nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒04‒04
six papers chosen by
Martin Berka
Massey University

  1. Real Exchange Rate Decompositions By Bruno Feunou; Jean-Sébastien Fontaine; Ingomar Krohn
  2. Identifying aggregate supply and demand shocks in small open economies By Patrik Barišić; Tibor Kovač; Vladimir Arčabić
  3. Cross-border regulatory spillovers and macroprudential policy coordination By Pierre-Richard Agénor; Timothy Jackson; Luiz Awazu Pereira da Silva
  4. Globalisation, productivity growth, and labour compensation By Dreger, Christian; Fourné, Marius; Holtemöller, Oliver
  5. After the Allocation: What Role for the Special Drawing Rights System? By Tobias Pforr; Fabian Pape; Steffen Murau
  6. A journey in the history of sovereign defaults on domestic-law public debt By Aitor Erce; Enrico Mallucci; Mattia Picarelli

  1. By: Bruno Feunou; Jean-Sébastien Fontaine; Ingomar Krohn
    Abstract: We provide a novel daily decomposition of the real exchange rate that exploits a direct link between bond and foreign exchange (FX) markets. Real exchange rate dynamics can be attributed to changes in the expected future level of the exchange rate; cross-country differentials of expected inflation, yields and bond term premia; and an FX risk premium. Through a variance decomposition exercise, we fi nd that the FX risk premium is the dominant component. Monetary policies and macroeconomic news announcements largely move the real exchange through changes in the FX risk premium.
    Keywords: Asset pricing; Exchange rates; International financial markets; Monetary policy transmission
    JEL: E43 F31 G12
    Date: 2022–03
  2. By: Patrik Barišić (Croatian National Bank); Tibor Kovač (Institute of Economics, Zagreb); Vladimir Arčabić (Faculty of Economics and Business, University of Zagreb)
    Abstract: This paper separates macroeconomic shocks into external and domestic aggregate demand and supply shocks in European Union's post-transition countries. Small open economies are typically very responsive to external shocks. The standard decomposition into aggregate demand and supply shocks covers up important information on the sources of business cycle fluctuations. Using a Bayesian SVAR model with combined sign and block exogeneity restrictions, we separately estimate external and domestic aggregate supply and demand shocks for GDP growth and inflation. We find that domestic shocks were a dominant source of fluctuations during the transition period in Croatia from 1992 to 2000. However, external shocks increased their importance with the trade and financial sector liberalization after 2000, becoming the dominant source of fluctuations with the Global financial crisis in 2008. In the short run, fluctuations are best explained by domestic shocks in 9 out of 11 analyzed countries, especially domestic supply shocks. However, in the medium run, fluctuations are dominantly explained by external aggregate demand shocks in 8 out of 11 countries. We argue that common sources of fluctuations in the medium run are beneficial for common monetary policy in the Eurozone.
    Keywords: small open economy, post-transition countries, aggregate supply and demand shocks, external and domestic shocks, Bayesian SVAR
    JEL: C32 C51 E32 F41
    Date: 2022–03–28
  3. By: Pierre-Richard Agénor; Timothy Jackson; Luiz Awazu Pereira da Silva
    Abstract: A core-periphery model with financial frictions, imperfect financial integration, and cross-border banking is used to assess the magnitude of regulatory spillovers and the gains from international macroprudential policy coordination. A core global bank lends to its affiliates in the periphery and banks in both regions are subject to risk-sensitive capital regulation. Following an expansionary monetary policy in the core, a countercyclical response in capital requirements induces the global bank to engage in regulatory arbitrage. The magnitude of the resulting cross-border capital flows depends on the degree of economies of scope in lending. Welfare gains associated with countercyclical capital buffers are calculated for three policy regimes: independent policies (Nash), coordination, and reciprocity---a regime in which capital ratios set in the core are imposed on branches operating in the periphery. If regulators set policies on the basis of a narrow financial stability mandate, and these policies are evaluated in terms of household welfare, reciprocity may perform better than Nash, and as well as coordination for all parties, when regulatory leakages are strong.
    Keywords: global banking, financial spillovers, regulatory leakages, macroprudential policy coordination.
    JEL: E58 F42 F62
    Date: 2022–03
  4. By: Dreger, Christian; Fourné, Marius; Holtemöller, Oliver
    Abstract: Since the onset of globalisation, production activities have become increasingly fragmented and organised in global value chains (GVC). These networks facilitate trade in intermediaries across industrial sectors and countries and change the conditions for policies to respond to shocks. In this paper, we contribute to the understanding of the effects of GVC on productivity and labour shares in advanced and emerging economies. As indicators for globalisation we use the foreign share in intermediate inputs and the foreign share in value added, extracted from international input output tables. Estimates based on local projections reveal a positive relationship between globalisation and productivity. Moreover, we are able to reject the hypothesis that a higher degree of international integration in country-industry pairs is negatively associated with the change in the labour share for advanced countries.
    Keywords: global value chains,globalisation,international trade integration,labour share,productivity
    JEL: F4 F6 J3
    Date: 2022
  5. By: Tobias Pforr (European University Institute); Fabian Pape (University of Warwick); Steffen Murau (Boston University)
    Abstract: In August 2021, the IMF made a new SDR allocation to help ease pandemic-induced financial strains in the Global South. This paper assesses the potential of the SDR system to address debt-related problems in global finance. We analyze the SDR system as a web of interlocking balance sheets whose members can use SDR holdings—the system's tradable assets—for conversion into usable currency as a perpetual low-interest loan or to make payments to each other. Using original IMF data, we study how the system has been practically used since 1990. Though widely perceived as a solution in search of a problem in the post-Bretton Woods era, we find that the SDR system provides three mechanisms through which IMF members borrow and lend usable currency to each other, with different strings attached: first, transactions by agreement; second, the IMF's core lending facilities for which the SDR system offers additional resources; and third, IMF-sponsored Trusts which seek to harness the SDR system for development purposes and are the basis for the current idea of 'voluntary channeling'. Overall, given the SDR system's idiosyncratic accounting rules, the new allocation can improve the liquidity position of a country and offer some limited avenues for sovereign debt restructuring but comes with new interest and exchange rate risks. Voluntary channeling cannot happen without a wealth transfer, neither the SDR allocation nor the use of Trusts can overcome this problem. Still, Trusts can be a useful instrument to help with debt forgiveness and to ensure that borrowed funds are used for their intended purpose.
    Keywords: International Monetary Fund, balance sheets, critical macro-finance, Money View, central banks, development finance, Global South.
    JEL: E42 E58 F02 F33 F34 F53 F55 N10 N20
    Date: 2022–03–09
  6. By: Aitor Erce (Navarra Public University); Enrico Mallucci (Board of Governors of the Federal Reserve System); Mattia Picarelli (ESM)
    Abstract: We introduce a novel database on sovereign defaults that involve public debt instruments governed by domestic law. By systematically reviewing a large number of sources, we identify 134 default and restructuring events of domestic debt instruments, in 52 countries from 1980 to 2018. Domestic-law defaults are a global phenomenon. Over time, they have become larger and more frequent than foreign-law defaults. Domestic-law debt restructurings proceed faster than foreign ones, often through extensions of maturities and amendments to the coupon structure. While face value reductions are rare, net-present-value losses for creditors are still large. Unilateral amendments and post-default restructuring are the norm but negotiated pre-default restructurings are becoming increasingly frequent. We also document that domestic-law defaults typically involve debt denominated in local currency and held by resident investors. We complement our analysis with a collection “sovereign histories", which provide the fine details about each episode.
    Keywords: Public debt, sovereign default, domestic law, database
    JEL: E62 E65 F34 G01 H12 H63 K00 K41
    Date: 2022–03–10

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