nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2022‒12‒19
sixteen papers chosen by
Martin Berka
Massey University

  1. Stagflation and Topsy-Turvy Capital Flows By Julien Bengui; Louphou Coulibaly
  2. The Bribe Rate and Long Run Differences in Sovereign Borrowing Costs By Farzana Alamgir; Johnny Cotoc; Alok Johri
  3. Protectionism, bilateral integration, and the cross section of exchange rate returns in US presidential debates By de Boer, Jantke; Eichler, Stefan; Rövekamp, Ingmar
  4. THE ICP, PPP AND HOUSEHOLD EXPENDITURE PATTERNS By Kenneth W Clements; Yihui Lan; Haiyan Liu
  5. Pass-Through of Cost-Push Pressures to Consumer Prices By Tomoyuki Yagi; Yoshiyuki Kurachi; Masato Takahashi; Kotone Yamada; Hiroshi Kawata
  6. The growing importance of investment funds in capital flows By Richard Schmidt; Pınar Yeşin
  7. Macroeconomic and policy implications of eurobonds By Cristina Badarau; F. Huart; I. Sangaré
  8. The rise and fall of global financial flows in EU 15: new evidence using dynamic panels with common correlated effects By Mariam Camarero; Silviano Alejandro Muñoz; Cecilio Tamarit
  9. An ergodic theory of sovereign default By Pierri, Damian Rene; Seoane, Hernán
  10. The Policy Mix in a Monetary Union: Who Bears the Burden of Asymmetric Shocks’ Stabilisation? By Christos Mavrodimitrakis
  11. Macroeconomic Effects of COVID-19 in a Commodity-Exporting Economy: Evidence from Mongolia By Doojav, Gan-Ochir
  12. Bilateral Remittance Inflows to Asia and the Pacific: Countercyclicality and Motivations to Remit By Kim, Kijin; Ardaniel, Zemma; Kikkawa, Aiko; Endriga, Benjamin
  13. What Happens in China Does Not Stay in China By William Barcelona; Danilo Cascaldi-Garcia; Jasper Hoek; Eva Van Leemput
  14. Modeling semiconductor export restrictions and the US-China trade conflict By Funke, Michael; Wende, Adrian
  15. Institutional Quality and Macrofinancial Resilience in Asia By Beirne, John; Panthi, Pradeep
  16. Dollar-Yuan Battle in the World Trade Network By C\'elestin Coquid\'e; Jos\'e Lages; Dima L. Shepelyansky

  1. 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.
    JEL: E32 E44 E52 F32 F41 F42
    Date: 2022–11
  2. By: Farzana Alamgir; Johnny Cotoc; Alok Johri
    Abstract: Sovereign spreads and the level of bureaucratic diversion of government spending vary widely across emerging economies and are correlated with each other. We build a sovereign default model where the government is constrained to use corrupt bureaucrats to deliver public goods and services in order to explain these facts. The diversion policy parameters are estimated using data on public resources and monitoring efficiency and used to calibrate the model. We use data on the average gift needed to be given to win public contracts in a country as a measure of bureaucratic diversion because it allows us to quantify diversion of public resources whereas tax evasion is hard to measure. We tie down the efficiency level to the Rule of Law index. We show that economies with low monitoring efficiency display higher diversion levels and higher default risk (and spreads) than those with higher efficiency. These results emerge because defaults reduce diversion levels and this benefit from default is higher for low monitoring efficiency economies, which encourages default.
    Keywords: sovereign default; country spreads; bureaucratic corruption; bribes; provision of public goods
    JEL: D73 F34 F41 G15 H63
    Date: 2022–11
  3. By: de Boer, Jantke; Eichler, Stefan; Rövekamp, Ingmar
    Abstract: We study the impact of US presidential election TV debates on intraday exchange rates of 96 currencies from 1996 to 2016. Expectations about protectionist measures are the main transmission channel of debate outcomes. Currencies of countries with high levels of bilateral foreign trade with the US depreciate if the election probability of the protectionist candidate increases during the debate. We rationalize our results in a model where a debate victory of a protectionist candidate raises expectations about future tariffs and reduces future net exports to the US, resulting in relative depreciation of currencies with high bilateral trade integration.
    Keywords: Exchange Rates,US Presidential Elections,TV Debates,Protectionism,Bilateral Trade Integration
    JEL: F31 G15 G14 D72
    Date: 2022
  4. By: Kenneth W Clements (Business School, The University of Western Australia); Yihui Lan (Business School, The University of Western Australia); Haiyan Liu (Business School, The University of Western Australia)
    Abstract: This paper reviews and synthetises three areas: The International Comparison Program (ICP), purchasing power parity (PPP) and patterns of household expenditure across countries. To compare countries consistently, the ICP uses relative price levels as PPPs. This approach is seemingly different to that of international finance, whereby PPP is now widely taken to mean that market exchange rates reflect national price levels over the longer term. A unification of the two approaches is suggested with a dependent-economy model. Detailed information on household expenditure patterns is another prominent component of the ICP. The prospectivity of these data is illustrated with several “laws” of consumption, a survey of research on cross-country consumption, and estimates of a global system of demand equations.
    Keywords: International Comparison Program, purchasing power parity, currency valuation, household expenditure patterns across countries
    JEL: F31 E01 D12
    Date: 2022
  5. By: Tomoyuki Yagi (Bank of Japan); Yoshiyuki Kurachi (Bank of Japan); Masato Takahashi (Bank of Japan); Kotone Yamada (Bank of Japan); Hiroshi Kawata (Bank of Japan)
    Abstract: Costs of intermediate inputs as well as those for product procurement facing Japanese firms have been rising markedly against the backdrop of international commodity price increases and of the depreciation of the yen, as global economy recovers from the COVID-19 pandemic. In this paper, we quantitatively measure the so-called "pass-through rate" - that is, the impact of an increase in cost-push pressures on consumer prices (namely, prices at the final demand stage) - and examine the recent changes and their context. The estimation results yield the following two implications. First, the exchange rate pass-through rate has been increasing in recent years reflecting higher import penetration. Second, the pass-through rate of raw material and other costs, excluding those attributable to exchange rate, have somewhat increased at the intermediate demand stage and even for some items at the final demand stage. Since the pass-through rates depend on: (i) the strength of cost-push pressures; (ii) the business cycle; and (iii) the tightness of demand and supply condition due partially to the pandemic, their developments should be monitored closely.
    Keywords: Cost-Push Pressures; Intermediate Input Costs; Exchange Rates; Consumer Prices; Pass-Through; COVID-19
    JEL: E30 E31 F31
    Date: 2022–11–30
  6. By: Richard Schmidt; Pınar Yeşin
    Abstract: In this paper, we first document the growing importance of foreign-domiciled investment funds in countries’ portfolio liabilities over time and then show empirical evidence that cross-border fund flows are coincident with asset price movements. To measure the external liabilities of countries to foreign-domiciled funds, we complement conventional balance of payments and international investment position data with granular and real-time fund flows data. We find that the external exposure of countries to investment funds has been steadily increasing both for advanced and emerging market economies. Furthermore, we find that this increased external exposure is coincident with higher exchange rate fluctuations, lower bond yields and higher stock returns. Because sustainability-themed investment funds are growing faster than conventional investment funds, we also focus on Environmental, Social and Governance (ESG) funds and construct an index of sustainable finance that can distinguish between its domestic and cross-border components. Our index reveals that ESG funds domiciled in European countries tend to invest predominantly in domestic markets, whereas ESG investment in emerging market economies to a large extent originates from foreign-domiciled investment funds.
    Keywords: Investment funds, portfolio investment, fund flows, ESG funds, financial markets
    JEL: F32 G15 G23
    Date: 2022–11
  7. By: Cristina Badarau (Larefi - Laboratoire d'analyse et de recherche en économie et finance internationales - UB - Université de Bordeaux); F. Huart; I. Sangaré
    Abstract: This article explores the controversial subject of Eurobonds, by analyzing their economic consequences in an asymmetric monetary union like the Eurozone, where countries differ in size and policy preferences. We thus build a two-country monetary union DSGE model to compare three scenarios of government debt issuance: i) countries issue their own sovereign bonds (the baseline scenario is given the label "National bonds"); ii) countries issue common sovereign bonds without any limitations on the amount they can borrow (this scenario is labelled "Eurobonds"); and iii) there is a cap on the issuance of Eurobonds by each country so that the joint liability is limited (we call this scenario "Limited Eurobonds"). Assuming that a country decides to increase public spending and cares little about debt stabilization, we find that the spending multiplier would be the highest with Eurobonds and the lowest with Limited Eurobonds. The spillover effects on output in the rest of the union would be negative with Eurobonds but positive with Limited Eurobonds. The positive trade channel of the spillover effects is reinforced while the negative financial channel is reduced in the latter scenario. From the perspective of the monetary union as a whole, Limited Eurobonds could bring about higher overall output and produce larger benefits for aggregate household welfare depending upon country size. Altogether, our findings support the case for limited joint liability, especially when the public spending shock originates from a country which is smaller than the rest of the union, but not too small. © 2020 Elsevier Inc.
    Date: 2021
  8. By: Mariam Camarero (University Jaume I and INTECO, Department of Economics, Campus de Riu Sec, E-12080 Castellón (Spain).); Silviano Alejandro Muñoz (University of València, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain).); Cecilio Tamarit (University of València and INTECO, Department of Applied Economics II, Av. dels Tarongers, s/n Eastern Department Building E-46022 Valencia, (Spain).)
    Abstract: This paper assesses capital mobility for a panel of 15 European countries for the period 1970- 2019 using dynamic common correlated effects modeling (DCCE) as proposed in Chudik and Pesaran (2015). In particular, we account for the existence of cross section dependence, slope heterogeneity, nonstationarity and endogeneity in a multifactor error correction model (ECM) that includes one homogeneous break. The analysis also identifies the heterogeneous structural breaks affecting the relationship for each of the individual countries. The ECM setting allows for a complete assessment of the domestic saving-investment relationship in the long-run as well as two other elements usually neglected: short-run capital mobility and the speed of adjustment. When we account for a single homogeneous break, this is found at the euro inception. We obtain that long-run capital mobility is high but not perfect yet. We also provide empirical evidence for the Ford and Horioka (2017)’s hypothesis, who argue that goods market integration is a necessary condition to obtain zero correlation between domestic saving-investment. Our results stress the role played by the euro as a booster for both financial and real integration. However, a complete degree of economic integration has not been fully achieved. Short-run capital was highly mobile for the whole period, with some exceptions, coinciding with turmoil episodes. Additionally, from the application of the CS-DL threshold analysis proposed by Chudik et al. (2016), we find that economic risk and openness play a key role in capital mobility.
    Keywords: Capital mobility; Feldstein-Horioka puzzle; Structural Breaks; Cross-sectional dependence; Cointegration, unit roots.
    JEL: F36 F45 O16
    Date: 2022–11
  9. By: Pierri, Damian Rene; Seoane, Hernán
    Abstract: We present the conditions under which the dynamics of a sovereign default model of private external debt are stationary, ergodic and globally stable. As our results are constructive, the model can be used for the accurate computation of global long run stylized facts. We show that default can be used to derive a stable unconditional distribution (i.e., a stable stochastic steady state), one for each possible event, which in turn allows us to characterize globally positive probability paths. We show that the stable and the ergodic distribution are actually the same object. We found that there are 3 type of paths: non-sustainable and sustainable; among this last category trajectories can be either stable or unstable. In the absence of default, non-sustainable and unstable paths generate explosive trajectories for debt. By deriving the notion of stable state space, we show that the government can use the default of private external debt as a stabilization policy.
    Keywords: Default; Private External Debt; Ergodicity; Stability
    JEL: F41 E61 E10
    Date: 2022–12–05
  10. By: Christos Mavrodimitrakis (Department of Economics, University of Reading)
    Abstract: We utilise a standard reduced-form neo-Keynesian model in a monetary union, in which the monetary authority and the fiscal authorities strategically interact, to explore who, under alternative institutional arrangements (strategic and fiscal regimes) and shocks’ configurations, bears the burden of asymmetric shocks’ stabilisation. We show that in the core/periphery fiscal regime, described by an asymmetry in the sequence of moves between the core and the peripheral member-states, asymmetric shocks pass through at the union level when there are strategically significant spill-over effects and the monetary policy’s and fiscal policy’s instruments are not perfect substitutes in the stabilisation process. The monetary authority reacts to asymmetric shocks, but does not succeed in fully offsetting them. The first best implies the coordination of fiscal policies. A second best might be achieved by the fiscal leadership strategic regime (a form of implicit coordination), when there are strong interconnections in the union, and/or inducing the fiscal authorities to use fiscal policy instruments that directly decrease inflation, such as taxes, production subsidies or public investment, when there is a strong cost channel of monetary policy.
    Keywords: monetary union, strategic interactions, policy mix, core/periphery set-up, asymmetric shocks
    JEL: E52 E61 E62 E63 F45
    Date: 2022–11–30
  11. By: Doojav, Gan-Ochir (Asian Development Bank Institute)
    Abstract: We examine macroeconomic effects and transmission mechanisms of COVID-19 in Mongolia, a developing and commodity-exporting economy, by estimating a Bayesian structural vector autoregression on quarterly data. We find strong cross-border spillover effects of COVID-19. Our estimates suggest that the People’s Republic of China’s GDP and copper price shocks account, respectively, for three-fifths and one-fifth of the drop in real GDP in 2020Q1. The recovery observed for Q2 2020–Q1 2021 is primarily due to positive external shocks. However, disruptions in credit and labor markets have been sustained in the economy. Two-thirds of the fall in employment in Q1 2021 could be attributed to adverse labor demand shocks. We also reveal novel empirical evidence for the balance sheet channel of the exchange rate, the financial accelerator effects, and an indirect channel of wage shock to consumer price passing through bank credit.
    Keywords: COVID-19; demand and supply shocks; macroeconomic fluctuations; structural vector autoregression; Bayesian analysis
    JEL: C32 E17 E27 E32 I15
    Date: 2022–08
  12. By: Kim, Kijin (Asian Development Bank Institute); Ardaniel, Zemma (Asian Development Bank Institute); Kikkawa, Aiko (Asian Development Bank Institute); Endriga, Benjamin (Asian Development Bank Institute)
    Abstract: We examine the countercyclicality of remittance inflows to the countries in Asia and the Pacific. We also identify major determinants of remittances using gravity models of bilateral remittances. We find that bilateral remittance inflows are countercyclical against the business cycle of a remittance-receiving country relative to a sending country. The degree to which remittances are countercyclical is found to vary significantly by subregion: Central Asia and Southeast Asia, including many remittance-dependent countries, show stronger countercyclicality than other subregions. The estimated models suggest that migrant stock is a top determinant of remittances, and that an increase in bilateral remittances is explained by a higher occurrence of disasters caused by natural hazards in receiving countries, appreciation of a receiving country’s currency value against that of the sending country, lower interest rate differential (receiver–sender), greater capital account openness and higher political instability, and lower costs of remittances. This suggests that an altruistic motivation to remit prevails in the region. We also find that the countercyclicality of remittances rises when recipient countries experience more frequent disasters, a higher old-age dependence ratio, less stringent capital control, and stable political climate.
    Keywords: remittances; Asia and the Pacific; countercyclicality; business cycle; gravity model
    JEL: C23 F24 F44
    Date: 2022–05
  13. By: William Barcelona; Danilo Cascaldi-Garcia; Jasper Hoek; Eva Van Leemput
    Abstract: Spillovers from China to global financial markets have been found to be small owing to China's limited integration in the global financial system. In this paper, however, we provide evidence that China constitutes an important driver of the global financial cycle. We argue that because of China's importance for global consumption, stronger Chinese growth raises global growth prospects, inducing an increase in global risk sentiment and an expansion in global asset prices and global credit. Two contributions are key to this finding: (1) We construct a measure of China's credit impulse to identify Chinese policy-induced demand shocks. Our approach takes advantage of the fact that a primary tool of China's stabilization policy-encompassing monetary, fiscal, and regulatory policies-is controlling the amount of credit in the economy. Without China's credit impulse, it is difficult to discern global financial spillovers; (2) We estimate an alternative measure of Chinese GDP growth that captures its business cycle given data concerns about the smoothness of official GDP data. Without China's alternative GDP measure, it is difficult to attribute any global cycle movements to economic developments in China.
    Keywords: China; Growth; Credit Impulse; Global Financial Cycle; Global Business Cycle; Global Risk Sentiment; Commodity Prices
    JEL: C52 E50 F44
    Date: 2022–11–25
  14. By: Funke, Michael; Wende, Adrian
    Abstract: The semiconductor industry stands at the center of the intensifying Sino-American trade conflict. Employing a multi-country, multi-sector general equilibrium modeling framework with imperfect competition and heterogeneous firms, we perform qualitative and quantitative analyses of protectionist semiconductor measures. The paper offers two innovations in assessing the macroeconomic impact of current trade restrictions in the semiconductor industry model. First, our model of the semiconductor industry takes into account semiconductor varieties at different technological levels with different substitutability. Second, we model trade restrictions using a novel approach to export bans on semiconductor varieties that is consistent with US policy. Our simulation results suggest that the trade restrictions imposed by the US and its allies consistently lead to a decline in Chinese GDP and welfare. The US also loses, but to a lesser extent. The effect of trade diversion favors the rest of the world. Our simulations further confirm that the US semiconductor industry is likely to be harmed by the restrictions, while China's could be strengthened.
    Keywords: International trade,firm heterogeneity,semiconductors,United States,China
    JEL: F12 F13 F41
    Date: 2022
  15. By: Beirne, John (Asian Development Bank Institute); Panthi, Pradeep (Asian Development Bank Institute)
    Abstract: We examine the effect of institutions on macrofinancial resilience in Asia. Focusing on a panel of 12 Asian economies from the first quarter of 1996 to the fourth quarter of 2020, we find that institutions for economies with high levels of institutional quality support the resilience of real GDP per capita, FDI, and portfolio equity during periods of elevated financial stress. Our results also suggest portfolio rebalancing effects at play in crisis times. For economies with low levels of institutional quality, institutions may help to stabilize portfolio debt during crisis times, although the magnitude of the effects are small. As well as pointing toward resilience thresholds in institutional quality, we provide insights on critical subcomponents of overall institutional quality, notably rule of law, political stability, and regulatory quality. The findings help to inform the direction of policy efforts toward strengthening institutional capacity, and structural reforms for enhancing economic development and resilience to shocks.
    Keywords: institutional quality; economic development; international capital flows; Asia
    JEL: F32 F41 F43 O43
    Date: 2022–08
  16. By: C\'elestin Coquid\'e; Jos\'e Lages; Dima L. Shepelyansky
    Abstract: From the Bretton Woods agreement in 1944 till the present day, the US dollar has been the dominant currency in the world trade. However, the rise of the Chinese economy led recently to the emergence of trade transactions in Chinese yuan. Here, we analyze mathematically how the structure of the international trade flows would favor a country to trade whether in US dollar or in Chinese yuan. The computation of the trade currency preference is based on the world trade network built from the 2010-2020 UN Comtrade data. The preference of a country to trade in US dollar or Chinese yuan is determined by two multiplicative factors: the relative weight of trade volume exchanged by the country with its direct trade partners, and the relative weight of its trade partners in the global international trade. The performed analysis, based on Ising spin interactions on the world trade network, shows that, from 2010 to present, a transition took place, and the majority of the world countries would have now a preference to trade in Chinese yuan if one only consider the world trade network structure.
    Date: 2022–11

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