nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒05‒09
ten papers chosen by
Martin Berka
Massey University

  1. Fiscal policy shocks and international spillovers By Sarah Brown; Ayobami E. Ilori; Juan Paez-Farrell; Christoph Thoenissen
  2. Nonlinearities in the Exchange Rate Pass-Through: The Role of Inflation Expectations By Christina Anderl; Guglielmo Maria Caporale
  3. Asymmetric Impact of Real Effective Exchange Rate Changes on Domestic Output Revisited: Evidence from Egypt By Sharaf, Mesbah; Shahen, Abdelhalem
  4. When the United States and the People’s Republic of China Sneeze: International Real and Financial Spillovers in Asia By Beirne, John; Renzhi, Nuobu; Volz, Ulrich
  5. Constrained Efficient Borrowing with Sovereign Default Risk By Juan Carlos Hatchondo; Leonardo Martinez; Francisco Roch
  6. A Journey in the History of Sovereign Defaults on Domestic-Law Public Debt By Aitor Erce; Enrico Mallucci; Mattia Picarelli
  7. The Taper This Time By Barry Eichengreen; Poonam Gupta; Rishabh Choudhary
  8. "Currency and commodity return relationship under extreme geopolitical risks: Evidence from the invasion of Ukraine". By Olga Dodd; Adrian Fernandez-Perez; Simon Sosvilla-Rivero
  9. Knowledge flows and global value chains By Marta Bisztray; Niclas Poitiers
  10. Macroeconomic Responses of Emerging Market Economies to Oil Price Shocks: An Analysis by Region and Resource Profile By Sophio Togonidze; Evžen Kočenda

  1. By: Sarah Brown (Department of Economics, University of Sheffield, UK and IZN Bonn); Ayobami E. Ilori (University of East Anglia.); Juan Paez-Farrell (Department of Economics, University of Sheffield, UK); Christoph Thoenissen (Department of Economics, University of Sheffield, UK and CAMA)
    Abstract: The domestic and international transmission mechanism of fiscal policy shocks are analysed in large developed economies. Using a Bayesian VAR approach, we find that fiscal expansions are associated with increases in output, private consumption and, in many cases, with an in- crease in private investment. The terms of trade, which affect the international transmission of fiscal policy shocks, are found to depreciate in response to a fiscal expansion, thus transferring some of the increased domestic purchasing power abroad. A US government spending shock is expansionary for all non-US G7 members. A German government spending shock is expansion- ary for most, but not all European economies, both within and outside the Euro Area. The dynamics of the BVAR are rationalised using a dynamics stochastic general equilibrium model where heterogeneous households and firms face borrowing constraints.
    Keywords: Fiscal policy, Bayesian VAR, DSGE modelling, International business cycles, spillovers
    JEL: E62 F41 F42
    Date: 2020–11
  2. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper investigates nonlinearities in the exchange rate pass-through (ERPT) to consumer and import prices by estimating a smooth transition regression model with different inflation expectations regimes for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeters (the US, the Euro-Area and Switzerland) respectively over the period January 1993-August 2021. Both market and survey measures of inflation expectations are used as the transition variable, and the nonlinear model is also assessed against a benchmark linear model. The pass-through to both consumer and import prices is found to be stronger in the nonlinear model and in some cases is close to being complete. Also, it is stronger for import prices than for consumer prices. Both seem to be more responsive to exchange rate changes when market expectations of both consumers and producers are considered instead of expectations from consumer surveys only. Finally, inflation expectations appear to affect the ERPT more in inflation targeting countries.
    Keywords: exchange rate pass-through, smooth transition regression, nonlinearities, inflation expectations
    JEL: C22 F31 F41
    Date: 2022
  3. By: Sharaf, Mesbah (University of Alberta, Department of Economics); Shahen, Abdelhalem (Alexandria University)
    Abstract: The Egyptian pound has undergone substantial devaluations over the past five years. The Central Bank of Egypt aimed through these currency devaluations to stimulate domestic output. In this paper, we investigate the asymmetric impact of the real effective exchange rate (REER) on Egypt's real domestic output from 1960 to 2020 using a Nonlinear Autoregressive Distributed Lag (NARDL) model. The analyses account for the various channels via which the REER would affect domestic output. Results show evidence of a long-run asymmetry in the output effect of REER changes in which only real currency depreciations have a contractionary impact on output, while the REER has no impact on output in the short run. The Egyptian monetary authority cannot rely on domestic currency depreciation as a policy instrument to boost domestic output.
    Keywords: Asymmetric effects; Domestic output; Egypt; ARDL; Real effective exchange rate
    JEL: E63 F31 F41 F62
    Date: 2022–03–24
  4. By: Beirne, John (Asian Development Bank Institute); Renzhi, Nuobu (Asian Development Bank Institute); Volz, Ulrich (Asian Development Bank Institute)
    Abstract: We examine real and financial spillovers from monetary policy shocks originating in the United States (US) and the People’s Republic of China (PRC) to advanced and emerging economies in Asia over the period 2000 to 2020. Using a structural panel vector autoregression approach, we find that Asian economies overall are more susceptible to spillovers to GDP, inflation, and the current account emanating from monetary policy shocks in the PRC than to those from the US. This is related to high inter-regional trade integration in Asia and is in line with previous research findings. However, while the prevailing literature has highlighted the dominant role of US monetary policy as a transmitter of shocks to global and Asian financial markets, we find more persistence in the response of advanced Asian interest rates to PRC monetary policy shocks. In addition, emerging Asian economies are found to be more susceptible to shocks emanating from the PRC in respect of equity markets and exchange rates. The rising synchronization of Asian financial markets in relation to the PRC as the financial account in the PRC has gradually opened as well as indirect effects via trade and regional value chains help to rationalize our findings.
    Keywords: monetary policy; global financial cycle; international spillovers; US; People’s Republic of China
    JEL: E44 E52 F33 F42
    Date: 2021–11
  5. By: Juan Carlos Hatchondo (University of Western Ontario); Leonardo Martinez (IMF); Francisco Roch (IMF)
    Abstract: Using a quantitative sovereign default model, we characterize constrained efficient borrowing by a Ramsey government that commits to income-history-contingent borrowing paths taking as given ex-post optimal future default decisions. The Ramsey government improves upon the Markov government because it internalizes the effects of borrowing decisions in period t on borrowing opportunities prior to t. We show the effect of borrowing decisions in t on utility flows prior to t can be encapsulated by two single dimensional variables. Relative to a Markov government, the Ramsey government distorts borrowing decisions more when bond prices are more sensitive to borrowing, and changes in bond prices have a larger effect on past utility. In a quantitative exercise, more than 80% of the default risk is eliminated by a Ramsey government, without decreasing borrowing. The Ramsey government also has a higher probability of completing a successful deleveraging (without defaulting), while smoothing out the fiscal consolidation.
    Keywords: Sovereign Default, Long-term Debt, Time Inconsistency, Dbt Dilution, Deleveraging, Austerity, Debt Management, Fiscal Rules
    JEL: F34 F41
    Date: 2022–03
  6. By: Aitor Erce; Enrico Mallucci; Mattia Picarelli
    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: 2022–03–18
  7. By: Barry Eichengreen (University of California, Berkeley); Poonam Gupta (National Council of Applied Economic Research); Rishabh Choudhary (An independent economist)
    Abstract: On November 3, 2021, the Federal Open Market Committee announced that it would reduce the scale of its asset purchases by $15 billion a month starting immediately. Do emerging markets, such as India, need to prepare for a replay of the taper tantrum of 2013? We show that emerging markets, including India, have strengthened their external economic and financial positions since 2013. At the same time, fiscal deficits are much wider, and public debts are much heavier. As U.S. interest rates now begin moving up, servicing existing debts and preventing the debt-to-GDP ratio from rising still further will become more challenging. Either taxes have to be raised or public spending must be cut to generate additional revenues for debt servicing.
    Keywords: Capital Flows, Emerging Markets, Monetary Policy, Tapering, India
    JEL: F32 F41 F42 F62
    Date: 2021–11–03
  8. By: Olga Dodd (Finance Department, Faculty of Business Economics and Law, Auckland University of Technology, New Zealand.); Adrian Fernandez-Perez (Finance Department, Faculty of Business Economics and Law, Auckland University of Technology, New Zealand.); Simon Sosvilla-Rivero (Complutense Institute for International Studies, Universidad Complutense de Madrid. 28223 Madrid, Spain.)
    Abstract: We examine the relationship between currency and commodity returns around the invasion of Ukraine in February 2022. We find that the expected positive contemporaneous relationship between currency and commodity returns reverses and becomes negative during this period of extreme geopolitical risks. In addition to commodity returns, currency returns around the invasion of Ukraine are significantly affected by geopolitical factors, particularly geographic distance to the war. Our results indicate that a war between two major commodity-exporting countries significantly affects global currency pricing.
    Keywords: Foreign exchange rates, Currency return, Commodity return, Russian invasion, Ukraine war, Geographic distance. JEL classification: F31, F51, G13, G14.
    Date: 2022–04
  9. By: Marta Bisztray; Niclas Poitiers
    Abstract: This Working Paper is an output from the MICROPROD project, which received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement no. 822390 The organisation of global value chains via supplier links and within business groups shapes global trade and forms a major channel through which knowledge is disseminated between countries. Global value chains are also an important channel through which economic shocks propagate. At...
    Date: 2022–04
  10. By: Sophio Togonidze; Evžen Kočenda
    Abstract: We analyze the impact of oil price shocks on the macroeconomic fundamentals in a panel of emerging economies from three regions and with different resource endowments. The existing literature on emerging economies remains inconclusive on how regional factors and resource characteristics affect the response of macroeconomic variables against oil price shocks. We show that (i) exports in Europe and Central Asia are more oil-driven than East Asia and the Pacific, and that (ii) policy-makers in East Asia and the Pacific should be concerned with real exchange appreciation following a positive oil shock to mitigate loss in non-oil export market. Analysis by resource-endowment further reveal that in less-resource-intensive economies oil price shock cause large variation consumption, and a negative and persistent impact on real GDP. In mineral-exporting economies, real GDP and interest rates are largely driven by oil price shocks. The response of real GDP in mineralexporting economies is short-lived. In oil exporting economies, it is only real GDP that has a large variation in response to oil price shock. For policy making, our findings underscores the need for customized policy responses to oil price shocks depending on resourceendowments as we confirm that a "uniform-policy cannot fit all" economies.
    JEL: C11 E32 E37 F44
    Date: 2022–04–25

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