nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒11‒14
fourteen papers chosen by
Martin Berka
Massey University

  1. From Health Crisis to Financial Distress By Reinhart,Carmen M.
  2. Dynamics and Synchronization of Global Equilibrium Interest Rates By Beyer,Robert Carl Michael; Milivojevic,Lazar
  3. Boosting carry with equilibrium exchange rate estimates By Rubaszek, Michał; Beckmann, Joscha; Ca' Zorzi, Michele; Kwas, Marek
  4. FX Resilience around the World: Fighting Volatile Cross-Border Capital Flows By Louisa Chen; Estelle Xue Liu; Zijun Liu
  5. Fiscal and Macroprudential Policies in a Monetary Union By José E. Boscá; Javier Ferri; Margarita Rubio
  6. Understanding the Strength of the Dollar By Zhengyang Jiang; Robert J. Richmond; Tony Zhang
  7. Asymmetric Macroeconomic Effects of QE and Excess Reserves in a Monetary Union By Neyer, Ulrike; Stempel, Daniel; Horst, Maximilian
  8. Revisiting the real exchange rate misalignment-economic growth nexus via the across-sector misallocation channel By Claire Giordano
  9. Invoicing Currency and Symmetric Pass-Through of Exchange Rates and Tariffs : Evidence from Malawian Imports from the EU By Montfaucon,Angella Faith Lapukeni
  10. Signaling virtue or vulnerability? The changing impact of exchange rate regimes on government bond yields By Barta, Zsófia; Baccaro, Lucio; Johnston, Alison
  11. The Impact of Oil Shocks on Sovereign Default Risk By Alturki,Sultan Abdulaziz M; Hibbert,Ann Marie
  12. The Role of Expectations for Currency Crisis Dynamics - The Case of the Turkish Lira By Beckmann, Joscha; Czudaj, Robert L.
  13. Commodity Price Effects on Currencies By Yin-Wong Cheung; Wenhao Wang
  14. Toward the African Continental Free Trade Area : The Effects of Economic Integration and Democracy on Real Misalignments across Exchange Rate Regimes By Owoundi Fouda,Ferdinand; Avom,Desire; Kuete,Flora Yselle

  1. By: Reinhart,Carmen M.
    Abstract: I discuss the multifaceted economic and financial vulnerabilities that have been created or exacerbated by the COVID-19 pandemic on a foundation of already weak economic fundamentals in many countries. Crises often do not travel alone. Banking, sovereign debt, exchange rate crashes, sudden stops, and inflation often intersect to become severe conglomerate crises. Historically, whether of the individual or conglomerate variety, crises influence the shape and speed of economic recovery. As the health crisis morphs into a financial or debt crisis in some countries, I discuss what may lie ahead in terms of the stages in crisis resolution and a brief reflection on how the resolution process can be expedited.
    Date: 2021–04–07
  2. By: Beyer,Robert Carl Michael; Milivojevic,Lazar
    Abstract: With the COVID-19 pandemic, the intense debate about secular stagnation will become even more important. Empirical estimates of equilibrium real interest rates are so far mostly limited to advanced economies, since no statistical procedure suitable for a large set of countries is available. This is surprising, as equilibrium rates have strong policy implications in emerging markets and developing economies as well; current estimates of the global equilibrium rate rely on only a few countries; and estimates for a more diverse set of countries can improve understanding of the drivers. This paper proposes a model and estimation strategy that decompose ex ante real interest rates into a permanent and transitory component even with short samples and high volatility. This is done with an unobserved component local level stochastic volatility model, which is used to estimate equilibrium rates for 50 countries with Bayesian methods. Equilibrium rates were lower in emerging markets and developing economies than in advanced economies in the 1980s, similar in the 1990s, and have been higher since 2000. In line with economic integration and rising global capital markets, synchronization has been rising over time and is higher among advanced economies. Equilibrium rates of countries with stronger trade linkages and similar demographic and economic trends are more synchronized.
    Keywords: Inflation,International Trade and Trade Rules,Financial Sector Policy,Demographics
    Date: 2020–12–07
  3. By: Rubaszek, Michał; Beckmann, Joscha; Ca' Zorzi, Michele; Kwas, Marek
    Abstract: We build currency portfolios based on the paradigm that exchange rates slowly converge to their equilibrium to highlight three results. First, this property can be exploited to build profitable portfolios. Second, the slow pace of convergence at short-horizons is consistent with the evidence of profitable carry trade strategies, i.e. the common practice of borrowing in low-yield currencies and investing in high-yield currencies. Third, the predictive power of equilibrium exchange rates may boost the performance of carry trade strategies. JEL Classification: F31, G12, G15
    Keywords: carry trade, equilibrium exchange rate, trading strategies
    Date: 2022–09
  4. By: Louisa Chen; Estelle Xue Liu; Zijun Liu
    Abstract: We show that capital flow (CF) volatility exerts an adverse effect on exchange rate (FX) volatility, regardless of whether capital controls have been put in place. However, this effect can be significantly moderated by certain macroeconomic fundamentals that reflect trade openness, foreign assets holdings, monetary policy easing, fiscal sustainability, and financial development. Passing the threshold levels of these macroeconomic fundamentals, the adverse effect of CF volatility may be negligible. We further construct an intuitive FX resilience measure, which provides an assessment of the strength of a country's exchange rates.
    Date: 2022–10
  5. By: José E. Boscá; Javier Ferri; Margarita Rubio
    Abstract: In the European Monetary Union (EMU), monetary policy is decided by the European Central Bank (ECB). This can create some imbalances that can potentially be corrected by national policies. So far, Öscal policy was the natural candidate to adjust those imbalances. Nevertheless, after the global Önancial crisis (GFC), a new policy candidate has emerged, namely national macroprudential policies, with the mission of reducing Önancial risks. This issue gives rise to an interesting research question: how do macroprudential and Öscal policies interact? By a§ecting real interest rates and the level of activity, a discretionary macroprudential policy alters the evolution of public debt and can impose a Öscal cost when the government is forced to increase tax rates to stabilize the public debt-to-GDP ratio. In a monetary union, a domestic macroprudential shock creates substantial crossborder Önancial e§ects and also ináuences the foreign country Öscal stance. Moreover, a discretionary government spending policy a§ects housing prices, so the strenght with which macroprudential policy reacts to a change in the price of houses has an impact on the Öscal multiplier.
    Date: 2022–10
  6. By: Zhengyang Jiang; Robert J. Richmond; Tony Zhang
    Abstract: We link the sustained appreciation of the U.S. dollar from 2011 to 2019 to international capital flows driven by primitive economic factors. We show that increases in foreign investors’ net savings, increases in U.S. monetary policy rates relative to the rest of the world, and shifts in investor demand for U.S. financial assets contributed approximately equally to the dollar’s appreciation. We then quantify the impact of potential future demand shifts for U.S. assets on the value of the dollar.
    JEL: F31 G15
    Date: 2022–10
  7. By: Neyer, Ulrike; Stempel, Daniel; Horst, Maximilian
    JEL: E51 E52 E58 F41 F45
    Date: 2022
  8. By: Claire Giordano (Bank of Italy)
    Abstract: Real effective exchange rate (REER) imbalances may affect economic growth by altering the allocation of labour and capital across sectors. This study assesses whether the component of inter-sectoral production factor misallocation induced by REER misalignments significantly hinders economic development and if this is the only channel via which REER imbalances operate. REER misalignments are derived from a Behavioural Equilibrium Exchange Rate model; labour misallocation and capital misallocation are measured, according to two alternative indicators, on a unique cross-country cross-sector national account dataset of 54 economies and 12 sectors over the years 1980-2015. Both REER over- and undervaluations lead to increased across-sector labour (but not capital) misallocation and, uniquely via this channel, they significantly hamper real growth. The correction of these external imbalances would thus stimulate inter-sectoral allocative efficiency and, ultimately, economic activity.
    Keywords: external imbalances, real effective exchange rate misalignments, labour misallocation, capital misallocation, economic development
    JEL: F40 F43 O11 O14 O19
    Date: 2022–10
  9. By: Montfaucon,Angella Faith Lapukeni
    Abstract: The response of import prices to exchange rates can be used to predict the effect of changes in trade policy. The hypothesis of symmetric pass-through of tariffs and exchange rates asserts that the effect of tariffs and exchange rates on prices are identical. This paper examines whether the symmetry hypothesis holds in the context of invoicing currency, by investigating the role of the euro and the U.S dollar currencies. The paper uses transaction-level data of Malawian imports from the European Union (EU) over a 12-year period, separating imports from the Economic and Monetary Union (EMU) members and non-members and across sectors. The findings show that the dollar has the highest invoicing share, and the pass-through rate of exchange rate and tariff shocks on to Malawian consumers is high. Symmetry holds when bilateral exchange rates are used, but when the invoicing currency is considered there are deviations from symmetry. This result implies that to predict the effects of trade policy based on import prices' responses to the exchange rate, bilateral exchange rates are not suitable for capturing exchange rate and tariff pass-through. The variations in the results across EMU and non-EMU, currencies, and industries demonstrates that that empirical evidence is needed in each case to understand the extent of pass-through, which is crucial for import-dependent developing countries such as Malawi.
    Keywords: International Trade and Trade Rules,Transport Services,Trade Policy,Rules of Origin,Trade and Multilateral Issues,Trade and Services
    Date: 2021–03–11
  10. By: Barta, Zsófia; Baccaro, Lucio; Johnston, Alison
    Abstract: Do exchange rate regimes affect the conditions under which developed countries borrow? This paper argues that they do, but their impact on yields depends on the prevailing macroeconomic context. When investors regard inflation as the most relevant risk to bond holdings, monetary union has a distinct advantage over floating and fixed exchange rates because of its credible in-built mechanism to control inflation. However, once default is seen as the most relevant risk, exchange rate rigidity becomes a liability due to its constraining effect on governments' ability to respond to adverse shocks. We test our argument with a moving window panel analysis for twenty-three OECD countries from 1980 to 2017. We find that before the late 2000s, inflation was penalized under floating and (to a lesser extent) fixed exchange rate regimes, but not in countries in monetary union. Since the 2010s, inflation carries no penalty under any exchange rate regime. Variables linked to default risk (debt and entitlement spending) did not affect yields under any exchange rate arrangements until the mid-2000s. Afterwards, countries in monetary union (and to a lesser extent in fixed exchange rate regimes) were significantly penalized for public debt and entitlement spending, whereas countries with floating regimes were not. Our results speak to the literatures on governments' institutional commitments and "room to move.
    Keywords: bond yields,euro,exchange rate regimes,financial markets,international political economy,Anleiherenditen,Euro,Finanzmärkte,internationale politische Ökonomie,Wechselkurssysteme
    Date: 2022
  11. By: Alturki,Sultan Abdulaziz M; Hibbert,Ann Marie
    Abstract: The paper examines the impact of oil shocks on sovereign credit default swaps (CDS) for the G10 countries and major oil-exporting countries. The results show that oil demand shocks have a uniformly negative impact on CDS spreads. In contrast, oil supply shocks increase the spreads of the G10 countries, but reduce the spreads of oil-exporting countries. Using quantile regressions, the findings show that oil demand shocks affect spreads across the conditional distribution, while oil supply shocks mostly influence the upper quantiles of spread changes. Furthermore, a two-state Markov-switching modeling confirms a significant non-linearity in the impact of oil shocks.
    Keywords: Oil&Gas,Energy and Environment,Energy Demand,Energy and Mining,Financial Sector Policy,Public Finance Decentralization and Poverty Reduction,Public Sector Economics,Financial Crisis Management&Restructuring
    Date: 2021–02–16
  12. By: Beckmann, Joscha; Czudaj, Robert L.
    Abstract: This paper examines whether and how expectations have contributed to the turbulent path of the Turkish lira since 2008. We derive uncertainty measures surrounding GDP growth, inflation, the interest rate, and exchange rates based on survey data from Consensus Economics. Our results illustrate that forecasts have affected realized exchange rates and stock market returns via increased uncertainty. We also show that expectations regarding monetary policy have changed throughout the sample period. In line with a gradual adjustment of expectations professionals have accounted for the violation of the Taylor rule.
    Keywords: Disagreement, Expectations, Foreign exchange, Survey data, Taylor rule, Turkish lira, Uncertainty
    JEL: F31 F41
    Date: 2022–10–13
  13. By: Yin-Wong Cheung; Wenhao Wang
    Abstract: Using quarterly data on four commodity exporting countries, we study the explanatory power of real commodity prices for predicting real effective exchange rates, with special attention to the separate roles of different sectoral commodity prices during alternative time periods. We find that the commodity price effect is non-uniform across countries and commodity sectors, and moreover varies over time. The use of fixed weight price indexes, or nominal exchange rates and commodity prices, also yields heterogeneous commodity price effects. Further, the pattern of commodity price effects is influenced by the presence of macroeconomic conditions, the effects of crises, and the exchange rates of top trading partners. These empirical results highlight the challenges of explaining a wide range of currency behaviors across different time periods with a single commodity-price-based exchange rate model. These findings also complicate the tasks facing policymakers who assume stable commodity price effects.
    Keywords: commodity currencies, sectoral commodity prices, The US Dollar Effect, The Global Financial Crisis, macro variables
    JEL: F31 F41
    Date: 2022
  14. By: Owoundi Fouda,Ferdinand; Avom,Desire; Kuete,Flora Yselle
    Abstract: This paper evaluates the role of economic integration and democracy in rationalizing differences in real exchange rate misalignments across exchange rate regimes in Africa. To this end, the paper derives competing indexes of misalignment using modern cointegration techniques while accounting for cross-sectional dependence. The findings indicate that fixed regimes per se are not prone to more misalignments, as institutional quality and economic links with foreign partners critically matter in explaining the observed discrepancies. Furthermore, when distinguishing between African and international partners in investment agreements, the extent of misalignment differs according to the level of democracy, as democratic countries can afford intermediate regimes, while for weak democracies, fixed regimes are required to curb disequilibria. Finally, membership in a regional economic community significantly reduces the magnitude of misalignments. The results imply that the quality of institutions, more than the type of the exchange rate regime, is called into question and should be the focus of efforts ahead of successful implementation of the African Continental Free Trade Area.
    Keywords: International Trade and Trade Rules,Trade and Multilateral Issues,Macro-Fiscal Policy,Public Finance Decentralization and Poverty Reduction,Economic Adjustment and Lending,Public Sector Economics,Investment and Investment Climate,Macroeconomic Management
    Date: 2021–02–17

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