nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒10‒11
eight papers chosen by
Martin Berka
University of Auckland

  1. Decrypting New Age International Capital Flows By Clemens Graf von Luckner; Carmen M. Reinhart; Kenneth S. Rogoff
  2. The Aftermath of Debt Surges By M. Ayhan Kose; Franziska Ohnsorge; Carmen Reinhart; Kenneth Rogoff
  3. The Global Financial Cycle By Silvia Miranda-Agrippino; Hélène Rey
  4. Tracking growth in the euro area subject to a dimensionality problem By Comunale, Mariarosaria; Mongelli, Francesco Paolo
  5. The International Role of the U.S. Dollar By Carol C. Bertaut; Stephanie E. Curcuru; Bastian von Beschwitz
  6. The Root Cause of Sovereign Default By Harashima, Taiji
  7. 60%, -4% and 6%, a tale of thresholds for EU fiscal and current account developments By António Afonso; José Carlos Coelho
  8. Liquidity Crises, Liquidity Lines and Sovereign Risk By Yasin Kürsat Önder

  1. By: Clemens Graf von Luckner; Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: This paper employs high frequency transactions data on the world’s oldest and most extensive centralized peer-to-peer Bitcoin market, which enables trade in the currencies of more than 135 countries. We develop an algorithm that allows, with high probability, the detection of “crypto vehicle transactions” in which crypto currency is used to move capital across borders or facilitate domestic transactions. In contrast to previous work which has used “on-chain” data, our approach enables one to investigate parts of the vastly larger pool of “off-chain” transactions. We find that, as a conservative lower bound, over 7 percent of the 45 million trades on the exchange we explore represent crypto vehicle transactions in which Bitcoin is used to make payment in fiat currency. Roughly 20 percent of these represent international capital flight/flows/remittances. Although our work cannot be used to put a price on cryptocurrencies, it provides the first systematic quantitative evidence that the transactional use of cryptocurrencies constitutes a fundamental component of their value, at least under the current regulatory regime.
    JEL: E42 E51 E58 F21 F24 F32 F38
    Date: 2021–10
  2. By: M. Ayhan Kose (World Bank, Prospects Group, Brookings Institution, CEPR, and CAMA); Franziska Ohnsorge (World Bank, Prospects Group, CEPR, and CAMA); Carmen Reinhart (World Bank, Harvard Kennedy School, NBER, CEPR); Kenneth Rogoff (Harvard University, NBER)
    Abstract: Debt in emerging market and developing economies (EMDEs) is at its highest level in half a century. In about nine out of 10 EMDEs, debt is higher now than it was in 2010 and, in half of the EMDEs, debt is more than 30 percentage points of gross domestic product higher. Historically, elevated debt levels increased the incidence of debt distress, particularly in EMDEs and particularly when financial market conditions turned less benign. This paper reviews an encompassing menu of options that have, in the past, helped lower debt burdens. Specifically, it examines orthodox options (enhancing growth, fiscal consolidation, privatization, and wealth taxation) and heterodox options (inflation, financial repression, debt default and restructuring). The mix of feasible options depends on country characteristics and the type of debt. However, none of these options comes without political, economic, and social costs. Some options may ultimately be ineffective unless vigorously implemented. Policy reversals in difficult times have been common. The challenges associated with debt reduction raise questions of global governance, including to what extent advanced economies can cast their net wider to cushion prospective shocks to EMDEs.
    Keywords: Debt restructuring; growth; inflation; fiscal consolidation; financial repression; wealth taxes.
    JEL: F62 F34 F44 E32 E63 H6 H63
    Date: 2021–10
  3. By: Silvia Miranda-Agrippino; Hélène Rey
    Abstract: We review the literature on the empirical characteristics of the global financial cycle and associated stylized facts on international capital flows, asset prices, risk aversion and liquidity in the financial system. We analyse the co-movements of global factors in asset prices and capital flows with commodity prices, international trade and world output as well as the sensitivity of different parts of the world to the Global Financial Cycle. We present evidence of the causal effects of the monetary policies of the US Federal Reserve, the European Central Bank and of the People's Bank of China on the Global Financial Cycle. We then assess whether the 2008 financial crisis has altered the transmission channels of monetary policies on the Global Financial Cycle. Finally, we discuss the theoretical modelling of the Global Financial Cycle and avenues for future research.
    JEL: E5 F3
    Date: 2021–10
  4. By: Comunale, Mariarosaria; Mongelli, Francesco Paolo
    Abstract: We investigate which variables have supported growth in the euro area over the last 30 years. This is a challenging task due to dimensionality problems: a large set of potential determinants, limited data, and the prospect that some variables could be non-stationary. We assemble a set of 35 real, financial, monetary, and institutional variables for nine of the original euro area countries covering the period between 1990Q1 and 2016Q4. Using the Weighted-Average Least Squares method, we gather clues about which variables to select. We quantify the impact of various determinants of growth in the short and long runs. Our main finding is the positive and robust role of EU institutional integration on long-term growth for all countries in the sample. An improvement in competitiveness matters for growth in the overall euro area in the long run, as well as a decline in sovereign and systemic stress. Debt over GDP negatively influences growth for the periphery, but only in the short run. Property and equity prices have a significant impact only in the short run, whereas the loans to non-financial corporations positively affect the core euro area. An increase in global GDP also supports growth in the euro area. JEL Classification: C23, E40, F33, F43
    Keywords: euro area, fiscal policy, GDP growth, institutional integration, institutional reforms, monetary policy, systemic stress
    Date: 2021–09
  5. By: Carol C. Bertaut; Stephanie E. Curcuru; Bastian von Beschwitz
    Abstract: For most of the last century, the preeminent role of the U.S. dollar in the global economy has been supported by the size and strength of the U.S. economy, its stability and openness to trade and capital flows, and strong property rights and the rule of law. As a result, the depth and liquidity of U.S. financial markets is unmatched, and there is a large supply of extremely safe dollar-denominated assets.
    Date: 2021–10–06
  6. By: Harashima, Taiji
    Abstract: Sovereign defaults have occurred more frequently in emerging countries and accompany significant currency depreciation and high inflation. The standard model of sovereign default cannot necessarily explain these facts sufficiently. In this paper, I examine the root cause of sovereign default on the basis of a model of inflation that is built on a micro-foundation of government behavior and conclude that the root cause of sovereign default is an insufficiently independent central bank. Without a sufficiently independent central bank, the government inevitably borrows money excessively, and as a result, inflation and currency depreciation accelerate. This situation will frustrate and anger the population, and the government may then declare a sovereign default in an attempt to place the blame on foreign lenders, at least temporarily.
    Keywords: Central bank; Exchange rate; Government bond; Inflation; International debt; Sovereign default
    JEL: E58 F31 F34 F53 H63
    Date: 2021–10–05
  7. By: António Afonso (Universidade de Lisboa); José Carlos Coelho (Universidade de Lisboa)
    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: D
    Date: 2021
  8. By: Yasin Kürsat Önder (-)
    Abstract: This paper quantitatively investigates the trade-offs of introducing an extra line of credit in an emergency situation. I show that temporary access to these lines for up to 3 percent of mean annual income during low liquidity periods yields long-term effects with a lower cost of borrowing but with incentives to accumulate higher debt. Permanent access, however, has only short-lived effects because temporal arrangement better completes the markets and induces market discipline as the government worries about rollover risk once the low liquidity period ends. I also present in an event analysis that Mexico’s arrangement of swap lines with the Federal Reserve amid the global financial crisis in 2008 helped avoid a potential debt crisis.
    Keywords: sovereign default, liquidity shocks, swap lines, sudden stops
    JEL: F30 F34
    Date: 2021–10

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