nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2021‒12‒20
eleven papers chosen by
Martin Berka
University of Auckland

  1. Labor Market Effects of Technology Shocks Biased toward the Traded Sector By Luisito Bertinelli; Olivier Cardi; Romain Restout
  2. Global spillovers of the Fed information effect By Pinchetti, Marco; Szczepaniak, Andrzej
  3. The Prudential Use of Capital Controls and Foreign Currency Reserves By Javier Bianchi; Guido Lorenzoni
  4. Fiscal and current account imbalances: the cases of Germany and Portugal By António Afonso; José Carlos Coelho
  5. Dollar Not So Dominant: Dollar Invoicing Has Only a Small Effect on Trade Prices By Joseph E. Gagnon; Madi Sarsenbayev
  6. Exchange Rates and Monetary Policy When Tradable and Nontradable Goods are Complements By William Craighead
  7. Can Sticky Portfolios Explain International Capital Flows and Asset Prices? By Philippe Bacchetta; Margaret Davenport; Eric van Wincoop
  8. Productivity and Real Exchange Rates for India: Does Balassa-Samuelson Effect Explain? By Ghosh, Saurabh; Nath, Siddhartha; Srivastava, Sauhard
  9. Sources and Transmission of Country Risk By Tarek Alexander Hassan; Jesse Schreger; Markus Schwedeler; Ahmed Tahoun
  10. Sovereign Debt Standstills By Mr. Leonardo Martinez; Juan Carlos Hatchondo; Cesar Sosa Padilla
  11. Rounding the corners of the trilemma: A simple framework By Jeanne, Olivier

  1. By: Luisito Bertinelli; Olivier Cardi; Romain Restout
    Abstract: Motivated by recent evidence pointing at an increasing contribution of asymmetric shocks across sectors to economic fluctuations, we explore the labor market effects of technology shocks biased toward the traded sector. Our VAR evidence for seventeen OECD countries reveals that the non-traded sector alone drives the increase in total hours worked following a technology shock that increases permanently traded relative to non-traded TFP. The shock generates a reallocation of labor toward the non-traded sector which contributes to 35% on average of the rise in non-traded hours worked. Both labor reallocation and variations in labor income shares are found empirically connected with factor-biased technological change. Our quantitative analysis shows that a two-sector open economy model with flexible prices can reproduce the labor market effects we document empirically once we allow for imperfect mobility of labor, gross substitutability between home- and foreign-produced traded goods, and factor-biased technological change. When calibrating the model to country-specific data, its ability to account for the cross-country reallocation and redistributive effects we estimate increases once we let factor-biased technological change vary between sectors and across countries.
    Keywords: Sector-biased technology shocks, Factor-augmenting efficiency, Open economy, Labor reallocation, CES production function, Labor income share
    JEL: E21 E32 F11 F41 O33
    Date: 2021
  2. By: Pinchetti, Marco (Bank of England); Szczepaniak, Andrzej (Ghent University)
    Abstract: This paper sheds lights on the open economy dimension of the Fed information effect, by evaluating its international spillovers on exchange rates, capital flows, and global economic activity. We provide empirical evidence that in response to unexpected increases in the Federal Funds rate associated with Fed information shocks, the dollar depreciates instead of appreciating. We show that this phenomenon occurs because Fed announcements affect investors’ risk appetite. Expansionary Fed information shocks increase investors’ risk appetite and drive capital towards foreign markets in pursuit of higher yields. Conversely, contractionary Fed information shocks decrease investors’ risk appetite and drive capital towards safe-haven currencies, causing an appreciation of the dollar and safe-haven currencies vis-à-visforeign currencies. We provide evidence that the Fed information effect is associated with large spillovers onto global safe-haven currencies, risk premia, cross-border credit, and ultimately, on global economic activity. These findings highlight the presence of global spillovers of the Fed information effect.
    Keywords: Monetary policy; information effects; international spillovers; flight to quality; high-frequency identification; sign restrictions; bayesian VAR
    JEL: E52 F31 F32 F41 F44
    Date: 2021–11–26
  3. By: Javier Bianchi; Guido Lorenzoni
    Abstract: We provide a simple framework to study the prudential use of capital controls and currency reserves that have been explored in the recent literature. We cover the role of both pecuniary externalities and aggregate demand externalities. The model features a central policy dilemma for emerging economies facing large capital outflows: the choice between increasing the policy rate to stabilize the exchange rate and decreasing the policy rate to stabilize employment. Ex ante capital controls and reserve accumulation can help mitigate this dilemma. We use our framework to survey the recent literature and provide an overview of recent empirical findings on the use of these policies.
    JEL: F32 F33 F41 F42 G18
    Date: 2021–11
  4. By: António Afonso; José Carlos Coelho
    Abstract: We investigate the bilateral relationship between government budget balances and current account balances for Portugal and Germany. We find that the response of the current account balance to the budget balance is greater in Portugal than in Germany. On the other hand, the response of the budget balance to the current balance is higher in Germany than in Portugal. In Portugal and Germany, a fiscal rules index has a negative impact on the current account balance and the government effectiveness index has a positive impact on the government balance. The public debt as a percentage of GDP positively affects the current account balance in Portugal, and in Germany it does not. During the period of implementation of the external assistance programme in Portugal, the current account balance improved, while the government balance did not.
    Keywords: budget deficit; external deficit; Portugal; Germany; fiscal rules; time-series
    JEL: F32 F41 H62 C31 C32
    Date: 2021–12
  5. By: Joseph E. Gagnon (Peterson Institute for International Economics); Madi Sarsenbayev (Peterson Institute for International Economics)
    Abstract: This paper estimates and tests four models of the effects of exchange rate changes on export prices. It supports the Goldberg and Knetter (1997) canonical result that exporters adjust their prices by about half of any movement in exchange rates. A new twist is that exchange rate movements against importing countries account for only three-fifths of this price adjustment, while exchange rate movements against a dominant currency account for the other two-fifths. The dominant currency is the euro in Europe and Africa and the US dollar in Asia and the Western Hemisphere. The recent claim that the dollar is the most important driver of export prices (Gopinath et al. 2020) is shown to be valid only for the smallest exporting economies. For the bulk of international trade, the extra effects of the dollar (or the euro) beyond their effects as exporter or importer currencies are relatively modest.
    Keywords: Exchange rate pass-through, pricing to market, dominant currency paradigm, local currency pricing, producer currency pricing
    JEL: F14 F32 F41
    Date: 2021–12
  6. By: William Craighead (Department of Economics and Geosciences, US Air Force Academy)
    Abstract: This paper examines the implications of complementarity between tradable and nontradable goods for exchange rates and monetary policy in a two-country general equilibrium model. In doing so, it revisits well-known findings in the New Open Economy Macroeconomics literature that exchange rates are proportional to national money supplies and that optimal monetary policies respond only to domestic shocks. These results depend on a number of simplifying assumptions, including a unitary elasticity of substitution between tradable and nontradable goods. When this assumption is replaced by a more-realistic one of complementarity, exchange rates depend on relative productivity in addition to money supplies when prices are flexible. When prices are sticky, complementarity amplifies the effect of relative money supplies on the exchange rate and creates additional spillover effects from changes of the foreign money supply on domestic consumption. With complementarity, optimal monetary policies respond to external as well as internal shocks.
    Keywords: Complementarity, New Open Economy Macroeconomics, Exchange Rates, Monetary Policy, Nontradable Goods
    JEL: F42 E52
    Date: 2021–08
  7. By: Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Margaret Davenport (University of Lausanne); Eric van Wincoop (University of Virginia - Department of Economics; National Bureau of Economic Research (NBER))
    Abstract: Recently portfolio choice has become an important element of many DSGE open economy models. Yet, a substantial body of evidence is inconsistent with standard frictionless portfolio choice models. In this paper we introduce a quadratic cost of changes in portfolio allocation into a two-country DSGE model. We investigate the level of portfolio frictions most consistent with the data and the impact of portfolio frictions on asset prices and net capital flows. We find the portfolio friction accounts for (i) micro evidence of portfolio inertia by households, (ii) macro evidence of the price impact of financial shocks and related disconnect of asset prices from fundamentals, (iii) a broad set of moments related to the time series behavior of saving, investment and net capital flows, and (iv) other phenomena relating to excess return dynamics. Financial and saving shocks each account for close to half of the variance of net capital flows.
    Date: 2021–12
  8. By: Ghosh, Saurabh; Nath, Siddhartha; Srivastava, Sauhard
    Abstract: We attempt to explore the long-term equilibrium relationship between India’s real exchange rates and sectoral productivity trends using internationally comparable productivity databases such as KLEMS databases for India, China, Euro area, USA, UK and Japan. Our panel-ARDL results find support for an ‘extended’ Balassa-Samuelson hypothesis that allows for labour market frictions that does not allow for wage equalisation between traded and non-traded sectors within a country. These empirical findings are also robust to both labour productivity and total factor productivity as alternative measures of sectoral productivity. This mechanism continues to find some support when we separate out distribution sector, that comprises wholesale and retail trade in the domestic services sector. Our empirical evidence suggests that India’s real exchange rate is anchored to domestic fundamentals and is closely aligned to its fair value over a medium to long-time horizon.
    Keywords: Balassa-Samuelson Model, Real exchange rate, Productivity, Trade, Panel Data
    JEL: F11 F41
    Date: 2021–12–12
  9. By: Tarek Alexander Hassan; Jesse Schreger; Markus Schwedeler; Ahmed Tahoun
    Abstract: We use textual analysis of earnings conference calls held by listed firms around the world to measure the amount of risk managers and investors at each firm associate with each country at each point in time. Flexibly aggregating this firm-country-quarter-level data allows us to systematically identify spikes in perceived country risk (“crises”) and document their source and pattern of transmission to foreign firms. While this pattern usually follows a gravity structure, it often changes dramatically during crises. For example, while crises originating in developed countries propagate disproportionately to foreign financial firms, emerging market crises transmit less financially and more to traditionally exposed countries. We apply our measures to show that (i) elevated perceptions of a country's riskiness, particularly those of foreign and financial firms, are associated with significant falls in local asset prices, capital outflows, and reductions in firm-level investment and employment. (ii) Risk transmitted from foreign countries affects the investment decisions of domestic firms. (iii) Heterogeneous currency loadings on perceived global risk can help explain the cross-country pattern of interest rates and currency risk premia.
    JEL: D21 F23 F3 F30 G15
    Date: 2021–11
  10. By: Mr. Leonardo Martinez; Juan Carlos Hatchondo; Cesar Sosa Padilla
    Abstract: As a response to economic crises triggered by COVID-19, sovereign debt standstill proposals emphasize debt payment suspensions without haircuts on the face value of debt obligations. We quantify the effects of standstills using a standard default model. We find that a one-year standstill generates welfare gains for the sovereign equivalent to a permanent consumption increase of between 0.1% and 0.3%, depending on the initial shock. However, except when it avoids a default, the standstill also implies capital losses for creditors of between 9% and 27%, which is consistent with their reluctance to participate in these operations and indicates that this reluctance would persist even without a free-riding or holdout problem. Standstills also generate a form of “debt overhang” and thus the opportunity for a “voluntary debt exchange”: complementing the standstill with haircuts could reduce creditors’ losses and simultaneously increase welfare gains. Our results cast doubts on the emphasis on standstills without haircuts.
    Keywords: Standstill;Haircuts;COVID-19;Default;Debt Overhang;Voluntary Debt Exchange;WP;Pareto gain;debt level;default probability;welfare gain;bond price increase;long-term debt
    Date: 2020–12–18
  11. By: Jeanne, Olivier (Johns Hopkins University, Department of Economics)
    Keywords: Keywords, Exchange rate regime, capital controls, foreign exchange interventions
    Date: 2021–10–26

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