nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒05‒23
seven papers chosen by
Martin Berka
Massey University

  1. External sustainability in Spanish economy: bubbles and crises, 1970–2020 By Esteve, Vicente; Prats, María A.
  2. Exploring the Role of Exchange Rate in Inflation Targeting: Evidence from Thailand By Pongsak Luangaram; Nipit Wongpunya
  3. Causal Effects of Countercyclical Interest Rates: Evidence from the Classical Gold Standard By Kris James Mitchener; Gonçalo Alves Pina
  4. Global Value Chain and Business Cycle Comovement: Does Distance Matter? By Daoju Peng; Kang Shi; Juanyi Xu
  5. The Trade Reform Wave of 1985-1995 By Douglas A. Irwin
  6. Is Domestic Uncertainty a Local Pull Factor Driving Foreign Capital Inflows? New Cross-Country Evidence By Sangyup Choi; Gabriele Ciminelli; Davide Furceri
  7. International Protection of Consumer Data By Yongmin Chen; Xinyu Hua; Keith E. Maskus

  1. By: Esteve, Vicente; Prats, María A.
    Abstract: We address the issue of the sustainability Spain's external debt, using data for the period 1970–2020. To detect episodes of potentially explosive behavior of the Spanish net foreign assets over GDP ratio and the current account balance over GDP ratio, as well as episodes of external adjustments over this long period, we employ a recursive unit root test approach. Our empirical analysis leads us to conclude that there is some evidence of bubbles in the ratio between Spanish net foreign assets and the GDP. In contrast, the evidence that the ratio between the Spanish current account balance and the GDP had explosive subperiods is very weak. The episode of explosive behavior identified in the position of net foreign assets during the period 2002–2015 was the result of the country's economic expansion 1995–2007. The results also show an external adjustment during the period 2008–2019 after the start of a cyclical economic recession.
    Keywords: explosiveness; external imbalances; intertemporal external budget constraint; recursive unit root test; sustainability
    JEL: F32 F36 F37 F41 C22
    Date: 2022–03–26
  2. By: Pongsak Luangaram; Nipit Wongpunya
    Abstract: This paper develops a small-scale, structural general equilibrium model for the Thai economy. Using Bayesian estimation, we evaluate the conduct of monetary policy under inflation targeting regime. Specifically, we focus on three main issues. First, we investigate whether exchange rate movements are incorporated in the monetary policy formulation. Second, we conduct welfare evaluation under alternative monetary policy settings. Third, we explore how the varying degree of openness could affect the transmission mechanism. Using data over the past 20 years, we find that the Bank of Thailand adjusted policy interest rate in response to exchange rate movements and this helped to reduce both output and inflation fluctuations from global shocks and improves welfare. While higher degree of openness is found to flatten the slope of the Phillips curve, it does not necessarily reduce monetary policy effectiveness. This is because openness also affects the policy coefficients in the central bank’s endogenous reaction function.
    Keywords: Small open economy models; Monetary policy rules; Exchange rates; Bayesian analysis; Thai economy
    JEL: C32 E52 F41
    Date: 2022–05
  3. By: Kris James Mitchener; Gonçalo Alves Pina
    Abstract: We estimate the causal impact of countercyclical interest rates on macroeconomic outcomes in open economies. To identify countercyclical interest rates, we construct a new database of short-term interest rates, principal exports, and international commodity prices for 40 economies from 1870 to 1913. This era of capital mobility, nominal anchors, specialization and trade integration, exposed economies to multiple exogenous demand-side shocks. Specialization and trade integration subjected economies to a “commodity lottery” in the form of price fluctuations in world markets. Capital mobility and a currency peg exposed them to interest-rate movements originating in the U.K., the largest economy and linchpin of the classical gold standard. We identify (i) positive effects of commodity-export prices on real GDP and the domestic price level and (ii) negative effects of exogenous changes in short-term interest rates on the same variables. We then show that countercyclical interest rates, defined relative to export-price shocks, stabilized both output and the domestic price level. This stabilization was more effective for the price level than for output.
    JEL: E4 E52 F33 F41 N10
    Date: 2022–04
  4. By: Daoju Peng (International School of Economics and Management, Capital University of Economics and Business, Beijing); Kang Shi (Department of Economics, Chinese University of Hong Kong); Juanyi Xu (Department of Economics, Hong Kong University of Science and Technology)
    Abstract: A salient feature of recent globalization is the emergence of global value chain, along which countries specialize in different positions. These difference of positions along the global production network may affect the business cycle comovement of two countries. Based on influence matrix derived from input-output linkage, a novel measure of distance is proposed to capture the heterogeneity between two countries in output response to country-specific technology shocks that propagate through global production network. We then show theoretically this distance is negatively correlated with output correlation across countries. To empirically test this conclusion, we relate the model to the data and calculate the distance and position measure using the world input-output table. The empirical result confirms a robust and significantly negative relationship between distance along the global value chain and business cycle synchronization. The closer the two countries' distance, the more comoved their output is. This result is robust to alternative distance measures and alternative output correlations. These findings thus offer new insights regarding international transmission of shocks through trade linkage.
    Keywords: Global Value Chain, Distance, Business Cycle Comovement
    JEL: F14 F44 F62
    Date: 2020–08
  5. By: Douglas A. Irwin
    Abstract: The decade from 1985 to 1995 was an unprecedented period of declining barriers to global trade. The reform wave was especially pronounced in developing countries where overvalued currencies were eliminated, quantitative import restrictions dismantled, and import tariffs reduced. What accounts for this remarkable transformation in policy? This paper focuses on how many of these restrictions were imposed for balance of payments purposes. As the benefits of managing payments imbalances through exchange rate adjustments rather than import controls came to be understood, economists in high-ranking government positions had the opportunity to shift policy in this direction. Perhaps surprisingly, special interests played little role in fostering the move to more open markets.
    JEL: B17 F13 F31
    Date: 2022–04
  6. By: Sangyup Choi (Yonsei Univ); Gabriele Ciminelli (OECD); Davide Furceri (IMF)
    Abstract: Theory and conventional wisdom suggest that an increase in uncertainty in one country scares away foreign investment. But, due to the limited availability of cross-country uncertainty data, empirical evidence remains scarce. This paper provides a systematic analysis of how foreign capital inflows react to an increase in political and economic uncertainty, proxied using the World Uncertainty Index. We focus on bank credit, portfolio debt, and portfolio equity capital inflows into 143 countries from 51 source countries. We find that an increase in domestic uncertainty induces a substantial and persistent decrease in bank credit and portfolio debt inflows, and (to a lesser extent) in equity inflows. The effects on portfolio flows are larger for countries with more open capital markets. We also uncover important differences in the response of portfolio flows through actively-managed and passive funds. The former are similarly sensitive to changes in uncertainty that are country-specific (purely local uncertainty) and common across countries (global uncertainty), while the latter are only sensitive to global uncertainty.
    Keywords: Uncertainty; Capital flows; World Uncertainty Index; Mutual funds; ETFs; COVID-19
    JEL: F21 F32 F42
    Date: 2022–04
  7. By: Yongmin Chen (University of Colorado Boulder); Xinyu Hua (Hong Kong University of Science and Technology); Keith E. Maskus (University of Colorado Boulder)
    Abstract: We study the international protection of consumer data in a model where data from product sales generate additional revenue to firms but disutility to consumers. When data usage lacks transparency, a firm suffers a commitment problem and overuses consumer data. As transparency increases, the firm may adjust prices inefficiently across countries with different privacy preferences. Contrary to the result in the single-country case, more transparency can exacerbate data-usage and output distortions in the global economy, and unilaterally-imposed regulation on data usage may reduce global welfare. There can be substantial gains from international coordination – though not necessarily uniformity – of data regulations.
    Keywords: consumer data, privacy, multinational Örm, regulation, data localization, international coordination
    JEL: F23 D18 L15
    Date: 2020–11

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