nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒01‒16
thirteen papers chosen by
Martin Berka
Massey University

  1. The exchange rate elasticity of the Swiss current account By Johannes Eugster; Giovanni Donato
  2. Commodity Exports, Financial Frictions and International Spillovers By Romain Houssa; Jolan Mohimont; Christopher Otrok
  3. Developing Countries’ Policy Responses to Large Private Capital Inflows: Control or Liberalize? By Shereen Attia; Ahmed Ragab
  4. Importer Dispersion and Exchange Rate Pass-Through By Qingyuan Du; Yalin Liu; Jianwei Xu
  5. Foreign Currency Working Capital Constraints for Imported Inputs and Compositional Effects in Intermediate Goods By Sámano Daniel
  6. Macro-financial stability frameworks: experience and challenges By Claudio Borio; Ilhyock Shim; Hyun Song Shin
  7. Capital Flight and the Real Exchange Rate in Resource Scarce MENA Countries By A. Yasemin Yalta; A. Talha Yalta
  8. Sovereign Default and Liquidity: The Case for a World Safe Asset By François Le Grand; Xavier Ragot
  9. The global financial cycle and macroeconomic tail risks By Beutel, Johannes; Emter, Lorenz; Metiu, Norbert; Prieto, Esteban; Schüler, Yves
  10. Chinese supply chain shocks By Khalil, Makram; Weber, Marc-Daniel
  11. Reallocation and Productivity during Commodity Cycles By Heresi, Rodrigo
  12. Welfare Effects of Capital Controls By Andreasen, Eugenia; Bauducco, Sofía; Dardati, Evangelina
  13. Interest Rate Uncertainty and Macroeconomics in Turkey By Pelin Öge Güney

  1. By: Johannes Eugster; Giovanni Donato
    Abstract: This paper investigates the effects of Switzerland's real effective exchange rate (REER) on its current account. Using dynamic empirical methods, we focus on exchange rate movements that are unrelated to real and monetary developments, i.e., those more likely to be driven by the Swiss franc's safe-haven proprieties or unexpected exchange rate policy decisions. The paper's key result is that the Swiss headline current account has been largely inelastic to the exchange rate at the business cycle frequency. Three factors explain this somewhat counterintuitive result. A) A negative but short-lived effect on the trade balance is partly offset by a positive effect on net investment income. B) Large and often volatile net exports of nonmonetary gold blur the aggregate reaction. C) Improved terms-of-trade largely offset the negative effect on the (real) goods trade balance, as import prices tend to fall by more than export prices. The limited sensitivity of the current account, however, does not mean that the Swiss economy is insensitive to the exchange rate. Our results confirm that consumer prices, as well as corporate profits in particularly exposed sectors, decline significantly following an appreciation. These results suggest that an appreciation of the Swiss franc likely doesn't reduce Switzerland's current account quickly but rather tightens monetary conditions, reduces GDP, and hampers prospects in the longer term.
    Keywords: Exchange rate, current account, pass-through
    JEL: E31 F31 F32 F41
    Date: 2022
  2. By: Romain Houssa; Jolan Mohimont; Christopher Otrok
    Abstract: This paper offers a solution to the international co-movement puzzle found in open-economy macroeconomic models. We develop a small open-economy (SOE) dynamic stochastic general equilibrium (DSGE) model describing three endogenous channels that capture spillovers from the world to a commodity exporter: a world commodity price channel, a domestic commodity supply channel and a financial channel. We estimate our model with Bayesian methods on two commodity-exporting SOEs, namely Canada and South Africa. In addition to explaining international business cycle synchronization, the new model attributes an important fraction of business cycle fluctuations to foreign shocks in the SOEs.
    Keywords: international spillovers; commodities; financial frictions; small open economy; DSGE; Bayesian; monetary policy
    JEL: E3 E43 E52 C51 C33
    Date: 2022–12–17
  3. By: Shereen Attia (Senior Researcher and Consultant); Ahmed Ragab (Cairo University)
    Abstract: Although the influx of large private capital inflows provides developing countries with substantial macroeconomic benefits, the integration process carries some difficult macroeconomic challenges. This paper examines the implications of large private capital inflows episodes on the macroeconomic fundamentals of highly integrated developing countries under the two policy regimes. We begin by classifying developing countries according to their degree of capital account openness. Then, we exploit large capital inflow episodes to measure their short-run effects on key domestic macroeconomic fundamentals for a sub-sample of highly integrated countries that adopted the two policy regimes using a VAR framework. The results indicate that countries experiencing more volatile macroeconomic fluctuations, including a sharp reversal of inflows, tend to have higher current account deficits and experience stronger increases in both aggregate demand and the real value of the currency during the period of large capital inflows. In this respect, countries with a liberalized capital account usually witness an expansion of economic activity. However, such an effect is not likely to last indefinitely, and the boom phase may tend to reverse itself as the economy reaches its potential. Meanwhile, countries that adopt tightening capital controls on capital inflows experience more moderate GDP growth following the surge in inflows. Nonetheless, capital controls don’t completely insulate countries against external disturbances, as the real exchange rate is more vulnerable to shocks.
    Date: 2022–09–20
  4. By: Qingyuan Du (Department of Economics, Monash University); Yalin Liu (Central University of Finance and Economics); Jianwei Xu (Beijing Normal University)
    Abstract: This paper investigates the effect of importer dispersion on exchange rate pass-through. We show theoretically that greater importer dispersion leads to lower exporter markup, thereby causing a higher exchange rate pass-through. Empirically, we use Colombia’s transaction-level customs data to provide strong evidence supporting the theoretical prediction. The quantitative effect of importer dispersion on exchange rate pass-through is significant: the importer dispersion channel is at least as important as the traditional exporter heterogeneity channel. Our results are robust to various empirical specifications and become even stronger in the context of the dominant currency paradigm.
    Keywords: importer heterogeneity, exchange rate pass-through
    JEL: F1
    Date: 2022–12
  5. By: Sámano Daniel
    Abstract: I develop an asymmetric two-country incomplete markets model in which economies trade final consumption goods and inputs. The purchases of imported inputs from the firms of one of the economies (the emerging) to the firms of the other economy (the advanced) are subject to a foreign currency working capital constraint. Domestic firms are assumed to finance their working capital by borrowing from the domestic household in local currency. Through numerical simulations, I show that in this environment domestic productivity shocks have compositional effects through the cost of the working capital. In particular, after a domestic positive productivity shock terms of trade rise and the working capital cost exhibits a sudden increase followed by a prolonged temporary decrease. This leads to inputs recomposition in the domestic economy in response to working capital cost adjustments.
    Keywords: Working capital;Foreign currency;Imported inputs
    JEL: C68 F15 F41
    Date: 2022–12
  6. By: Claudio Borio; Ilhyock Shim; Hyun Song Shin
    Abstract: Since the 2008–9 Great Financial Crisis, major advanced economies (AEs) have used monetary and macroprudential policies to achieve macroeconomic and financial stability. Emerging market economies (EMEs) have, in addition, combined interest rate tools with FX intervention, macroprudential policy and, sometimes, capital flow management measures (CFMs) to address the challenges from capital flow and exchange rate volatility. This paper provides an overview of the use of monetary, macroprudential and exchange rate policies, sometimes alongside CFMs, both in AEs and EMEs. It also assesses the extent to which the use of these policies constitutes a holistic macro-financial stability framework (MFSF). We reach three conclusions. First, combining tools has succeeded in improving policy trade-offs, notably by mitigating the risks to domestic stability arising from external influences. Second, a holistic MFSF is still a work in progress. Finally, more efforts need to be made to better understand the channels of international spillovers and spillbacks.
    Keywords: capital flow, exchange rate policy, macro-financial stability framework, macroprudential measure, monetary policy
    JEL: E44 E52 F38 G28
    Date: 2022–12
  7. By: A. Yasemin Yalta (Hacettepe University); A. Talha Yalta (TOBB University of Economics and Technology)
    Abstract: We analyze the determinants of capital flight in three resource scarce MENA countries namely Egypt, Morocco, and Tunisia. Our methodology involves both the linear and the nonlinear auto-regressive distributed lag (ARDL) cointegration approach, with a focus on asymmetric relationships between capital flight and the real exchange rate in order to distinguish the effects of appreciation and depreciation of the domestic currency on capital flight. Based on annual data between 1975 and 2019, we demonstrate that capital flight responds more to the real exchange rate depreciation in Egypt, and that the Arab Spring has resulted in higher capital flight in Egypt and Morocco in the long run. Our results also reveal that the real GDP growth rate and inflation are important factors affecting capital flight in Morocco, while the lagged values of capital flight and the institutional quality are more prevalent in Tunisia.
    Date: 2021–11–20
  8. By: François Le Grand (EM - emlyon business school, ETH Zürich - Eidgenössische Technische Hochschule - Swiss Federal Institute of Technology [Zürich]); Xavier Ragot (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: This paper presents a positive and normative study of a world financial market when sovereign countries can default on their debt. We construct a tractable model that enables us to study sovereign default in general equilibrium. The amount of safe assets is thus endogenous and determined by international risk-sharing. We characterize the equilibrium structure and we show that the market equilibrium can generate multiple equilibria. In addition, the market equilibrium is not constrained-efficient because countries do not fully internalize the value of their debt being used as liquidity. We prove that a world fund issuing a safe asset increases aggregate welfare. The fund's relationship with the IMF's Special Drawing Rights is discussed.
    Keywords: Sovereign Default,Safe Asset,International Liquidity
    Date: 2021–07
  9. By: Beutel, Johannes; Emter, Lorenz; Metiu, Norbert; Prieto, Esteban; Schüler, Yves
    Abstract: We study the link between the global financial cycle and macroeconomic tail risks using quantile vector autoregressions. Contractionary shocks to financial conditions and monetary policy in the United States cause elevated downside risks to growth around the world. By tightening financial conditions globally, these shocks affect the left tail of the conditional output growth distribution more strongly than the center of the distribution. This effect is particularly pronounced for countries with less flexible exchange rate arrangements, higher foreign currency exposures, and higher levels of private sector leverage, suggesting that exchange rate policies and macroprudential policies can mitigate downside risks to growth.
    Keywords: Financial shocks,Monetary policy,Global financial cycle,Growth-at-Risk,International spillovers,Quantile VAR
    JEL: C32 E23 E32 E44 F44
    Date: 2022
  10. By: Khalil, Makram; Weber, Marc-Daniel
    Abstract: In structural vector autoregressive models of United States and euro area manufacturing, we use sign restrictions to identify shocks that alter the frictions to Chinese supply chain trade. We find a quantitatively significant role of such shocks for the decline of US manufacturing output at the height of the Sino-American trade tensions in 2019. At the beginning of the Covid-19 pandemic in early 2020, the results pointed towards large spillovers from the shutdown in China to manufacturing in the US and the euro area. Moreover, for the recovery in late 2020 and 2021, favourable Chinese supply chain shocks related to the shift of preferences towards goods with a large China valued-added content played a relevant role. Interestingly, the impact of Chinese supply chain shocks is not limited to manufacturing sectors that are highly exposed to China. Furthermore, negative Chinese supply chain shocks cause upward price pressure across the whole manufacturing industry.
    Keywords: Cross-border supply-chain disruptions,trade frictions,China,trade tensions,Covid-19 recession,US and euro area manufacturing
    JEL: E32 F41 F62
    Date: 2022
  11. By: Heresi, Rodrigo
    Abstract: I study the firm-level dynamic response of a commodity-exporting economy to global cycles in commodity prices. To do so, I develop a heterogeneous-firms model that endogenizes declines in aggregate productivity through reallocation towards less productive firms. Within a given sector, commodity booms reallocate market share away from exporters because of currency appreciation and away from capital-intensive firms because of the increase in capital cost. I provide empirical evidence for these channels using microdata for Chile, the worlds largest copper producer. When fed with the commodity super-cycle of 2003-2012, the calibrated model generates about 50% of the observed productivity decline.
    Keywords: Productivity;Resource booms;Open economy macroeconomics
    JEL: F41 D24 Q33
    Date: 2021–04
  12. By: Andreasen, Eugenia; Bauducco, Sofía; Dardati, Evangelina
    Abstract: This paper studies the effect of capital controls on misallocation and welfare in an economy with financial constraints. We build a general equilibrium model with heterogeneous firms, financial constraints and international trade and calibrate it to the Chilean economy. Since high-productivity and exporting firms need to borrow more to reach their optimal scale, capital controls that tax international borrowing hit them harder. As a result, misallocation increases relatively more for this group of firms, and for young firms that are still trying to reach their optimal scale. In terms of welfare, the model predicts a sizable aggregate loss of 2.39 percent when capital controls are introduced, with welfare decreasing twice as much for high-productivity firms. We empirically corroborate the main insights in terms of misallocation obtained from the model using Chilean manufacturing firm data from 1990 to 2007.
    Keywords: International trade;Financial Frictions;welfare;Capital controls;Misallocation
    JEL: F41 O47 F12
    Date: 2021–06
  13. By: Pelin Öge Güney (Hacettepe University)
    Abstract: Monetary policy plays a central role in stabilizing macroeconomic fluctuations. In addition to monetary policy, uncertainty in monetary policy associated with uncertainty in interest rates is an important determinant of economic decisions. In this paper, we analyze the effect of interest rate uncertainties for different maturities on industrial production, inflation, unemployment, and exchange rate for Turkey using the VAR model. Since the dominant position of the US economy in global financial markets implies uncertainty about how the monetary policy of the US (MPU) may impact foreign economies, we also discuss the impact of MPU uncertainty on the variables of interest. Although the effect varies across the different maturities of the yield, our findings suggest that interest rate uncertainty reduces the growth of industrial production, increases unemployment, and depreciates the exchange rate. Additionally, inflation increases in response to interest rate uncertainty shocks. Finally, while a shock in MPU uncertainty tends to significantly increase unemployment, it decreases the growth of production.
    Date: 2022–08–20

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