nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒12‒12
fourteen papers chosen by
Martin Berka
Massey University

  1. Portfolio Capital Flows and the US Dollar Exchange Rate: Viewed from the Lens of Time and Frequency Dynamics of Connectedness By Mangal Goswami; Victor Pontines; Yassier Mohammed
  2. Can Time-Varying Currency Risk Hedging Explain Exchange Rates? By Leonie Bräuer; Harald Hau
  3. Elite incomes around the world: Command over tradables, non-tradables, and people By Paul Segal; Michail Moatsos
  4. Sectoral effects of exchange rate shocks: Goods exports and the appreciation of the Swiss Franc in 2015 By Brunhart, Andreas; Geiger, Martin
  5. Do Exchange Rates Fully Reflect Currency Pressures? By Linda S. Goldberg; Stone Kalisa
  6. Borrowing Constraints in Emerging Markets By Santiago Camara; Maximo Sangiacomo
  7. International Business Cycle Synchronization: A Synthetic Assessment By Lee, Hyun-Hoon; Park, Cyn-Young; Pyu, Ju Hyun
  8. Measuring Uncertainty and its e ects in a Small Open Economy By Miguel Cabello; Rafael Nivin
  9. Gains from Trade and the Food Engel Curve By Farrokhi, Farid; Jinkins, David; Xiang, Chong
  10. Pandemic-induced increases in container freight rates: Assessing their domestic effects in a globalized world By Josè Pulido
  11. The Global South Debt Revolution That Wasn’t By Quentin Deforge; Benjamin Lemoine
  12. The Influence of Global Inflation on Emerging Market Economies' Inflation By Arango-Castillo Lenin; Orraca María José; Molina Martínez G. Stefano
  14. Constrained Liquidity Provision in Currency Markets By Wenqian Huang; Angelo Ranaldo; Andreas Schrimpf; Fabricius Somogyi

  1. By: Mangal Goswami; Victor Pontines; Yassier Mohammed
    Abstract: Using high-frequency, proprietary data on daily net non-resident portfolio flows to emerging markets, our study finds in the time domain connectedness framework that, to varying degrees, there is less interconnectedness in non-resident debt and equity portfolio flows to our sample of emerging market (EM) economies during normal times. In contrast, during times of uncertainty and stress, the interconnectedness of portfolio flows intensifies. This indicates the notion of asymmetry in the spillovers of these portfolio flows during periods of stress relative to normal times. More importantly, over most of the sample period, we find that shocks in the broad EM US dollar exchange rate can have important effects on these interconnections where, based on estimates of the net directional spillover index, the broad EM US dollar exchange rate is a net transmitter of shocks to debt and equity portfolio flows of the EM economies. Using the more recent frequency domain approach to connectedness, we find that the broad EM US dollar exchange rate is a net transmitter of shocks to the EM economies’ debt and equity flows with the impact of such shocks hitting portfolio capital flows within at least a week to 100 days. In addition to the importance of pre-emptive prudential policy levers, efforts toward better monitoring of risks can contribute to creditors and investors in EM economies becoming more resilient to global shocks, particularly, during times of US dollar appreciations when these portfolio flows tend to reverse.
    Keywords: Portfolio debt flows, portfolio equity flows, connectedness, directional spillover
    JEL: C58 F31 F41 G15
    Date: 2022–11
  2. By: Leonie Bräuer; Harald Hau
    Abstract: Over the last decade foreign bond portfolio positions in US dollar assets have risen above the reciprocal US investor positions in foreign currencies. In periods of increased economic uncertainty, institutional investors hedge their international bond positions, which creates a net hedging demand for dollar assets that depreciates USD rates in both the forward and spot markets. We document the time-varying nature of this net hedging demand and show how it relates to eco-nomic uncertainty and the US net foreign bond position in various currencies. Based on a parsimonious VAR model, we find that changes in FX hedging pressure can account for approximately 30% of all monthly variation in the seven most important dollar exchange rates from 2012 to 2022.
    Keywords: exchange rate, hedging channel, institutional investors
    JEL: E44 F31 F32 G11 G15 G23
    Date: 2022
  3. By: Paul Segal; Michail Moatsos
    Abstract: This paper analyses elite incomes around the world, and how international comparisons of elite incomes vary depending on the exchange rate and income concept used. It is well known that between-country income inequality is higher using market exchange rates than purchasing power parity (PPP) exchange rates, due to a combination of traded sector bias and the Balassa-Samuelson effect, and we confirm that this is the case for comparing elite incomes across countries.
    Keywords: Elites, Income inequality, Exchange rate
    Date: 2022
  4. By: Brunhart, Andreas; Geiger, Martin
    Abstract: Using granular customs data, we construct a counterfactual of the evolution of Swiss goods exports under the premise that the minimum exchange rate policy would have been continued. We study the dynamic adjustment of aggregate and sectoral goods exports due to the exchange rate shock in January 2015. In absence of a comprehensive J-curve type adjustment we find that Swiss nominal export values increase in Euro, while they drop in Swiss Franc. In real quantities, exports remain largely unaffected indicating a high degree of resilience of the Swiss export industry. On the sectoral level, we observe heterogenous adjustment of exports consistent with varying degrees of flexibility for supply side adjustment and market power.
    Keywords: exchange rate shock,goods exports,export sectors,synthetic control method
    JEL: F14 F31 F41
    Date: 2022
  5. By: Linda S. Goldberg; Stone Kalisa
    Abstract: Currency values are important both for the real economy and the financial sector. When faced with currency market pressures, some central banks and finance ministries turn to foreign exchange intervention (FXI) in an effort to reduce realized currency depreciation, thus diminishing its economic and financial consequences. This post provides insights into how effective these interventions might be in limiting currency depreciation.
    Keywords: exchange rates; foreign exchange interventions; exchange market pressure; balance of payments; currency
    JEL: F00
    Date: 2022–11–10
  6. By: Santiago Camara; Maximo Sangiacomo
    Abstract: Borrowing constraints are a key component of modern international macroeconomic models. The analysis of Emerging Markets (EM) economies generally assumes collateral borrowing constraints, i.e., firms access to debt is constrained by the value of their collateralized assets. Using credit registry data from Argentina for the period 1998-2020 we show that less than 15% of firms debt is based on the value of collateralized assets, with the remaining 85% based on firms cash flows. Exploiting central bank regulations over banks capital requirements and credit policies we argue that the most prevalent borrowing constraints is defined in terms of the ratio of their interest payments to a measure of their present and past cash flows, akin to the interest coverage borrowing constraint studied by the corporate finance literature. Lastly, we argue that EMs exhibit a greater share of interest sensitive borrowing constraints than the US and other Advanced Economies. From a structural point of view, we show that in an otherwise standard small open economy DSGE model, an interest coverage borrowing constraints leads to significantly stronger amplification of foreign interest rate shocks compared to the standard collateral constraint. This greater amplification provides a solution to the Spillover Puzzle of US monetary policy rates by which EMs experience greater negative effects than Advanced Economies after a US interest rate hike. In terms of policy implications, this greater amplification leads to managed exchange rate policy being more costly in the presence of an interest coverage constraint, given their greater interest rate sensitivity, compared to the standard collateral borrowing constraint.
    Date: 2022–11
  7. By: Lee, Hyun-Hoon (Kangwon National University); Park, Cyn-Young (Asian Development Bank); Pyu, Ju Hyun (Korea University)
    Abstract: We synthetically assess the three major transmission channels of international business cycles: bilateral trade, foreign direct investment (FDI), and portfolio investment flows between economies with multiple fixed effects. Using the data of 72 economies during 2010–2019, we find that real and financial integration generates heterogeneous impacts on business cycle comovement. Trade integration, particularly through intermediate input trade, drives business cycle synchronization. We also find greenfield FDI leads business cycle comovements. This may be due to deepening intra-industry trade and dense global value chains. Higher debt market integration is also associated with more synchronized business cycle comovement, implying that balance sheet effects and the related credit cycle can exert influence on business cycle comovements. However, equity integration leads to business cycle divergence, suggesting that cross-border equity holdings may help stabilize transmission of a foreign economy’s shocks.
    Keywords: business cycle synchronization; trade; FDI; portfolio investment
    JEL: F15 F21 F34 F44
    Date: 2022–08–31
  8. By: Miguel Cabello (Central Reserve Bank of Peru); Rafael Nivin (Central Reserve Bank of Peru)
    Abstract: In the aftermath of the 2008 Global Financial Crisis (GFC), scholars and policymakers turned their attention to the role of uncertainty in amplifying the e ects of economic or financial shocks on economic activity. A growing literature has focused on addressing this question. Most works find that uncertainty provides an additional transmission mechanism for recessionary shocks, which amplifies their negative e ects on the economy. Nonetheless, most of these studies focus on developed economies. It is important to study the e ects of uncertainty in the context of small open economies as, unlike developed countries, they are subject to uncertainty from both external and domestic sources. Along these lines, this paper seeks to assess the e ects of uncertainty on economic performance in a small open economy and establish the relative importance of external and domestic uncertainty.
    Keywords: Uncertainty; Stochastic volatility; Dynamic Factor models.
    JEL: E44 C11 C13 C32 C55
    Date: 2022–11–16
  9. By: Farrokhi, Farid (Purdue University); Jinkins, David (Copenhagen Business School); Xiang, Chong (Purdue University)
    Abstract: This paper examines the extent to which gains-from-trade predictions from commonly-used trade theories are consistent with observed household consumption decisions. Our approach is based on inference from household-level estimation of food Engel curves in the US and in a few other countries. For a given price index as the deflator of income, deviations from food Engel curves indicate how biased that price index is relative to the true household price index. We construct open-economy price indices based on trade theory and data, evaluate their biases according to our approach, and compare them with the bias of official CPI statistics. We find that theory-consistent open-economy price indices that account for industry-level heterogeneity and input-output linkages tend to eliminate a large fraction of the bias of CPI.
    Keywords: Food Engel Curves, price indices, household-level consumption, gains from trade
    JEL: D12 F14 E31
    Date: 2022–10
  10. By: Josè Pulido (Banco de la Republica)
    Abstract: The Covid-19 pandemic disrupted the international transportation industry, causing container freight rates to reach record highs from late 2020 and into 2021. I evaluate the dynamic effects of the observed increases in container freight rates all around the world on the domestic inflation, real consumption, and the allocation of labor of a particular country (Colombia).
    Keywords: International trade; container freights; Covid-19 pandemic; welfare effects; general equilibrium
    JEL: F16 F62 F17
    Date: 2022–11–16
  11. By: Quentin Deforge (CAK-CRHST - Centre Alexandre Koyré - Centre de Recherche en Histoire des Sciences et des Techniques - MNHN - Muséum national d'Histoire naturelle - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique); Benjamin Lemoine (IRISSO - Institut de Recherche Interdisciplinaire en Sciences Sociales - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)
    Abstract: In this article, we analyse how international crises and conflicts over sovereign debt have transformed the agenda of the United Nations Conference on Trade and Development (UNCTAD), the Geneva-based organization founded in 1964 and whose history is closely linked to the G77 group of developing countries. We show how UNCTAD's projects for structural reform of the international financial architecture were contested and ultimately rejected in the 1970s. Such defeats were a blow to the transformative goals that UNCTAD had initially set to achieve. In the 1980s, UNCTAD gradually became a technical agency and its mandate restricted to providing expert assistance and support to developing countries during their negotiations with the Paris Club. Meanwhile, the mandate to produce expertise at the macro level (the so-called ‘upstream' area), was effectively transferred to the IMF and World Bank. With the development of the Debt Management Financial Analysis System (DMFAS), UNCTAD went from promoting systemic change in international financial architecture to sponsoring the micro-management of domestic policies as remedy to over-indebtedness. But we also show that UNCTAD did not always restrict itself to doing such ‘downstream' work, i.e., improving debt issuing capacities and technologies of developing countries. While UNCTAD's recent project on fair principles of lending and borrowing principles conforms to what's expected from the group of advanced countries, another project involving the creation of an international mechanism of sovereign debt restructuring functioned as a disturbance to this fragile downstream–upstream division of labour between international organizations.
    Date: 2021
  12. By: Arango-Castillo Lenin; Orraca María José; Molina Martínez G. Stefano
    Abstract: We calculate global inflation as the first principal component of inflation in a sample of emerging market and advanced economies and find that it may account for an important fraction of headline and core inflation variance across countries. We then show that global inflation is correlated with international commodity price variation, the global economic cycle, and financial volatility, but that a large fraction of its variance is unaccounted for by these factors. Finally, we augment standard inflation forecasting models for ten emerging market economies with global inflation and find that doing so improves forecasting performance for headline inflation. We argue that this predictive potential stems from its correlation with commodity prices, output gap and global financial volatility, but also from the additional information that this variable contains regarding other inflation determinants worldwide.
    Keywords: Inflation;Principal Components;Forecasting and Prediction Methods
    JEL: E31 C38 C53
    Date: 2022–11
  13. By: Pippenger, John
    Abstract: Conventional wisdom claims that the Law of One Price (LOP) fails in commodity markets, commodity borders are wide and Purchasing Power Parity (PPP) fails. But the evidence supporting those claims comes primarily from retail markets where price differentials do not represent risk-free profits. As we show, prices from a wide range of auction markets strongly support the LOP, reject wide borders and do not reject PPP. In addition, recognizing the difference between retail and auction markets helps explain several puzzles associated with exchange rates. The Keynesian paradigm dominates macroeconomics. We question that dominance for two reasons: (1) by reviving PPP we reject Liquidity Preference and support Loanable funds and (2) we reject the standard Keynesian assumption that commodity markets clear slowly and asset markets clear rapidly. Whether commodity or asset, retail markets clear slowly. Whether commodity or asset, auction markets clear rapidly.
    Keywords: Social and Behavioral Sciences
    Date: 2022–11–28
  14. By: Wenqian Huang (Bank for International Settlements); Angelo Ranaldo (University of St. Gallen; Swiss Finance Institute); Andreas Schrimpf (CREATES - Aarhus University; Bank for International Settlements (BIS) - Monetary and Economic Department); Fabricius Somogyi (D’Amore-McKim School of Business)
    Abstract: We study dealers’ liquidity provision in the currency market. We show that at times when dealers’ intermediation capacity is constrained their cost of liquidity provision increases disproportionately relative to dealer-provided volume. As a result, the elasticity of dealers’ liquidity provision weakens by at least 80% relative to periods when they are unconstrained. We identify constrained periods based on leverage ratios, Value-at-Risk measures, credit default spreads, and debt funding costs. We interpret our novel empirical findings within a parsimonious model that sheds light on the key mechanisms of how liquidity provision by dealers tends to weaken when intermediary constraints are tightening.
    Keywords: Currency markets, dealer constraints, market liquidity, foreign exchange, liquidity provision.
    JEL: F31 G12 G15
    Date: 2022–10

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