nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒04‒11
six papers chosen by
Martin Berka
Massey University

  1. Sovereign bonds since Waterloo By Meyer, Josefin; Reinhart, Carmen M.; Trebesch, Christoph
  2. Capital Flows and the Eurozone's North-South Divide By Karsten Kohler
  3. Hidden defaults By Horn, Sebastian; Reinhart, Carmen M.; Trebesch, Christoph
  4. Real Exchange Rate Misalignment and Business Cycle Fluctuations in Asia and the Pacific By Ambaw, Dessie; Pundit, Madhavi; Ramayandi, Arief; Sim, Nicholas
  5. Time-variation in the effects of push and pull factors on portfolio flows: Evidence from a Bayesian dynamic factor model By Bettendorf, Timo; Karadimitropoulou, Aikaterini
  6. New allocation of Special Drawing Rights By Manuel A. Pérez Álvarez

  1. By: Meyer, Josefin; Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: This paper studies external sovereign bonds as an asset class. We compile a new database of 266,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering up to 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns average more than 6 percent annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of 3-4 percent above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. Central to this finding are the high average coupons offered on external sovereign bonds. The observed returns are hard to reconcile with canonical theoretical models and the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median creditor loss (haircut) is below 50 percent.
    JEL: E4 F3 F4 G1 N0
    Date: 2021
  2. By: Karsten Kohler
    Abstract: The paper offers a monetary perspective on the role of capital flows in the Eurozone's north-south divide. It argues that finance-centric narratives in Comparative Political Economy rightly emphasise financial instability in the periphery, but that the role of capital flows therein requires clarification. The paper draws on post-Keynesian monetary theory, coherent accounting, and balance-of-payments data to make three main points. First, the focus on the financial account as a driver of current accounts should be abandoned in favour of an analysis of gross capital flows. Gross flows need not stem from excess savings in core countries and can be independent from trade flows. Second, speculative portfolio flows into bond markets and foreign direct investment into real estate are causally more important than interbank flows in driving financial instability. Third, rising spreads in the periphery during the Eurozone crisis and the outbreak of the pandemic were not triggered by balance-of-payments problems but by a reversal of speculative flows in government bond markets. The argument suggests that Comparative Political Economy should dedicate more attention to institutions that render peripheral countries particularly susceptible to speculative capital flows into asset markets.
    Keywords: Gross capital flows, balance-of-payments, current account imbalances, Eurozone crisis, sudden stop, comparative political economy, post-Keynesian macroeconomics
    JEL: E12 F32 F36 F41 O57
    Date: 2022–03
  3. By: Horn, Sebastian; Reinhart, Carmen M.; Trebesch, Christoph
    Abstract: China's lending boom to developing countries is morphing into defaults and debt distress. Given the secrecy surrounding China's loans, also the associated defaults remain 'hidden', as missed payments and restructuring details are not disclosed. We construct an encompassing dataset of sovereign debt restructurings with Chinese lenders and find that these credit events are surprisingly frequent, exceeding the number of sovereign bond or Paris Club restructurings. Chinese lenders follow a resolution approach reminiscent of 1980s Western lenders; they seldom provide deep debt relief with face value reduction. If history is any guide, multi-year debt workouts with serial restructurings lie in store.
    Keywords: China,external debt,default,crisis resolution,official lending,hidden debts,sovereign risk,Belt and Road initiative
    JEL: F21 F34 F42 F6 G15 H63 N25
    Date: 2022
  4. By: Ambaw, Dessie (University of South Australia); Pundit, Madhavi (Asian Development Bank); Ramayandi, Arief (Asian Development Bank); Sim, Nicholas (Singapore University of Social Sciences)
    Abstract: Real exchange rate (RER) misalignment, which is the deviation between the actual real exchange rate from its equilibrium, occurs frequently among developing economies. Studies have shown that RER misalignment may have negative economic implications, such as a reduction in economic growth, exports and export diversification, and an increased risk of currency crises and political instability. Using quarterly data for 22 sample economies from 1990 to 2018, this paper investigates the impact of RER misalignment on business cycles in Asia and the Pacific by employing a panel vector autoregression involving consumer price index (CPI) inflation, output gap, short-term interest rate, and RER misalignment. We find that RER overvaluation may lead to a reduction in CPI inflation and short-term interest rate. We also find that Asia and the Pacific is highly heterogeneous wherein the output gaps of some economies, particularly those in Southeast Asia, are more susceptible to RER misalignment shocks.
    Keywords: real exchange rate misalignment; business cycle fluctuations
    JEL: D74 E32 F31 F41 O11
    Date: 2022–03–08
  5. By: Bettendorf, Timo; Karadimitropoulou, Aikaterini
    Abstract: The extent to which push and pull factors affect international capital flows is widely debated. We contribute to this strand of literature by estimating the relative importance of push and pull factors for portfolio flows over a time span, encompassing the global financial crisis, the European sovereign debt crisis as well as the beginning of the Covid-19 pandemic. To do so, we extract common and country-specific components from fund flow data using Bayesian dynamic factor models with time-varying coefficients and stochastic volatility. Assuming that the common component represents push factors and the country-specific component pull factors, we show that (i) time-variation matters and (ii) there is a substantial amount of heterogeneity in the importance of factors across regions (advanced versus emerging market economies) and asset classes (equity versus bonds). We find that the relative importance of push factors for flows into advanced economies has on average increased over time, particularly for EU countries. With respect to flows into emerging market economies, we find very heterogeneous results between individual countries. Moreover, we identify risk measures, US stock market returns, US real interest rates, the US real effective exchange rate and the oil price as important push factors. Pull factors seem to covary with domestic stock market returns, in particular.
    Keywords: portfolio flows,push and pull factors,bayesian dynamic factor model,time-variation
    JEL: C32 E52 F32
    Date: 2022
  6. By: Manuel A. Pérez Álvarez (Banco de España)
    Abstract: In August 2021, the International Monetary Fund (IMF) made a new allocation of Special Drawing Rights (SDRs) equivalent to $650 billion. This significant amount has tripled the total existing stock of SDRs. For Spain it involves an increase of 16% in foreign reserves, and an increase in receivables from the IMF, which amount to 22% of the reserves on the balance sheet of the Banco de España, as compared with 10% at present. The purpose of this expansion of SDRs is to support a group of countries that are having most difficulty fighting the impact of the COVID-19 pandemic. These countries have a greater need for foreign exchange to obtain basic supplies just when they are shut out of international capital markets. The new allocation is likely to boost SDR transactions given its large amount, the urgent need for funds in some countries and the experience of the 2009 allocation. This paper explains the characteristics of the use of SDRs as an effective source of liquidity, concluding that the way in which the issuance of this instrument is made effective is by means of transactions, allocation being the formal prerequisite for their existence. Accordingly, the key to their effectiveness will be the transactions actually carried out to obtain liquidity in international business. A liquidity ratio is proposed for monitoring their use. With regard to the magnitude of the allocation and, given that it is based on the quotas of each IMF member country, the developed countries have received the bulk of the allocation, as opposed to those countries having greater difficulty accessing the markets. Accordingly, measures will have to be taken to promote the passing on of SDRs so that their purpose can be achieved and they effectively supplement the reserves available within the framework of international trade.
    Keywords: SDRs, allocation, IMF, COVID-19, pandemic, liquidity, reserve assets, foreign exchange, voluntary trading arrangements, international cooperation
    JEL: F33 F42 G15
    Date: 2022–01

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