nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒02‒28
ten papers chosen by
Martin Berka
University of Auckland

  1. Currency Undervaluation and Comparative Advantage By Paul Bergin
  2. Political Constraints and Sovereign Default By Marina Azzimonti; Nirvana Mitra
  3. Foreign Direct Investment under Uncertainty: Evidence from a Large Panel of Countries By Caroline Jardet; Cristina Jude; Menzie D. Chinn
  4. A Medium-Scale DSGE Model for the Integrated Policy Framework By Mr. Francis Vitek; Vitor Gaspar; Mr. Tobias Adrian
  5. Business Cycle Accounting for the COVID-19 Recession By Fernandes, Daniel
  6. Exchange Rate Elasticities of International Tourism and the Role of Dominant Currency Pricing By Ding Ding; Mr. Yannick Timmer
  7. Trade Under Lockdown By Antoine Berthou; Sebastian Stumpner
  8. International Pecking Order By Egemen Eren; Semyon Malamud; Haonan Zhou
  9. Tracking Exchange Rate Determinants amid the Pandemic By MASUJIMA Yuki
  10. The Common Currency Effect on International Trade: Evidence from an Accidental Monetary Union By Roger Vicquéry

  1. By: Paul Bergin
    Abstract: This paper highlights a tradeoff implied by a policy of export-led growth through currency undervaluation. While undervaluation can foster domestic manufacturing in countries like China by sustaining trade surplus, it also can harm a country’s comparative advantage by altering the composition of exports. Undervaluation may discourage specializing in high-value added manufacturing and instead favor specialization in non-differentiated goods with higher price elasticity. A dynamic general equilibrium model of two traded good sectors and capital account restrictions shows that undervaluation can either raise or lower welfare depending on two competing effects on comparative advantage: agglomeration versus an elasticity effect.
    JEL: F41
    Date: 2022–01
  2. By: Marina Azzimonti; Nirvana Mitra
    Abstract: We study how political constraints, characterized by the degree of flexibility to choose fiscal policy, affect the probability of sovereign default. To that end, we relax the assumption that policymakers always repay their debt in the dynamic model of fiscal policy developed by Battaglini and Coate (2008). In our setup, legislators bargain over taxes, general spending, debt repayment, and a local public good that can be targeted to the region they represent. Under tighter political constraints, more legislators have veto power, implying that local public goods need to be provided to a larger number of regions. The resources that are freed after a default have to be shared with a higher number of individuals, which reduces the benefits from defaulting in per-capita terms. This lowers the incentive to default compared to the case with lax political constraints. The model is calibrated to Argentina and the results conform to robust empirical evidence. An event study for the 2001/2002 sovereign debt crisis shows that political constraints had an important role in the buildup that led to the crisis.
    JEL: D72 E43 E62 E65 F34 F41 F44 H2 H4 H63
    Date: 2022–01
  3. By: Caroline Jardet; Cristina Jude; Menzie D. Chinn
    Abstract: We examine the effect of uncertainty on foreign direct investment inflows for a heterogeneous sample of advanced, emerging market and developing countries over a 25 year long (pre-Covid) sample. Using a push-pull framework, and controlling for both global and local factors, we find policy uncertainty has discernable and significant effects on inflows, but those effects vary in strength and direction between different groups of countries. Moreover, it is not host country uncertainty that seems to matter the most, but rather global uncertainty. Additionally, we find that high levels of uncertainty matter disproportionately. Finally, financial openness accentuates the impact of uncertainty for emerging market and developing countries.
    JEL: F21 F4
    Date: 2022–01
  4. By: Mr. Francis Vitek; Vitor Gaspar; Mr. Tobias Adrian
    Abstract: This paper jointly analyzes the optimal conduct of monetary policy, foreign exchange intervention, fiscal policy, macroprudential policy, and capital flow management. This policy analysis is based on an estimated medium-scale dynamic stochastic general equilibrium (DSGE) model of the world economy, featuring a range of nominal and real rigidities, extensive macrofinancial linkages with endogenous risk, and diverse spillover transmission channels. In the pursuit of inflation and output stabilization objectives, it is optimal to adjust all policies in response to domestic and global financial cycle upturns and downturns when feasible—including foreign exchange intervention and capital flow management under some conditions—to widely varying degrees depending on the structural characteristics of the economy. The framework is applied empirically to four small open advanced and emerging market economies.
    Keywords: Monetary Policy, Foreign Exchange Intervention, Fiscal Policy, Macroprudential Policy, Capital Flow Management, Dynamic Stochastic General Equilibrium Model, Small Open Economy
    Date: 2022–01–28
  5. By: Fernandes, Daniel
    Abstract: We apply the Business Cycle Accounting framework to the COVID-19 recession in the Euro Area and the United States. We conclude that the efficiency wedge had the most important role in the Euro Area, followed by the labor and investment wedges. In the United States, the labor wedge was most crucial, with the investment wedge taking a second place. We present hypotheses, supported by our theoretical framework, for the dichotomy of the role of the efficiency wedge between the studied regions.
    Keywords: Economics COVID-19 Business Cycle Accounting Macroeconomics Financial Crises Financial Frictions Wedges
    JEL: E3 E32 F4 F44
    Date: 2022–01–17
  6. By: Ding Ding; Mr. Yannick Timmer
    Abstract: We estimate a variety of exchange rate elasticities of international tourism. We show that, in addition to the bilateral exchange rate between the tourism origin and destination countries, the exchange rate vis-à-vis the US dollar is also an important driver of tourism flows and pricing. The effect of US dollar pricing is stronger for tourism destination countries with higher dollar borrowing, indicating a complementarity between dominant currency pricing and financing. Country-specific dominant currencies (CSDCs) play only a minor role for the average country, but are important for tourism-dependent countries and those with a high concentration of tourists. The importance of the dollar exchange rate represents a strong piece of evidence of dominant currency pricing (DCP) in the international trade of services and suggests that the benefits of exchange rate flexibility for tourism-dependent countries may be weaker than previously thought.
    Keywords: International tourism; trade of services; exchange rate elasticity; dominant currency pricing; dominant currency financing
    Date: 2022–02–04
  7. By: Antoine Berthou; Sebastian Stumpner
    Abstract: To curb the effect of the Covid-19 pandemic on public health, many countries around the world introduced lockdown policies in 2020. We estimate the effect of these lockdowns on international trade flows, using a rich dataset of monthly bilateral product-level trade flows that covers roughly three quarters of world trade. Our main findings are: (i) Both exporter and importer lockdowns substantially reduced international trade, with importer lockdowns having a stronger impact; (ii) The effect of lockdowns on trade was strongest during the first wave, and has since been declining; (iii) Beyond the direct effect of lockdowns, we find evidence for indirect effects (i.e. lockdowns by third countries) through global value chains.
    Keywords: COVID-19, Impact of Lockdowns, Global Value Chains
    JEL: F10 F14 F44
    Date: 2022
  8. By: Egemen Eren (Bank for International Settlements (BIS) - Monetary and Economic Department); Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Haonan Zhou (Princeton University - Department of Economics)
    Abstract: We document that corporates in emerging markets borrow more in foreign currency when the local currency provides a better hedge in downturns. We develop an international corporate finance model in which firms facing adverse selection choose the foreign currency share of their debt. In the unique separating equilibrium, good firms optimally expose themselves to currency risk to signal their type. The nature of this equilibrium crucially depends on the co-movement between cash flows and the exchange rate. We provide extensive empirical evidence for this signalling channel using micro data for firms in multiple emerging markets and event studies of local currency depreciation episodes.
    Keywords: Foreign currency debt, corporate debt, signalling, exchange rates, pecking order
    JEL: D82 F34 G01 G15 G32
    Date: 2022–02
  9. By: MASUJIMA Yuki
    Abstract: This paper investigates how exchange rate determinants and channels changed during the COVID-19 crisis. Compared to the Global Financial Crisis and non-crisis periods, the smaller interest rate differentials among major economies and large shocks to the real economy shed light on the importance of trade channels, while the impacts on the movements of the exchange rate through the portfolio investment channel appear to be smaller. Daily activity indexes developed from high frequency datasets including web-search data and electricity demand are used to track the movements of the exchange rate. After controlling interest rates and risk factors, the business activity of the home country and overseas are significantly associated with the exchange rate movement for the majority of the economies during the pandemic, though the directions of impacts are different between advanced and emerging economies. Higher safe haven demand tends to appreciate the yen during a crisis, but the effects via trade channels partially offset safe-haven effects, which is associated with the relatively stable yen amid the pandemic. The effects via trade channels could support a faster recovery of Japan's exports after the pandemic ends.
    Date: 2022–01
  10. By: Roger Vicquéry
    Abstract: I rely on a historical natural experiment to provide, for the first time, a causal estimate of the effect of currency unions on international trade. Since the seminal paper by Rose (2000), a large literature has developed around currencies as a trade cost. However, self-selection and endogeneity bias implied by membership of a currency union are likely to be pervasive and might explain the large pro-trade effect of currency union found in the literature. I offer a quasi-experimental contribution by exploiting an exogenous variation in currency union membership, driven by an unexpected geopolitical shock – the 1861 Italian unification - and involving a French franc pan-European zone that existed throughout the 19th century. I employ original data and structural gravity equations to estimate an effect in the order of 35%, consistent with a large - if heterogenous - effect of common currencies on trade.
    Keywords: Currency Unions, Common Currency, Trade, Natural Experiment, Gravity Regressions.
    JEL: F15 F33 F54 N73
    Date: 2021

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