nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒09‒19
five papers chosen by
Martin Berka
Massey University

  1. Policy Rules and Large Crises in Emerging Markets By Emilio Espino; Julian Kozlowski; Fernando M. Martin; Juan M. Sanchez
  2. The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis By Pierre-Olivier Gourinchas; Philippe Martin; Todd Messer
  3. The effects of Monetary Policy on Capital Flows A Meta-Analysis By Villamizar-Villegas, Mauricio; Arango-Lozano, Lucía; Castelblanco, Geraldine; Fajardo-Baquero, Nicolás; Ruiz-Sánchez, María Alejandra
  4. How Credit Improves the Exchange Rate Forecast By Martin Casta
  5. BoC–BoE Sovereign Default Database: What’s new in 2022? By David Beers; Elliot Jones; Karim McDaniels; Zacharie Quiviger

  1. By: Emilio Espino; Julian Kozlowski; Fernando M. Martin; Juan M. Sanchez
    Abstract: In response to the COVID-19 pandemic, Latin American countries temporarily suspended rules limiting debt, fiscal and monetary policies. Despite this increase in flexibility, the crisis implied a substantial deterioration of macroeconomic variables (e.g., real GDP declined by 9.5%) and high welfare costs (which we estimate as equivalent to a 13% one-time reduction in non-tradable consumption). This paper studies a sovereign default model with fiscal and monetary policies to assess the policy response and evaluate the gains from flexibility in times of severe distress.
    Keywords: COVID-19; crises; default; Sovereign debt; Exchange rate; inflation; fiscal policy; emerging markets; Markov equilibrium
    JEL: E52 E62 F34 F41 G15
    Date: 2022–08–31
  2. By: Pierre-Olivier Gourinchas; Philippe Martin; Todd Messer
    Abstract: Despite a formal 'no-bailout clause; we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal, and Spain, ranging from roughly 0.5% (Ireland) to a whopping 43% (Greece) of2010 output during the Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a 'Southern view' of the crisis (transfers did not help) and a 'Northern view' (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of 'kicking the can down the road.' Mapping the model to the estimated transfers, we find that the main purpose of the outsized Greek bailout was to prevent an exit from the eurozone and possible contagion. Bailouts to avoid sovereign default were comparatively modest.
    Keywords: Euro area; Monetary union; Sovereign debt; Sovereign default; Debt monetization
    JEL: F34 F45 G15
    Date: 2022–08–03
  3. By: Villamizar-Villegas, Mauricio; Arango-Lozano, Lucía; Castelblanco, Geraldine; Fajardo-Baquero, Nicolás; Ruiz-Sánchez, María Alejandra
    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.
    Keywords: Meta-Analysis; Capital Flows; Monetary Policy
    JEL: C83 E58 F21 F31 F32
    Date: 2022–08
  4. By: Martin Casta
    Abstract: This paper presents a simple reduced-form error correction model for forecasting nominal exchange rates. The model is inspired by the classical monetary model of exchange rates. However, the commonly used monetary aggregates were replaced by loans to corporations. The reason for this change is that our goal is to focus on corporate deposits, for which corporate loans act as a proxy. For presentational purposes, we focus on eight major trading currency pairs: AUD/USD, CAD/USD, CHF/USD, EUR/USD, GBP/USD, NZD/USD, SEK/USD and JPY/USD, for which we use data from approximately the last two decades. We empirically show statistically and economically significant exchange rates forecastability in the medium and long run, and we also present some findings on predictability even in the short run. In short, our results suggest that corporate loans are a significant driver behind exchange rate movements.
    Keywords: Exchange rates, forecasting, forecast evaluation
    JEL: C5 F31 F32 F37
    Date: 2022–08
  5. By: David Beers; Elliot Jones; Karim McDaniels; Zacharie Quiviger
    Abstract: The BoC–BoE database of sovereign debt defaults, published and updated annually by the Bank of Canada and the Bank of England, provides comprehensive estimates of stocks of government obligations in default.
    Keywords: Debt management; Development economics; Financial stability; International financial markets
    JEL: F3 F34 G1 G10 G14 G15
    Date: 2022–08

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