nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒04‒24
ten papers chosen by
Martin Berka
Massey University

  1. Winners and losers from reducing global imbalances By Jacek Rothert; Ayse Kabukcuoglu Dur
  2. Natural Resources and Sovereign Risk in Emerging Economies: A Curse and a Blessing By Franz Hamann; Juan Camilo Mendez-Vizcaino; Enrique G. Mendoza; Paulina Restrepo-Echavarria
  3. Real Exchange Rate Risk and FDI flows: stylized facts and theory By Jacek Rothert; Alexander McQuoid; Katherine Smith
  4. Hegemony or Harmony? A Unified Framework for the International Monetary System By Tao Liu; Dong Lu; Liang Wang
  5. The Geography of Capital Allocation in the Euro Area By Beck, Roland; Coppola, Antonio; Lewis, Angus; Maggiori, Matteo; Schmitz, Martin; Schreger, Jesse
  6. Can governments sleep more soundly when holding international reserves? A banking and financial vulnerabilities perspective By Audrey Sallenave; Jean-Pierre Allegret; Tolga Omay
  7. Does Institutional Quality Matter to Korean Outward FDI? A Gravity Model Analysis By Muhammad Akhtaruzzaman, Muhammad Akhtaruzzaman
  8. Escape clauses for escaping default By Caputo, Rodrigo; Ordóñez Jofré, Felix
  9. Spillover effects between commodities and the Australian dollar By Peter Albrecht
  10. Global protectionist trade effect of rules of origin: assessment of input-output restrictions at HS6 level in 400 FTAs By Kniahin, Dzmitry

  1. By: Jacek Rothert (United States Naval Academy; Group for Research in Applied Economics (GRAPE)); Ayse Kabukcuoglu Dur (North Carolina State University)
    Abstract: We analyze the welfare effects of various policies aimed at global rebalancing --- the elimination of persistent current account surpluses and deficits, and/or elimination of large positive and negative net foreign asset positions. Specifically, we study how these policies will affect the welfare of different groups of households, as well as overall wealth inequality within both debtor and creditor countries. We use a two-country version of a workhorse heterogeneous agents framework of Aiyagari (1994), calibrated to the U.S. (largest debtor) and a composite of its trading partners, the Rest of the World (ROW). Our results show that, relative to full financial integration, policies that reduce global imbalances via an increase in U.S. savings rates will lower global interest rates, increase capital-output ratio and total output in both countries. They will improve welfare of the poorest households and reduce wealth inequality in both countries. Conversely, policies that operate via a decrease in ROW's savings will raise global interest rates, reduce the capital-output ratio and total output in both countries. The rise in interest rates will reduce the welfare of the poor households, even though the overall wealth inequality will decline.
    Keywords: Global imbalances, wealth inequality, rebalancing, heterogeneous agents, international capital flows
    JEL: E21 F3 F32 F41
    Date: 2023
  2. By: Franz Hamann; Juan Camilo Mendez-Vizcaino; Enrique G. Mendoza; Paulina Restrepo-Echavarria
    Abstract: Emerging economies that are large oil producers have sizable external debt, their country risk rises when oil prices fall, and several of them have defaulted at least once since 1979. Moreover, while oil and non-oil output reduce country risk on impact and in the long-run, oil reserves reduce it marginally on impact but increase it in the long-run. We propose a model of sovereign default and oil extraction consistent with these observations. The sovereign manages oil reserves strategically to make default less painful by altering the value of autarky, and hence its sustainable debt falls. All else equal, default is less likely in states in which reserves or oil prices are higher, or non-oil GDP is lower, but the equilibrium dynamics of reserves and country risk in response to oil-price shocks switch from negatively correlated on impact to positively correlated for several years.
    JEL: F34 F41
    Date: 2023–03
  3. By: Jacek Rothert (United States Naval Academy; Group for Research in Applied Economics (GRAPE)); Alexander McQuoid (United States Naval Academy); Katherine Smith (United States Naval Academy)
    Abstract: We document a robust negative relationship between bilateral RER volatility and bilateral FDI flows in the European Union. We then extend the standard international business cycle model to allow for domestic and foreign ownership of physical capital stock to be less than perfect substitutes. This allows the model to have meaningful predictions about the behavior of gross FDI flows. We characterize the conditions under which lower RER volatility coincides with larger bilateral FDI flows. We also show, both theoretically, and using numerical simulations, that the magnitude of the relationship between the RER volatility and FDI flows depends crucially on one parameter: the elasticity of substitution between domestic and foreign ownership of capital stock used in production. Our results suggest the existence of a new channel through which a reduction in RER volatility can be welfare improving: more efficient allocation of capital across countries (capital diversity).
    Keywords: FDI, real exchange rates, international financial integration, exchange rate risk
    JEL: E F
    Date: 2023
  4. By: Tao Liu (Central University of Finance and Economics); Dong Lu (Renmin University of China); Liang Wang (University of Hawaii Manoa)
    Abstract: There have been two competing views on the structure of the international monetary system. One sees it as a unipolar system with a dominant currency, such as the U.S. dollar, while the other argues that multiple international currencies can coexist. Aiming to provide a unified theoretical framework to reconcile these two views, we develop a micro-founded monetary model to examine the interactions of two essential roles played by international currencies, the medium of exchange and the store of value, and highlight the importance of abundant safe asset supplies. When the two roles of international currencies reinforce each other, a unipolar equilibrium exists. However, when one currency is unable to serve as sufficient safe assets for international trade transactions, the two roles work against each other. Agents have the incentive to diversify their portfolio and we have a multipolar system. The effects of monetary policy, fiscal policy, and their combinations crucially depend on the total supply of safe assets and the relative importance of the two functions of international currencies. The structure of the international monetary system could be influenced by various policies such as monetary policy, fiscal policy, and financial sanctions. We also discuss welfare under different equilibria and the effect of financial sanctions on the dominant currency in a unipolar world.
    Keywords: International, Money, Multipolar, Safe Assets, Unipolar
    JEL: E42 E52 F33 F40
    Date: 2023–03
  5. By: Beck, Roland; Coppola, Antonio; Lewis, Angus; Maggiori, Matteo; Schmitz, Martin; Schreger, Jesse
    Abstract: We reassess the pattern of Euro Area financial integration adjusting for the role of “onshore offshore financial centers” (OOFCs) within the Euro Area. While the Euro Area records large levels of international investment both within and outside of the currency union, much of these flows are intermediated via the OOFCs of Luxembourg, Ireland, and the Netherlands. These countries have dual roles as both hubs of investment fund intermediation and centers of securities issuance by foreign firms. We look through both roles and restate the pattern of Euro Area investment positions by linking fund sector investments to the ultimate underlying holders and securities issuance to the ultimate parent firms. Our new estimates of Euro Area investment allow us to document a number of stylized facts. First, the Euro Area’s estimated gross external position is smaller than in official data. Second, the Euro Area is more biased towards euro-denominated assets and away from US dollar and other foreign currency assets than in official data. Third, the Euro Area is less financially integrated than it appears. Fourth, European financial integration occurs disproportionately through securities issued in OOFCs rather than via domestic capital markets. Fifth, there is a North-South bias in Euro Area financial integration whereby Northern European countries are relatively underweight securities issued by Southern European countries.
    Date: 2023–03–25
  6. By: Audrey Sallenave; Jean-Pierre Allegret (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique); Tolga Omay (Atilim Universitesi)
    Abstract: We use a sample of 40 developing and emerging countries over the period 1995- 2015 to assess the effectiveness of international reserve holding as a crisis mitigator. We test the relevance of the reserve accumulation decreasing returns assumption by estimating the most recent version of the PSTR model. We find that increasing stocks of international reserves allows domestic authorities to mitigate the negative impacts of financial and banking vulnerabilities on GDP growth rates leading to reject the decreasing returns assumption. This evidence is robust to sensitivity checks.
    Keywords: Banking vulnerabilities, Financial vulnerabilities, External shocks, Emerging and developing countries, Panel Smooth Transition Regression model, Reserves accumulation
    Date: 2023–02–16
  7. By: Muhammad Akhtaruzzaman, Muhammad Akhtaruzzaman (Toi Ohomai InstitTechnologyute of)
    Abstract: According to Korea’s Ministry of Knowledge Economy (currently the Ministry of Trade, Industry and Energy), foreign investment has now become one of the major economic pillars driving the Korean economy over the past 15 years (Tang 2022). The Korean economy started to open up to rest of the world following the Asian financial crisis in 1997 and was the biggest FDI policy reformer among 40 developed and emerging economies over the period from 1997 to 2010 (Nicolas et al. 2013). Over the last decade, Korea’s outward FDI grew much faster than inward FDI (See Figure 1) and Korea is now a net capital exporter to the world. In 2021, Korea’s outward FDI flows totaled $76.64 billion and a total of 2323 Korean enterprises invested in overseas countries (Korea EXIM Bank 2022). Due to this increased amount of outward FDI, a large number of studies (Kim and Rhee 2009; Park and Jung 2020) investigated what determines Korea’s outward FDI (OFDI). Institutional quality is found to be a major determinant in FDI literature in general. It suggests that political risk (lack of/poor institutional quality) not only deters FDI inflows to host countries but also can lead FDI to countries with higher risks and to ‘pollution heaven’ which might have an adverse impact on long term growth and development in both host and home countries. There are strong empirical evidences in literature that lack of institutional quality or good governance is associated with lower FDI inflows. An extensive literature (Alfaro et al. 2008; Ali et al. 2010; Akhtaruzzaman et al. 2017; Bénassy‐Quéré et al. 2007) investigated FDI response to various types of institutional quality in FDI host countries. Over the last 20 years data evidenced that Korea’s OFDI flowed to developing countries with a sustained large gap existing in institutional quality between host countries and Korea (See, Fig 2 top panel); however; those countries had been offering a higher degree of capital account openness. A sharp increase in capital account openness since the early 2000s coincides with sharp increase in Korea’s OFDI to those host countries. For example, Peru was the least open economy and started to initiate measures to open capital account since the mid-90s and early 2000s. The degree of openness in Peru is now similar to that of developed countries. (the rest omitted)
    Keywords: A Gravity Model Analysis; Outward FDI; Institutional Quality
    Date: 2023–01–03
  8. By: Caputo, Rodrigo; Ordóñez Jofré, Felix (Facultad de Administración y Economía.Universidad de Santiago de Chile)
    Abstract: We study the benefits of introducing escape clauses into debt limit rules. These clauses mitigate the trade-off between expanding government transfers and repaying debt, that policymakers face in recessions. In adverse cycles, the government can issue more debt to sustain government transfers and debt payments, reducing both the probability of default and the sovereign spread. The benefits of escape clauses are present even when they are not active. Classification-JEL F34, F41
    Keywords: Debt Limit Fiscal Rules, Escape Clauses, Sovereign Spread, Default.
    Date: 2023–09
  9. By: Peter Albrecht (Department of Economics, Faculty of Business and Economics, Mendel University in Brno, Zemedelska 1, 613 00 Brno, Czech Republic)
    Abstract: The paper investigates the volatility spillover effects between commodities exported by Australia and the Australian dollar. These findings give better information about the transmissions of shocks between commodities and the Australian currency. We find that the spillover effects on the Australian dollar are more connected to herd behaviour than to export commodities. The research is carried out using a time-varying approach as per the methodology used by Diebold and Yilmaz (2009). We identify the commodities that transmit volatility to the currency but also the currencies that obtain volatility from Australian dollar. Further, we bring evidence that the AUD reacts more quickly to shocks than the commodities but over the longer term it obtains volatility from these commodities during periods of economic turbulence. The study provides specific investment recommendations for investors whose assets are held in AUD.
    Keywords: Spillovers, connectedness, commodities, exchange rates
    JEL: C18 C58 F31 G15 Q02
    Date: 2023–03
  10. By: Kniahin, Dzmitry
    Abstract: FTA policymakers designate input-output relationships when formulating rules of origin (RoO). These relationships define restricted inputs that can only be sourced from FTA area. Conconi et al. (2018) found a strong trade diversion effect in such inputs in the case of NAFTA. We construct a global dataset by extracting HS6 input-output restrictions from 400 FTAs a la Conconi et al. using Rules of Origin Facilitator/MacMap global database at HS6 level. We document that: (1) Input-output tables diverge across FTAs, driven by political economy of protected inputs; (2) FTAs show heterogeneity in precision of revealed HS6 input-output relationships. Precision is higher in “sensitive” products and in NAFTA-style FTAs (US FTAs, LatAm FTAs and CPTPP); (3) RoO globally divert trade by XX% in restricted inputs, thus the effect is less than in NAFTA (45%); (4) RoO that designate `allowed' inputs result in `trade creation' in such inputs by X%, somewhat compensating trade diversion in restricted inputs. For example, if fabrics are placed on restricted list, it can trigger imports of yarn instead. Finally, we augment the NAFTA-based HS6 input-output matrix with 460 FTAs and publish a more complete, more granular research dataset which enables disaggregated value-chain impact modeling of trade policy changes.
    Keywords: International Relations/Trade, International Relations/Trade
    Date: 2022

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