nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒10‒03
four papers chosen by
Martin Berka
Massey University

  1. On the Empirical Relevance of the Exchange Rate as a Shock Absorber at the Zero Lower Bound By David Finck; Mathias Hoffmann; Patrick Huertgen
  2. Macroeconomic Implications of Oil-Price Shocks to Emerging Economies: A Markov Regime-Switching Approach By Sophio Togonidze; Evzen Kocenda
  3. Inflation and Wage Growth Since the Pandemic By Òscar Jordà; Fernanda Nechio
  4. Alternative Measures for the Global Financial Cycle: Do They Make a Difference? By Xin Tian; Jan P.A.M. Jacobs; Jakob de Haan

  1. By: David Finck (University of Giessen); Mathias Hoffmann (Deutsche Bundesbank); Patrick Huertgen (Deutsche Bundesbank)
    Abstract: The open economy New Keynesian model with flexible exchange rates postulates that the real exchange rate appreciates in response to an asymmetric negative demand shock in a zero lower bound (ZLB) scenario and exacerbates the adverse macroeconomic effects. However, when monetary policy is able to accommodate the adverse effects of the negative demand shock via unconventional measures, the model can generate a real depreciation at the ZLB. This paper examines these counteracting exchange rate channels empirically. We estimate the effect of a negative asymmetric demand shock on the real exchange rate and inflation expectations as well as output and prices by employing state-dependent and sign-restricted local projection methods for the euro area vis-Ã -vis the United States, Canada, and Japan. We find that the real exchange rate depreciates when interest rates are not at the ZLB but also when they are. Furthermore, our empirical results show that the real exchange rate can absor considerable variations in output, confirming its shock-absorbing capacity before but also during the ZLB episode. The stabilizing role of the exchange rate is accompanied by a significant expansion of the ECBs balance sheet in the ZLB period, while it remained unaffected in the pre-ZLB period. Overall, our empirical results favor the open economy New Keynesian model with unconventional measures when interest rates are at the ZLB.
    Keywords: Zero Lower Bound, Exchange Rate, Local Projections, State-dependent Effects
    JEL: F31 E31 E37 C54
    Date: 2022
  2. By: Sophio Togonidze (Institute of Economic Studies, Charles University, Prague, Czech Republic); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic & Institute of Information Theory and Automation, Prague, Czech Republic & CESifo Munich; IOS Regensburg)
    Abstract: We investigate an impact of oil-price shocks on GDP and exchange rate dynamics in resource-heterogeneous economies. We employ a Markov regime-switching version of a vector autoregressive (VAR) model to allow for regime shifts, non-linear effects and timevarying parameters of the VAR process. Empirically we use quarterly data series in oil exporting, metal-exporting, and less-resource-intensive economies. On average, real GDP in oil-exporting economies exhibits substantial contraction, while for metal exporters there is a significant real GDP expansion suggesting an offsetting effect of metal exports on oil imports. We find that currency appreciation state is more persistent in oil- and metal exporting economies while less-resource-intensive economies remain longer in a currency depreciation state. Further evidence suggests existence of the counteracting forces such as foreign exchange interventions by authorities in oil-exporting economies. It also emerges that currency appreciation in oil-exporting economies is driven largely by economic performance rather than oil price movement.
    Keywords: Emerging economies, Oil shocks, GDP, Markov regime-switching, Exchange rate, Oil exporters, Metal exporters
    JEL: F44 E37 C11 E32 C22 C58 F31 Q43
    Date: 2022–09
  3. By: Òscar Jordà; Fernanda Nechio
    Abstract: Following the worst of the COVID-19 pandemic, inflation has surged to 1980s levels in advanced economies. Motivated by vast differences in pandemic support across countries, we investigate the subsequent response of inflation and the feedback to wages. We exploit these differences to identify the effect these programs had on inflation and to examine the link between wages and inflation. Our empirical approach is based on a novel dynamic difference-in differences method based on local projections. Our estimates suggest that an increase of 5% in direct transfers (relative to trend) peaked at about an average 3 percentage points boost to the rate of inflation and wage growth after one year the support measures are introduced, with their effect waning by the second year. Moreover, since the pandemic and under a high-inflation environment, the role of inflation expectations on wage-setting dynamics have increased and become longer lasting.
    Keywords: inflation; wages; fiscal transfers; covid19
    JEL: E01 E30 E32 E44 E47 E51 F33 F42 F44
    Date: 2022–09–06
  4. By: Xin Tian (University of Groningen); Jan P.A.M. Jacobs (CAMA, Canberra / CIRANO, Montréal / University of Groningen); Jakob de Haan (CESifo, Munich / University of Groningen)
    Abstract: We construct several measures for the global financial cycle using dynamic factor models and data for 25 advanced and emerging countries over 1980-2019. Our results suggest that global cycles in asset prices and capital flows are highly similar and synchronized, especially during crisis episodes. Our measures for asset-specific global cycles suggest that cycles in credit and house prices are less volatile and have a longer duration than cycles in equity and bond prices. Finally, we find significant co-movement of our global financial cycle measures and two measures as suggested in the literature that are based on top-down and bottom-up approaches.
    Keywords: Global financial cycle, National financial cycle, Dynamic factor analysis, Capital flows, Asset prices
    JEL: E44 F32 F36
    Date: 2022–07

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