nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒05‒15
twelve papers chosen by
Martin Berka
Massey University

  1. Capital Controls or Macroprudential Regulation: Which is Better for Land Booms and Busts? By Yang Zhou; Shigeto Kitano
  2. The Impact of the Real Exchange Rate on Non-Traditional Chilean and Peruvian Exports: Evidence using Microdata By Renzo Castellares Añazco
  3. Capital Controls in Times of Crisis – Do They Work? By Annamaria Kokenyne; Romain Bouis; Umang Rawat; Apoorv Bhargava; Manuel Perez-Archila; Ms. Ratna Sahay
  4. International Diversification, Reallocation, and the Labor Share By Joel M. David; Romain Rancière; David Zeke
  5. The Impact of Remittances on Monetary Transmission Mechanism in Remittance-recipient Countries: with Focus on Credit and Exchange Rate Channels By Jahan Abdul Raheem; Gazi M. Hassan; Mark J. Holmes
  6. Multinational Production and Global Shock Propagation during the Great Recession By Haishi Li
  7. China as an International Lender of Last Resort By Sebastian Horn; Bradley C. Parks; Carmen M. Reinhart; Christoph Trebesch
  8. The signaling value of legal form in debt financing By Felix Bracht; Jeroen Mahieu; Steven Vanhaverbeke
  9. Sovereign Uncertainty By Silgado-Gómez, Edgar
  10. Foreign Reserve Management and U.S. Money Market Liquidity: A Cost of Exorbitant Privilege By Ron Alquist; Karlye Dilts Stedman; Robert Jay Kahn
  11. Currency Usage for Cross Border Payments By Ms. Longmei Zhang; Hector Perez-Saiz; Roshan Iyer
  12. Is the Global Economy Deglobalizing? And if so, why? And what is next? By Pinelopi K. Goldberg; Tristan Reed

  1. By: Yang Zhou (Institute of Developing Economies, Japan External Trade Organization and Junir Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration (RIEB), Kobe University, JAPAN)
    Abstract: Emerging markets have experienced land booms and busts along with international capital inflows and outflows repeatedly. This study quantitatively examines the effectiveness of (i) macroprudential policies targeting land markets and (ii) capital controls targeting capital inflows and outflows. We analyze which policy better manages the coincidence between land booms (busts) and capital inflows (outflows). We build a small open economy NK-DSGE model in which banks choose their asset portfolio between physical capital and land subject to financial constraints. The quantitative results show that the superiority of the two policies depends on the type of shock impacting a small open economy. In the case of domestic land market shocks, macroprudential policies enhance welfare, whereas capital controls reduce welfare. Conversely, in the case of foreign interest rate shocks, the superiority of the two policies is reversed: capital controls enhance welfare, while macroprudential policies deteriorate welfare.
    Keywords: Capital control; Macroprudential policy; Financial frictions; Balance sheets channel; DSGE
    JEL: E69 F32 F38 F41
    Date: 2023–04
  2. By: Renzo Castellares Añazco
    Abstract: This study estimates the Bilateral Real Exchange Rate (BRER) impact on Non-Traditional Exports (NTX) of Chilean and Peruvian firms. Different from previous works about Chile and Peru, this paper considers a heterogeneous impact of the BRER on firm’s exports, depending on firm’s productivity. In addition, we estimate the impact of the real exchange rate of countries whose exports compete against Peruvian and Chilean exports in third markets. This variable has been barely used in the literature and its omission causes a downward bias on the estimation of the BRER elasticity on exports. To do this, we use detailed firm-level information of products and destinations of Chilean exports from 2004 to 2011, and Peruvian exports from 2007 to 2014.
    Keywords: Bilateral real exchange rate, productivity, exports, competitors, Peru, Chile
    Date: 2022–12
  3. By: Annamaria Kokenyne; Romain Bouis; Umang Rawat; Apoorv Bhargava; Manuel Perez-Archila; Ms. Ratna Sahay
    Abstract: This paper provides an analysis of the use and effects of capital controls in 27 AEs and EMDEs which experienced at least one financial crisis between 1995 and 2017. Countries often turn to using capital controls in crisis: some ease inflow controls while others tighten controls on outflows. A key finding is that countries with pervasive controls before the start of the crisis are shielded compared to countries with more open capital accounts, which see a significant decline in capital flows during crises. In contrast, the effectiveness of capital controls introduced during crises appears to be weak and difficult to identify. There is also some evidence that the introduction of outflow controls during crises is negatively associated with sovereign debt ratings, but that investors may actually forgive with time.
    Keywords: Capital controls; capital outflows; financial crises; inflow control; outflow controls Introduced; outflow control; controls on outflow; tightening control; Capital account; Capital flows; Caribbean; Global
    Date: 2023–03–17
  4. By: Joel M. David; Romain Rancière; David Zeke
    Abstract: How does growing international financial diversification affect firm-level and aggregate labor shares? We study this question using a novel framework of firm labor choice in the face of aggregate risk. The theory implies a cross-section of labor risk premia and labor shares that appear as markups in firm-level data. International risk sharing leads to a reallocation of labor towards riskier/low labor share firms alongside a rise in within-firm labor shares, matching key micro-level facts. We use cross-country firm-level data to document a number of empirical patterns consistent with the theory, namely: (i) riskier firms have lower labor shares and (ii) international financial diversification is associated with a reallocation towards risky/low labor share firms. Our estimates suggest the reallocation effect has dominated the within effect in recent decades; on net, increased financial integration has reduced the corporate labor share in the US by about 2.5 percentage points, roughly one-third of the total decline since the 1970s.
    JEL: F2 F21 F23 F4 F66
    Date: 2023–04
  5. By: Jahan Abdul Raheem (University of Waikato); Gazi M. Hassan (University of Waikato); Mark J. Holmes (University of Waikato)
    Abstract: Remittances contribute to welfare enhancement and poverty alleviation in many remittance-recipient economies. However, recent literature also focuses on the macroeconomic impact of remittances due to their increasing inflow into these economies. We use an unbalanced heterogeneous panel Structural Vector Autoregression (SVAR) methodology to study the impact of remittances on intermediate monetary transmission channels in remittance-recipient countries. In particular, we analyse the effect of remittances on credit and exchange rate channels in these economies. We, initially, estimate credit and exchange rate impulse responses (IRs) to a shock in remittances. The IRs estimates suggest a significant variation among countries in credit and exchange rates in response to a shock in remittances. In the next stage, we run a cross-section regression of these responses to identify the factors influencing the IRs of these variables. We find that the magnitude of remittances received by an economy significantly impacts the exchange rate channel thus affecting the smooth functioning of the monetary transmission mechanism. However, the effect of remittances on the credit channel is dependent on the level of remittance inflows and savings in remittance-recipient economies. Our finding also reveals that remittances weaken the functioning of the credit channel at a higher level of remittance inflows, especially, when the remittances are higher than approximately five percent of GDP in remittance-recipient economies. Overall, our findings have broad policy implications revealing that policymakers have to pay attention to the possible effects of remittances on intermediate monetary transmission channels in achieving the monetary policy targets.
    Keywords: remittances;monetary policy;monetary transmission mechanism
    JEL: E5 E52 F24
    Date: 2023–04–20
  6. By: Haishi Li
    Abstract: Did multinational production (MP) exacerbate or mitigate the collapse of international trade during the Great Recession? What role did MP and trade links play in propagating economic shocks across countries? I resolve the “Multinationals’ Resilience Puzzle” during the Great Recession by documenting that while MP declined less than GDP in an average country, MP declined more in larger countries and GDP declined more in countries with a high MP intensity. Thus, MP declined as a percentage of GDP at the global level. To understand the sources of MP and trade collapse, I build a model of MP, trade, and sectoral linkages. The model highlights the frictions that multinational enterprises (MNEs) face when they source from and sell to countries other than their headquarters. These parameters determine MNEs’ vertical/horizontal-ness and govern the rich interactions between MP and trade. According to the model with MP, supply-side productivity shocks contributed to the collapse of trade almost as much as demand shocks. The majority of the collapse in MP (both globally and cross-country) was attributed to shocks that affected aggregate productivity and were specific to multinationals in a few key headquarters countries. The MP links significantly amplified the impact of these shocks on the rest of the world, which had a much greater impact than if the shocks had been propagated solely through trade.
    Date: 2023
  7. By: Sebastian Horn; Bradley C. Parks; Carmen M. Reinhart; Christoph Trebesch
    Abstract: This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. We build the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. The swaps bolster gross reserves and are mostly drawn by distressed countries with low liquidity ratios. In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China's Belt and Road Initiative. These findings have implications for the international financial and monetary architecture, which is becoming more multipolar, less institutionalized, and less transparent.
    JEL: F2 F33 F42 F65 G15 H63 N25
    Date: 2023–04
  8. By: Felix Bracht; Jeroen Mahieu; Steven Vanhaverbeke
    Abstract: We examine if a startup's legal form choice is used as a signal by credit providers to infer its risk to default on a loan. We propose that choosing a legal form with low minimum capital requirements signals higher default risk. Arguably, small relationship banks are more likely to use legal form as a screening device when deciding on a loan. Using data from Orbis and the IAB/ZEW Start-up Panel for a sample of German firms, we find evidence consistent with our hypotheses but inconsistent with predictions of several competing explanations, including differential demand for debt or growth opportunities.
    Keywords: legal form, minimum capital requirements, signaling, access to debt, financial constraint
    Date: 2023–04–17
  9. By: Silgado-Gómez, Edgar (Central Bank of Ireland)
    Abstract: This paper investigates the impact and the transmission of uncertainty regarding the future path of government finances on economic activity. I first employ a data-rich approach to extract a novel proxy that captures uncertainty surrounding public finances, which I refer to as sovereign uncertainty, and demonstrate that the estimated measure exhibits distinct fluctuations from macro-financial and economic policy uncertainty indices. Next, I analyze the behavior of sovereign uncertainty shocks and detect the presence of significant and long-lasting negative effects in the financial and macroeconomic sectors using state-ofthe-art identification strategies, within the context of a Bayesian vector autoregression framework. I show that a shock to sovereign uncertainty differs from a macro-financial uncertainty shock — while the former dampens the economy in the medium-run and points to deflationary dynamics, the latter displays a short-lived response in real activity and generates inflationary pressures. Finally, I study the role of sovereign uncertainty in a New Keynesian dynamic stochastic general equilibrium model augmented with recursive preferences and financial intermediaries. I find that a sovereign uncertainty shock in the model is able to capture the empirical slowdowns in economic aggregates if there is lack of reaction by the monetary authority in the aftermath of the shock. The model also emphasizes the importance of financial frictions in transmitting the effects of sovereign uncertainty shocks and highlights the minor role played by nominal rigidities.
    Keywords: Sovereign Uncertainty Index, Government Finances, Economic Activity, Eventbased Identification, Bayesian VARs, Non-Linear DSGE Models.
    JEL: C32 E32 E44 E60
    Date: 2022–12
  10. By: Ron Alquist; Karlye Dilts Stedman; Robert Jay Kahn
    Abstract: We show theoretically and empirically that the dollar’s status as the global reserve currency can lead to economically significant changes in U.S. money market liquidity. We develop a model in which U.S. money market spreads respond to foreign central banks’ exchange-rate management decisions. Foreign central banks remove liquidity from U.S. money markets and cause spreads to widen by selling Treasuries to supply liquidity to their financial systems. Our analysis focuses on the major oil exporting countries with fixed exchange rates because their foreign-exchange market interventions are straightforward to characterize. Our regression analysis shows that shifts in the central banks’ demand for dollar liquidity related to oil price volatility are associated with significantly higher overnight spreads in domestic money markets. A one-standard deviation increase in the demand for dollar liquidity by a central bank in an oil-exporting country leads, on average, to three billion dollars of Treasury sales and a two to six basis point increase in U.S. money market spreads. At the same time, deposits held with the Federal Reserve increase in response to this higher oil-price volatility, which is consistent with the model’s predictions. This evidence indicates that the widespread use of the U.S. dollar as a reserve currency acts as a channel that can propagate funding shocks from the rest of the world to the United States.
    Keywords: central banking; markets
    JEL: E43 G12 G13 G23
    Date: 2022–09–02
  11. By: Ms. Longmei Zhang; Hector Perez-Saiz; Roshan Iyer
    Abstract: While the global usage of currencies other than the U.S. dollar and the euro for cross-border payments remains limited, rapid technological (e.g. digital money) or geopolitical changes could accelerate a regime shift into a multipolar or more fragmented international monetary system. Using the rich Swift database of cross-border payments, we empirically estimate the importance of legal tender status, geopolitical distance, and other variables vis-à-vis the large inertia effects for currency usage, and perform several forecasting simulations to better understand the role of these variables in shaping the future payments landscape. While our results suggest a substantially more fragmented international monetary system would be unlikely in the short and medium term, the impact of new technologies remains highly uncertain, and much more rapid geopolitical developments than expected could accelerate the transformation of the international monetary system towards multipolarity.
    Keywords: Cross border payments; Swift; currency dominance; legal tender; international monetary system (IMS)
    Date: 2023–03–24
  12. By: Pinelopi K. Goldberg; Tristan Reed
    Abstract: Data on global trade as well as capital and labor flows indicate a slowdown, but not reversal, of globalization post the 2008-09 financial crisis. Yet profound changes in the policy environment and public sentiment in the largest economies over the past five years suggest the beginning of a new era. Increasing anxiety about the labor market effects of import competition from low-wage countries, especially China, laid the groundwork, but was not the catalyst for the reversal in attitudes towards globalization. Similarly, the COVID pandemic provided novel arguments against free trade based on global supply chain resilience, but neither the pandemic nor short run policy response had enduring effects on trade flows. We demonstrate that global trade was remarkably resilient during the pandemic and that supply shortages would likely have been more severe in the absence of international trade. After a temporary decline in 2020, global trade in goods and services increased sharply in 2021. Russia’s invasion of Ukraine raised new concerns about national security and the exposure of supply chains to geopolitical risk. This was followed by demands to diversify away from “non-friendly” countries and to the employment of trade policy, export restrictions in particular, to halt China’s technological development. The future of globalization is highly uncertain at this point, but these new policies will likely slow global growth, innovation, and poverty reduction even if they benefit certain industries in certain countries. Regarding resilience, the main goal of recent trade policy changes, measures of trade volatility or concentration can be helpful, but resilience will be elusive as long as we lack benchmarks against which policy performance can be measured.
    JEL: F0 F1 N0 O10 O49
    Date: 2023–04

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