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on Open Economy Macroeconomics |
| By: | Barry Eichengreen (UC Berkeley); Ricardo Hausmann (Harvard KSG); Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | Notwithstanding announcements of progress, “international original sin†(the denomination of external debt in foreign currency) remains a persistent phenomenon in emerging markets. Although some middle-income countries have succeeded in developing markets in local-currency sovereign debt and attracting foreign investors, they continue to hedge their currency exposures through transactions with local pension funds and other resident investors. The result is to shift the locus of currency mismatches within emerging economies but not to eliminate them. Other countries have limited original sin by limiting external borrowing, passing up valuable investment opportunities in pursuit of stability. We document these trends, analyzing regional and global aggregates and national case studies. Our conclusion is that there remains a case for an international initiative to address currency risk in low- and middle-income economies so they can more fully exploit economic development opportunities. |
| Keywords: | Original sin; Currency mismatches; Debt crises |
| JEL: | H63 F34 C82 |
| Date: | 2022–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp28-2022&r=opm |
| By: | Canofari Paolo; Di Bartolomeo Giovanni; Messori Marcello |
| Abstract: | This paper examines the impact of exogenous shocks on sovereign debts in an incomplete monetary union. We assume that financial stability is a public good that sovereign debt shocks can undermine in fragile (peripheral) members. Our model shows that, unlike the common misconception, active monetary policies do not induce the peripheral government to relax its fiscal constraints; on the contrary, these policies tend to incentivize fiscal discipline by reducing the cost of balance consolidation. Active monetary policies, in fact, partially reallocate the stabilization costs from the periphery to the core of the union, preserving the common good and facilitating fiscal discipline in the periphery. |
| Date: | 2022–10 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:00152&r=opm |
| By: | Riccardo Degasperi (DG Economics, Statistics and Research, Rome, Italy); Seokki Simon Hong (Paris School of Economics, Paris, France); Giovanni Ricco (CREST – Ecole Polytechnique, Palaiseau, France) |
| Abstract: | US monetary policy shapes economic conditions globally due to the dominant role of the dollar in the world economy. We study the propagation of US monetary policy shocks abroad using a state-of-the-art high-frequency identification and a harmonised dataset covering 30 economies and over 150, 000 datapoints. A policy tightening has large contractionary effects on both advanced and emerging economies. The propagation via financial variables limits foreign central banks’ control over domestic economic conditions by increasing risk premia and by destabilising the medium-long segment of the yield curve. The responses of headline prices abroad are instead shaped by spillovers via commodity markets. |
| Keywords: | Monetary policy, Trilemma, Exchange Rates, Monetary Policy Spillovers. |
| JEL: | E5 F3 F4 C3 |
| Date: | 2022–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:crs:wpaper:2023-02&r=opm |
| By: | Valérie Mignon; Carl Grekou; Emmanuelle Faure |
| Abstract: | This paper revisits the crucial issue of current account imbalances and focuses on the determinants of their gaps between eurozone Member States. We conduct robust estimations of the current account balances for a panel of ten founding euro area economies and construct a measure that allows us to diagnose why some countries have started to diverge from the eurozone mean in the last two decades. Our findings show evidence of remaining differences in countries’ economic development, meaning that real macroeconomic convergence has failed in the zone. Price and cost competitiveness, as well as fiscal balances, have also participated in this growing macroeconomic divergence. Overall, while the European authorities cannot influence the part of the current account gaps due to demographic factors, the role of fiscal redistribution and investment at the euro area level could help achieve macroeconomic convergence and thus reduce current accounts’ divergence in the zone. |
| Keywords: | Current account, global imbalances, eurozone |
| JEL: | F32 O52 C33 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2023-3&r=opm |
| By: | Mahmood, Asif; Zahoor, Muhammad Awais |
| Abstract: | Pakistan’s economy has a history of facing continuous external sector shocks that often resulted in large exchange rate depreciations. Whether these depreciations have supported growth in exports from Pakistan or do more harm than providing any benefit to the economy is always a matter of domestic debate with inconclusive results. One major apprehension sighted in this regard is the role of intermediate imported goods that become expensive after depreciations and thus offset any competitive gains expected to be achieved from the exchange rate adjustment. To empirically investigate this argument, we evaluate that whether and how the Global Value Chains (GVCs) participation, i.e. the export and import of intermediate goods, affects the REER elasticity for exports in Pakistan using input-output model techniques. We find that, like elsewhere, REER elasticity of exports has declined in Pakistan overtime. However, only around 16 percent of this decline in REER elasticity is explained by the role of GVCs participation. One major reason for this lower impact could be coming from the fact that, unlike other emerging economies and in contrast to general perception, role of backward participation (i.e. use of imported inputs to produce exports) is one of the lowest in Pakistan. While the results still signify the role of PKR exchange rate in external adjustment, the low backward participation is not helping the exports to become competitive overtime. |
| Keywords: | Real Exchange Rate, Export Growth, Global Value Chains |
| JEL: | F14 F31 F41 |
| Date: | 2021–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:115958&r=opm |
| By: | Eduardo Corso (Central Bank of Argentina); Maximo Sangiacomo (Central Bank of Argentina) |
| Abstract: | dollarization hinders financial intermediation in domestic currency which is detrimental for economic growth and development. A broad branch of the financial dollarization literature is based on portfolio theory. Dollarization of savings portfolios is the result of optimal mean-variance portfolio selection. In this document, we use an optimal portfolio selection approach to analyse financial dollarization's hysteresis in Argentina. Based on the historical experience of our country, we model agents' expectations using second-order probability distributions, that allow us to incorporate positive bias in subjective distribution of dollar returns. This bias arises from the subjective perceptions of unsustainability of the current regime. Under the proposed analytical scheme, in contexts in which households and firms face difficulties in identifying informative signals about the sustainability of the current exchange-rate regime, policy measures aimed at promoting financial de-dollarization may produce unwanted behavior. For example, the usually stated mean-variance approach argument of rising real exchange rate volatility relative to domestic currency volatility (inflation) could be perceived as an increase in the subjective probability of regime change, leading to portfolio rebalancing towards the foreign currency, with opposite results to those expected. |
| Keywords: | dollarization, asset substitution, financial intermediation |
| JEL: | E52 F36 F41 G11 |
| Date: | 2023–01 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:2023106&r=opm |
| By: | Patrick Bolton (Imperial College, London); Mitu Gulati (University of Virginia Law School); Ugo Panizza (IHEID, Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | We review the state of the sovereign debt literature and point out that the canonical model of sovereign debt cannot be easily reconciled with several facts about sovereign debt pricing and servicing. We identify and classify twenty puzzles. Some are well known and documented, others are less so and are sometimes based on anecdotal evidence. We classify these puzzles into three categories- puzzles about how sovereigns issue debt; puzzles about the pricing of sovereign debt; and puzzles about sovereign default and the working out of defaults. We conclude by suggesting possible avenues for new research aimed at reconciling theory with what we observe in the real world. |
| Keywords: | Sovereign Debt; Sovereign Default; Public Debt |
| JEL: | F30 F34 G15 K12 |
| Date: | 2022–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp27-2022&r=opm |
| By: | Ariel Dvoskin (Central Bank of Argentina - CONICET); Matías Torchinsky Landau (CONICET) |
| Abstract: | Supermultiplier growth models show that higher autonomous spending leads to stronger economic growth, implying that greater government spending can boost economic activity (Freitas and Serrano, 2015). However, several authors highlighted the limits of this strategy, arguing that increased spending might lead to unsustainable debt accumulation patterns. This is particularly important for small open economies, where growth requires imports that must be paid with foreign currency, which can lead to growing external indebtedness (Thirlwall, 1979; Nikiforos, 2018; Oreiro and Costa Santos, 2019). We build a structuralist supermultiplier model for a small open economy with two sources of autonomous demand, government expenditures and exports. We account for the dynamics of external indebtedness (determined by economic activity), wage growth (related to wage resistance) and the exchange rate (determined by the Central Bank but limited by international reserves constraints). We find that, in the long run, there is a limit for government spending: its growth rate cannot exceed that of exports without generating an external crisis. However, there is a strong role for public policy: there is nothing that automatically leads the economy to its maximum growth rate compatible with the external constraint to growth, and if government expenditures grow less than exports, the economy will not completely exploit its external space. But the main contribution of the paper is in the short-run analysis, where we find an additional restriction, related to income distribution. Since higher wages increase consumption and economic activity, they also require more imports, potentially leading to unsustainable debt growth. Therefore, there is a maximum real wage compatible with external equilibrium (Canitrot, 1983). If unions’ demand wages are lower than the external equilibrium wage, the economy will be stable, but will also achieve unnecessarily low output and real wages. On the contrary, if target wages exceed those compatible with external equilibrium, the economy displays economic cycles between capacity utilisation, income distribution and indebtedness, marked by permanent inflation. We show that, in the short run, the government can optimize fiscal and monetary policies to maximise output given the external space, but that in the long run, economic growth requires not only domestic spending but also increasing exports to be sustainable. |
| Keywords: | Sraffian supermultiplier, Thirlwall's law, fiscal policy, income distribution, structuralism |
| JEL: | E11 E31 E32 F43 O41 |
| Date: | 2022–06 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:2022102&r=opm |
| By: | Roger Vicquéry |
| Abstract: | This paper quantifies the relative dominance of global currencies and the competitive structure of the international monetary system since 1825. I find the post-1945 experience of dollar hegemony to have no historical precedent. No currency has ever maintained such a large, long-lasting lead over global currency rivals. Close competitors frequently challenged the previous hegemon, the pound sterling. I confirm the dollar temporarily overtook the sterling for the first time in the mid-1920s. Among previously overlooked episodes of monetary competition, I highlight the rise of the French franc in the 1850s and 1930s as well as of the German mark in the 1870s. In light of the recent debate on the costs and benefits of a multipolar international monetary system, I document a positive correlation between higher global currency competition and the prevalence of financial crises, which is however highly dependent on specific sub-periods. |
| Keywords: | International Monetary System, Long Run, Dollar Hegemony, Multipolarity |
| JEL: | F3 F4 N2 E5 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:882&r=opm |
| By: | Cole, Alexandre Lucas; Guerello, Chiara; Traficante, Guido |
| Abstract: | We evaluate the stabilization properties of several rules and instruments to reduce government debt in a Currency Union, like the EMU. In a two-country New-Keynesian DSGE model, with a debt-elastic government bond spread and incomplete international financial markets, we study the effects of government debt deleveraging, under different scenarios for fiscal policy coordination. We find that greater stabilization is achieved when the two countries coordinate by stabilizing net exports. Moreover, we find that taxes are a better instrument for deleveraging compared to government transfers. Our policy prescriptions for the Euro Area are to reduce government debt less during recessions and liquidity traps, and to do so using distortionary taxes, while concentrating on reducing international demand imbalances. |
| Keywords: | Sovereign Debt, International Policy Coordination, Monetary Union, New Keynesian |
| JEL: | E12 E63 F42 F45 H63 |
| Date: | 2023–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:115980&r=opm |