nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒02‒07
seven papers chosen by
Martin Berka
University of Auckland

  1. Preemptive Policies and Risk-Off Shocks in Emerging Markets By Ms. Mitali Das; Ms. Gita Gopinath; Şebnem Kalemli-Özcan
  2. On the International Spillover Effects of Country-Specific Financial Sector Bailouts and Sovereign Risk Shocks By Matthew Greenwood-Nimmo; Viet Hoang Nguyen; Eliza Wu
  3. Currency Carry Trade by Trucks: The Curious Case of China's Massive Imports from Itself By Xuepeng Liu; Heiwai Tang; Zhi Wang; Shang-Jin Wei
  4. Sensitivity of Charitable Giving to Realized Income Changes: Evidence from Military Bonuses and the Combined Federal Campaign By Wojtaszek, Carl J.; Kofoed, Michael S.
  5. Not All Shocks Are Created Equal: Assessing Heterogeneity in the Bank Lending Channel By Luísa Farinha; Laura Blattner; Gil Nogueira
  6. US trade policy and the US dollar By Khalil, Makram; Strobel, Felix
  7. Monetary Policy and Determinacy: An Inquiry in Open Economy New Keynesian Framework By William Barnett; Unal Eryilmaz

  1. By: Ms. Mitali Das; Ms. Gita Gopinath; Şebnem 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 preemptive 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.
    Keywords: Preemptive policies, UIP, external finance premia, risk-off shocks, FX debt
    Date: 2022–01–07
  2. By: Matthew Greenwood-Nimmo (Department of Economics, The University of Melbourne; Centre for Applied Macroeconomic Analysis, Australian National University); Viet Hoang Nguyen (Melbourne Institute: Applied Economic & Social Research, The University of Melbourne); Eliza Wu (University of Sydney Business School; Centre for Applied Macroeconomic Analysis, Australian National University)
    Abstract: We use sign-identified macroeconomic models to study the interaction of financial sector and sovereign credit risks in Europe. We find that country-specific financial sector bailout shocks do not generate strong international spillovers, because they primarily transfer private sector risk onto the local sovereign. By contrast, sovereign risk shocks generate substantial spillovers onto the global financial sector and for international sovereign debt markets. We conclude that any financial sector bailout policy that undermines the creditworthiness of the affected sovereign is likely to exacerbate global credit risk. Our findings highlight the unintended global consequences of country-specific financial sector bailout programmes.
    Keywords: Financial sector bailouts; sovereign risk shocks; international spillovers; structural shocks; sign restrictions
    JEL: C58 E61 F42
    Date: 2020–11
  3. By: Xuepeng Liu; Heiwai Tang; Zhi Wang; Shang-Jin Wei
    Abstract: With capital controls, the standard financial market transactions needed for currency carry trade are hard to implement. Using detailed trade data reported by both the mainland Chinese and Hong Kong’s governments, we present evidence that indirect currency carry trade likely takes place via round-trip reimports. We also show that greater state control in terms of more state-owned firms does not reduce such “carry trade by trucks.”
    JEL: F14 F3 G15
    Date: 2022–01
  4. By: Wojtaszek, Carl J. (United States Military Academy); Kofoed, Michael S. (U.S. Military Academy, West Point)
    Abstract: The permanent income hypothesis states that agents perfectly smooth consumption given a large, anticipated shock to income. Testing these implications is difficult given the endogenous nature of income and payment timing. We leverage exogenous variation in military bonus size and timing matched with donations from a large workplace charitable drive where soldiers contribute via payroll deductions during a fixed open enrollment period. Our findings suggest that soldiers are 5 to 10 percent more likely to contribute if they receive their bonus during the open enrollment period. We show that soldiers smooth donations more with age and increased bonus experience.
    Keywords: charitable giving, altruism, income shocks, permanent income hypothesis
    JEL: D9 D64 H31
    Date: 2021–12
  5. By: Luísa Farinha; Laura Blattner; Gil Nogueira
    Abstract: We provide evidence that the strength of the bank lending channel varies considerably across three major positive events in the European sovereign debt crisis – the Greek debt restructuring (PSI), outright monetary transactions (OMT), and quantitative easing (QE). We study how lending responds to each event combining credit registry data with security-level bank balance sheet data from Portugal, a country that was directly exposed to all three events. Even though the price of sovereign debt increased by substantially more after the PSI and OMT announcements, only QE had statistically and economically significant effects on lending to firms and households. We find that banks only realized trading gains after QE but not the other two events. These results suggest that banks’ incentives to sell bonds are an important determinant of the transmission of sovereign debt interventions to the real economy.
    JEL: E52 E58 G18 G21
    Date: 2021
  6. By: Khalil, Makram; Strobel, Felix
    Abstract: We investigate the extent to which the effect of the 2018/2019 US import tariff hikes on US (post-tariff) import prices was offset by the concurrent appreciation of the US dollar and trace the source of the appreciation back to US trade policy itself. The dollar response to trade policy uncertainty (TPU) is key to assessing the overall impact of trade policies. Within a SVAR framework, identified TPU shocks account for a sizable fraction of the USD appreciation - against a broad currency basket, but also against the Chinese yuan. To rationalize the SVAR evidence, we build an open economy NK model featuring financial frictions, which accounts for uncertainty regarding future trade policy. In the model, an increase in TPU raises the relative demand for safer US assets, triggering an appreciation of the US dollar. Moreover, in assessing the offsetting effects from the exchange rate,we use detailed product data on unit values of manufacturing imports and document that Chinese exporters react to an USD appreciation by markedly lowering their US dollar-denominated export prices. This holds in particular for intermediate goods producers, which had been the main target of US trade policy in 2018 and 2019. Overall, we find that offsetting effects on the newly imposed tariffs were substantial.
    Keywords: Trade policy uncertainty,safe-asset currency,two-country model with financial frictions,exchange rate pass-through to import prices,tariffs
    JEL: F31 F13 F14 F41 E31
    Date: 2021
  7. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Unal Eryilmaz (Ministry of Treasury and Finance, Ankara, Turkey)
    Abstract: We analyze determinacy in the baseline open-economy New Keynesian model developed by Gali and Monacelli (2005). We find that the open economy structure causes multifaceted behaviors in the system creating extra challenges for policy making. The degree of openness significantly affects determinacy properties of equilibrium under various forms and timing of monetary policy rules. Conditions for the uniqueness and local stability of equilibria are established. Determinacy diagrams are constructed to display the regions of unique and multiple equilibria. Numerical analyses are performed to confirm the theoretical results. Limit cycles and periodic behaviors are possible, but in some cases only for unrealistic parameter settings. Complex structures of open economies require rigorous policy design to achieve optimality.
    Keywords: Bifurcation; Determinacy; Dynamic systems; New Keynesian; Stability; Open economy; Taylor Principle
    JEL: C14 C22 C52 C61 C62 E32 E37 E61 L16
    Date: 2022–01

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