nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒11‒28
ten papers chosen by
Martin Berka
Massey University

  1. The Impact of U.S. Monetary Policy on Foreign Firms By Julian di Giovanni; John H. Rogers
  2. Fiscal Policy in the Age of COVID-19: Does It “Get in All of the Cracks”? By Pierre-Olivier Gourinchas; Sebnem Kalemli-Ozcan; Veronika Penciakova; Nicholas Sander
  3. A North-South Model of Structural Change and Growth By Maria Aristizabal-Ramirez; John V. Leahy; Linda Tesar
  4. Stagflation and Topsy-Turvy Capital Flows By Julien Bengui; Louphou Coulibaly
  5. The Currency Composition of Asia’s International Investments By Paulo Rodelio Halili; Rogelio V. Mercado, Jr.
  6. Sovereign Bond Prices, Haircuts and Maturity By Tamon Asonuma; Dirk Niepelt; Romain Ranciere
  7. Global Fund Flows and Emerging Market Tail Risk By Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
  8. Government Expenditures in a Small Open Economy Model : The Role of Credit Constraint By Wu, Zhe
  9. Monetary Policy and Exchange Rate Dynamics in a Behavioural Open Economy Model By Marcin Kolasa; Sahil Ravgotra; Pawel Zabczyk
  10. Capital Flows in an Aging World By Zsófia L. Bárány; Nicolas Coeurdacier; Stéphane Guibaud

  1. By: Julian di Giovanni; John H. Rogers
    Abstract: This paper uses cross-country firm-level data to explore the impact of U.S. monetary policy shocks on firms’ sales, investment, and employment. We estimate a sizable impact of U.S. monetary policy on the average foreign firm, while controlling for other macroeconomic and financial variables like the VIX and exchange rate fluctuations that accompany U.S. monetary policy changes. We then quantify the role of international trade exposure and financial constraints in transmitting monetary policy shocks to firms, allowing for a better identification of the importance of external demand effects and the interest rate channel. We first exploit cross-country sector-level data on intermediate and final goods trade to show that greater global production linkages amplify the impact of U.S. monetary policy at the firm level. We then show that the impact varies along the firm-level distribution of proxies for firms’ financial constraints (for example, size and net worth), with the impact being significantly attenuated for less constrained firms.
    Keywords: U.S. monetary policy spillovers; Foreign firms; production linkages; financial constraints
    JEL: E52 F40
    Date: 2022–11–01
  2. By: Pierre-Olivier Gourinchas; Sebnem Kalemli-Ozcan; Veronika Penciakova; Nicholas Sander
    Abstract: We study the effects of fiscal policy in response to the COVID-19 pandemic at the firm, sector, country and global levels. First, we estimate the impact of COVID-19 and policy responses on small and medium-sized enterprise (SME) business failures. We combine firm-level financial data from 50 sectors in 27 countries, a detailed I-O network, real-time data on lockdown policies and mobility patterns, and a rich model of firm behavior that allows for several dimensions of heterogeneity. We find that absent government support, the failure rate of SMEs would have increased by 9 percentage points, significantly more so in emerging-market economies (EMs). With policy support it increased by only 4.3 percentage points, and even decreased in advanced economies (AEs). We also find that fiscal policy was poorly targeted: most of the funds disbursed went to firms that did not need it. Nevertheless, we find little evidence of the policy merely postponing mass business failures or creating many “zombie” firms: failure rates rise only slightly in 2021 once policy support is removed. Next, we build a tractable global intertemporal general equilibrium I-O model with fiscal policy. We calibrate the model to 64 countries and 36 sectors. We find that a sizeable share of the global economy is demand-constrained under COVID-19, especially so in EMs. Globally, fiscal policy helped offset about 8% of the downturn in COVID-19, with a low “traditional” fiscal multiplier. Yet it significantly reduced the share of demand-constrained sectors, preserving employment in these sectors. Fiscal policy exerted small and negative spillovers to output in other countries but positive spillovers on employment. A two-speed recovery would put significant upward pressure on global interest rates which imposes an additional headwind on the EM recovery. Corporate and sovereign spreads rise when global rates increase, suggesting that EMs may face challenging external funding conditions as AEs normalize.
    Keywords: Coronavirus disease (COVID-19); Fiscal policy; Firm dynamics; International topics
    JEL: E62 F41 D57
    Date: 2022–10
  3. By: Maria Aristizabal-Ramirez; John V. Leahy; Linda Tesar
    Abstract: This paper is motivated by a set of cross-country observations on growth, structural transformation, and investment rates in a large sample of countries. We observe a hump-shaped relationship between a country's investment rate and its level of development, both within countries over time and across countries. Advanced economies reach their investment peak at a higher level of income and at an earlier point in time relative to emerging markets. We also observe the familiar patterns of structural change (a decline in the agricultural share and an increase in the services share, both relative to manufacturing). The pace of change observed in the 1930 to 1980 period in advanced economies is remarkably similar to that in emerging markets since 1960. We develop a two-region model of the world economy in which regions are isolated from each other up to the point of capital market liberalization in the early 1990s. At that point, capital flows from advanced economies to emerging markets and accelerates the process of structural change in emerging markets. The majority of gains from financial liberalization accrue to emerging economies. We consider the impact of a “second wave” of liberalization when China fully opens its economy to capital inflows.
    JEL: E2 F62 O10
    Date: 2022–10
  4. By: Julien Bengui; Louphou Coulibaly
    Abstract: Are unregulated capital flows excessive during a stagflation episode? We argue that they likely are, owing to a macroeconomic externality operating through the economy’s supply side. Inflows raise domestic wages through a wealth effect on labor supply and cause unwelcome upward pressure on marginal costs in countries where monetary policy is trying to drive down costs to stabilize inflation. Yet market forces are likely to generate such inflows. Optimal capital flow management instead requires net outflows, suggesting topsy-turvy capital flows following markup shocks.
    Keywords: Inflation and prices; International financial markets; International topics; Monetary policy
    JEL: D62 E52 F38 F41
    Date: 2022–10
  5. By: Paulo Rodelio Halili (Asian Development Bank); Rogelio V. Mercado, Jr. (South East Asian Central Banks (SEACEN) Research and Training Centre)
    Abstract: This paper examines the importance of trade ties, macro-financial volatilities, and US dollar trade invoicing in explaining Asia’s international investment assets and liabilities denominated in world currencies, including the US dollar (USD), euro (EUR), pound sterling (GBP), Japanese yen (JPY) and Chinese yuan (CNY). The results show heterogeneous patterns of relevant covariates across different currencies. More importantly, the estimates offer evidence that the region hedges its currency risk by investing in US dollar denominated assets as greater US dollar trade invoicing significantly covaries with greater debt asset holdings denominated in US dollar.
    Keywords: currency composition, international investment assets and liabilities, trade invoicing, bilateral trade, macro-financial volatilities
    JEL: F31 F36 F41
    Date: 2022–11
  6. By: Tamon Asonuma; Dirk Niepelt; Romain Ranciere
    Abstract: We document that creditor losses (“haircuts”) during sovereign debt restructurings vary across debt maturity. In our novel dataset on instrument-specific haircuts suffered by private creditors in 1999?2020 we find larger losses on short- than long-term debt, independently of the specific haircut measure we use. A standard asset pricing model rationalizes our findings under two assumptions, both of which are satisfied in the data: increasing short-run restructuring risk in the run-up to a restructuring, and high exit yields. We relate our findings to the policy debate on restructuring procedures.
    Keywords: Sovereign Debt; Sovereign Default; Debt Restructuring; Bond Prices; Haircuts; Maturity; Restructuring Probability.
    JEL: F34 F41 H63
    Date: 2022–11
  7. By: Anusha Chari; Karlye Dilts Stedman; Christian Lundblad
    Abstract: Global risk and risk aversion shocks have distinct distributional impacts on emerging market capital flows and returns. In particular, we find salient consequences of these different global shocks for tail risk in emerging markets. Open-end mutual fund trading provides a key mechanism linking shocks facing global investors to extreme capital flow and return realizations. The effects are heterogeneous across asset classes and fund types. The limited discretion and higher conformity of passive fund investments linked to benchmarking amplify pass-through effects that engender abnormal co-movements in emerging market flows and returns.
    JEL: F3 F32 G11 G15
    Date: 2022–10
  8. By: Wu, Zhe (Monash University)
    Abstract: We investigate the role of international credit market constraint in a dynamic stochastic general equilibrium model in determining the effect of government spending policies on macroeconomic variables such as consumption and the real exchange rate in a small open economy. The numerical results show that increasing government expenditure under certain economic shocks can increase the value of the real exchange rate and reduce the chance of the small open economy reaching the borrowing limit. Hence, the dynamics of consumption and the real exchange rate can be significantly affected by government spending policies under international credit market constraints.
    Keywords: Credit Constraint ; Real Exchange Rate ; Government Spending JEL Classification: F41
    Date: 2022
  9. By: Marcin Kolasa (International Monetary Fund); Sahil Ravgotra (University of Surrey); Pawel Zabczyk (International Monetary Fund)
    Abstract: We develop and estimate an extension of the open economy New Keynesian model in which agents are boundedly rational _a la Gabaix (2020). Our setup successfully mitigates many puzzling aspects of the relationship between exchange rates and interest rates, and remains consistent with recent empirical evidence showing that UIP puzzles vanish when actual - as opposed to rational - exchange rate expectations are used. We find that accounting for myopia dampens the effects of current monetary shocks and lowers the efficacy of forward guidance (FG), but its relative importance in mitigating the “FG puzzle" is decreasing in openness. We also show that bounded rationality makes positive monetary spillovers more likely, increases the persistence of the real exchange rate and net foreign assets, and exacerbates the small open economy unit root problem. Finally, the model provides arguments against using the exchange rate as a nominal anchor.
    JEL: F41 E70 E52 E58 G40
    Date: 2022–11
  10. By: Zsófia L. Bárány (CEU - Central European University [Budapest, Hongrie], CEPR - Center for Economic Policy Research - CEPR); Nicolas Coeurdacier (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR); Stéphane Guibaud (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We investigate the importance of worldwide demographic evolutions in shaping capital flows across countries. Our lifecycle model incorporates crosscountry differences in fertility and longevity as well as differences in countries' ability to borrow inter-temporally and across generations through social security. In this environment, global aging triggers uphill capital flows from emerging to advanced economies, while country-specific demographic evolutions reallocate capital towards countries aging more slowly. Our quantitative multi-country overlapping generations model explains a large fraction of long-term capital flows across advanced and emerging countries.
    Keywords: Aging,Household Saving,International Capital Flows
    Date: 2022

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