nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒02‒27
seven papers chosen by
Martin Berka
Massey University

  1. The shine beneath: foreign exchange intervention in resource-rich economies By Ortiz, Marco; Herrera, Gerardo; Perez, Fernando
  2. Exchange Rate Uncertainty and Connectedness of Inflation By Sadettin Haluk Citci; Hüseyin Kaya
  3. The Currency Composition of Asia’s International Investments By Paulo Rodelio Halili; Rogelio Mercado, Jr.
  4. Make-up strategies and exchange rate pass-through in a low-interest-rate environment By Alessandro Cantelmo; Pietro Cova; Alessandro Notarpietro; Massimiliano Pisani
  5. Rentiers, Strategic Public Goods and Financialization in the Periphery By Gabriel Porcile; Gilberto Tadeu Lima
  6. Stress Relief? Funding Structures and Resilience to the Covid Shock By Kristin Forbes; Christian Friedrich; Dennis Reinhardt
  7. US Dollar Dominance in Asia’s Trade Invoicing By Rogelio Mercado, Jr.; Ryan Jacildo; Sanchita Basu Das

  1. By: Ortiz, Marco; Herrera, Gerardo; Perez, Fernando
    Abstract: We propose a dynamic general equilibrium model to study the optimal reaction to terms of trade shocks when international financial markets are imperfect and the composition of capital flows affects the exchange rate determination. These elements allow us to showcase the interactions between commodity prices and international financial market inefficiencies. Positive commodity price shocks will generate a real over-appreciation of the currency and an inefficiently large shift of factors between the tradable and non-tradable sectors. We study the welfare implications of foreign exchange intervention through optimal simple rules and find support for leaning-against-the-wind foreign exchange intervention. Our setup, allows us to rationalize the reserve accumulation episodes commonly observed during periods of high commodity prices in resource-rich economies.
    Keywords: Open economy macroeconomics; Foreign exchange intervention; Terms of trade
    JEL: D58 E32 F31 F41 G15 O24
    Date: 2022–10–28
  2. By: Sadettin Haluk Citci (Department of Economics, Gebze Technical University); Hüseyin Kaya (Department of Economics, Istanbul Medeniyet University)
    Abstract: In this study, we theoretically and empirically examine the connectedness of exchange rate uncertainty and inflation. In a small open economy setting with a flexible exchange rate and monopolistically competitive imported final goods sector, we show that price rigidities cause importers to carry exchange rate risk and they impose a premium for the risk they face by increasing consumer prices. This pricing behavior provides a channel between exchange rate uncertainty and overall price level. Then, we empirically analyze the impact of exchange rate uncertainty on inflation by using panel data from 149 countries over the period 19802017. The estimation results point that the uncertainty of the exchange rate has a significant and positive effect on inflation. Moreover, the degree of exchange rate pass-through and the effect of exchange rate uncertainty on inflation differ among country groups and their effects on inflation have decreased through time. We also show that the effect of exchange rate uncertainty on inflation is non-monotonic.
    Keywords: exchange rate uncertainty, inflation, pricing power, exchange rate passthrough
    JEL: E31 E52 F41
    Date: 2023–01–24
  3. By: Paulo Rodelio Halili; Rogelio Mercado, Jr.
    Abstract: This paper examines the importance of trade ties, macro-financial volatilities, and US dollar trade invoicing in explaining Asia’s international investment assets and liabilities denominated in world currencies, including the US dollar (USD), euro (EUR), pound sterling (GBP), Japanese yen (JPY) and Chinese yuan (CNY). The results show heterogeneous patterns of relevant covariates across different currencies. More importantly, the estimates offer evidence that the region hedges its currency risk by investing in US dollar denominated assets as greater US dollar trade invoicing significantly covaries with greater debt asset holdings denominated in US dollar.
    Keywords: Currency composition, international investment assets and liabilities, trade invoicing, bilateral trade, macro-financial volatilities
    JEL: F31 F36 F41
    Date: 2023–01
  4. By: Alessandro Cantelmo (Bank of Italy); Pietro Cova (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: We evaluate the macroeconomic stabilization properties, with particular reference to the exchange rate pass-through, of price level targeting (PLT), average inflation targeting (AIT) and inflation targeting (IT) strategies when the effective lower bound on the monetary policy rate can be binding. The results of simulating the canonical open-economy New Keynesian model -- in which the assumption of local currency pricing holds and which is calibrated without loss of generality to the euro area -- are as follows. First, make-up strategies (PLT and AIT) stabilize inflation better than IT, by favoring a smaller appreciation (larger depreciation) of the nominal exchange rate in the event of disinflationary demand (supply) shocks. Second, and in connection with this, the exchange rate pass-through to import prices is more limited under make-up strategies than under IT, as the former stabilize the inflation rate of imports to a greater extent. Third, the results are robust to alternative values of import price stickiness and elasticity of substitution between domestic and imported goods. Fourth, the stabilization properties of make-up strategies are qualitatively preserved under partially backward-looking inflation expectations, although the relative gains of make-up strategies with respect to IT are smaller than under model-consistent inflation expectations.
    Keywords: effective lower bound, exchange rate pass-through, local currency pricing, make-up strategies, monetary policy
    JEL: E31 E52 F31 F41
    Date: 2023–02
  5. By: Gabriel Porcile; Gilberto Tadeu Lima
    Abstract: This paper revisits a traditional theme in the literature on the political economy of development, namely how to redistribute rents from traditional exporters of natural resources towards capitalists in technology-intensive sectors that have a higher potential for innovation and the creation of higher-productivity jobs. We argue that this conflict has been reshaped in the past three decades by two major transformations in the international economy. The first is the acceleration of technical change and the key role governments play in supporting international competitiveness. This role takes the form of the provision of strategic public goods to foster innovation and the diffusion of technology (what Christopher Freeman called “technological infrastructure†). The second is the impact of financial globalization in limiting the ability of governments in the periphery to tax and/or issue debt to finance those public goods. Capital mobility allows exporters of natural resources to send their foreign exchange abroad to arbitrate between domestic and foreign assets, and to avoid taxation. Using a macroeconomic model for a small open economy, we argue that in this more complex international context the external constraint on output growth assumes different forms. We focus on two polar cases: the “pure financialization†case, in which legal and illegal capital flights prevent the government from financing the provision of strategic public goods; and the “trade deficit†case, in which private firms in the more technology-intensive sector cannot import the capital goods they need to expand industrial production.
    Keywords: Rentiers; public goods; financial globalization; technological infrastructure; center and periphery
    JEL: E12 F31 F63 H41 O11
    Date: 2023–01–30
  6. By: Kristin Forbes; Christian Friedrich; Dennis Reinhardt
    Abstract: This paper explores whether different funding structures—including the source, instrument, currency, and counterparty location of funding—affected the extent of financial stress experienced in various countries and sectors during the Covid-19 spread in early 2020. We measure financial stress using a new dataset on changes in credit default swap spreads for sovereigns, banks, and corporates. Then we use country-sector and country-sector-time panels to assess if these different funding structures mitigated—or amplified—the impact of this risk-off shock. A higher share of funding from non-bank financial institutions (NBFI) or in US dollars was correlated with significantly greater stress, while a higher share of funding in debt instruments (instead of loans) or cross-border (instead of domestic) did not significantly impact resilience. The results suggest that macroprudential regulations should broaden their current focus to take into account exposures to NBFI and dollar funding, giving less priority to regulations focused on residency (i.e., capital controls). After the sharp increase in financial stress in early 2020, policy responses targeting these structural vulnerabilities (i.e., US$ swap lines and policies focused on NBFIs) were more effective at mitigating stress related to these funding structures than policies supporting banks, even after controlling for macroeconomic policy responses.
    Keywords: Coronavirus disease (COVID-19); Exchange rates; Financial institutions; Financial stability; Financial system regulation and policies; International topics
    JEL: E44 E65 F31 F36 F42 G18 G23 G38
    Date: 2023–01
  7. By: Rogelio Mercado, Jr.; Ryan Jacildo; Sanchita Basu Das
    Abstract: This paper assesses the covariation between global value chains (GVCs) and multinational corporates (MNCs) with US dollar share in trade invoicing for Asia and Pacific economies. Using the Boz et al. (2020) dataset, the empirical analysis exploits cross-sectional heterogeneities that could explain the region’s high share of exports and imports invoiced in the US dollar. The results show that Asia and Pacific economies with greater GVC participation tend to have higher share of their exports and imports invoiced in US dollars, in contrast with non-regional economies wherein economies with higher GVC have significantly lower share of exports and imports invoiced in US dollar. In addition, Asia and Pacific economies with more MNCs usually have a significantly higher share of exports invoiced in US dollar. Among other reasons, one factor could be due to less trade integration among the Asian countries considered in the paper and absence of an alternative strong regional currency. Trade exposure of these countries continue to remain significant with the US and Europe. The findings offer new empirical evidence in the context of the Asia and Pacific region as well as relevance of the presence of MNCs.
    Keywords: International trade invoicing, dominant currency paradigm, GVCs and MNCs
    JEL: F14 F31 F41
    Date: 2023–01

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