nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒04‒03
twelve papers chosen by
Martin Berka
Massey University

  1. Sovereign Defaults and Debt Restructurings: Public Capital and Fiscal Constraint Tightness By Tamon Asonuma; Hyungseok Joo
  2. An Empirical Approximation of the Effects of Trade Sanctions with an Application to Russia By Jean Imbs; Laurent Pauwels
  3. Exploring The Role of Limited Commitment Constraints in Argentina’s "Missing Capital" By Carlos Zarazaga; Marek Kapicka; Finn Kydland
  4. Capital Controls and Free-Trade Agreements By Lloyd, S. P.; Marin, E. A.
  5. What happens to EMEs when US yields go up? By Julián Caballero; Christian Upper
  6. Exchange Rate Pass-Through and Data Frequency: Firm-Level Evidence from Bangladesh By Md Deluair Hossen
  7. Cost Pass-Through with Capacity Constraints and International Linkages By Reinhard Ellwanger; Hinnerk Gnutzmann; Piotr Śpiewanowski
  8. Non-bank Financial Intermediation and Capital Flows: Evidence from Emerging Market Economies By Horacio Aguirre; Rodrigo Pérez Ártica
  9. Drivers and spillover effects of inflation: the United States, the euro area, and the United Kingdom By Stephen G. Hall; George S. Tavlas; Yongli Wang
  10. Global Value Chains and Exchange Rate Pass-through into the Import Prices of Japanese Industries By Fabien RONDEAU; YOSHIDA Yushi
  11. Topography, borders, and trade across Europe By Richard Frensch; Jarko Fidrmuc; Michael Rindler
  12. Commodity prices and the US Dollar By Daniel Rees

  1. By: Tamon Asonuma (International Monetary Fund); Hyungseok Joo (University of Surrey)
    Abstract: Sovereigns' public capital and fiscal constraint tightness influence sovereign debt crises and resolution. We compile a dataset on public expenditure composition in 1975{2020 for 75 countries. We show that during sovereign debt restructurings with private external creditors, public investment (i) experiences severe decline and slow recovery, (ii) differs from public consumption and transfers, and (iii) relates with restructuring delays. We develop a theoretical model of defaultable debt that embeds endogenous public capital accumulation, expenditure composition, production and multi-round debt renegotiations. The model quantitatively shows public investment dynamics and fiscal constraint tightness delay debt settlement. Data support theoretical predictions.
    JEL: F34 F41 H63
    Date: 2023–04
  2. By: Jean Imbs; Laurent Pauwels
    Abstract: We propose a data-based approximation of the effects of trade sanctions. We validate the approximation by comparing it with exact responses simulated from a canonical multi-country multi-sector model. The approximation is palatable for a broad range of elasticities of substitution, except for extremely low ones. It is based on a decomposition of high order trade according to destination or inputs markets and can readily be computed on the basis of international input-output data. As such it provides a practical shortcut to evaluating the consequences of trade sanctions without having to make difficult calibration choices. We implement our approximation to evaluate the consequences of trade sanctions between Europe and Russia. Our approximated effects are within the range of existing estimates, but they mask vast asymmetries. First, the effects of sanctions are about fifteen times larger on Russia than on Europe. Second, the effects within Europe are enormously asymmetric, with much larger consequences on ex-“satellite†countries of the Soviet Union than on large Western European economies. We then adapt our approach to show that the most affected European countries do not typically have access to substitute markets and are in fact highly dependent on Russia. We show that this extreme dependence on Russia is at least partly explained by the existence of specific energy transporting infrastructure (pipelines) that appear to constrain tightly the production of electricity in those heavily affected East European economies. These findings illustrate the practical potentiality of our approximation in a variety of different contexts.
    Keywords: European Energy Imports, Russian Sanctions, Economic Consequences of Sanctions, Global Value Chain
    JEL: F14 F42 F51
    Date: 2023–03
  3. By: Carlos Zarazaga; Marek Kapicka; Finn Kydland
    Abstract: The paper investigates why capital accumulation in Argentina was weaker in the 1990s and 2000s than suggested by the high productivity growth rates and low international interest rates prevailing then. It is shown that lack of commitment to honor contractual obligations with foreign investors introduces two mechanisms that account for that puzzling capital accumulation dynamics. First, the response of investment to a total factor productivity increase is muted and short-lived, while the response to a decrease is large and persistent. Second, unlike in an economy with commitment, low international interest rates may reduce capital accumulation, because they increase the relevance of future commitment constraints. A quantitative implementation of a canonical open economy model with limited commitment constraints shows that the two mechanisms are very important to understand the evolution of Argentina’s capital stock over time. The model accounts for virtually all the capital missing from Argentina in the period 1980-2019, relative to that which would have been observed in the absence of the limited commitment friction.
    JEL: F34 F41
    Date: 2022–11
  4. By: Lloyd, S. P.; Marin, E. A.
    Abstract: How does the conduct of optimal cross-border financial policy change with prevailing trade agreements? We study the joint optimal determination of trade policy and capital-flow management in a two-country, two-good model with trade in goods and assets. While the cooperative optimal allocation is efficient and involves no intervention, a country planner acting unilaterally can achieve higher domestic welfare by departing from free trade in addition to levying capital controls. However, time variation in the optimal tariff induces households to over- or under-borrow through its effects on the real exchange rate. In response to fluctuations where incentives for the planner to manipulate the terms of trade inter-and intra-temporally are aligned-e.g., the availability of domestic goods changes, or when faced with trade disruptions to imports-optimal capital controls are larger when used in conjunction with optimal tariffs. In contrast, when the incentives are misaligned, the optimal trade tariff partly substitutes for the use of capital controls. Accounting for strategic interactions, we show that committing to a free-trade agreement can reduce incentives to engage in costly capital-control wars.
    Keywords: Capital-Flow Management, Free-Trade Agreements, Ramsey Policy, Tariffs, Trade Policy
    JEL: F13 F32 F33 F38
    Date: 2023–02–14
  5. By: Julián Caballero; Christian Upper
    Abstract: This paper explores why some episodes of US yield increases result in investor retrenchment from emerging markets and others do not. To answer this, we identify episodes of sharp increases in US 10-year Treasury yields and explore under which conditions these are associated with negative outcomes in emerging markets. We focus on four outcome variables: local currency yields, exchange rates, equity prices, and portfolio fund flows. We find that increases in US yields are more likely to be associated with adverse outcomes in emerging markets when they reflect (i) a rise in the US term premium, (ii) coincide with dollar appreciation, and (iii) rising inflation expectations in the US and in EMEs. The effects of these variables are highly non-linear and economically significant as well as robust to a variety of sensitivity checks.
    Keywords: monetary policy, international spillovers, term premium, US dollar
    JEL: F30 F36 F42 F65
    Date: 2023–03
  6. By: Md Deluair Hossen
    Abstract: The vast literature on exchange rate fluctuations estimates the exchange rate pass-through (ERPT). Most ERPT studies consider annually aggregated data for developed or large developing countries for estimating ERPT. These estimates vary widely depending on the type of country, data coverage, and frequency. However, the ERPT estimation using firm-level high-frequency export data of a small developing country is rare. In this paper, I estimate the pricing to market and the exchange rate pass-through at a monthly, quarterly, and annual level of data frequency to deal with aggregation bias. Furthermore, I investigate how delivery time-based factors such as frequent shipments and faster transport affect a firm`s pricing-to-market behavior. Using transaction-level export data of Bangladesh from 2005 to 2013 and the Poisson Pseudo Maximum Likelihood (PPML) estimation method, I find very small pricing to the markets to the exchange rates in the exporter's price. As pass-through shows how the exporters respond to macro shocks, for Bangladesh, this low export price response to the exchange rate changes indicates that currency devaluation might not have a significant effect on the exporter. The minimal price response and high pass-through contrast with the literature on incomplete pass-through at the annual level. By considering the characteristics of the firms, products, and destinations, I investigate the heterogeneity of the pass-through. The findings remain consistent with several robustness checks.
    Date: 2023–03
  7. By: Reinhard Ellwanger; Hinnerk Gnutzmann; Piotr Śpiewanowski
    Abstract: Commodity markets are linked through international trade but are separated by heterogeneous regulations and input markets. We investigate theoretically and empirically how regional, as opposed to global, cost shocks pass through into global prices. Capacity constraints mitigate the output response to regional cost shocks in the short run. Once constraints bind, the pass-through of a cost increase is enhanced while for cost decreases it drops to zero. We study the market for ammonia, a commodity produced largely from natural gas, to highlight the nonlinearity of the cost pass-through and its implications for unilateral climate policies.
    Keywords: Climate change; Econometric and statistical methods; Inflation and prices; International topics
    JEL: L13 L65 Q54 Q40
    Date: 2023–03
  8. By: Horacio Aguirre; Rodrigo Pérez Ártica
    Abstract: We look at the interplay of non-bank financial intermediation (NBFI) and capital flows in emerging market economies (EMEs). We examine whether gross capital flows to twenty-four EMEs, including seven Latin American economies, are related to foreign bond holdings of non-bank financial intermediaries, over and above local and global factors. We estimate panel data models that account for cross-country correlation, using quarterly data from the dataset by Arslanalp and Tsuda (2014) in the 2004-2021 period. We discriminate flows by sectors (total, government, corporate and banking), include time and country fixed effects, and employ several definitions of our variable of interest: as a categorical variable, capturing countries with the largest share of foreign nonbank investors, or as a direct measure of their participation. We also carry out event studies around the occurrence of the global financial crisis and the covid-19 crisis. Preliminary results suggest that: NBFI are “pipe” factors driving flows (in addition to “push” and “pull” ones), whose impact changes over time and depending on the type of flow; in some cases, foreign NBFI magnifies the impact of global factors on capital inflows, while they weaken the pull of local factors; and NBFI amplified outflows in the market turmoil of 2020.
    JEL: C23 E44 F32 G23
    Date: 2022–11
  9. By: Stephen G. Hall (Leicester University, Bank of Greece, and Pretoria University); George S. Tavlas (Bank of Greece and the Hoover Institution, Stanford University); Yongli Wang (Birmingham University)
    Abstract: We investigate the drivers of the recent inflation in three currency areas: the United States, the euro area, and the United Kingdom. To do so, we use a VAR set-up to examine the nature of the shocks that underpinned the recent inflation. We apply two methods to calculate shocks -- the standard Cholesky decomposition and a new method that captures more realistic shocks by solving the VAR backwards. We also use spatial modelling to investigate cross-country inflation spillovers. We find the inflationary shocks in the United States are transmitted to the euro area and the United Kingdom in a powerful and consistent way. The euro area transmits inflation to the other regions but to a lesser extent, while the inflation in the United Kingdom has little effect on the other two regions
    Keywords: Inflation; VAR analysis; impulse responses; spatial spillovers
    JEL: C52 C53
    Date: 2022–12
  10. By: Fabien RONDEAU; YOSHIDA Yushi
    Abstract: With internationally fragmented processes of production or global value chains, value-added components of a country’s export include the importer’s contributions as well as the contributions of third countries. The exchange rate sensitivity of export price reflects these value-added components. We examine the effect of value-added contributions of exporters and importers on the degree of exchange rate pass-through by focusing on the Japanese import prices by industry. Our results show that exchange rate pass-through increases for industries with a higher contribution of exporting countries’ value-added and for industries with a lower contribution of the importing country’s value-added. The differentials in value-added help explain the dynamics of exchange rate pass-through at the industry level.
    Date: 2023–03
  11. By: Richard Frensch (IOS Regensburg); Jarko Fidrmuc; Michael Rindler
    Abstract: The gravity literature has focused on distance, borders and contiguity to measure geography’s impact on trade. We add value to this literature in terms of data, method and assessment of effects. First, we expand existing geographical databases by adding topographical features. We supply novel detailed primary data on the international European river network. We also construct a new indicator for the ruggedness of trade routes for more than a thousand European country pairs. Second, we introduce a new approach to differentiate between contemporaneous versus historical trade costs. Third, we assess the impact of topography on trade across Europe by applying two-stage structural gravity estimations, identifying bilateral trade costs on the basis of a worldwide panel of manufacturing trade including countries’ domestic trade. We show that positive effects of rivers on trade are less important – and also less persistent over time – than the negative effects of mountains. While border effect estimates remain largely robust against variations in topography, much of the historical – and all of the contemporaneous – trade costs usually attributed to non-contiguity can be accounted for by topography. Finally, counterfactual simulations for western (along the river Rhine) versus southeastern (along the river Danube) European countries suggest that historically topography may have contributed to the marginalization of southeastern Europe in European trade.
    Keywords: Gravity, geography, panel models
    JEL: C23 F15 F40 O18
    Date: 2021–11
  12. By: Daniel Rees
    Abstract: In the aftermath of the Covid pandemic rising commodity prices went hand-in-hand with a strengthening US dollar. This was a sharp contrast to the usual relationship between commodity prices and the dollar. This paper presents evidence that post-Covid correlation patterns could become more common in the future. This conclusion rests on two observations. First, the US dollar exhibits a close and stable relationship with the US terms of trade. Second, the United States' shift from being a net oil importer to a net oil exporter means that higher commodity prices now tend to raise the US terms of trade, rather than lowering them. Changes in the relationship between commodity prices and the US dollar will have implications for commodity exporters and importers alike.
    Keywords: time series models, foreign exchange, open economy macroeconomics
    JEL: C22 F31 F41
    Date: 2023–03

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