nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒08‒08
six papers chosen by
Martin Berka
Massey University

  1. Scrambling for Dollars: International Liquidity, Banks and Exchange Rates By Javier Bianchi; Saki Bigio; Charles Engel
  2. Global Supply Chain Pressures, International Trade, and Inflation By Julian di Giovanni; Sebnem Kalemli-Ozcan; Alvaro Silva; Muhammed A. Yildirim
  3. International Transmission of Quantitative Easing Policies: Evidence from Canada By Serdar Kabaca; Kerem Tuzcuoglu
  4. Excess Savings and Twin Deficits: The Transmission of Fiscal Stimulus in Open Economies By Rishabh Aggarwal; Adrien Auclert; Matthew Rognlie; Ludwig Straub
  5. The International Monetary Fund and capital flows By Stephen Grenville
  6. Exchange Rate Uncertainty and Business Cycle Fluctuations By Kamalyan, Hayk; Davtyan, Vahagn

  1. By: Javier Bianchi (Federal Reserve Bank of Minneapolis); Saki Bigio (Department of Economics, University of California, Los Angeles and NBER); Charles Engel (Department of Economics, University of Wisconsin, Madison, NBER and CEPR)
    Abstract: We develop a theory of exchange rate fluctuations arising from financial institutions’ demand for dollar liquid assets. Financial flows are unpredictable and may leave banks “scrambling for dollars.” Because of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield on the dollar. We show that an increase in the dollar funding risk leads to a rise in the convenience yield and an appreciation of the dollar, as banks scramble for dollars. We present empirical evidence on the relationship between exchange rate fluctuations for the G10 currencies and the quantity of dollar liquidity, which is consistent with the theory.
    Keywords: Exchange rates, liquidity premia, monetary policy
    Date: 2022–07
  2. By: Julian di Giovanni; Sebnem Kalemli-Ozcan; Alvaro Silva; Muhammed A. Yildirim
    Abstract: We study the impact of the COVID-19 pandemic on euro area inflation and how it compares to the experiences of other countries, such as the United States, over the two-year period 2020-21. Our model-based calibration exercises deliver four key results: (1) compositional effects, or the switch from services to goods consumption, are amplified through global input-output linkages, affecting both trade and inflation; (2) inflation can be higher under sector-specific labor shortages relative to a scenario with no such supply shocks; (3) foreign shocks and global supply chain bottlenecks played an outsized role relative to domestic aggregate demand shocks in explaining euro area inflation over 2020–21; and (4) international trade did not respond to changes in GDP as strongly as it did during the 2008–09 crisis despite strong demand for goods. These lower trade elasticities in part reflect supply chain bottlenecks. These four results imply that policies aimed at stimulating aggregate demand would not have produced as high an inflation as the one observed in the data without the negative sectoral supply shocks.
    Keywords: inflation; international trade; supply chains; spillovers
    JEL: E2 E3 E6 F1 F4
    Date: 2022–07–01
  3. By: Serdar Kabaca; Kerem Tuzcuoglu
    Abstract: What are the cross-border spillovers from major economies’ quantitative easing (QE) policies to their trading partners? We provide evidence by concentrating on spillovers from the US to Canada during the zero lower bound period when QE policies were actively used. We identify QE shocks in the US and estimate their impact on a large number of Canadian macroeconomic and financial variables. We then analyze transmission channels of foreign QE shocks to the domestic economy. Our results suggest that US QE shocks are expansionary for Canada despite a currency appreciation. This is because they spill over to domestic borrowing costs, lowering long-term rates as well as financial premiums, and increasing asset prices. We find evidence for both portfolio balance and risk channels.
    Keywords: Business fluctuations and cycles; International topics; Monetary policy transmission
    JEL: E52 F41 F44
    Date: 2022–06
  4. By: Rishabh Aggarwal; Adrien Auclert; Matthew Rognlie; Ludwig Straub
    Abstract: We study the effects of debt-financed fiscal transfers in a general equilibrium, heterogeneous-agent model of the world economy. In the long run, increases in government debt anywhere raise the world interest rate and increase private wealth everywhere. In the short run, a country with a larger-than-average fiscal deficit experiences both a large increase in private savings (“excess savings”) and a small but persistent current account deficit (a slow-motion “twin deficit”). These patterns are consistent with the evolution of the world’s balance of payments since the beginning of the Covid pandemic.
    JEL: E21 E62 F32 F41
    Date: 2022–06
  5. By: Stephen Grenville
    Abstract: Controls on international capital flows were a central issue for the International Monetary Fund at Bretton Woods in 1944. But by the 1970s, mainstream thinking was encouraging open capital flows. A succession of damaging crises followed: Latin America in the 1980s, Mexico again in 1994 and Asia in 1997. Fund policies were tweaked, but the causes were seen as being largely in the recipient countries. Capital controls were specifically rejected. Nevertheless, the Fund’s view began to shift, probably encouraged by the 2008 global financial crisis. There was a growing recognition that the capital-flow surges at the heart of these crises were often externally driven, reflecting global factors. The appropriate response would include capital flow management (CFM). The Fund recognized this in its 2012 Institutional View, but CFM was at the bottom of the policy toolbox, surrounded by conditions and constraints, maintaining the stigma on CFM. Meanwhile many emerging economies were enhancing their ability to cope with excessive capital flows, although at some cost (slower growth, tighter fiscal policy, large foreign-exchange reserves). At the same time the flows were increasing, with a bigger component of flighty portfolio flows. CFM measures still have an important place in this new environment, but the Fund’s reluctance to embrace them means that a deep discussion on operationalizing effective CFMs is still lacking.
    Keywords: International Monetary Fund; capital flow management; economic crises
    JEL: F32 F33 F34 F42 F65
    Date: 2021
  6. By: Kamalyan, Hayk; Davtyan, Vahagn
    Abstract: What is the impact of heightened exchange rate uncertainty on business cycle dynamics? This question is particularly important for emerging economies where exchange rate uncertainty is substantially higher and time-varying. Using data from emerging countries, we show that exchange rate uncertainty is essential for business cycle fluctuations. We find that heightened exchange rate uncertainty yields a drop in economic activity, an increase in prices, and an exchange rate depreciation. We rationalize our empirical findings in a small open economy model augmented with time-varying volatility of exchange rate shocks. In the structural model, the main ingredient of the transmission mechanism is the households’ precautionary behavior. We also show that no other shocks, often featured in the literature, can produce the reported co-movement pattern among the macro variables.
    Keywords: DSGE, Stochastic Volatility, Nominal Exchange Rate
    JEL: E32 F41 F44
    Date: 2022–06–17

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