nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒01‒23
twelve papers chosen by
Martin Berka
Massey University

  1. Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings By Mitali Das; Gita Gopinath; Taehoon Kim; Jeremy C. Stein
  2. Optimal Policy under Dollar Pricing By Konstantin Egorov; Dmitry Mukhin
  3. Sudden Stops, Sovereign Risk, and Fiscal Rules By Gomez-Gonzalez, Jose E.; Valencia, Oscar; Sánchez, Gustavo
  4. Sovereign Default and Liquidity: The Case for a World Safe Asset By François Le Grand; Xavier Ragot
  5. A Tale of Two Global Monetary Policies By Silvia Miranda-Agrippino; Tsvetelina Nenova
  6. Sanctions and the Exchange Rate By Oleg Itskhoki; Dmitry Mukhin
  7. The Micro and Macro Dynamics of Capital Flows By Felipe Saffie; Liliana Varela; Kei-Mu Yi
  8. Optimal Bailouts in Banking and Sovereign Crises By Sewon Hur; Cesar Sosa-Padilla; Zeynep Yom
  9. An Ergodic Theory of Sovereign Default By Damián Pierri; Hernán D. Seoane
  10. Foreign Shocks as Granular Fluctuations By Julian Di Giovanni; Andrei A Levchenko; Isabelle Mejean
  11. Capital Flows in an Aging World By Zsófia L. Bárány; Nicolas Coeurdacier; Stéphane Guibaud
  12. The macroeconomic effects of global supply chain disruptions By Finck, David; Tillmann, Peter

  1. By: Mitali Das; Gita Gopinath; Taehoon Kim; Jeremy C. Stein
    Abstract: This paper explores how non-U.S. central banks behave when firms in their economies engage in currency mismatch, borrowing more heavily in dollars than justified by their operating exposures. We begin by documenting that, in a panel of 53 countries, central bank holdings of dollar reserves are significantly correlated with the dollar-denominated bank borrowing of their non-financial corporate sectors, controlling for a number of known covariates of reserve accumulation. We then build a model in which the central bank can deal with private-sector mismatch, and the associated risk of a domestic financial crisis, in two ways: (i) by imposing ex ante financial regulations such as bank capital requirements; or (ii) by building a stockpile of dollar reserves that allow it to serve as an ex post dollar lender of last resort. The model highlights a novel externality: individual central banks may tend to over-accumulate dollar reserves, relative to what a global planner would choose. This is because individual central banks do not internalize that their hoarding of reserves exacerbates a global scarcity of dollar-denominated safe assets, which lowers dollar interest rates and encourages firms to increase the currency mismatch of their liabilities. Relative to the decentralized outcome, a global planner may prefer stricter financial regulation (e.g., higher bank capital requirements) and reduced holdings of dollar reserves.
    JEL: E42 F4 G15
    Date: 2022–12
  2. By: Konstantin Egorov (New Economic School (NES)); Dmitry Mukhin (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: Recent empirical evidence shows that most international prices are sticky in dollars. This paper studies the policy implications of this fact in the context of an open economy model, allowing for an arbitrary structure of asset markets, general preferences and technologies, time- or state-dependent price setting, and a rich set of shocks. We show that although monetary policy is less efficient and cannot implement the flexible-price allocation, inflation targeting remains robustly optimal in non-U.S. economies. The implementation of this non-cooperative policy results in a “global monetary cycle” with other countries importing the monetary stance of the U.S. The capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. Thanks to the dominance of the dollar, the U.S. can extract rents in international goods and asset markets and enjoy a higher welfare than other economies. Although international cooperation benefits other countries by improving global demand for dollar-invoiced goods, it is not in the self-interest of the U.S. and may be hard to sustain.
    Date: 2021–10
  3. By: Gomez-Gonzalez, Jose E.; Valencia, Oscar; Sánchez, Gustavo
    Abstract: This paper studies the effect of implementing fiscal rules on sovereign default risk and on the probability of large capital ow reversals for a large sample of countries including both developed and emerging market economies. Results indicate that fiscal rules are beneficial for macroeconomic stability, as they significantly reduce both sovereign risk perception and the probability of a sudden stop in countries that implement them. These results, which are robust to various empirical specifications, have important policy implications specially for countries that have relaxed their fiscal rules in response to the Covid-19 pandemic.
    Keywords: Fiscal Rules;Sudden stops;sovereign default risk;dynamic heterogeneous panel data models
    JEL: F34 G15 C33
    Date: 2021–03
  4. 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
  5. By: Silvia Miranda-Agrippino (Bank of England; Centre for Macroeconomics (CFM); Centre for Economic Policy Research (CEPR)); Tsvetelina Nenova (London Business School)
    Abstract: US monetary policy is not the only one with a global reach. We compare the international financial spillovers of the unconventional monetary policies of the Fed and the ECB. Monetary policy tightenings in both areas are followed by a global retrenchment in capital flows, a fall in global stock markets, and a rise in global risk measures. Thus, ECB and Fed monetary policies propagate internationally through equivalent transmission channels. ECB monetary policy shocks also affect significantly the US business and financial cycles. We produce tentative evidence that links the strength of the ECB international spillovers to the Euro exposure for both trade invoicing and the pricing of financial transactions.
    Keywords: Monetary Policy, Global Financial Cycle, International spillovers, Currency Pricing Paradigm, Fed, ECB
    JEL: F42 E52 G15
    Date: 2021–08
  6. By: Oleg Itskhoki (University of California-Los Angeles (UCLA)); Dmitry Mukhin (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: We show that the exchange rate may appreciate or depreciate depending on the specific mix of sanctions imposed, even if the underlying equilibrium allocation is the same. Sanctions that limit a country’s imports tend to appreciate the country’s exchange rate, while sanctions that limit exports and/or freeze net foreign assets tend to depreciate it. Increased precautionary household demand for foreign currency is another force that depreciates the exchange rate, and it can be offset with domestic financial repression of foreign currency savings. The overall effect depends on the balance of currency demand and currency supply forces, where exports and official reserves contribute to currency supply and imports and foreign currency precautionary savings contribute to currency demand. Domestic economic downturn and government fiscal deficits are additional forces that affect the equilibrium exchange rate. The dynamic behavior of the ruble exchange rate following Russia’s military invasion of Ukraine in February 2022 and the resulting sanctions is entirely consistent with the combined effects of these mechanisms.
    Date: 2022–05
  7. By: Felipe Saffie (University of Virginia Darden); Liliana Varela (London School of Economics (LSE); Centre for Economic Policy Research (CEPR)); Kei-Mu Yi (Federal Reserve Bank of Dallas; University of Houston; National Bureau of Economic Research (NBER))
    Abstract: We study empirically and theoretically the effects of international capital flows on resource allocation. Using the universe of firms in Hungary, we show that financial openness triggers input-cost and consumption channels, with the latter dominant and reallocating resources toward high expenditure elasticity activities in the short-run. A multi-sector heterogeneous firm trade model replicates these dynamics. In the long-run, the model predicts that resources will shift towards manufacturing exports to service debt. Owing to endogenous terms of trade dynamics, countries face a trade-off between the speed of convergence and their long-run capital stock; thus, financial openness can lead to welfare losses.
    Keywords: firm dynamics, financial liberalization, reallocation, capital flows, welfare, non-homothetic preferences
    JEL: F15 F41 F43 F63
    Date: 2021–06
  8. By: Sewon Hur (Federal Reserve Bank of Dallas); Cesar Sosa-Padilla (University of Notre Dame/NBER); Zeynep Yom (Villanova University)
    Abstract: We study optimal bailout policies in the presence of banking and sovereign crises. First, we use European data to document that asset guarantees are the most prevalent way in which sovereigns intervene during banking crises. Then, we build a model of sovereign borrowing with limited commitment, where domestic banks hold governmentdebt and also provide credit to the private sector. Shocks to bank capital can trigger banking crises, with the government sometimes finding it optimal to extend guaranteesover bank assets. This leads to a trade-off: Larger bailouts relax domestic financial frictions and increase output, but also imply increasing government fiscal needs andpossible heightened default risk (i.e., they create a ‘diabolic loop’). We find that the optimal bailouts exhibit clear properties. Other things equal, the fraction of bankinglosses that the bailouts cover is: (i) decreasing in the level of government debt; (ii) increasing in aggregate productivity; and (iii) increasing in the severity of the bankingcrisis. Even though bailouts mitigate the adverse effects of banking crises, we find that the economy is ex ante better off without bailouts: Having access to bailouts lowers thecost of defaults, which in turn increases the default frequency, and reduces the levels of debt, output, and consumption.
    Keywords: Bailouts, Sovereign Defaults, Banking Crises, Contingent Transfers, Sovereignbank diabolic loop
    JEL: E32 E62 F34 F41 G01 G15 H63
    Date: 2022–12
  9. By: Damián Pierri (Universidad Carlos III de Madrid); Hernán D. Seoane (Universidad Carlos III de Madrid)
    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
  10. By: Julian Di Giovanni (Federal Reserve Bank of New York, CEPR - Center for Economic Policy Research - CEPR); Andrei A Levchenko (University of Michigan System, CEPR - Center for Economic Policy Research - CEPR, NBER - National Bureau of Economic Research [New York] - NBER - The National Bureau of Economic Research); Isabelle Mejean (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, CEPR - Center for Economic Policy Research - CEPR)
    Abstract: This paper uses a dataset covering the universe of French firm-level value added, imports, and exports over the period 1995-2007 and a quantitative multi-country model to study the international transmission of business cycle shocks at both the micro and the macro levels. Because the largest firms are the most likely to trade internationally, foreign shocks are transmitted to the domestic economy primarily through the large firms. We first document a novel stylized fact: larger French firms are significantly more sensitive to foreign GDP growth. We then implement a quantitative framework calibrated to the full extent of the observed heterogeneity in firm size, exporting, and importing. We simulate the propagation of foreign shocks to the French economy and report one micro and one macro finding. At the micro level heterogeneity across firms predominates: 45 to 75% of the impact of foreign fluctuations on French GDP is accounted for by the "foreign granular residual"-the term capturing the larger firms' greater responsiveness to the foreign shocks. At the macro level, firm heterogeneity attenuates the impact of foreign shocks, with the GDP responses 10 to 20% larger in a representative firm model compared to the baseline model.
    Keywords: Granularity, Shock transmission, Aggregate fluctuations, Input linkages, International trade
    Date: 2022–09–06
  11. 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
  12. By: Finck, David; Tillmann, Peter
    Abstract: Highly interconnected global supply chains make countries vulnerable to sup ply chain disruptions. This paper estimates the macroeconomic effects of global supply chain shocks for the euro area. Our empirical model combines busi ness cycle variables with data from international container trade. Using a novel identification scheme, we augment conventional sign restrictions on the impulse responses by narrative information about three episodes: the Tohoku earthquake ¯ in 2011, the Suez Canal obstruction in 2021, and the Shanghai backlog in 2022. We show that a global supply chain shock causes a drop in euro area real economic activity and a strong increase in consumer prices. Over a horizon of one year, the global supply chain shock explains about 30% of inflation dynamics. We also use regional data on supply chain pressure to isolate shocks originating in China. Our results show that supply chain disruptions originating in China are an important driver for unexpected movements in industrial production, while disruptions originating outside China are an especially important driver for the dynamics of consumer prices.
    Keywords: Container Trade, Supply Chain, Inflation, Narrative Identification, Sign Restrictions
    JEL: E32 F14 F62
    Date: 2022

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