nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒10‒17
nine papers chosen by
Martin Berka
Massey University

  1. Monetary Policy During Unbalanced Global Recoveries By Luca Fornaro; Federica Romei
  2. A new optimum currency area index for the euro area By Kunovac, Davor; Palenzuela, Diego Rodriguez; Sun, Yiqiao
  3. Exchange Rate Synchronization for a set of Currencies from Different Monetary Areas By António Manuel Portugal Duarte; Nuno José Henriques Baetas da Silva
  4. Considerations for devaluation and depreciation of Malawi Kwacha against major trading currencies in National Development Agendas – Litmus Test for Malawi Vision 2063 By Phiri Kampanje, Brian
  5. Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy By Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
  6. On the Optimal Design of a Financial Stability Fund By Árpád Ábrahám; Eva Cárceles-Poveda; Yan Liu; Ramon Marimon
  7. Long-Run Trends in Long-Maturity Real Rates 1311-2021 By Kenneth S. Rogoff; Barbara Rossi; Paul Schmelzing
  8. Biases in Survey Inflation Expectations: Evidence from the Euro Area By Jiaqian Chen; Lucyna Gornicka; Vaclav Zdarek
  9. Effect of Macroprudential Policies on Sovereign Bond Markets: Evidence from the ASEAN-4 Countries By Joshua Aizenman; Gazi Salah. Uddin; Tianqi Luo; Ranadeva Jayasekera; Donghyun Park

  1. By: Luca Fornaro; Federica Romei
    Abstract: We study optimal monetary policy during times of exceptionally high global demand for tradable goods, relative to non-tradable services. The optimal monetary response entails a rise in inflation, which helps rebalance production toward the tradable sector. While the inflation costs are fully beared domestically, however, part of the gains in terms of higher supply of tradable goods spill over to the rest of the world. National central banks may thus fall into a coordination trap, and implement an excessively tight monetary policy during tradable goods-driven recoveries.
    Keywords: asymmetric shocks, reallocation, monetary policy, international monetary cooperation, inflation, global supply shortages
    JEL: E32 E44 E52 F41 F42
    Date: 2022–01
  2. By: Kunovac, Davor; Palenzuela, Diego Rodriguez; Sun, Yiqiao
    Abstract: We propose a new and time-varying optimum currency area (OCA) index for the euro area in assessing the evolution of the OCA properties of the monetary union from an international business cycle perspective. It is derived from the relative importance of symmetric vs. asymmetric shocks that result from a sign and zero restricted open-economy structural vector autoregression (VAR) model. We argue that the euro area is more appropriate through the lens of empirical OCA properties when the relative importance of common symmetric shocks is high, but, at the same time, is not overly dispersed across euro area member countries. We find that symmetric shocks have been the dominant drivers of business cycles across euro area countries. Our OCA index, nevertheless, shows that cyclical convergence among euro area members is not a steady process as it tends to be disrupted by crises, especially those not primarily triggered by common external shocks. In the aftermath of a crisis the OCA index embarks on a recovery trajectory catching up with its pre-crisis level. Our OCA index is slow-moving and a good reflection of changing underlying economic structures across the euro area and, therefore, informative about the ability of monetary policy to stabilise the euro area economy in the medium run. JEL Classification: F33, F44, E42
    Keywords: economic convergence, optimum currency area, symmetric and asymmetric shocks
    Date: 2022–09
  3. By: António Manuel Portugal Duarte (University of Coimbra, Centre for Business and Economics Research, CeBER and Faculty of Economics); Nuno José Henriques Baetas da Silva (Ph.D. Student at Faculty of Economics, University of Coimbra)
    Abstract: The degree of co-movement between currencies remains an important subject for interna- tional trade and monetary integration across countries. However, the economic literature has given limited answers about the directional relationships among currencies, and whether they have a leader or a driver. Using the Hodrick-Prescott lter and the wavelet methodology, this paper analyzes exchange rate synchronization for a set of twelve currencies belonging to dierent monetary areas covering the period between January 1980 and July 2020. The empirical results reveal that: i) the U.S. dollar still plays an essential role as a foreign exchange anchor; ii) the euro shows an out-of-phase relationship with the vast majority of currencies, including with the other European currencies; iii) the British pound seems to have departed signicantly from the European single currency; iv) the Brazilian real leads the Chinese yuan for most of the sample, and both currencies record great dissimilarities with the other currencies; v) in the absence of short-term foreign exchange market frictions, average bilateral distances between currencies are smaller, and vi) during the international nancial crisis, exchange rates became more synchro- nized
    Keywords: Exchange rate, co-movements, Hodrick-Prescott lter, wavelets, synchronization.
    JEL: E31 F41 F42 C51
    Date: 2022–03
  4. By: Phiri Kampanje, Brian
    Abstract: This paper strived to evaluate the impact of exchange rate of Malawi Kwacha more specifically as result of devaluation and depreciation against major currencies in the attainment of the country’s developmental agendas. The results indicate that the country has failed to achieve meaningful gains in its developmental agendas in view significant adverse movement in the exchange rate. There was however one exception with Malawi Growth and Development Strategy (2006-2011) when the exchange rate was stable. National Planning Commission should consider safeguards in the Vision 2063 by curbing illegal externalisation of forex as sustainable tool to avoid depreciation and devaluation of the Malawi Kwacha.
    Keywords: Devaluation; Development; Depreciation
    JEL: E00 E01 F10 F41 F43
    Date: 2022–08–15
  5. By: Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
    Abstract: We study how capital controls and domestic macroprudential policy tame credit supply booms, respectively targeting foreign and domestic bank debt. For identification, we exploit the simultaneous introduction of capital controls on foreign exchange (FX) debt inflows and an increase of reserve requirements on domestic bank deposits in Colombia during a strong credit boom, as well as credit registry and bank balance sheet data. Our results suggest that first, an increase in the local monetary policy rate, raising the interest rate spread with the United States, allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending, especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade. Second, the increase in reserve requirements on domestic deposits directly reduces credit supply, and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates on credit supply. Importantly, different banks finance credit in the boom with either domestic or foreign (FX) financing. Hence, capital controls and domestic macroprudential policy complementarily mitigate the boom and the associated risk-taking through two distinct channels.
    Keywords: capital controls, macroprudential and monetary policy, carry trade, credit supply, risk-taking
    JEL: E52 E58 F34 F38 G21 G28
    Date: 2022–02
  6. By: Árpád Ábrahám; Eva Cárceles-Poveda; Yan Liu; Ramon Marimon
    Abstract: We develop a model of a Financial Stability Fund (Fund) for a union of sovereign countries. By contract design, the Fund never has expected undesired losses while, being default-free, a participant country has greater ability to borrow and share risks than using sovereign debt financing. The Fund contract also provides better incentives for the country to reduce endogenous risks. These efficiency gains arise from the ability of the Fund to offer long-term contingent financial contracts, subject to limited enforcement (LE) and moral hazard (MH) constraints as part of the contingencies. We develop the theory (welfare theorems, with a new price decentralization) and quantitatively compare the constrained-efficient Fund economy with an incomplete markets economy with default. In particular, we characterize how prices and allocations differ, when the two economies are subject to exogenous productivity and endogenous government expenditure shocks. In our economies, calibrated to the euro area ‘stressed countries’, substantial welfare gains are achieved, particularly in times of crisis. The Fund is, in fact, a risk-sharing, crisis prevention and resolution mechanism, which transforms participant countries’ defaultable sovereign debts into union’s safe assets. In sum, our theory can help to improve current official lending practices and, eventually, to design an European Fiscal Fund.
    Keywords: fiscal unions, recursive contracts, Debt Contracts, partnerships, limited enforcement, moral hazard, debt restructuring, Debt Overhang, sovereign fund
    JEL: E43 E44 E47 E63 F34 F36
    Date: 2022–03
  7. By: Kenneth S. Rogoff; Barbara Rossi; Paul Schmelzing
    Abstract: Taking advantage of key recent advances in long-run financial and economic data, this paper analyzes the statistical properties of global long-maturity real interest rates over the past seven centuries. In contrast to existing consensus, which has overwhelmingly concentrated on short samples for short-maturity rates, we find that long-maturity real interest rates across advanced economies are in fact trend stationary, and exhibit a persistent downward trend since the Renaissance. We investigate structural breaks in real interest rates over time using multiple statistical approaches, and find that only the Black Death and the "Trinity default" of 1557 appear as consistent inflection points in capital markets on both global and country levels. While a 1914 break is also suggested in multiple series (though less robust than existing literature would lead one to expect), the evidence for an inflection point in 1981 appears much weaker. We further examine trends in persistence, as well as commonly-invoked drivers of global real rates: exploiting significant data advances, we argue that historically, demographic and productivity factors appear to show no promising causal role, and in fact diverge from real interest rates over the long run.
    JEL: E4 F3 N20
    Date: 2022–09
  8. By: Jiaqian Chen; Lucyna Gornicka; Vaclav Zdarek
    Abstract: This paper reveals new facts about inflation expectations in the euro area. By employing local projection and least squares techniques, the following five facts are documented. First, individual inflation expectations overreact to individual news. Second, the cross-section average of individual inflation expectations underreacts to shocks initially, but overreacts in the medium term. Third, disagreement about future inflation increases in response to news when the current inflation is high, and declines when inflation is low, consistent with a zero lower bound of expectations. Fourth, overreaction of individual inflation expectations to news increased after the global financial crisis (GFC). Fifth, the reaction of average expectations (and of actual inflation) to shocks became more muted post-GFC in the euro area, but not in the US economy.
    JEL: E3 E4 E5 D83 D84
    Date: 2022–09
  9. By: Joshua Aizenman; Gazi Salah. Uddin; Tianqi Luo; Ranadeva Jayasekera; Donghyun Park
    Abstract: This paper examines whether prudential policies help to reduce sovereign bond vulnerability to global spillover risk in ASEAN-4 countries (Indonesia, Malaysia, the Philippines, and Thailand). We measure sovereign vulnerability within a risk connectedness network among sovereign bonds. The direct effect is that markets with tighter prudential policies have significantly smaller spillovers from the Treasury yield shocks of other regional and global economies. The sum of indirect and direct effects indicates that prudential policies reduce sovereign spillover risk in the long term. These findings suggest prudential policies have dual efficiency in sovereign risk regulation and Treasury internationalization.
    JEL: E52 E58 F42
    Date: 2022–09

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