nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒10‒24
eleven papers chosen by
Martin Berka
Massey University

  1. Monetary Policy Cyclicality in Emerging Economies By Pierre De Leo; Gita Gopinath; Ṣebnem Kalemli-Özcan
  2. Multinationals and Structural Transformation By Vanessa I. Alviarez; Cheng Chen; Nitya Pandalai-Nayar; Liliana Varela; Kei-Mu Yi; Hongyong Zhang
  3. Exchange rate pass-through in India By Prashant Parab
  4. Foreign exchange reserves, imperfect substitutability of financial assets and the monetary policy quadrilemma By Thibault Laurentjoye
  5. Classifying Exchange Rate Regimes: 20 Years Later By Eduardo Levy Yeyati; Federico Sturzenegger
  6. The Dynamics of International Exploitation By Cogliano, Jonathan F.; Veneziani, Roberto; Yoshihara, Naoki
  7. Capital Controls, Corporate Debt and Real Effects By Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
  8. Global Monetary and Financial Spillovers: Evidence from a New Measure of Bundesbank Policy Shocks By James Cloyne; Patrick Hürtgen; Alan M. Taylor
  9. Central bank digital currency and cryptocurrency in emerging markets By Le, Anh H.
  10. External Wealth of Nations and Systemic Risk By Alin Marius Andries; Alexandra-Maria Chiper; Steven Ongena; Nicu Sprincean
  11. Exchange rate expectations and exports: Firm-level evidence from China By Xiaohua Bao; Hailiang Huang; Larry D Qiu; Xiaozhuo Wang

  1. By: Pierre De Leo; Gita Gopinath; Ṣebnem Kalemli-Özcan
    Abstract: Conventional wisdom holds that monetary policy in emerging economies is procyclical, unlike in advanced economies. Using a large sample of countries from the mid-1990s onwards, we show that the conduct of monetary policy is not fundamentally different across these two groups of countries. Emerging and advanced economies alike lower their policy rates when economic activity decelerates, both unconditionally and following exogenous U.S. monetary policy tightening. We show that the common practice of using market rates, such as government bond rates, to proxy for the stance of monetary policy leads one to draw inaccurate conclusions about emerging economies’ monetary policy cyclicality due to inherent risk premia in those market rates.
    JEL: E0 F0 F3
    Date: 2022–09
  2. By: Vanessa I. Alviarez; Cheng Chen; Nitya Pandalai-Nayar; Liliana Varela; Kei-Mu Yi; Hongyong Zhang
    Abstract: We study the role of multinationals (MNCs) in facilitating firm-level and aggregate structural transformation. Using a stylized model of multinational production and trade, we show that an inward multinational liberalization in the manufacturing sector raises employment in host country firms, and decreases manufacturing employment, while also raising services employment, in the parent firms. We also show the conditions under which aggregate structural transformation occurs. We test the model's firm-level predictions by using confidential microdata from Japan. We study the response of Japanese MNC parents and of their affiliates in China to an exogenous change in China's openness to foreign direct investment (FDI). We find that in industries where inward FDI was encouraged, Japan MNC's affiliates in China experienced increases in their employment. We also find that MNC parents in the encouraged industries experienced decreases in home country manufacturing employment and increases in home country services and R&D employment. Finally, using microdata for several advanced and middle-income countries, we decompose the change in overall manufacturing employment shares into MNC and non-MNC components. We find a significant role for MNCs across all countries, suggesting the mechanism we highlight is an important global driver of structural transformation.
    JEL: F41 F44
    Date: 2022–09
  3. By: Prashant Parab (Indira Gandhi Institute of Development Research)
    Abstract: Investigating exchange rate fluctuations is important to understand their influence on domestic inflation dynamics of the country as well as to study the stabilisation role played by the monetary policy. Understanding exchange rate pass-through (ERPT) is important especially from emerging markets' perspective since they tend to be net importers. This study examines ERPT for India from 2005Q2 to 2021Q2, i.e., the effects of the nominal effective exchange rate (NEER) on the domestic inflation captured using CPI and WPI. Using linear and non-linear ARDL models, we discover less than perfect exchange rate pass-through for India. The influence is higher for WPI than CPI on account of inelastic crude oil imports. This study also finds a higher influence of exchange rate appreciation than that of depreciation due to the policy measures to limit the pass-through effect of exchange rate depreciation but allowing appreciation to have a complete pass-through.
    Keywords: Exchange rate pass-through, ARDL, NARDL, Nominal effective exchange rate, Inflation dynamics
    JEL: C32 E31 E32 F31
    Date: 2022–08
  4. By: Thibault Laurentjoye (EHESS Paris (FR))
    Abstract: In this paper, I investigate how the use of foreign exchange reserves can turn the monetary policy trilemma into a quadrilemma. After surveying recent developments in international macroeconomics literature, including the dilemma vs trilemma debate and the dominant currency paradigm, I make a twofold contribution to support the case for the quadrilemma. The first contribution is a logical characterisation of the quadrilemma in the form of a single equation which includes exchange rate variations, interest rate differential, capital controls and the level of reserves. The second contribution consists of a nominal stock-flow consistent model with two countries, characterised by perfect capital mobility and imperfect asset substitutability, to study the pure effect of international investors’ portfolio reallocation following unanticipated changes in the policy rate of the domestic economy. The model is run several times, varying the direction of the monetary policy shock and the relative size of the two countries. Two constraints on reserves are highlighted, one in the short run and one in the long run – albeit less significant – which define the limit between the classical trilemma and the quadrilemma.
    Keywords: International reserves, foreign exchange intervention, monetary policy trilemma, quadrilemma, stock-flow consistent modelling
    JEL: E43 E58 F31 F32 F36 F41
    Date: 2022–10
  5. By: Eduardo Levy Yeyati (Universidad Di Tella); Federico Sturzenegger (Universidad de San Andres and Harvard Kennedy School)
    Abstract: Twenty years ago, in Levy Yeyati and Sturzenegger (2001) we proposed a de facto classification of exchange rate regimes which contrasted with the –at the time, standard– de jure classifications based on self-reporting by monetary authorities. This paper extends our original classification through 2021 more than doubling the number of country-year observations (from 3335 to 8491). It also introduces an updating methodology to keep the classification updated in real time. Also, based on this extension, the paper documents the main stylized facts about exchange rate regime choices in the past two decades, which shows a jump in the prevalence of flexible regimes in the early 2000s and a gradual convergence between de jure and de facto groupings over time.
    Date: 2022–09
  6. By: Cogliano, Jonathan F.; Veneziani, Roberto; Yoshihara, Naoki
    Abstract: This paper develops a framework to analyse imperialistic international relations and the dynamics of international exploitation. A new measure of unequal exchange across borders is proposed which captures the territorial structure of imperialistic international relations: wealthy nations are net lenders and exploiters, whereas endowment-poor countries are net borrowers and exploited. Capital flows transfer surplus from countries in the periphery of the global economy to those in the core. However, while international credit markets and wealth inequalities are central in generating international exploitation, other factors, including labour-saving technical change, are shown to be essential in explaining its persistence.
    Keywords: International exploitation, Imperialism, Unequal exchange, Uneven development, Capital movements
    JEL: F54 B51 D63
    Date: 2022–09
  7. By: Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
    Abstract: Non-US firms have massively borrowed dollars (foreign currency, FX), which may lead to booms and crises. We show the real effects of capital controls, including prudential benefits, through a firm-debt mechanism. Our identification exploits the introduction of a tax on FX-debt inflows in Colombia before the global financial crisis (GFC), and administrative, proprietary datasets, including loan-level credit register data and firm-level information on FX-debt inflows and imports/exports. Our results show that capital controls substantially reduce FX-debt inflows, particularly for firms with larger ex-ante FX-debt exposure. Moreover, firms with weaker local banking relationships cannot substitute FX-debt with domestic-debt and experience a reduction in total debt and imports upon implementation of the policy. However, our results suggest that, by preemptively reducing pre-crisis firm-level debt, capital controls boost exports during the subsequent GFC, especially among financially-constrained firms.
    Keywords: capital controls, corporate FX-debt, real effects, macroprudential, capital inflows
    JEL: F3 F38 F4 F6 G01 G15 G21 G28
    Date: 2022–04
  8. By: James Cloyne; Patrick Hürtgen; Alan M. Taylor
    Abstract: Identifying exogenous variation in monetary policy is crucial for investigating central bank policy transmission. Using newly-collected archival real-time data utilized by the Central Bank Council of the German Bundesbank, we identify unexpected changes in German monetary policy from 580 policy meetings between 1974 and 1998. German monetary policy shocks produce conventional effects on the German domestic economy: activity, prices, and credit decline significantly following a monetary contraction. But given Germany’s central role in the European Monetary System (EMS), we can also shed light on debates about the international transmission of monetary policy and the relative importance of the U.S. Federal Reserve for the global cycle during these years. We find that Bundesbank policy spillovers were much stronger in major EMS economies with Deutschmark pegs than in non-EMS economies with floating exchange rates. Furthermore, compared to monetary spillovers from the U.S., German spillovers were comparable or even larger in magnitude for both pegs and floats.
    JEL: E32 E52 F42 F44
    Date: 2022–09
  9. By: Le, Anh H.
    Abstract: Blockchain technology has opened up the possibility of digital currency, smart contracts and much more applications including the launch of central bank digital currencies (CBDC). However, literature about the effect of CBDC with the presence of cryptocurrency for an emerging market economy seems to be left behind. In this paper, we introduce a New Keynesian - Dynamic Stochastic General Equilibrium (NK-DSGE) model to examine the implications of CBDC and cryptocurrency in an open economy for emerging markets. In our model, cryptocurrency is implemented as a form of deposit in banks where bankers can also receive deposits from abroad. Lastly, CBDC is introduced as a payment and saving instrument. We find that cryptocurrency has a crucial role in banking sectors and a significant effect on the dynamic of foreign debt which is deeply important for emerging markets. We also conduct optimal monetary policy under different scenarios. Hence, we uncover that a flexible rate in CBDC can affect the responses of the monetary rate and can reinforce the conventional monetary policy to achieve the central bank's targets.
    Keywords: Central bank digital currency, Cryptocurrency, Open-economy, Financial frictions, Optimal monetary policy
    JEL: E50 F30 F31 G15 G18 G23
    Date: 2022–09–20
  10. By: Alin Marius Andries (Alexandru Ioan Cuza University of Iasi; Romanian Academy - Institute for Economic Forecasting); Alexandra-Maria Chiper (Alexandru Ioan Cuza University of Iasi); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)); Nicu Sprincean (Alexandru Ioan Cuza University of Iasi)
    Abstract: External imbalances played a pivotal role in the run-up to the global financial crisis, being an important underlying cause of the ensuing turmoil. While current account (flow) imbalances have narrowed in the aftermath of the crisis, net international investment position (stock) imbalances still persist. In this paper, we explore the implications of countries’ net foreign positions on systemic risk. Using a sample composed of 450 banks located in 46 advanced, developing and emerging countries over the period 2000-2020, we document that banks can reduce their systemic risk exposure when the countries where they are incorporated maintain creditor positions vis-à-vis the rest of the world. However, only the equity components of the net international investment positions are responsible for this outcome, whereas debt flows do not contribute significantly. In addition, we find that the heterogeneity across countries is substantial and that only banks located in advanced markets that maintain their creditor positions have the potential to improve their resilience to system-wide shocks. Our findings are relevant for policy makers who seek to improve banks’ resilience to adverse shocks and to maintain financial stability.
    Keywords: External Wealth of Nations, External Imbalances, Net International Investment Position, Systemic Risk, Financial Stability
    JEL: F32 G21 G32
    Date: 2022–09
  11. By: Xiaohua Bao; Hailiang Huang; Larry D Qiu; Xiaozhuo Wang
    Abstract: The notion that the exchange rate affects exports is well understood. However, whether exporters respond to the expectations of the exchange rate is unknown. Hence, in this study, we construct a measure of exchange rate expectations based on news articles from the Factiva database. We use machine learning to identify and classify news articles about the appreciation of the renminbi (RMB, Chinese currency). Our empirical estimation shows that from 2000 to 2006, Chinese firms reduced their exports in response to a higher expectation of RMB appreciation. They switched their sales from export to domestic markets. The responses are larger in low-productivity firms, state-owned enterprises, processing trade, and final goods trade.
    Keywords: Exchange rate expectation; Exports; RMB appreciation
    Date: 2022

This nep-opm issue is ©2022 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.