nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒04‒18
nine papers chosen by
Martin Berka
Massey University

  1. Real Exchange Rates and Primary Commodity Prices: Mussa Meets Backus-Smith* By Juan Pablo Nicolini; Constantino Hevia; Joao Ayres
  2. Dollar Invoicing, Global Value Chains, and the Business Cycle Dynamics of International Trade By Nikhil Patel; Mr. David Cook
  3. When domestic and foreign QE overlap: evidence from Sweden By Di Casola, Paola; Stockhammar, Pär
  4. The Impacts of Financial Crises on the Trilemma Configurations By Joshua AIZENMAN; Menzie CHINN; ITO Hiroyuki
  5. The cost of disinflation in a small open economy vis-à-vis a closed economy By Faryna, Oleksandr; Jonsson, Magnus; Shapovalenko, Nadiia
  6. Exchange Rate Pass-through Under the Unconventional Monetary Policy Regime By YOSHIDA Yushi; Weiyang ZHAI; SASAKI Yuri; Siyu ZHANG
  7. Capital controls, corporate debt and real effects By Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
  8. The Covid-19 pandemic and international supply chains By Kleifgen, Eva; Roth, Duncan; Stepanok, Ignat
  9. Long-Term Debt Sustainability in Emerging Market Economies: A Counterfactual Analysis By Ugo Panizza

  1. By: Juan Pablo Nicolini; Constantino Hevia; Joao Ayres
    Abstract: We show that explicitly modeling primary commodities in an otherwise totally standard incomplete markets open economy model can go a long way in explaining the Mussa puzzle and the Backus-Smith puzzle, two of the main puzzles in the international economics literature.
    Keywords: primary commodity prices, Mussa puzzle, Backus-Smith puzzle.
    JEL: F31 F41
    Date: 2021–09
  2. By: Nikhil Patel; Mr. David Cook
    Abstract: Recent literature has highlighted that international trade is mostly priced in a few key vehicle currencies and is increasingly dominated by intermediate goods and global value chains (GVCs). Taking these features into account, this paper reexamines the relationship between monetary policy, exchange rates and international trade flows. Using a dynamic stochastic general equilibrium (DSGE) framework, it finds key differences between the response of final goods and GVC trade to both domestic and foreign shocks depending on the origin and ultimate destination of value added and the intermediate shipments involved. For example, the model shows that in response to a dollar appreciation triggered by a US interest rate increase, direct bilateral trade between non-US countries contracts more than global value chain oriented trade which feeds US final demand, and exports to the US decline much more when measured in gross as opposed to value added terms. We use granular data on GVCs at the sector level to document empirical evidence in favor of these key predictions of the model.
    Keywords: Dollar invoicing, global value chains, exchange rates, monetary policy; business cycle dynamics; dollar invoicing; EU importer; EU exporter; goods trade; Exports; Global value chains; Currencies; Trade balance; Imports; Global
    Date: 2022–02–11
  3. By: Di Casola, Paola (Monetary Policy Department, Central Bank of Sweden); Stockhammar, Pär (Monetary Policy Department, Central Bank of Sweden)
    Abstract: We estimate the effects of domestic and foreign quantitative easing (QE) programmes on a small open economy, Sweden, using a structural BVAR model. Domestic QE raised GDP, lowered unemployment and depreciated the currency, while effects on inflation are less clear. The ECB QE had large positive effects on both GDP and inflation in Sweden, also due to the endogenous response of domestic QE to the foreign one. In terms of transmission channels, domestic QE improved lending conditions for households and lowered expected future rates, while foreign QE improved financing conditions for firms.
    Keywords: Quantitative Easing; international spillovers; transmission channels; small open economy; Bayesian VAR models
    JEL: E44 E52 F41 G15
    Date: 2021–05–01
  4. By: Joshua AIZENMAN; Menzie CHINN; ITO Hiroyuki
    Abstract: Over the years, policymakers have explored various combinations of varying degrees of monetary policy independence, exchange rate stability, and financial openness, while recognizing that not all three policies can be achieved to the fullest extent – this is known as the "monetary trilemma" hypothesis. In recent years, holding international reserves (IR) has become an important policy instrument as a buffer or insurance against liquidity shortages. Significant and fundamental economic events such as currency crises have often changed the policy mix. In this paper, we find that countries' policy mixes have been diverse and have varied over time from the perspective of both the monetary trilemma and IR holdings. We then illustrate how the combination of the three trilemma policies and IR holding drastically changed before and after the Asian Financial Crisis (AFC). However, the Global Financial Crisis (GFC) did not lead to a drastic change in the policy arrangements. We find that countries that faced large terms of trade shocks or negative economic growth during the crisis increase IR holding in the post-AFC. Countries that had negative growth during the crisis also tend to pursue more exchange rate flexibility and more open financial markets. This characteristic is true for commodity exporters, but not for manufacturing exporters. Countries with large current account deficits (i.e., "large capital borrowers") tended to be more sensitive to economic growth at the time of the AFC. Countries that are under IMF stabilization programs or those with sovereign wealth funds tend to hold more IR. These characteristics were not found in the aftermath of the GFC. In general, countries increased their IR holdings after the GFC, but did not respond to the during-crisis economic and institutional conditions.
    Date: 2022–03
  5. By: Faryna, Oleksandr (National Bank of Ukraine and National University of Kyiv-Mohyla Academy); Jonsson, Magnus (Monetary Policy Department, Central Bank of Sweden); Shapovalenko, Nadiia (National Bank of Ukraine)
    Abstract: We use a standard new Keynesian model to evaluate the cost of disinflation – measured by the sacrifice ratio, the central bank’s loss function, and the welfare cost – in a small open economy vis-à-vis a closed economy. Disinflation is either more costly or less beneficial in the small open economy, but the results vary quantitatively depending on the measure and the economic environment. Optimised simple monetary policy rules imply that the relative weight on inflation stabilisation should be lower in the small open economy if the central bank minimises the loss function, but higher if it maximises welfare.
    Keywords: Disinflation; sacrifice ratio; central bank’s loss function; welfare cost; small open economy; new Keynesian model; optimised rules; imperfect credibility
    JEL: E31 E50 F41
    Date: 2021–11–01
  6. By: YOSHIDA Yushi; Weiyang ZHAI; SASAKI Yuri; Siyu ZHANG
    Abstract: We apply the structural VAR model to Japan under the unconventional monetary policy regime, 2000Q1 and 2019Q4. In addition to the traditional sign restrictions, we impose narrative sign restrictions based on five phenomenal economic episodes. Estimated exchange rate pass-through induced by monetary policy shock or exogenous exchange rate shock is consistent with the conventional view, i.e., a Japanese yen depreciation induces inflation at the consumer level. On the other hand, we found evidence of perverse exchange rate pass-through induced by demand shock. A ten percent exchange rate depreciation driven by weak domestic demand is associated with a one percent deflation at the consumer level. The magnitude of the latter effect is greater than the former. This demand-shock-induced exchange rate pass-through effect may have undermined the continuous efforts of the Bank of Japan to achieve the target of a two percent inflation rate.
    Date: 2022–03
  7. By: Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
    Abstract: Non-US firms have massively borrowed dollars (foreign currency, FX), which may lead to booms and crises. We show the real effects of capital controls, including prudential benefits, through a firm-debt mechanism. Our identification exploits the introduction of a tax on FX-debt inflows in Colombia before the global financial crisis (GFC), and administrative, proprietary datasets, including loan-level credit register data and firm-level information on FX-debt inflows and imports/exports. Our results show that capital controls substantially reduce FX-debt inflows, particularly for firms with larger ex-ante FX-debt exposure. Moreover, firms with weaker local banking relationships cannot substitute FX-debt with domestic-debt and experience a reduction in total debt and imports upon implementation of the policy. However, our results suggest that, by preemptively reducing pre-crisis firm-level debt, capital controls boost exports during the subsequent GFC, especially among financially-constrained firms.
    Keywords: Capital controls; corporate FX-debt; real effects; macroprudential; capital inflows
    JEL: F3 F38 F4 F6 G01 G15 G21 G28
    Date: 2021–09
  8. By: Kleifgen, Eva (Institute for Employment Research (IAB), Nuremberg, Germany); Roth, Duncan (Institute for Employment Research (IAB), Nuremberg, Germany); Stepanok, Ignat (Institute for Employment Research (IAB), Nuremberg, Germany)
    Abstract: "The Covid-19 pandemic has caused major disruptions in international trade and has raised concerns about adverse effects on international supply chains. Using a unique establishment survey matched with administrative data from Germany, we provide novel evidence on how establishments have adjusted their supply chains in response to pandemic-induced disruptions. We find that establishments that experienced difficulties in obtaining intermediate inputs as a result of the pandemic are significantly more likely to change their network of suppliers than establishments without such problems, especially if disruptions affected imports from abroad. If an establishment experienced disruptions, it is also more likely to replace a distant with a closer supplier. However, these supply chain adjustments in response to the pandemic appear to be temporary." (Author's abstract, IAB-Doku) ((en))
    Keywords: IAB-Datensatz BeCovid ; IAB-Open-Access-Publikation ; IAB-Betriebs-Historik-Panel
    JEL: F14 D22
    Date: 2022–03–28
  9. By: Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: The 2015 Addis Ababa Action Agenda recognized the need for policies aimed at maintaining longterm debt sustainability. This paper describes a set of commonly used definitions of debt sustainability and shows that none of them focuses on long-term debt sustainability. It then discusses concept and several practical and conceptual difficulties linked to assessing solvency in developing and emerging countries. Next, the paper asks whether countries default because they borrow too much, or because investors think that they will default and this expectation becomes self-fulfilling. To answer this question, the paper uses a sample of 17 emerging market countries over 1970-2020 to build counterfactual debt levels under the assumption that these countries had continuous access to the international capital market without paying any premium over US Treasuries. The exercise shows that most debt crises are not driven by solvency issues.
    Keywords: Public debt; Default; Liquidity crises
    JEL: F34 F32 H63
    Date: 2022–04–12

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