nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒03‒06
six papers chosen by
Martin Berka
Massey University

  1. International Capital Flow Pressures and Global Factors By Linda S. Goldberg; Signe Krogstrup
  2. Rentiers, Strategic Public Goods and Financialization in the Periphery By Gabriel Porcile; Gilberto Tadeu Lima
  3. New dawn fades: trade, labour and the Brexit exchange rate depreciation By Vieira Marques Da Costa, Rui; Dhingra, Swati; Machin, Stephen
  4. Foreign exchange order flow as a risk factor By Craig Burnside; Mario Cerrato; Zhekai Zhang
  5. Effects of the fiscal rule and model assumptions on the response of inflation in the aftermath of a terms-of-trade shock By Mikhail Andreyev
  6. Growth and Risk: A View from International Trade By Pravin Krishna; Andrei A. Levchenko; Lin Ma; William F. Maloney

  1. By: Linda S. Goldberg; Signe Krogstrup
    Abstract: The risk sensitivity of international capital flow pressures is explored using a new Exchange Market Pressure index that combines pressures observed in exchange rate adjustments with model-based estimates of incipient pressures that are masked by foreign exchange interventions and policy rate adjustments. The sensitivity of capital flow pressures to risk sentiment, including for so-called safe-haven currencies, evolves over time, varies significantly across countries, and differs between normal times and extreme stress events. Across countries, risk sensitivities and safe-haven status are associated with self-fulfilling exchange rate expectations and carry trade funding currencies. In contrast, association with more traditional macroeconomic country characteristics is weak.
    Keywords: exchange market pressure; risk aversion; safe haven; capital flows; exchange rates; foreign exchange interventions; global financial cycle
    JEL: F32 G11 G20
    Date: 2023–02–01
  2. 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: 2023–02
  3. By: Vieira Marques Da Costa, Rui; Dhingra, Swati; Machin, Stephen
    Abstract: This paper studies consequences of the very large exchange rate depreciation occurring in June 2016 due to the UK electorate unexpectedly voting to leave the European Union. As news of a leave vote came in, the value of sterling plummeted, recording the biggest one day depreciation of any of the world’s four major currencies since the collapse of Bretton Woods. The prospect of Brexit really happening generated sizable differences in how much sterling depreciated against different currencies. Coupled with pre-referendum cross-country trade patterns, this generated variations in exchange rate depreciations facing businesses in different industries. The paper first considers revenue and cost channels operating through trade price responses, offering evidence of a cost shock from the price of intermediate imports rising by more in higher depreciation industries, but with no revenue offset from exports. Workers were impacted by the increased cost pressures facing businesses, not in terms of job loss but through relative real wage declines and stagnation for workers employed in industries facing larger depreciations.
    Keywords: Brexit; exchange rate depreciation; trade prices; labour outcomes
    JEL: J68 L52 P25
    Date: 2022–12–07
  4. By: Craig Burnside; Mario Cerrato; Zhekai Zhang
    Abstract: We propose a novel pricing factor for currency returns motivated by the marketmicrostructure literature. Our factor aggregates order flow data to provide a measure of buying and selling pressure related to conventional currency trading strategies. It successfully prices the cross-section of currency returns sorted on the basis of interest rates and momentum. The association between our factor and currency returns differs according to the customer segment of the foreign exchange market. In particular, it appears that financial customers are risk takers in the market, while non-financial customers serve as liquidity providers.
    Keywords: exchange rates, market microstructure, order flow, carry trade, currency momentum, crash risk, stochastic discount factor
    JEL: F31 G15
  5. By: Mikhail Andreyev (Bank of Russia, Russian Federation)
    Abstract: Does a stabilization fiscal rule based on long-term resource prices and the formation of a sovereign wealth fund effectively reduce volatility of output, inflation, and exchange rate? Given that the previous fiscal rule in Russia has been violated since the beginning of 2022, what might the new fiscal rule look like and will it be effective? We tried to answer these questions using a dynamic stochastic general equilibrium model. A study shows that there are a number of economic parameters and types of fiscal rules under which the introduction of a mechanism for smoothing budget expenditures does not lead to a decrease in the volatility of some macroeconomic indicators. We have found that cases, when the introduction of a smoothing mechanism does not lead to a decrease in the volatility of output and the exchange rate, are rare and economically interpretable. As for the effect of the fiscal rule on inflation volatility, it turns out that it depends on many parameters such as such the design of the budget rule, the duration of price and wage contracts, and the presence of capital control. The fiscal rule, which operated until 2022 and used an external sovereign wealth fund, proved to be the most effective for stabilization purposes. In the new reality, with the impossibility of accumulating external reserves, the rule that saves additional oil and gas revenues within the country and uses the debt market to smooth budget revenues turned out to be the most effective and feasible.
    Keywords: DSGE model, fiscal rule, inflation, exchange rate pass-through, business cycle, commodity prices, fiscal policy, monetary policy
    JEL: D58 E47 E62 E63
    Date: 2022–12
  6. By: Pravin Krishna; Andrei A. Levchenko; Lin Ma; William F. Maloney
    Abstract: This paper studies the cross-country patterns of risky innovation and growth through the lens of international trade. We use a simple theoretical framework of risky quality upgrading by firms under varying levels of financial development to derive two predictions. First, the mean rate of quality growth and the corresponding cross-sectional variance of quality growth in a country are positively correlated. Second, both the mean and variance of quality changes are positively correlated with the country's level of financial development. We then test these two hypotheses using data on disaggregated (HS10) bilateral exports to the United States. The patterns in the data are consistent with the theory. The mean and the variance of quality growth are strongly positively correlated with each other. Countries with greater financial depth are systematically characterized by higher mean and higher variance in the growth of product quality. Our findings suggest a mean-variance trade-off in product quality improvements along the development path. Increases in financial depth do not imply lower variability of changes in the product space.
    JEL: F14 O3 O4
    Date: 2023–02

This nep-opm issue is ©2023 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.