nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒08‒22
ten papers chosen by
Martin Berka
Massey University

  1. E pluribus plures: shock dependency of the USD pass-through to real and financial variables By Minesso, Massimo Ferrari; Gräb, Johannes
  2. Systemic Sudden Stops in Emerging Economies: A Recent Perspective By Tunio, Mohsin Waheed
  3. The evolution of macroprudential policy use in Chile, Latin America and the OECD By Carlos Madeira
  5. Modern Monetary Theory: the post-Crisis economy misunderstood? By Liu, Chunping; Minford, Patrick; Ou, Zhirong
  6. Fiscal policy and excess inflation during Covid-19: a cross-country view By Francois de Soyres; Ana Maria Santacreu; Henry L. Young
  7. Sovereign Bailouts: Are Ex-Ante Conditions Useful? By Perazzi, Elena
  9. The effects of Monetary Policy on Capital Flows A Meta-Analysis By Mauricio Villamizar-Villegas; Lucía Arango-Lozano; Geraldine Castelblanco; Nicolás Fajardo-Baquero; Maria A. Ruiz-Sanchez
  10. Superior Predictability of American Factors of the Won/Dollar Real Exchange Rate By Sarthak Behera; Hyeongwoo Kim; Soohyon Kim

  1. By: Minesso, Massimo Ferrari; Gräb, Johannes
    Abstract: This paper quantifies the pass-through of a US dollar appreciation on trade variables and domestic financial conditions in a panel of 34 countries. Pass-through coefficients are highly shock-dependent: if the appreciation is driven by a US expansionary shock, the positive effects of stronger global demand - the “real” channel dominate the negative effects of a stronger dollar - the “exchange rate” channel. As a result, a positive US demand (supply)-drive appreciation expands global trade and stock valuations up to 2.2 (2.5) and 8% (15%) respectively, while if the appreciation is driven by a monetary policy shock the sign is opposite, leading to a contraction in the order of 2.5% (3%) depending on the country. The coefficients also exhibit a large degree of cross-country heterogeneity, we find that financial and trade exposure to the US, trade openness and USD invoicing shares explain up to 60% of the USD pass-through after demand and supply shocks. Cross-country differences, instead, are not explained by dollar invoicing if monetary policy or risk shocks determine USD movements. We explain this finding with the endogenous policy reaction of monetary authorities in emerging markets that stabilizes the exchange rate against the dollar and weakens the invoicing channel of dollar shocks. JEL Classification: F31, F41, F44, E44, E32
    Keywords: Exchange rate, pass-through, USD, VAR
    Date: 2022–07
  2. By: Tunio, Mohsin Waheed
    Abstract: This paper first looks for Sudden Stops in capital inflows to nineteen emerging economies of Asia, Europe, Latin America, and Africa as Calvo, Izquierdo and Mejia (2008) based on the country-specific data availability from January 1990 to May 2022. The paper then introduces the notion of Systemic Sudden Stop as the one triggered by exogenous factors and measured in terms of a rise in Emerging Market Bond Index (EMBI) spreads. The author finds out that four countries i.e. Indonesia, Thailand, Poland, and Egypt have already entered into the Systemic Sudden Stop phase while other emerging economies could also be at a greater risk of the similar situation. The major risks to emerging markets come from the commodity prices and rising inflation due to the Russia-Ukraine conflict; tightening financial conditions; mounting uncertainty; and recessionary fears. Nevertheless, on the positive note, net ratings of emerging market sovereign bonds have improved in comparison with the year 2020, and EMBI spreads have not increased much due to greater risk being already priced-in, especially in high yield.
    Keywords: sudden stops, capital inflows, capital outflows, emerging markets, exchange rate, current account, EMBI spreads
    JEL: F31 F32 F39 F41
    Date: 2022–07
  3. By: Carlos Madeira
    Abstract: This study compares the use of macroprudential policies and capital flow management in Chile versus other countries. I find that Chile made a lower net tightening of its macroprudential policies relative to 1990 than the other country groups, whether in terms of its overall index or any of its subcategories. This is explained in part because Chile had already adopted tight macroprudential policies after the Banking Law of 1986; therefore, it started the 1990s with a more conservative level of financial regulation than most countries. However, Chile still presents a restrictive Loan to Value regulation, close to the OECD average. In terms of Financial Openness and Capital Controls, Chile was very closed until the Asian crisis. Chile is more open with respect to capital inflows relative to all the country groups, although it is still more closed than the OECD and Advanced Economies for outflows.
    Date: 2022–07
  4. By: Damián Pierri (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET)
    Abstract: We present a new Generalized Markov Equilibrium (GME) approach to studying sudden stops and financial crises in emerging countries in the canonical small open economy model with equilib-rium price-dependent collateral constraints. Our approach to characterizing and computing stochastic equilibrium dynamics is global, encompasses recursive equilibrium as a special case, yet allows for a much more flexible approach to modeling memory in such models that are known to have multiple equilibrium. We prove the existence of ergodic GME selections from the set of sequential competitive equilibrium, and show that at the same time ergodic GME selectors can replicate all the observed phases of the macro crises associated with a sudden stop (boom, collapse, spiralized recession, recov-ery) while still being able to capture the long-run stylized behavior of the data. We also compute stochastic equilibrium dynamics associated with stationary and nonstationary GME selections, and we find that: a) the ergodic GME selectors generate stochastic dynamics that are less financially constrained with respect to stationary non-ergodic paths; and, b) non-stationary GME selections ex-hibit a great range of fluctuations in macroeconomic aggregates compared to the stationary selections. From a theoretical perspective, we prove the existence of both sequential competitive equilibrium and (minimal state space) recursive equilibrium, as well as provide a complete theory of robust recursive equilibrium comparative statics in deep parameters. Consistent with recent results in the literature, relative to the set of recursive equilibrium, we find 2 stationary equilibrium: one with high/over borrowing, the other with low/under borrowing. These equilibrium are extremal and “self-fulfilling” under rational expectations. The selection among these equilibria depend on observable variables and not on sunspots.
    Keywords: Financial Crises, Sudden Stops, Small Open Economies, Ergodicity, Recursive Equilibrium, Generalized Markov Equilibria
    JEL: C6 D52 F32
    Date: 2021–06
  5. By: Liu, Chunping (Nottingham Trent University); Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: We set out Modern Monetary Theory (MMT) as a full DSGE model, and test it by indirect inference on post Financial Crisis US data, alongside a standard New Keynesian, NK, model. The MMT model is rejected, while the NK model has a high probability. We then evaluate replacing the fiscal and monetary policies within the NK model by MMT policies, and find that they imply a material loss of welfare
    Keywords: Modern Monetary Theory; DSGE model; fiscal activism; Wald test; indirect inference
    Date: 2022–07
  6. By: Francois de Soyres; Ana Maria Santacreu; Henry L. Young
    Abstract: The recent surge in inflation in many countries around the world and the fiscal stimulus provided in the face of the COVID-19 pandemic has renewed interest in analyzing the potential role of large fiscal spending as a driver of price increases. In this note, we examine how fiscal support impacted the balance between supply and demand across countries during the COVID-19 crisis.
    Date: 2022–07–15
  7. By: Perazzi, Elena
    Abstract: Bailout guarantees create moral hazard, even when full repayment can be enforced. In a strategic default model calibrated to the GIIPS countries, I show that, with unconditional bailout guarantees, government deficits are 6 to 15 percentage points higher than they would be in the absence of guarantees, for a given level of debt. Even if the frequency of outright defaults is reduced, this results in a high frequency of bailouts, which may be inefficient if providing a bailout is costly. In this case ex-ante fiscal conditions can be an effective way to make bailouts a time-consistent policy. The model provides a rationale to a recent reform of the European Stability Mechanism (ESM).
    Keywords: Bailouts, Moral Hazard, Ex-ante conditions
    JEL: E6 F41 H6
    Date: 2022–06–17
  8. By: Gabriel Montes-Rojas (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET); Fernando Toledo (Universidad Nacional de La Plata)
    Abstract: Se examinan los efectos empíricos de dos shocks externos que desencadenan presiones inflacionarias en Argentina. El primer shock involucra los precios internacionales de los productos básicos agrícolas exportados por el país. El segundo shock afecta el tipo de cambio nominal ($/U$S). Mediante la estimación de modelos VAR con quintiles direccionados (VARQD) para el período 2004Q1-2019Q4, se advierte cómo el pass-through de estos shocks a la tasa de inflación opera de manera asimétrica y se manifiesta principalmente a través de incrementos en los salarios nominales. Se estima que un shock en los precios internacionales de las materias primas agrícolas exportadas por Argentina genera un pass-through del 10%, frente a un shock en el tipo de cambio nominal con un pass-through del 25%. Se interpretan estos resultados resaltando la relevancia del conflicto distributivo como un mecanismo clave de transmisión inflacionaria, en línea con ciertos modelos poskeynesianos-estructuralistas (PK-E). Estos hallazgos plantean importantes desafíos para el diseño de la política económica, en particular considerando la adopción de medidas que tengan como objetivo desvincular los efectos potencialmente disruptivos de los shocks externos sobre las presiones inflacionarias en Argentina.
    Keywords: Shocks externos, Precio internacional de commodities de exportación, Tipo de cambio nominal, Salarios, Conflicto distributivo, Tasa de inflación, Argentina, Modelos VAR
    JEL: C32 E12 E31 F31 F41
    Date: 2021–06
  9. By: Mauricio Villamizar-Villegas; Lucía Arango-Lozano; Geraldine Castelblanco; Nicolás Fajardo-Baquero; Maria A. Ruiz-Sanchez
    Abstract: We investigate whether central banks are able to attract or redirect capital flows, by bringing together the entire empirical literature into the first quantitative meta-analysis on the subject. We dissect policy effects by the type of flow and by the origin of the monetary shock. Further, we assess whether policy effects depend on factors that drive investors to either search for yields or fly to safety. Our findings indicate a mean effect size of inflows in the amount of 0.09% of quarterly GDP in response to either a 100 basis point (bp) increase in the domestic policy rate or a 100bp reduction in the external rate. However, the effect size under a random effect specification is much lower (0.01%). Factors that significantly attract inflows include foreign exchange reserves, output growth, and financial openness, while factors that deter flows include foreign debt, capital controls, and departures from the uncovered interest rate parity. Also, both local and global risks matter (global risks exerting a larger pressure). Finally, we shed light on differences across the different types of flows: banking flows being the most responsive to monetary policy, while foreign direct investment being the least responsive. **** RESUMEN: Este trabajo representa el primer metanálisis cuantitativo sobre si los bancos centrales son capaces de atraer o redirigir los flujos de capital. Se analizan los efectos por tipo de flujo y por el origen del choque monetario. Además, se evalúa si los efectos de las políticas dependen de factores que impulsan a que inversionistas extranjeros busquen rendimientos o, por el contrario, busquen refugio. Nuestros hallazgos indican que, en promedio, el tamaño de las entradas de capital es de 0,09% del PIB trimestral en respuesta a un choque de 100 puntos básicos, ya sea en aumentos de la tasa de política doméstica o en reducciones de la tasa de política externa. Sin embargo, bajo una especificación de efectos aleatorios el tamaño del efecto es mucho menor (0,01%). Los factores que atraen significativamente flujos de capital incluyen el nivel de reservas internacionales, el crecimiento de la producción y el grado de apertura financiera, mientras que los factores que disuaden los flujos incluyen la deuda fiscal, controles de capital y desviaciones de la paridad descubierta de la tasa de interés. También, tanto los riesgos locales como los globales importan (aunque los riesgos globales ejercen una mayor presión). Finalmente, brindamos luces sobre las diferencias entre los tipos de flujos: los flujos bancarios siendo los más reactivos a la política monetaria, y los de inversión extranjera directa los menos reactivos.
    Keywords: Meta-Analysis, Capital Flows, Monetary Policy, Meta-Análisis, Flujos de Capital, Política Monetaria
    JEL: C83 E58 F21 F31 F32
    Date: 2022–08
  10. By: Sarthak Behera; Hyeongwoo Kim; Soohyon Kim
    Abstract: Utilizing an array of data dimensionality reduction methods, we estimate latent common factors for the Won/Dollar real exchange rate from a large panel of economic predictors of the U.S. and Korea. We demonstrate superior out-of-sample predictability of our factor augmented forecasting models relative to conventional models when we utilize factors obtained from U.S. economic variables, while the Korean factors fail to enhance predictability. Our models perform better at longer horizons when the American real activity factors are employed, whereas the American nominal/financial market factors help improve short-run prediction accuracy. The UIP-based global factors with the dollar as numéraire overall perform well, while the PPP and RIRP factors play a limited role in forecasting the Won/Dollar exchange rate.
    Keywords: Won/Dollar Real Exchange Rate; Principal Component Analysis; Partial Least Squares; LASSO; Out-of-Sample Forecast
    JEL: C38 C53 C55 F31 G17
    Date: 2022–07

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