up a general equilibrium trade model with heterogeneous agents allowing for country asymmetries. We show that under international trade compared to autarky, a unilateral tax increase leads to a less pronounced decline in aggregate real income in the reforming country, while income inequality is reduced to a larger extent for sufficiently small initial tax rates. We highlight as a key mechanism a tax-induced reduction in the market size of the reforming country relative to its trading partner, resulting in a firm selection effect towards exporting. From the perspective of a non-reforming trading partner, the unilateral redistribution policy reform resembles a unilateral increase in trade costs leading to a deterioration of terms-of-trade and a decline in both aggregate real income and inequality.
    Keywords: Income inequality,Redistribution,International trade,Heterogeneous firms
    JEL: D31 F12 F16 H24
    Date: 2021
  5. By: Georgia Bush; Carlos Iván Cañón Salazar; Daniel Gray
    Abstract: We exploit individual security holdings data for global mutual funds to distinguish between two reasons why a fund's holdings of emerging market economy (EME) bonds might change: (i) the amount invested in the fund changes and (ii) the fund manager changes portfolio allocations. We find that funds' responsiveness to global macroeconomic conditions, ''push factors'', is explained by investor flow decisions. Conversely, funds' responsiveness to local macroeconomic conditions, ''pull factors'', is explained by manager reallocation decisions. We also identify other institutional factors which impact reallocation decisions: their leverage, their benchmark, and risk appetite (funds reallocate towards safer EMEs when global risk increases).
    JEL: F32 G11 G15 G23
    Date: 2021–09
  6. By: Andreea-Alexandra Maerean (European Commission (DG Economic and Financial Affairs)); Maja Pedersen (University of Southern Denmark); Paul Sharp (University of Southern Denmark)
    Abstract: Do emerging markets need to sacrifice economic sovereignty in order to borrow more cheaply on the international capital markets? To explore this, we exploit a natural experiment following the Treaty of Berlin in 1878 when four Balkan states - Bulgaria, Greece, Romania, and Serbia - received full or de facto independence. Using a novel dataset of monthly bond prices from the Berlin and London stock exchanges, we find that a sacrifice of national sovereignty or ‘supersanctions’ was one way for these emerging markets to receive more favourable borrowing conditions. Romania never submitted to such measures, however, but was usually able to borrow more cheaply than her neighbours.
    Keywords: Bulgaria, creditworthiness, emerging markets, Greece, Romania, Serbia, sovereign debt
    JEL: E4 E5 G1 N2
    Date: 2021–09
  7. By: Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: This paper examines the impact of exogenous shocks on sovereign debts in an incomplete monetary union. We assume that financial stability is a public good which can be undermined by sovereign debt problems in fragile (peripheral) members. Our model shows that, unlike the common misconception, active monetary policies do not induce the peripheral government to relax its fiscal constraints; on the contrary, these policies tend to incentivize fiscal discipline by reducing the cost of balance consolidation. Active monetary policies, in fact, partially reallocate the stabilization costs from the periphery to the core of the union, preserving the common good and facilitating fiscal discipline in the periphery.
    Keywords: Core-periphery models; Stability in a monetary union; Risk sharing; Monetary union institutions; Unconventional policies
    JEL: E02 E58 E63 E65
    Date: 2021–09
  8. By: Joshua Aizenman; Yin-Wong Cheung; Xingwang Qian
    Abstract: We examine the effects of active international reserve management (IRM) conducted by central banks of emerging market economies (EMEs) on firm investment in the presence of global financial shocks. Using firm level data from 46 EMEs from 2000 to 2018, we document four findings. First, active IRM positively affects firm investment - the effect strengthens with the magnitude of adverse external financial shocks. Second, financially constrained firms, compared with unconstrained ones, are less responsive to active IRM. Third, our results suggest that the country credit spread is a plausible causal channel of the positive IRM effect on firm investment. Fourth, the policies of capital controls and exchange rate managements are complementary to the IRM – it is beneficial to form a macro policy mix including active IRM to safeguard firm investment against global financial shocks. Further, our results indicate the IRM effect on firm investment is both statistical and economical significance and is relevant to the aggregate economy.
    JEL: F36 F42 F61 G31
    Date: 2021–09
  9. By: António Afonso; José Carlos Coelho
    Abstract: We study the relationship between the budget balance and the current account balance for European Union (EU) countries, using quarterly data from 1995 to 2020. Through the use of panel Granger causality tests and a panel SUR model, we conclude that the relationship is bi-directional for the EU panel as a whole. Furthermore, we find that in Eurozone countries, before 2010, for those countries with an average current account balance-to-GDP ratio outside the range of -4 to 6%, and also in countries whose average debt-to-GDP ratio is greater than 60%, the impact of the budget balance on the current account balance is greater. Conversely, in non-Eurozone countries, after 2010, in countries with a current account balance-to-GDP ratio of -4 to 6%, and also in countries with an average debt-to-GDP ratio of less than 60%, the impact of the fiscal balance on the current account balance is less relevant.
    Keywords: budget deficit; external deficit; European Union; panel data; time series
    JEL: F32 F41 H62 C32 C33
    Date: 2021–09

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