nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒05‒02
four papers chosen by
Martin Berka
Massey University

  1. Exports and the Exchange Rate: A General Equilibrium Perspective By Patrick Alexander; Abeer Reza
  2. Sustainable Finance and Climate Change: Wasteful but a Political Commitment Device? By Clemens Fuest; Volker Meier
  3. What Drives Long-Term Interest Rates? Evidence from the Entire Swiss Franc History 1852-2020 By Niko Hauzenberger; Daniel Kaufmann; Rebecca Stuart; Cédric Tille
  4. Domestic Supplier Spillovers of Global Value Chains in Central and Eastern European Countries By Knez, Klemen

  1. By: Patrick Alexander; Abeer Reza
    Abstract: Understanding and predicting the evolution of exports after a change in the nominal exchange rate is of central importance in international economics. Most of the literature focuses on estimating this relationship by reduced form, with the aim of uncovering a single structural parameter, but theory suggests it could differ depending on the shock that drives the movement in the exchange rate. Building on this insight, we develop a small-open-economy SVAR model to derive structural shocks that affect the exchange rate. We then estimate this model using Canadian data and construct the response of exports relative to the response of the exchange rate, conditional on each shock. Our findings suggest that this relationship differs greatly from one shock to another, where domestic shocks generate a much weaker relationship than global shocks. We show that these differences can be reconciled with theoretical results from a small-open-economy New Keynesian model where Canadian exports are largely invoiced in US dollars. Finally, we highlight how our results help to inform recent discussions on the evolution of the exchange rate elasticity over time, the benefits of a flexible exchange rate, and the impact of terms of trade movements on exports.
    Keywords: Balance of payments and components; Business fluctuations and cycles; Exchange rate regimes; Exchange rates; International topics; Monetary policy transmission; Trade integration
    JEL: F31 F32 F33 F41
    Date: 2022–04
  2. By: Clemens Fuest; Volker Meier
    Abstract: Promoting investment in low carbon “clean” sectors has gained popularity over the last years under the heading of sustainable finance, at the same time raising concerns about adverse welfare effects of such policies. We analyze the economic impact of subsidizing investment in “clean” industries in a stylized two-sector small open economy model. Such a reform increases gross wages, but reduces national income due to the distortion of capital. At given national emissions cap, worldwide emissions rise because imports of the high-carbon good will increase. When adapting the emissions cap, the environmental policy becomes laxer if it is dominated by income effects or by mitigating losses arising from the distortion of the allocation of capital. At the same time, the shrinking high carbon sector reduces income gains from a higher cap and thus works toward a stricter policy. Results are similar if capital in “dirty” industries is taxed. Though sustainable finance policies do seem wasteful, we provide a rationalization in a setting with irreversible investment, where a “green” government” uses such a policy to induce stricter environmental measures after a possible switch to a “conservative” government.
    Keywords: climate change, global externalities, sustainable finance, small open economy, political economy
    JEL: F41 H23 H87 Q58
    Date: 2022
  3. By: Niko Hauzenberger; Daniel Kaufmann; Rebecca Stuart; Cédric Tille
    Abstract: We study domestic and international drivers of long-term interest rates using newly compiled financial market data for Switzerland starting in 1852. We use a time-varying parameter vector autoregressive model to estimate long-term trends in nominal interest rates, exchange rate growth, and inflation. We then decompose the Swiss long-term interest rate trend into various drivers using an interest rate accounting framework. The decline in long-term interest rates since 1970 is mainly driven by a decline in the level of inflation. Comparing Switzerland with the rest of the world, we show that while Swiss real interest rates were higher during the 19th century, the pattern reversed after World War 2 with Swiss nominal and real rates becoming lower than foreign ones. However, this Swiss “low interest rate island” has disappeared in recent years. We document a connection between inflation risk and the Swiss term spread, as well between relative inflation risk and the difference between Swiss and foreign real interest rates.
    Keywords: Natural rate of interest, exchange rate, inflation risk, term spread, uncovered interest parity, historical data
    JEL: E4 E5 F3
    Date: 2022–04
  4. By: Knez, Klemen
    Abstract: The article extends existing sectoral analyses of the internationalisation process in the EU by complementing qualitative studies of supplier linkages with a novel aggregate input-output approach to measuring the structure of supplier linkages. Examining changes in the structure of domestic and global supplier linkages over the period 2000 to 2014, we find that the new Central and Eastern European EU Member States exhibit a specific pattern that differs from that of the old EU countries. Above-average decreases in purely domestic value chains and a decrease in the share of global integration with complex domestic supplier linkages combined with an above-average increase in global integration with no domestic supplier linkages show the uneven pattern of the internationalisation process in the European Union and reveal the structural position of the European Eastern integrated peripheries.
    Keywords: European integration, integrated periphery, supplier linkages, input-output analysis, middle income trap
    JEL: F1 F4 F6 R1
    Date: 2022–03–15

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