nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒03‒21
nine papers chosen by
Martin Berka
University of Auckland

  1. Globalization and Pandemics By Pol Antrà s; Stephen J. Redding; Esteban Rossi-Hansberg
  2. Exchange Rate Pass-Through Conditional on Shocks and Monetary Policy Credibility. The Case of Uruguay By Fernanda Cuitiño; Juan Pablo Medina; Laura Zacheo
  3. An equilibrium model of the international price system By Mukhin, Dmitry
  4. A Safe Asset Perspective for an Integrated Policy Framework By Markus K. Brunnermeier; Sebastian Merkel; Yuliy Sannikov
  5. Financial frictions in a commodity exporting small open economy: the Case of Kazakhstan By Erlan Konebayev
  6. Fundamental determinants of exchange rate expectations By Joscha Beckmann; Robert L. Czudaj
  7. Unequal Expenditure Switching: Evidence from Switzerland By Raphael Auer; Ariel Burstein; Sarah M. Lein; Jonathan Vogel
  8. The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States By Andrew Atkeson; Jonathan Heathcote; Fabrizio Perri
  9. Self-Fulfilling Debt Crises, Revisited By Mark Aguiar; Satyajit Chatterjee; Harold Cole; Zachary Stangebye

  1. By: Pol Antràs (Harvard University); Stephen J. Redding (Princeton University); Esteban Rossi-Hansberg (Princeton University)
    Abstract: We develop a model of human interaction to analyze the relationship between globalization and pandemics. Our framework provides joint microfoundations for the gravity equation for international trade and the Susceptible-Infected-Recovered (SIR) model of disease dynamics. We show that there are cross-country epidemiological externalities, such that whether a global pandemic breaks out depends critically on the disease environment in the country with the highest rates of domestic infection. A deepening of global integration can either increase or decrease the range of parameters for which a pandemic occurs, and can generate multiple waves of infection when a single wave would otherwise occur in the closed economy. If agents do not internalize the threat of infection, larger deaths in a more unhealthy country raise its relative wage, thus generating a form of general equilibrium social distancing. Once agents internalize the threat of infection, the more unhealthy country typically experiences a reduction in its relative wage through individual-level social distancing. Incorporating these individual-level responses is central to generating large reductions in the ratio of trade to output and implies that the pandemic has substantial effects on aggregate welfare, through both deaths and reduced gains from trade.
    Keywords: COVID-19, Globalization, Gravity Equation, Pandemics, SIR model
    JEL: F1 F2 F4 F6 I1
    Date: 2020–09
  2. By: Fernanda Cuitiño (Banco Central del Uruguay); Juan Pablo Medina (Business School, Universidad Adolfo Ibáñez, Chile); Laura Zacheo (Banco Central del Uruguay)
    Abstract: The estimation of exchange rate pass-through (ERPT) is critical for understanding and forecasting the inflation dynamics in open economies. In this work, we estimate a medium scale New-Keynesian model for the Uruguayan economy to analyze the ERPT. We compute the ERPT with the estimated model conditional on specific external shocks and on whether the monetary policy has perfect or imperfect credibility. The results show that the empirical fit is better under imperfect credibility. The estimated degree of imperfect credibility is quite significant and it shows substantial variation across shocks and over time. We find that the ERPT tends to be lower for a shock that has a higher offsetting effect in aggregate demand and when monetary policy is more credible in keeping the inflation target constant. Finally, adding the exchange rate stabilization in the monetary policy rule in the case of Uruguay has a stronger empirical role once we allow for imperfect credibility.
    Keywords: exchange rate pass-through, emerging economy, imperfect credibility, bayesian estimation
    JEL: E12 E58 F31 F41
    Date: 2021
  3. By: Mukhin, Dmitry
    Abstract: What explains the central role of the dollar in world trade? Will the U.S. currency retain its dominant status in the future? This paper develops a quantitative general equilibrium framework with endogenous currency choice that can address these questions. Complementarities in price setting and input-output linkages across rms generate complementarities in currency choice making exporters coordinate on the same currency of invoicing. The dollar is more likely to play this role because of the large size of the U.S. economy, a widespread peg to the dollar, and the history dependence in currency choice. Calibrated using the world input-output tables and exchange rate moments, the model can successfully replicate the key empirical facts about the use of currencies at the global level, across countries, and over time. According to the counterfactual analysis, the peg to the dollar in other economies ensures that the U.S. currency is unlikely to lose its global status because of the falling U.S. share in the world economy, but can be replaced by the renminbi in case of a negative shock in the U.S. economy. If the peg is abandoned, the world is likely to move to a new equilibrium with multiple regional currencies.
    Keywords: International Economics Section; Cowles Foundation
    JEL: D21 E31 E42 F14 F31 F33
    Date: 2022–02–01
  4. By: Markus K. Brunnermeier (Princeton University); Sebastian Merkel (Princeton University); Yuliy Sannikov (Stanford University)
    Abstract: Borrowing from Brunnermeier and Sannikov (2016, 2019) this policy paper sketches a policy framework for emerging market economies by mapping out the roles and interactions of monetary policy, macroprudential policies, foreign exchange interventions, and capital controls. Safe assets are central in a world in which financial frictions, distribution of risk, and risk premia are important elements. The paper also proposes a global safe asset for a more self-stabilizing global financial architecture.
    Keywords: Safe asset, bubbles, international capital flows, capital controls, monetary policy, macroprudential policy, FX interventions
    JEL: E52 F38
    Date: 2020–05
  5. By: Erlan Konebayev (NAC Analytica, Nazarbayev University)
    Abstract: This paper adds the banking sector to a commodity-exporting small open economy DSGE model and estimates it using the data for Kazakhstan between 2001 and 2019. The resulting model produces one-step-ahead predictions that are a good fit for the banking sector variables. We find that the oil price and risk premium shocks are the drivers of much of the economic activity in Kazakhstan - they explain a large part of the variation in most of the macro variables considered. A comparison with the baseline model that has no banking sector shows that the influence of the risk premium shock on real variables can be overestimated when financial frictions are excluded. The above-mentioned two shocks, along with the fiscal policy shock, have also significantly contributed to historical fluctuations in real GDP growth, although with no particular trend in the direction or magnitude of their effects.
    Keywords: DSGE; Bayesian analysis; small open economy; Kazakhstan
    JEL: C11 E30 E32 E37
    Date: 2021–12
  6. By: Joscha Beckmann (Faculty of Business Administration and Economics, FernUniversitaet in Hagen and Faculty of Economics, University of Greifswald and Kiel Institute for the World Economy); Robert L. Czudaj (Faculty of Mathematics, Computer Science and Statistics, Ludwig-Maximilians-University Munich and Faculty of Economics and Business, Chemnitz University of Technology)
    Abstract: This paper provides a new perspective on the exchange rate disconnect puzzle by referring to the expectations building mechanism in foreign exchange markets. We analyze the role of expectations regarding macroeconomic fundamentals for expected exchange rate changes. In doing so, we assess real-time survey data for 29 economies from 2002 to 2020 and consider expectations regarding GDP growth, inflation, interest rates, and current accounts. Our empirical findings show that fundamentals expectations are more important over the long run compared to the short run. We find that an expected increase in GDP growth relative to the US leads to an expected appreciation of the domestic currency while higher relative inflation expectations lead to an expected depreciation, a finding consistent with purchasing power parity. Our results also indicate that the expectation building process differs systematically across pessimistic and optimistic forecasts with the former paying more attention to expected fundamentals. Finally, we also observe that incorporating expected fundamentals tends to reduce forecast errors over the long run.
    Keywords: Exchange rates, Expectations, Forecast errors, Fundamentals, Survey data
    JEL: F31 F37 G17
    Date: 2022–03
  7. By: Raphael Auer; Ariel Burstein; Sarah M. Lein; Jonathan Vogel
    Abstract: What are the unequal effects of changes in consumer prices on the cost of living? In the context of changes in import prices, most analyses focus on variation across households in initial expenditure shares on imported goods. However, the unequal welfare effects of non-marginal foreign price changes also depend on differences in how consumers substitute between imported and domestic goods, on which there is scant evidence. Using data from Switzerland surrounding the 2015 appreciation of the Swiss franc, we provide evidence that lower income households have higher price elasticities. These differences in elasticities contribute significantly to the unequal welfare effects of large import price changes.
    JEL: E3 F1 F41
    Date: 2022–02
  8. By: Andrew Atkeson; Jonathan Heathcote; Fabrizio Perri
    Abstract: The US net foreign asset position has deteriorated sharply in the years following the Global Financial Crisis and is currently negative 65 percent of US GDP. This deterioration primarily reflects changes in the relative values of large gross international equity positions, as opposed to net new borrowing. In particular, a sharp increase in equity prices that has been US specific has inflated the value of US foreign liabilities. We develop an international macro finance model to interpret these trends, and argue that the rise in equity prices in the United States likely reflects rising profitability of domestic firms rather than a substantial accumulation of unmeasured capital by those firms. Under that interpretation, the revaluation effects that have driven down the US net foreign asset position are associated with large unanticipated transfers of US output to foreign investors.
    JEL: F30 F40
    Date: 2022–02
  9. By: Mark Aguiar (Princeton University); Satyajit Chatterjee (Federal Reserve Bank of Philadelphia); Harold Cole (University of Pennsylvania); Zachary Stangebye (University of Notre Dame)
    Abstract: We revisit self-fulfilling rollover crises by exploring the potential uncertainty introduced by a gap (however small) between an auction of new debt and the payment of maturing liabilities. It is well known (Cole and Kehoe, 2000) that the lack of commitment at the time of auction to repayment of imminently maturing debt can generate a run on debt, leading to a failed auction and immediate default. We show the same lack of commitment leads to a rich set of possible self-fulfilling crises, including a government that issues more debt because of the crisis, albeit at depressed prices. Another possible outcome is a "sudden stop" (or forced austerity) in which the government sharply curtails debt issuance. Both outcomes stem from the government's incentive to eliminate uncertainty about imminent payments at the time of auction by altering the level of debt issuance. In an otherwise standard quantitative version of the one-period debt model, including such crises increase the default probabilities by a factor of five and the spread volatility by a factor of twenty-five.
    Keywords: self-fulfilling debt crises, rollover crises
    JEL: F10 G30
    Date: 2020–12

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