nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒05‒01
five papers chosen by
Martin Berka
Massey University

  1. International business cycles By Thepthida Sopraseuth; Eleni Iliopulos
  2. Real exchange rate and international reserves in the era of financial integration. By Joshua Aizenman; Sy-Hoa Ho; Luu Duc Toan Huynh; Jamel Saadaoui; Gazi Salah Uddin
  3. A Move Toward a ‘Crawling Peg’ Exchange Rate System in 2023 By Oyadeyi, Olajide
  4. Demographic change, national saving and international capital flows By Liu, Weifeng Larry
  5. The Transmission of US Monetary Policy Shocks The Role of Investment & Financial Heterogeneity By Santiago Camara; Sebastian Ramirez Venegas

  1. By: Thepthida Sopraseuth; Eleni Iliopulos (Université de Cergy-Pontoise, THEMA)
    Abstract: In this paper, we examine the current state of the international macroeconomic literature, focusing specically on international spillovers and the international transmission of countryspeci c shocks. Using a general equilibrium framework, we analyze the standard two-country RBC model and its ability to replicate empirical evidence on international correlation of output, consumption, and international risk sharing. We then survey attempts in the literature to address the limitations of the model, including incorporating nominal rigidities and nancial frictions, as well as recent contributions bridging the gap between open-economy macroeconomics and international nance. These works have the potential to explain the international transmission of shocks among advanced countries by accounting for factors aecting international risk sharing.
    Keywords: international business cycles, cross-country co-movement, quantity puzzle
    JEL: E44 F41 F42 F44
    Date: 2023
  2. By: Joshua Aizenman; Sy-Hoa Ho; Luu Duc Toan Huynh; Jamel Saadaoui; Gazi Salah Uddin
    Abstract: The global financial crisis has brought increased attention to the consequences of international reserves holdings. In an era of high financial integration, we investigate the relationship between the real exchange rate and international reserves using nonlinear regressions and panel threshold regressions over 110 countries from 2001 to 2020. We find the buffer effect of international reserves is more pronounced in Europe and Central Asia above a threshold of 17% of international reserves over GDP. Our study shows the level of financial-institution development plays an essential role in explaining the buffer effect of international reserves. Countries with a low development of their financial institutions may manage the international reserves as a shield to deal with the negative consequences of terms-of-trade shocks on the real exchange rate. We also find the buffer effect is stronger in countries with intermediate levels of financial openness.
    Keywords: Real exchange rate, International reserves, Financial institutions.
    JEL: F15 F21 F32 F36 G20
    Date: 2023
  3. By: Oyadeyi, Olajide
    Abstract: As of the last working day of the year 2022 (30th December 2022), the official exchange rate against the US dollar (USD) was 448, while the naira USD exchange rate at the black market traded at 748—a premium of 300. The dollar had already peaked above 800 on the black market during the year 2022, when there were pressures on the foreign exchange (FX) due to elevated demand from individuals, students traveling abroad, and businesses that needed FX to produce their goods and services. Given the continuous depreciation of the naira exchange rate against the USD, caused by a scarcity of foreign exchange, pegging the naira against the USD despite a high rate of inflation may not be the solution to the country’s exchange rate maladjustments. The paper, therefore, offers an alternative policy to help circumvent the problem of exchange rate misalignments and mal-adjustments for Nigeria and proffers ways by which the exchange rate policy becomes transparent and explicit, allowing businesses and individuals to better plan their economic and financial activities.
    Keywords: Exchange Rate, Crawling Peg System
    JEL: E52 E58 F13 F16 F18 F41
    Date: 2023–01–01
  4. By: Liu, Weifeng Larry
    Abstract: This paper explores the impacts of demographic change on national saving and international capital flows. Introducing demographic structure and pension systems into a four-stage overlapping-generation model of a small open economy, the paper derives analytical solutions which link a wide range of factors to national saving and the current account. This framework enables tractable analysis of the effects of various demographic shocks on national saving and external balances, and also of the interaction between demographic shocks and productivity growth and pension systems. The demographic impacts on national saving and capital flows depend on the nature of demographic shocks (fertility or mortality; transitory, permanent or persistent) and on the stage of demographic shocks, as well as productivity growth and pension structure.
    Keywords: International Relations/Trade, International Relations/Trade
    Date: 2022
  5. By: Santiago Camara (Northwestern University/Red-NIE); Sebastian Ramirez Venegas (Comisión para el Mercado Financiero)
    Abstract: This paper studies the transmission of US monetary policy shocks into Emerging Markets emphasizing the role of investment and financial heterogeneity. First, we use a panel SVAR model to show that a US interest tightening leads to a persistent recession in Emerging Markets driven by a sharp reduction in aggregate investment. Second, we study the role of firms’ financial heterogeneity in the transmission of US interest rate shocks by exploiting detailed balance sheet dataset from Chile. We find that more indebted firms experience greater drops in investment in response to a US tightening shock than less indebted firms. This result is at odds with recent evidence from US firms, even when using the same identification strategy and econometric methods. Third, we rationalize this finding using a stylized model of heterogeneous firms subject to a tightening leverage constraint. Finally, we present evidence in support of this hypothesis as well as robustness checks to our main results. Overall, our results suggests that the transmission channel of US monetary policy shocks within and outside the US differ, a result novel to the literature.
    Keywords: Firm dynamics, Firm heterogeneity, Financial frictions, balance sheet effects, US interest rates, Emerging Markets
    JEL: F1 F4 G32
    Date: 2023–04

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