nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒03‒20
six papers chosen by
Martin Berka
Massey University

  1. Effects of foreign and domestic central bank government bond purchases in a small open economy DSGE model: Evidence from Sweden before and during the coronavirus pandemic By Akkaya, Yildiz; Belfrage, Carl-Johan; Di Casola, Paola; Strid, Ingvar
  2. World Prices and Business Cycles of a Small Open Input-Output Economy By Khelifi, Atef
  3. The puzzling change in the international transmission of U.S. macroeconomic policy shocks By Ilzetzki, Ethan; Jin, Keyu
  4. Foreign price shocks and inflation targeting: Effects on income and inflation inequality By Rolim, Lilian; Marins, Nathalie
  5. Money, Exchange rate and Wage Inequality By Ganguly, Shrimoyee
  6. International Commodity Prices Transmission to Consumer Prices in Africa By Thibault Lemaire; Paul Vertier

  1. By: Akkaya, Yildiz (Monetary Policy Department, Central Bank of Sweden); Belfrage, Carl-Johan (Monetary Policy Department, Central Bank of Sweden); Di Casola, Paola (European Central Bank); Strid, Ingvar (Monetary Policy Department, Central Bank of Sweden)
    Abstract: This paper evaluates the macroeconomic effects of foreign and domestic central bank government bond purchases on the Swedish economy before and during the Corona pandemic using a small open economy DSGE model with segmented asset markets. In this model, the effects of foreign and domestic quantitative easing on the Swedish economy occur mainly through the exchange rate channel. The calibrated model is able to broadly capture the movements in foreign and domestic bond yields, capital flows and the Krona exchange rate associated with QE since the global financial crisis in 2007-2009. We find that foreign quantitative easing strengthened the Krona exchange rate and had modestly negative effects on Swedish GDP and inflation. Domestic QE, on the other hand, depreciated the Krona and had modestly positive macroeconomic effects. In 2015-2019 the government bond purchases on average depreciated the Krona by 2.5 percent, increased GDP by 0.2 percent, and increased inflation by 0.2 percentage points. The government bond purchases following the pandemic, which were more limited in size, had roughly half of these effects.
    Keywords: Unconventional Monetary Policy; Quantitative Easing; Effective Lower Bound; International Spillovers; DSGE model
    JEL: E44 E52 F41
    Date: 2023–02–01
  2. By: Khelifi, Atef
    Abstract: The role of terms-of-trade shocks in driving economic fluctuations is revisited through a multisector small open economy (SOE) model, where the various types of goods can all be consumed and employed as inputs. Under this assumption, we show that contrary to conventional wisdom, terms-oftrade shocks may not necessarily trigger an economic boom for the exporting country, if its export goods are intensively employed or consumed domestically. We calibrate and estimate the proposed model using data from 15 emerging countries and find that it performs better than the standard model to explain the different impacts of terms-of-trade shocks across countries documented by Schmitt-Grohe and Uribe (2018).
    Keywords: Terms of trade; business cycles; microfounded dynamic Leontief input-output model; DSGE model
    JEL: E32 F41 F44
    Date: 2023–01
  3. By: Ilzetzki, Ethan; Jin, Keyu
    Abstract: We demonstrate a dramatic change over time in the international transmission of US monetary policy shocks. International spillovers from US interest rate policy have had a different nature since the 1990s than they did in post-Bretton Woods period. Our analysis is based on a panel of 21 high income and emerging market economies. Prior to the 1990s, the US dollar appreciated, and ex-US industrial production declined, in response to increases in the US Federal Funds Rate, as predicted by textbook open economy models. The past decades have seen a shift, whereby increases in US interest rates depreciate the US dollar but stimulate the rest of the world economy. Results are robust to several identification methods. We sketch a simple theory of exchange rate determination in face of interest-elastic risk aversion that rationalizes these findings.
    Keywords: international spillovers; exchange rates; P004253/1; 71828301
    JEL: N0 F3 G3
    Date: 2021–05–01
  4. By: Rolim, Lilian; Marins, Nathalie
    Abstract: Foreign price shocks have significant effects on functional income distribution and on inflation inequality. By increasing prices in domestic currency that are linked to foreign prices, they increase the profit share in some sectors and reduce real wages, in particular of workers whose consumption basket is more sensitive to the price of certain goods (e.g. food prices for low-wage workers). Based on the conflicting-claims inflation literature, we propose a new extension to this framework by incorporating worker's heterogeneity (in terms of nominal income and consumption patterns) in an open economy model with an inflation-targeting regime. We investigate the impacts of foreign price shocks on income and inflation inequality and analyze how monetary policy influences these outcomes. Our simulation results indicate that a positive foreign price shock increases the profit share and the within-workers inequality (in real terms), since low-wage workers are more affected by these shocks. Yet, such effects are mediated by the strength of the monetary policy's transmission channels (domestic economic activity or nominal exchange rate), indicating that the monetary authority response may exacerbate or attenuate these distributive effects.
    Keywords: inflation, inequality, monetary policy, foreign shocks, transmission mechanisms
    JEL: D3 E12 E31 F41
    Date: 2023
  5. By: Ganguly, Shrimoyee
    Abstract: In the existing literature, several channels have been suggested for the effects of monetary policy on income inequality. This paper explores an altogether different channel by examining the effect of an expansionary monetary policy on wage inequality between skilled and unskilled workers in a competitive general equilibrium framework of a small open economy. This issue assumes relevance since monetary policies are often pursued by the central banks to manage exchange rate fluctuations under a managed float regime, which may adversely affect the wages to low skilled workers. Under optimal allocation of wealth over a portfolio of cash, domestic assets and foreign assets, we show that an increase in the domestic money supply affects the wage inequality primarily in two ways. One is through larger investment, capital formation and consequent endowment effect; the other is through changes in the nominal exchange rate. Expansionary monetary policy aggravates wage inequality if the labour to capital share required to produce the traditional export good exceeds that needed in the skill-based export good. A contractionary monetary policy in the foreign country on the other hand, minimises wage inequality if the capital-cost share in the export good Z is highest followed by that in the composite traded good and that in the non-traded good is least.
    Keywords: Monetary Policy, Wage inequality, Employment, Exchange rate, Portfolio choice.
    JEL: E24 E52 F11 F41
    Date: 2023–02
  6. By: Thibault Lemaire (UP1 UFR02 - Université Paris 1 Panthéon-Sorbonne - École d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne, CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique); Paul Vertier (Banque de France - Banque de France - Banque de France)
    Abstract: Global commodity prices spikes can have strong macroeconomic effects, particularly in developing countries. This paper estimates the global commodity prices pass-through to consumer price inflation in Africa. Our sample includes monthly data for 48 countries over the period 2002m02-2021m04. We consider 17 commodity prices separately to take into account both the heterogeneity in price variations and the cross-correlations between them, and to depart from aggregate indices that use weights unrepresentative of consumption in African countries. Using local projections in a panel dataset, we find a maximum passthrough of 24%, and a long-run pass-through of about 20%, higher than usually found in the literature. We also consider country-specific regressions to test whether estimated pass-through are related to countries' observable characteristics.
    Keywords: Commodity prices, food prices, energy prices, inflation, pass-through, Africa
    Date: 2023–01–18

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.