nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒11‒07
eleven papers chosen by
Martin Berka
Massey University

  1. What Types of Capital Flows Help Improve International Risk Sharing ? By Islamaj,Ergys; Kose,Ayhan
  2. Emerging market bond flows and exchange rate returns By Peter Hördahl; Giorgio Valente
  3. One-Stop Source : A Global Database of Inflation By Ha,Jongrim; Kose,Ayhan; Ohnsorge,Franziska Lieselotte
  4. The determination of the exchange rate: a new-developmental approach By Bresser-Pereira, Luiz Carlos; Feijó, Carmem; Araújo, Eliane Cristina
  5. The Aftermath of Debt Surges By Kose,Ayhan,Ohnsorge,Franziska Lieselotte,Reinhart,Carmen M.,Rogoff,Kenneth S.
  6. Decrypting New Age International Capital Flows By Graf Von Luckner,Clemens Mathis Henrik,Reinhart,Carmen M.,Rogoff,Kenneth S.
  7. Sovereign Bonds since Waterloo By Meyer,Josefin; Reinhart,Carmen M.; Trebesch,Christoph
  8. The Macroeconomy After Tariffs By Furceri,Davide; Hannan,Swarnali A.; Ostry,Jonathan D.; ROSE,ANDREW K.
  9. Drivers and Spillover Effects of Inflation: the United States, the Euro Area, and the United Kingdom By Stephen G. Hall; George S. Tavlas; Yongli Wang
  10. Hidden Defaults By Horn,Sebastian Andreas; Reinhart,Carmen M.; Trebesch,Christoph
  11. Assessing the Impact of the 2017 PPPs on the International Poverty Line and Global Poverty By Jolliffe,Dean Mitchell; Mahler,Daniel Gerszon; Lakner,Christoph; Atamanov,Aziz; Tetteh Baah,Samuel Kofi

  1. By: Islamaj,Ergys; Kose,Ayhan
    Abstract: Cross-border capital flows are expected to lead to increased international risk sharing byfacilitating borrowing and lending in global financial markets. This paper examines risk-sharing outcomes ofvarious types of capital flows (foreign direct investment, portfolio equity, debt, remittance, and aid flows) in alarge sample of emerging market and developing economies. The results suggest that remittances and aid flows areassociated with increased international risk sharing. Other types of capital flows are not consistently correlated withbetter risk-sharing outcomes. These findings are robust to the use of different econometric specifications,country-specific characteristics, and other controls.
    Date: 2021–11–15
  2. By: Peter Hördahl; Giorgio Valente
    Abstract: We study the relationship between international bond ows and exchange rate returns for a panel of emerging market economies (EMEs). Specifically, we investigate whether international net bond ows are correlated with subsequent changes in the value of the local currency against the US dollar. Using a portfolio approach, we find evidence of a positive relationship between bond ows and future exchange rate returns of EMEs, which is not present for advanced economy currencies. EME currencies tend to depreciate following large bond out ows, while they tend to appreciate following in ows. A dollar-neutral portfolio that goes long in in ow currencies and shorts out ow currencies earns large excess returns that are not correlated with ones from known international portfolio strategies. Moreover, using an asset pricing approach, we find strong evidence that a risk factor implied by this result is priced in the cross-section of currencies. These findings are consistent with investors requiring compensation for the risk that countries experiencing large portfolio in ows today could be facing a future tightening of their aggregate financial conditions.
    Keywords: Bond ows, exchange rate dynamics, financial conditions.
    JEL: F31 G12 G23 G24
    Date: 2022–09
  3. By: Ha,Jongrim; Kose,Ayhan; Ohnsorge,Franziska Lieselotte
    Abstract: This paper introduces a global database that contains inflation series: (i) for a wide range of inflation measures (headline, food, energy, and core consumer price inflation; producer price inflation; and gross domestic product deflator changes); (ii) at multiple frequencies (monthly, quarterly and annual) for an extended period (1970–2021); and (iii) for a large number (up to 196) of countries. As it doubles the number of observations over the next-largest publicly available sources, the database constitutes a comprehensive, single source for inflation series. The paper illustrates the potential use of the database with three applications. First, it studies the evolution of inflation since 1970 and document the broad-based disinflation around the world over the past half-century, with global consumer price inflation down from a peak of roughly 17 percent in 1974 to 2.5 percent in 2020. Second, it examines the behavior of inflation during global recessions. Global inflation fell sharply (on average by 0.9 percentage points) in the year to the trough of global recessions and continued to decline even as recoveries got underway. In 2020, inflation declined less, and more briefly, than in any of the previous four global recessions over the past 50 years. Third, the paper analyzes the role of common factors in explaining movements in different measures of inflation. While, across all inflation measures, inflation synchronization has risen since the early 2000s, it has been much higher for inflation measures that involve a larger share of tradable goods.
    Keywords: Inflation,Energy and Environment,Energy Demand,Energy and Mining,Macroeconomic Management,Financial Structures
    Date: 2021–07–27
  4. By: Bresser-Pereira, Luiz Carlos; Feijó, Carmem; Araújo, Eliane Cristina
    Abstract: This paper discusses the long-term determination of the exchange rate, given that it may remain depreciated or overvalued for some time. It defines the equilibrium exchange rate and the competitive exchange rate; the latter makes investment projects competitive internationally. Instead of starting from the PPP theory, it starts from the concept of the value of foreign money or the exchange rate around which the price, the exchange rate, revolves according to the supply and demand of foreign money. This, in turn, is influenced by three factors: the terms of trade, the current-account balance as a determinant of the net capital flows or inflows, and the interest rate differential. This paper criticizes the “fundamental equilibrium” concept and develops two econometric tests. The first checks whether the four determinant variables used in the model are relevant. The second verifies whether this model is a good predictor of the exchange rate throughout time.
    Date: 2022–08–31
  5. By: Kose,Ayhan,Ohnsorge,Franziska Lieselotte,Reinhart,Carmen M.,Rogoff,Kenneth S.
    Abstract: Debt in emerging market and developing economies (EMDEs) is at its highest level in half a century. In about nine out of 10 EMDEs, debt is higher now than it was in 2010 and, in half of the EMDEs, debt is more than 30 percentage points of gross domestic product higher. Historically, elevated debt levels increased the incidence of debt distress, particularly in EMDEs and particularly when financial market conditions turned less benign. This paper reviews an encompassing menu of options that have, in the past, helped lower debt burdens. Specifically, it examines orthodox options (enhancing growth, fiscal consolidation, privatization, and wealth taxation) and heterodox options (inflation, financial repression, debt default and restructuring). The mix of feasible options depends on country characteristics and the type of debt. However, none of these options comes without political, economic, and social costs. Some options may ultimately be ineffective unless vigorously implemented. Policy reversals in difficult times have been common. The challenges associated with debt reduction raise questions of global governance, including to what extent advanced economies can cast their net wider to cushion prospective shocks to EMDEs.
    Keywords: Inflation,Armed Conflict,Public Sector Economics,Macro-Fiscal Policy,Economic Adjustment and Lending,Public Finance Decentralization and Poverty Reduction,Energy Privatization,Democratic Government,Public Sector Administrative and CivilService Reform,Public Sector Administrative&Civil Service Reform,Privatization,Economics and Finance of PublicInstitution Development,State Owned Enterprise Reform,De Facto Governments
    Date: 2021–09–10
  6. By: Graf Von Luckner,Clemens Mathis Henrik,Reinhart,Carmen M.,Rogoff,Kenneth S.
    Abstract: This paper employs high frequency transactions data on the world’s oldest and most extensive centralized peer-to-peer Bitcoin market, which enables trade in the currencies of more than 135 countries. It presents an algorithm that allows, with high probability, the detection of “crypto vehicle transactions” in which crypto currency is used to move capital across borders or facilitate domestic transactions. In contrast to previous work which has used “on-chain” data, this paper’s approach enables one to investigate parts of the vastly larger pool of “off-chain” transactions. Finding that, as a conservative lower bound, over 7 percent of the 45 million trades on the exchange we explore represent crypto vehicle transactions in which Bitcoin is used to make payments in fiat currency. Roughly 20 percent of these represent international capital flight/flows/remittances. Although this work cannot be used to put a price on cryptocurrencies, it provides the first systematic quantitative evidence that the transactional use of cryptocurrencies constitutes a fundamental component of their value, at least under the current regulatory regime.
    Keywords: International Trade and Trade Rules,Investment and Investment Climate,Law Enforcement Systems
    Date: 2021–10–05
  7. By: Meyer,Josefin; Reinhart,Carmen M.; Trebesch,Christoph
    Abstract: This paper studies external sovereign bonds as an asset class. It compiles a new database of266,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle ofWaterloo) and 2016, covering up to 91 countries. The main insight is that, as in equity markets, the returns onexternal sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns average more than6 percent annually across two centuries, including default episodes, major wars, and global crises. This represents anexcess return of 3–4 percent above US or UK government bonds, which is comparable to stocks and outperformscorporate bonds. Central to this finding are the high average coupons offered on external sovereign bonds. Theobserved returns are hard to reconcile with canonical theoretical models and the degree of credit risk in thismarket, as measured by historical default and recovery rates. Based on an archive of more than 300 sovereign debtrestructurings since 1815, the authors show that full repudiation is rare; the median creditor loss (haircut) isbelow 50 percent.
    Keywords: External Debt,Debt Markets,Debt Relief and HIPC,International Trade and Trade Rules,Armed Conflict,Financial Sector Policy
    Date: 2022–01–20
  8. By: Furceri,Davide; Hannan,Swarnali A.; Ostry,Jonathan D.; ROSE,ANDREW K.
    Abstract: What does the macroeconomy look like in the aftermath of tariff changes This paper estimatesimpulse response functions from local projections using a panel of annual data that spans 151 countries over1963–2014. Tariff increases are associated with persistent, economically and statistically significant, declines indomestic output and productivity, as well as higher unemployment and inequality, real exchange rate appreciationand insignificant changes to the trade balance. Output and productivity impacts are magnified when tariffs rise duringexpansions and when they are imposed by more advanced or smaller (as opposed to developing or larger) economies;effects are asymmetric, being larger when tariffs go up than when they fall. While firmly establishing causality is always a challenge, the results are robust to a large numberof perturbations to the baseline methodology, and hold using both macroeconomic and industry-level data.
    Keywords: International Trade and Trade Rules,Macroeconomic Management,Employment and Unemployment,Inflation,Trade Policy
    Date: 2021–11–18
  9. By: Stephen G. Hall (Leicester University, Bank of Greece, and Pretoria University); George S. Tavlas (Bank of Greece and the Hoover Institution, Stanford University); Yongli Wang (University of Birmingham)
    Abstract: We investigate the drivers of the recent inflation in three currency areas: the United States, the euro area, and the United Kingdom. To do so, we use a VAR set-up to examine the nature of the shocks that underpinned the recent inflation. We apply two methods to calculate shocks -- the standard Cholesky decomposition and a new method that captures more realistic shocks by solving the VAR backwards. We also use spatial modelling to investigate cross-country inflation spillovers. We find the inflationary shocks in the United States are transmitted to the euro area and the United Kingdom in a powerful and consistent way. The euro area transmits inflation to the other regions but to a lesser extent, while the inflation in the United Kingdom has little effect on the other two regions.
    Keywords: Inflation, VAR analysis, impulse responses, spatial spillovers
    JEL: C52 C53
    Date: 2022–10
  10. By: Horn,Sebastian Andreas; Reinhart,Carmen M.; Trebesch,Christoph
    Abstract: China’s lending boom to developing countries is morphing into defaults and debt distress. Giventhe secrecy surrounding China’s loans, also the associated defaults remain “hidden”, as missed payments andrestructuring details are not disclosed. This paper constructs an encompassing dataset of sovereign debtrestructurings with Chinese lenders and finds that these credit events are surprisingly frequent, exceeding thenumber of sovereign bond or Paris Club restructurings.Chinese lenders follow a resolution approach reminiscent of 1980s Western lenders; they seldom provide deep debt reliefwith face value reduction. If history is any guide, multi-year debt workouts with serial restructurings lie in store.
    Keywords: External Debt,Debt Relief and HIPC,Debt Markets,Financial Sector Policy
    Date: 2022–02–04
  11. By: Jolliffe,Dean Mitchell; Mahler,Daniel Gerszon; Lakner,Christoph; Atamanov,Aziz; Tetteh Baah,Samuel Kofi
    Abstract: Purchasing power parities (PPPs) are used to estimate the international poverty line (IPL) in acommon currency and account for relative price differences across countries when measuring global poverty. This paperassesses the impact of the 2017 PPPs on the nominal value of the IPL and global poverty. The analysis indicates thatupdating the $1.90 IPL in 2011 PPP dollars to 2017 PPP dollars results in an IPL of approximately $2.15—a findingthat is robust to various methods and assumptions. Based on an IPL of $2.15, the global extreme poverty rate in 2017falls from 9.3 to 9.1 percent, reducing the count of people who are poor by 16 million. This is a modest change comparedwith previous updates of PPP data. The paper also assesses the methodological stability between the 2011 and 2017 PPPs,scrutinizes large changes at the country level, and analyzes higher poverty lines with the 2017 PPPs.
    Keywords: Inequality,Inflation,International Trade and Trade Rules,Poverty Lines,Poverty Impact Evaluation,Small Area Estimation Poverty Mapping,Poverty Monitoring & Analysis,Poverty Diagnostics,Poverty Assessment
    Date: 2022–02–21

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