nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒06‒20
ten papers chosen by
Martin Berka
Massey University

  1. Uncertainty Shocks, Capital Flows, and International Risk Spillovers By Ozge Akinci; Ṣebnem Kalemli-Özcan; Albert Queralto
  2. Government Debt and Capital Accumulation in an Era of Low Interest Rates By N. Gregory Mankiw
  3. Exchange Rate Elasticities of International Tourism and the Role of Dominant Currency Pricing By Ding Ding; Yannick Timmer
  4. Global Stagflation By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
  5. Evolution of the Exchange Rate Pass-Throught into Prices in Peru: An Empirical Application Using TVP-VAR-SV Models By Calero Roberto; Gabriel Rodríguez; Salcedo Cisnero Roberto
  6. A tale of two global monetary policies By Agrippino, Silvia Miranda; Nenova, Tsvetelina
  7. A Simple Model of Internal and External Balance for Resource-Rich Developing Countries By Davies, Martin; Schröder, Marcel
  8. Commodity price shocks and macroeconomic dynamics By Ruthira Naraidoo; Juan Paez-Farrell
  9. Fiscal Policy and the Slowdown in Trend Growth in an Open Economy By Alexander Beames; Mariano Kulish; Nadine Yamout
  10. Exchange rate and inflation under weak monetary policy: Turkey verifies theory By Gürkaynak, Refet S.; Kısacıkoğlu, Burçin; Lee, Sang Seok

  1. By: Ozge Akinci; Ṣebnem Kalemli-Özcan; Albert Queralto
    Abstract: Foreign investors’ changing appetite for risk-taking have been shown to be a key determinant of the global financial cycle. Such fluctuations in risk sentiment also correlate with the dynamics of UIP premia, capital flows, and exchange rates. To understand how these risk sentiment changes transmit across borders, we propose a two-country macroeconomic framework. Our model features cross-border holdings of risky assets by U.S. financial intermediaries who operate under financial frictions, and who act as global intermediaries in that they take on foreign asset risk. In this setup, an exogenous increase in U.S.-specific uncertainty, modeled as higher volatility in U.S. assets, leads to higher risk premia in both countries. This occurs because higher uncertainty leads to deleveraging pressure on U.S. intermediaries, triggering higher global risk premia and lower global asset values. Moreover, when U.S. uncertainty rises, the exchange rate in the foreign country vis-à-vis the dollar depreciates, capital flows out of the foreign country, and the UIP premium increases in the foreign country and decreases in the U.S., as in the data.
    JEL: F3 F31 F32 F4 F41 F44
    Date: 2022–05
  2. By: N. Gregory Mankiw
    Abstract: This essay discusses the reasons for and implications of the decline in real interest rates around the world over the past several decades. It suggests that the decline in interest rates is largely explicable from trends in saving, growth, and markups. In this environment, greater government debt is likely not problematic from a budgetary standpoint. But a Ponzi-like scheme of perpetual debt rollover might fail, and such a failure would make an already-bad state of the world even worse. In addition, even if a perpetual debt rollover succeeds, the increased debt could still crowd out capital, reducing labor productivity, real wages, and consumption.
    JEL: E13 E22 E62 H41 H63
    Date: 2022–05
  3. By: Ding Ding; Yannick Timmer
    Abstract: We estimate exchange rate elasticities of international tourism. We show that, in addition to the bilateral exchange rate, the exchange rate between the tourism origin country vis-à-vis the U.S. dollar is an important driver of tourism flows, indicating a strong role of U.S. dollar pricing. The U.S. dollar exchange rate is more important for tourism destination countries with higher U.S. dollar borrowing, pointing toward a complementarity between U.S. dollar pricing and financing. Country-specific dominant currencies (CSDCs) play only a minor role for the average country but are important for tourism-dependent countries and those with a high concentration of tourists. The importance of the U.S. dollar exchange rate represents a strong piece of evidence of dominant currency pricing (DCP) in the international trade of services and suggests that the benefits of exchange rate flexibility for tourism-dependent countries may be weaker than previously thought.
    Keywords: exchange rates, trade, tourism, dominant currency pricing
    Date: 2022
  4. By: Jongrim Ha (World Bank); M. Ayhan Kose (World Bank; Brookings Institution; CEPR; CAMA); Franziska Ohnsorge (World Bank; CEPR; CAMA)
    Abstract: Global inflation has risen sharply from its lows in mid-2020, on rebounding global demand, supply bottlenecks, and soaring food and energy prices, especially since the Russian Federation’s invasion of Ukraine. Markets expect inflation to peak in mid-2022 and then decline, but to remain elevated even after these shocks subside and monetary policies are tightened further. Global growth has been moving in the opposite direction: it has declined sharply since the beginning of the year and, for the remainder of this decade, is expected to remain below the average of the 2010s. In light of these developments, the risk of stagflation—a combination of high inflation and sluggish growth—has risen. The recovery from the stagflation of the 1970s required steep increases in interest rates by major advanced-economy central banks to quell inflation, which triggered a global recession and a string of financial crises in emerging market and developing economies. If current stagflationary pressures intensify, they would likely face severe challenges again because of their less well-anchored inflation expectations, elevated financial vulnerabilities, and weakening growth fundamentals.
    Keywords: Inflation; growth; COVID-19; global recession; monetary policy; fiscal policy; disinflation.
    JEL: E31 E32 E52 Q43
    Date: 2022–06
  5. By: Calero Roberto (Departamnento de Economía, Pontificia Universidad Católica del Perú.); Gabriel Rodríguez (Pontificia Universidad Católica del Perú.); Salcedo Cisnero Roberto (Pontificia Universidad Católica del Perú.)
    Abstract: We use a set of VAR models with time-varying parameters and stochastic volatility (TVP-VARSV) to estimate the evolution of the exchange rate pass-through (ERPT) into prices for Peru over 1995Q2-2019Q4. According to two Bayesian selection criteria, the best-fitting models allow most parameters and the variances of shocks to evolve over time. The results are divided into two parts: (i) the ERPTs into import and producer prices decline significantly since the end of the 1990s until 2008. However, since 2014 both ERPTs resurge considerably due to exchange rate depreciation associated with the end of Quantitative Easing (QE), falling commodity prices, and global political events. These findings are in line with recent literature using TVP-VARSV and emphasizing ERTP resurgence after the Global Financial Crisis (GFC); (ii) the ERPT into consumer prices declined steadily throughout the sample. This is in line with the existing literature and is explained by a low-inflation context under an Inflation Targeting (IT) regime and by strong Central Bank credibility. Finally, the results are robust to a set of sensitivity exercises, including changes in the variables associated with the external shock and domestic economic activity, as well as in the values of the priors; and an estimation of the ERPT for Colombia. JEL Classification-JE: C11, C32, E31, F31.
    Keywords: Exchange Rate Pass-Through into Prices, Vector Autoregressive Model with TimeVarying Parameters, Stochastic Volatility, Bayesian Estimation and Comparison of Models, Deviance Information Criterion, Marginal Likelihood, Peruvian Economy.
    Date: 2022
  6. By: Agrippino, Silvia Miranda (Bank of England); Nenova, Tsvetelina (London Business School)
    Abstract: We compare the macroeconomic and financial spillovers of the unconventional monetary policies of the Fed and the ECB. Monetary policy tightenings in the two areas are followed by a contraction in global activity and trade, a retrenchment in global capital flows, a fall in global stock markets, and a rise in risk aversion. Bilateral spillovers are also powerful. Fed and ECB monetary policies propagate internationally through the same channels – trade and risk-taking – but the magnitude of ECB spillovers is smaller. We postulate that the relative importance of the euro and the US dollar in the international financial system can help to explain such asymmetries, and produce tentative evidence that links the strength of the ECB spillovers to € exposure in trade invoicing and the pricing of financial transactions.
    Keywords: Unconventional monetary policy; high-frequency identification; international spillovers; Fed; ECB
    JEL: E52 F42 G15
    Date: 2022–04–14
  7. By: Davies, Martin (Washington and Lee University); Schröder, Marcel (Asian Development Bank)
    Abstract: We present a simple model of internal and external balance that incorporates the key features of resource-rich developing countries (RRDCs). The main result is that “government take", which is the ratio of fiscal resource revenue to resource output, is a key determinant of the equilibrium real exchange rate (RER) in RRDCs. In examining the case of Papua New Guinea, which has grappled with foreign exchange restrictions since 2015, we find that about half of the RER overvaluation estimated at 26% in 2019 would disappear if the current low level of government take was to be lifted to its long-term average. The analysis has two key takeaways for RRDCs. First, changes in the government take require adjustments to the RER and fiscal policy to maintain internal and external balance. Second, economic adjustments to falls in the take are difficult; therefore policies that seek to stabilize the take over time to promote macroeconomic stability are recommended.
    Keywords: government take; internal and external balance; real exchange rate; resource-rich developing countries; resource taxation
    JEL: F31 O11 Q32 Q33 Q38
    Date: 2022–05–26
  8. By: Ruthira Naraidoo (University of Pretoria); Juan Paez-Farrell (Department of Economics, University of Sheffield, UK)
    Abstract: We analyse the transmission mechanism of commodity price shocks in emerging economies. Using a panel vector autoregression, we find that the shock leads to a real exchange rate appreciation, increases in output, inflation the nominal interest rate and the trade balance, and a fall in the unemployment rate. The transmission mechanism can be understood using a dynamic stochastic general equilibrium model of a small commodity-exporting open economy with nominal as well as search and matching frictions. We find that the conduct of monetary policy is key to both the variables’ dynamics as well as to the magnitude of Dutch disease effects.
    Keywords: Commodity prices, emerging markets, inflation, monetary policy, search and matching, unemployment, Dutch disease, DSGE modelling
    JEL: E31 E32 E44 E52 E61 F42 O11
    Date: 2022–05
  9. By: Alexander Beames (Macroeconomic Group, The Treasury); Mariano Kulish (School of Economics, University of Sydney); Nadine Yamout (School of Economics, University of Sydney)
    Abstract: We study the impact that a permanent slowdown in trend growth has on fiscal policy with an estimated small open economy model. The magnitude and timing of the change in trend growth are estimated alongside the structural and fiscal policy rule parameters. Around 2003:Q3, trend growth in per capita output is estimated to have fallen from just over 2 per cent to 0.6 per cent annually. The slowdown sets off an endogenous response of the private sector which increases capital accumulation acting as an automatic stabilizer. The slowdown also brings about a lasting transition which in the short-run decreases consumption tax revenues but increases them in the long-run changing permanently the composition of tax revenues and temporarily increasing the government debt to output ratio.
    Keywords: Open economy, trend growth, fiscal policy, real business cycles, estimation, structural breaks.
    JEL: E30 F43 H30
    Date: 2022–05
  10. By: Gürkaynak, Refet S.; Kısacıkoğlu, Burçin; Lee, Sang Seok
    Abstract: For the academic audience, this paper presents the outcome of a well-identifted, large change in the monetary policy rule from the lens of a standard New Keynesian model and asks whether the model properly captures the effects. For policymakers, it presents a cautionary tale of the dismal effects of ignoring basic macroeconomics. The Turkish monetary policy experiment of the past decade, stemming from a belief of the government that higher interest rates cause higher inflation, provides an unfortunately clean exogenous variance in the policy rule. The mandate to keep rates low, and the frequent policymaker turnover orchestrated by the government to enforce this, led to the Taylor principle not being satisfted and eventually a negative coefficient on inflation in the policy rule. In such an environment, was the exchange rate still a random walk? Was inflation anchored? Does the "standard model" suffice to explain the broad contours of macroeconomic outcomes in an emerging economy with large identifying variance in the policy rule? There are no surprises for students of open-economy macroeconomics; the answers are no, no, and yes.
    JEL: E02 E31 E52 E58 F31 F41
    Date: 2022

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