nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒01‒31
twelve papers chosen by
Martin Berka
University of Auckland

  1. Foreign Vulnerabilities, Domestic Risks: The Global Drivers of GDP-at-Risk By Lloyd, S.; Manuel, E.; Panchev, K.
  2. Currency Wars, Trade Wars, and Global Demand By Olivier Jeanne
  3. Preemptive Policies and Risk-Off Shocks in Emerging Markets By Mitali Das; Gita Gopinath; Ṣebnem Kalemli-Özcan
  4. Growth and instability in a small open economy with debt By Leonor Modesto; Carine Nourry; Thomas Seegmuller; Alain Venditti
  5. Exchange Rate Pass-through and Wheat Prices in Russia By Yugay, Stanislav; Götz, Linde; Svanidze, Miranda
  6. Innovation Networks and Innovation Policy By Ernest Liu; Song Ma
  7. The Political Economy of Anti-Bribery Enforcement By Lauren Cohen; Bo Li
  8. 40 Years of Dutch Disease Literature: Lessons for Developing Countries By M Goujon; Edouard Mien
  9. Consumer Credit with Over-Optimistic Borrowers By Florian Exler; Igor Livshits; James MacGee; Michele Tertilt
  10. Welfare Implication of Tax Rates Increase in a Recessionary Economy By Ibrahim, Umar Bambale; Abubakar, Isah Funtua
  11. Labor Reallocation and Remote Work During COVID-19: Real-time Evidence from GitHub By Grant R. McDermott; Benjamin Hansen
  12. The causes of Original Sin: An empirical investigation of emerging market and developing countries By Gegenfurtner, Dennis Andreas

  1. By: Lloyd, S.; Manuel, E.; Panchev, K.
    Abstract: We study how foreign financial developments influence the conditional distribution of domestic GDP growth. Within a quantile regression setup, we propose a method to parsimoniously account for foreign vulnerabilities using bilateral-exposure weights when assessing downside macroeconomic risks. Using a panel dataset of advanced economies, we show that tighter foreign financial conditions and faster foreign credit-to-GDP growth are associated with a more severe left tail of domestic GDP growth, even when controlling for domestic indicators. The inclusion of foreign indicators significantly improves estimates of ‘GDP-at-Risk’, a summary measure of downside risks. In turn, this yields time-varying estimates of higher GDP growth moments that are interpretable and provide advanced warnings of crisis episodes. Decomposing historical estimates of GDP-at-Risk into domestic and foreign sources, we show that foreign shocks are a key driver of domestic macroeconomic tail risks.
    Keywords: Financial stability, GDP-at-Risk, International spillovers, Local projections, Quantile regression, Tail risk
    JEL: E44 E58 F30 F41 F44 G01
    Date: 2021–07–30
  2. By: Olivier Jeanne
    Abstract: This paper presents a tractable model of a global economy in which countries can use a broad range of policy instruments---the nominal interest rate, taxes on imports and exports, taxes on capital flows or foreign exchange interventions. Low demand may lead to unemployment because of downward nominal wage stickiness. Markov perfect equilibria with and without international cooperation are characterized in closed form. The welfare costs of trade and currency wars crucially depend on the state of global demand and on the policy instruments that are used by national policymakers. Countries have more incentives to deviate from free trade when global demand is low. Trade wars lower employment if they involve tariffs on imports but raise employment if they involve export subsidies. Tariff wars can lead to self-fulfilling global liquidity traps.
    JEL: F16 F31 F33 F38 F40 F42
    Date: 2021–12
  3. By: Mitali Das; Gita Gopinath; Ṣebnem Kalemli-Özcan
    Abstract: We show that “preemptive” capital flow management measures (CFM) can reduce emerging markets and developing countries’ (EMDE) external finance premia during risk-off shocks, especially for vulnerable countries. Using a panel dataset of 56 EMDEs during 1996–2020 at monthly frequency, we document that countries with preemptive policies in place during the five year window before risk-off shocks experienced relatively lower external finance premia and exchange rate volatility during the shock compared to countries which did not have such pre-emptive policies in place. We use the episodes of Taper Tantrum and COVID-19 as risk-off shocks. Our identification relies on a difference-in-differences methodology with country fixed effects where preemptive policies are ex-ante by construction and cannot be put in place as a response to the shock ex-post. We control the effects of other policies, such as monetary policy, foreign exchange interventions (FXI), easing of inflow CFMs and tightening of outflow CFMs that are used in response to the risk-off shocks. By reducing the impact of risk-off shocks on countries’ funding costs and exchange rate volatility, preemptive policies enable countries’ continued access to international capital markets during troubled times.
    JEL: F3 F31 F41 F44
    Date: 2021–12
  4. By: Leonor Modesto (UCP, Catolica Lisbon School of Business and Economics); Carine Nourry (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université); Thomas Seegmuller (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université); Alain Venditti (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université, École des hautes études commerciales du Nord (EDHEC))
    Abstract: The relationship between public debt, growth and volatility is investigated in a Barro-type (1990) endogenous growth model, with three main features: we consider a small open economy, international borrowing is constrained and households have taste for domestic public debt. Therefore, capital, public debt and the international asset are not perfect substitutes and the economy is characterized by an investment multiplier. Whatever the level of the debt-output ratio, the existing BGP features expectation-driven fluctuations. If the debt-output ratio is low enough, there is also a second BGP with a lower growth rate. Hence, a lower debt does not stabilize the economy with credit market imperfections. However, a high enough taste for domestic public debt may rule out the BGP with lower growth. This means that if the share of public debt held by domestic households is high enough, global indeterminacy does not occur.
    Keywords: Small open economy,Public debt,Credit constraint,Indeterminacy
    Date: 2021–07
  5. By: Yugay, Stanislav; Götz, Linde; Svanidze, Miranda
    Keywords: International Relations/Trade, Food Security and Poverty
    Date: 2020–09–18
  6. By: Ernest Liu; Song Ma
    Abstract: We study the optimal allocation of R&D resources in an endogenous growth model with an innovation network, through which one sector’s past innovations may benefit other sectors’ future innovations. First, we provide closed-form sufficient statistics for the optimal path of R&D resource allocation, and we show that planners valuing long-term growth should allocate more R&D toward key sectors that are upstream in the innovation network. Second, we extend to an open-economy setting and illustrate an incentive for countries to free-ride on fundamental technologies: an economy more reliant on foreign knowledge spillovers has less incentive to direct resources toward innovation-upstream sectors, leading to cross-country differences in unilaterally optimal R&D allocations across sectors. Third, we build the global innovation network based on over 30 million global patents and establish its empirical importance for knowledge spillovers. Fourth, we apply the model to evaluate R&D allocations across countries and time. Adopting optimal R&D allocations can generate substantial welfare improvements across the globe. For the United States, R&D misallocation accounts for about 0.68 percentage points of missing annual growth since the 2000s.
    JEL: F43 O33 O38
    Date: 2021–12
  7. By: Lauren Cohen; Bo Li
    Abstract: This paper documents novel evidence on the influence of political incentives in the regulatory enforcement of foreign bribery. Using exogenous variation in the timing and geographic location of U.S. Congressional elections, we find that the probability of a Foreign Corrupt Practices Act (FCPA) enforcement action against foreign firms located in the Senator’s jurisdiction increases significantly pre-election, spiking 23%, with zero equivalent move for equivalently global (but domestic-headquartered) firms in the Senator’s jurisdiction. Using hand-collected case-level data from the U.S. SEC and DOJ, we also observe larger discretion in regions where foreign firms are larger global competitors of in-state firms, operate in locally important industries, and when Senators serve as the Chairman of the Senate Judiciary Committee (which oversees the DOJ). Anti-bribery enforcement has electoral implications, leading to spikes in media coverage of the FCPA enforcement coupled with greater vote shares for the Senator. Moreover, the cases pushed through against these foreign firms just prior to elections appear to be weaker cases. The enforcements result in real effects, as in response to strategic timing in enforcement, firms reallocate business segments and sales.
    JEL: F13 F14 F36 F53 F55 F65 G28 G38 K22 K33 K42
    Date: 2021–12
  8. By: M Goujon (CERDI - Centre d'Études et de Recherches sur le Développement International - UCA [2017-2020] - Université Clermont Auvergne [2017-2020] - CNRS - Centre National de la Recherche Scientifique); Edouard Mien (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)
    Abstract: This paper surveys the "Dutch disease" literature in developing and emerging countries. It describes the original model of Dutch disease and some main extensions proposed in the theoretical literature, focusing on the ones that match developing countries' conditions. It then reviews various empirical studies that have been conducted and provides evidence that the Dutch disease is still an issue for many developing countries. Finally, it discusses the gaps in the theoretical and empirical literature for understanding the suitable policy instruments to cope with Dutch disease.
    Keywords: Real exchange rate. JEL Codes: O13 • O14 • Q32 • Q33,Resource curse,Structural transformations,Natural resources,Dutch disease
    Date: 2021–11–23
  9. By: Florian Exler; Igor Livshits; James MacGee; Michele Tertilt
    Abstract: Do cognitive biases call for regulation to limit the use of credit? We incorporate over-optimistic and rational borrowers into an incomplete markets model with consumer bankruptcy. Over-optimists face worse income risk but incorrectly believe they are rational. Thus, both types behave identically. Lenders price loans forming beliefs—type scores—about borrower types. This gives rise to a tractable theory of type scoring. As lenders cannot screen types, borrowers are partially pooled. Over-optimists face cross subsidized interest rates but make financial mistakes: borrowing too much and defaulting too late. The induced welfare losses outweigh gains from cross subsidization. We calibrate the model to the U.S. and quantitatively evaluate policies to address these frictions: financial literacy education, reducing default cost, increasing borrowing costs, and debt limits. While some policies lower debt and filings, only financial literacy education eliminates over borrowing and improves welfare. Score-dependent borrowing limits can reduce financial mistakes but lower welfare.
    Keywords: Consumer Credit; Over-Optimism; Financial Mistakes; Bankruptcy; Default; Financial Literacy; Financial Regulation; Type Score; Cross-Subsidization
    JEL: E21 E49 G18 K35
    Date: 2021–12–07
  10. By: Ibrahim, Umar Bambale; Abubakar, Isah Funtua
    Abstract: In this work, we compare the welfare cost of the two tax policy options in Nigeria, by applying a small-open economy within the New-Keynesian Dynamic Stochastic General Equilibrium Model (NKDSGE) of Nigeria augmented by a robust fiscal sector with several tax rules. Increase in tax rates has different welfare implications in a recessive economy. Increase in Consumption tax VAT rate is welfare superior compared to increase in CIT rate, which harms private agents’ incentive to invest in either new or existing venture. Hence, data does not support tax reform in the form of increase in Company Income Tax rate. Our finding implies that the current Nigerian tax reform in the form of an increase in VAT rate while allowing other tax rates unchanged is the right policy direction.
    Keywords: DSGE Models; Fiscal Policy; Welfare
    JEL: H24
    Date: 2020–09–30
  11. By: Grant R. McDermott; Benjamin Hansen
    Abstract: We investigate the effect of the COVID-19 pandemic on labor activity using real-time data from millions of GitHub users around the world. We show that the pandemic triggered a sharp pattern of labor reallocation at both the global and regional level. Users were more likely to work on weekends and outside of traditional 9 am to 6 pm hours, especially during the early phase of the pandemic. We also document considerable heterogeneity between different user groups and locations. Some locations show a steady reversion back to historical work patterns, while others have experienced persistent trend deviations in the wake of COVID-19. The pattern of labor reallocation is slightly more pronounced among males in our sample, suggesting that men may have benefited more from the increased flexibility provided by remote work than women. Finally, we show that the pattern of reallocation was accompanied by a simultaneous increase in overall activity, though this effect is more transient. We discuss several potential mechanisms and draw tentative conclusions for broader workplace trends given our study population.
    JEL: J01 J22 J23 J4 O3
    Date: 2021–12
  12. By: Gegenfurtner, Dennis Andreas
    Abstract: International Original Sin is still a persistent and widespread phenomenon, especially in emerging market and developing (EMD) countries. The difficulties that may arise from the inability of countries to borrow internationally in their domestic currency, among other effects, can hamper EMD countries' efforts to achieve domestic economic stability. The phenomenon of Original Sin and some of its potential causes were examined by Eichengreen et al. (2002) and later Hausmann and Panizza (2003). According to their findings, merely the economic size of a country is significant in explaining the variation of Original Sin. This article, first, investigates empirically whether the rather orthodox explanations of Original Sin as examined by Eichengreen et al. (2002) and Hausmann and Panizza (2003) remain invalid, even when investigating a greater timeframe with different trends and, second, elaborates an alternative explanatory approach following Fritz et al. (2018) and de Paula et al. (2017, 2020). The empirical analysis confirms that rather orthodox theories have difficulties in explaining the increased exposure of EMD countries to Original Sin. However, the concept of a currency hierarchy sheds light on the phenomenon. Differences in the liquidity premium between northern and southern currencies and the liquidity preference of investors explain the constraints of southern countries to borrow internationally in their own currency. To climb up the hierarchy of currencies by increasing their liquidity premium is a lengthy and arduous undertaking. One way to achieve this could be by uniting with economic partners, especially in its ultimate form as a currency union.
    Keywords: Original Sin,emerging market and developing countries,empirical analysis
    JEL: C31 C32 F3 F4 F6
    Date: 2021

This nep-opm issue is ©2022 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.