nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒06‒12
thirteen papers chosen by
Martin Berka
Massey University

  1. Long-Run Movements in Real Exchange Rates: 1264 to 2020 By Kellard, Neil; Madsen, Jakob B; Snaith, Stuart
  2. Method Versus Cross-Country Heterogeneity in the Exchange Rate Pass-Through By Tersoo David Iorngurum
  3. From Dominant to Producer Currency Pricing: Dynamics of Chilean Exports By Jose De Gregorio; Pablo Garcia; Emiliano Luttini; Marco Rojas
  4. Global Commodity Markets and Sovereign Risk across 150 Years By Angélica Domínguez-Cardoza; Adelina Garamow; Josefin Meyer
  5. Theoretical Foundations of the Dependent Monetary Regimes By Nikolay Nenovsky
  6. Navigating the Waves of Global Shipping: Drivers and Aggregate Implications By Jason Dunn; Fernando Leibovici
  7. Estimation of Nonlinear Exchange Rate Dynamics in Evolving Regimes By Jeffrey Frankel
  8. Prospects of BRICS currency dominance in international trade By C\'elestin Coquid\'e; Jos\'e Lages; Dima L. Shepelyansky
  9. International Diversification, Reallocation, and the Labor Share By Joel M. David; Romain Ranciere; David Zeke
  10. The Dollar’s Imperial Circle By Ozge Akinci; Gianluca Benigno; Serra Pelin; Jonathan Turek
  11. Reframing The US Dollar Debate: What Outlook for the US Dollar as World Money? By Jeremy Srouji
  12. Determinants of Inflation in Sierra Leone By Jackson, Emerson Abraham; Kamara, Purity; Kamara, Abdulsalam
  13. Carbon Emission Reduction Effect of RMB Appreciation: Empirical Evidence from 283 Prefecture-Level Cities of China By Chen Fengxian; Lv Xiaoyao

  1. By: Kellard, Neil; Madsen, Jakob B; Snaith, Stuart
    Abstract: The real exchange rate is an important measure of the relative strength of an economy. Given long-term productivity differentials between countries, Harrod-Balassa-Samuelson effects suggest that stronger economies will experience real exchange rate appreciations and vice versa. How long can these effects last? Using a novel dataset and trend tests robust to pre-testing for the order of integration, we examine the path of ten ultra-long real exchange rates relative to Sterling with data commencing in the 13th century.Whilst we show Sterling commonly presents a trend appreciation from the 16th century to the 19th century, a striking trend depreciation occurred throughout 20th century with some evidence of prior decline. Further analysis reveals that real exchange rates are cointegrated with productivity differential proxies over much of the last millennia, suggesting the UK’s current productivity decline is more entrenched and persistent than previously thought.
    Keywords: Real exchange rate; Sterling; Harrod-Balassa-Samuelson effects; Robust trends; Cointegration
    Date: 2023–05–17
  2. By: Tersoo David Iorngurum (Faculty of Social Sciences, Charles University, Prague)
    Abstract: Estimates of the exchange rate pass-through vary significantly across studies, making it difficult for policymakers and researchers to ascertain the true impact of exchange rate fluctuations on domestic prices. I conduct a meta-analysis to understand why estimates differ and provide consensus for the conflicting results. My dataset includes 32 primary studies containing 684 estimates for 108 countries. Because there are many potential causes of heterogeneity, I use Bayesian model averaging to identify the most important ones. I find that estimates vary due to differences in country-specific and methodological characteristics. The country-specific characteristics include central bank independence, inflationary environment, and economic development, while the methodological variables include data frequency, data dimension, and data time span. When I control for differences in methodology and assign greater weight to those that reflect the best practices in the literature, I find that the implied pass-through estimates remain substantial, albeit smaller than suggested in the literature. The pass-through is 6% for developed countries and 9% for developing countries.
    Keywords: exchange rate pass-through, prices, heterogeneity, meta-analysis
    JEL: F31 F41
    Date: 2023–05
  3. By: Jose De Gregorio; Pablo Garcia; Emiliano Luttini; Marco Rojas
    Abstract: We revisit a central question for international macroeconomics: The response of export prices and quantities to movements in the exchange rate (ER). We use a comprehensive dataset for Chile and study how the effects vary over time with the currency of invoicing and the destination of exports. For prices, we find that the short-run effects of bilateral ER movements vanish when we control for U.S. dollar ER, which supports the dominant currency paradigm. The longer the horizon, the larger the role is played by bilateral ER movements, which lends support to producer currency pricing. The dynamics do not depend on the invoicing currency. We find consistent results for quantities, supporting the view that bilateral exchange rate movements contribute to macroeconomic adjustment through exports. We also find that U.S. dollar fluctuations, holding bilateral exchange rates constant, show results suggestive of relevant supply and demand effects.
    Date: 2023–01
  4. By: Angélica Domínguez-Cardoza; Adelina Garamow; Josefin Meyer
    Abstract: How do commodity price movements affect sovereign default risk over the long-run? Using a novel dataset covering 41 countries and 42 raw commodities, we take a comprehensive long-run view to shed light on this so far understudied relationship between commodity risk and sovereign risk across 150 years. We create a novel country-specific commodity price index that allows us to take advantage of countries’ variation in their commodity export compositions. Our results are twofold: first, commodity price fluctuations show a persistent association with sovereign borrowing costs for countries that are commodity export dependent across the last one and a half centuries. Second, historically this relationship was driven by agricultural price movements; today it is driven by mineral and energy price movements.
    Keywords: Sovereign Risk, commodity prices
    JEL: E44 F41 F34 H63 G12
    Date: 2022
  5. By: Nikolay Nenovsky (LEFMI - Laboratoire d’Économie, Finance, Management et Innovation - UR UPJV 4286 - UPJV - Université de Picardie Jules Verne)
    Abstract: The purpose of the present article is to present a comprehensive framework to analyse main characteristics and institutional forms of the dependent monetary regimes. A country's monetary regime is an extension of its geopolitical and geo-economic place in the international system. The dynamic monetary dependence/independence of a particular country is a direct continuation of, as well as ‘serving', the (geo)political and economic dependence/independence of that country. That dependence does not mean that small countries do not benefit from this type of monetary and political regimes; on the contrary – in most cases it is the most appropriate, so to speak, "optimal" form which, if skilfullymanaged, minimises losses under a given external structural constraint. As a rule, in dependent countries, external sources of money supply dominate domestic sources. Peripheral and dependent countries cannot borrow on international markets in their own national currencies. They borrow in major world currencies and become vulnerable to currency (exchange rate) risk. The inflow of external capital, in turn, requires a corresponding stable institutional and political environment. Therefore, the external equilibrium (external stability), i.e., the state of the balance of payments and especially its financial (capital) account, as well as the dynamics of the exchange rate, become central parameters for the development of the peripheral countries. It is interesting to add that the imposition of a dependent regime in small and peripheral countries is accompanied by the imposition and dissemination of economic views, theories and ideas ("economic narrative"), which legitimise this new monetary regime and prepare the imposition of a certain economic development model.
    Keywords: monetary system, monetary regime, dependent monetary regimes, monetary history
    Date: 2022–12–01
  6. By: Jason Dunn; Fernando Leibovici
    Abstract: This paper studies the drivers of global shipping dynamics and their aggregate implications. We document novel evidence on the dynamics of global shipping supply, demand, and prices. Motivated by this evidence, we set up a multi-country dynamic model of international trade with a global shipping market where shipping companies and importers endogenously determine shipping supply and prices. We find the model can successfully account for the dynamics of global shipping observed in the aftermath of COVID-19 and that accounting for these has important implications for the dynamics of aggregate economic activity.
    Keywords: international shipping; international trade; shipping supply; shipping demand; shipping prices
    JEL: F1 F41 L91
    Date: 2023–02
  7. By: Jeffrey Frankel
    Abstract: This paper develops a new econometric framework to estimate and classify exchange rate regimes. They are classified into four distinct categories: fixed exchange rates, BBC (band, basket and crawl), managed floating, and freely floating. The procedure captures the patterns of exchange rate dynamics and the interventions by authorities under each of the regimes. We pay particular attention to the BBC and offer a new approach to parameter estimation by utilizing a three-regime Threshold Auto Regressive (TAR) model to reveal the nonlinear nature of exchange rate dynamics. We further extend our benchmark framework to allow the evolution of exchange rate regimes over time by adopting the minimum description length (MDL) principle, to overcome the challenge of simultaneous two-dimensional inference of nonlinearity in the state dimension and structural breaks in the time dimension. We apply our framework to 26 countries. The results suggest that exchange rate dynamics under different regimes are well captured by our new framework.
    Keywords: Exchange rate regime, MDL, Minimum Description Length, structural breaks, TAR, Threshold Autoregression
    JEL: F33
    Date: 2023–03
  8. By: C\'elestin Coquid\'e; Jos\'e Lages; Dima L. Shepelyansky
    Abstract: During his state visit to China in April 2023, Brazilian President Lula proposed the creation of a trade currency supported by the BRICS countries. Using the United Nations Comtrade database, providing the frame of the world trade network associated to 194 UN countries during the decade 2010 - 2020, we study a mathematical model of influence battle of three currencies, namely, the US dollar, the euro, and such a hypothetical BRICS currency. In this model, a country trade preference for one of the three currencies is determined by a multiplicative factor based on trade flows between countries and their relative weights in the global international trade. The three currency seed groups are formed by 9 eurozone countries for the euro, 5 Anglo-Saxon countries for the US dollar and the 5 BRICS countries for the new proposed currency. The countries belonging to these 3 currency seed groups trade only with their own associated currency whereas the other countries choose their preferred trade currency as a function of the trade relations with their commercial partners. The trade currency preferences of countries are determined on the basis of a Monte Carlo modeling of Ising type interactions in magnetic spin systems commonly used to model opinion formation in social networks. We adapt here these models to the world trade network analysis. The results obtained from our mathematical modeling of the structure of the global trade network show that as early as 2012 about 58 percent of countries would have preferred to trade with the BRICS currency, 23 percent with the euro and 19 percent with the US dollar. Our results announce favorable prospects for a dominance of the BRICS currency in international trade, if only trade relations are taken into account, whereas political and other aspects are neglected.
    Date: 2023–04
  9. By: Joel M. David; Romain Ranciere; 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 U.S. by about 2.5 percentage points, roughly one-third of the total decline since the 1970s.
    Date: 2023–04–20
  10. By: Ozge Akinci; Gianluca Benigno; Serra Pelin; Jonathan Turek
    Abstract: The importance of the U.S. dollar in the context of the international monetary system has been examined and studied extensively. In this post, we argue that the dollar is not only the dominant global currency but also a key variable affecting global economic conditions. We describe the mechanism through which the dollar acts as a procyclical force, generating what we dub the “Dollar’s Imperial Circle, ” where swings in the dollar govern global macro developments.
    Keywords: Global spillovers; spillovers and spillbacks; manufacturing; global trade; global supply chain
    JEL: F00
    Date: 2023–03–01
  11. By: Jeremy Srouji (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: It is often difficult to make sense of the range of optimistic, cautious, and pessimistic views about the sustainability of the US dollar's role as the top international currency. This paper reframes the US dollar debate by demonstrating that economists generally draw on two distinct theories of currency internationalization, with very different assumptions about how currencies achieve and maintain an international role. These assumptions often remain implicit, but are essential to make sense of the debate, as well as the question of international money more generally. The paper then considers whether crypto currencies and central bank digital currencies could play the international currency role, as understood by these theories. It concludes by reflecting on whether in an increasingly multipolar world the question of the sustainability of the US dollar's international role is misplaced, particularly given the growing support for the establishment of a true global international reserve currency.
    Keywords: US dollar, international money, international monetary system reform, US debt, Bretton Woods II, global macroeconomic imbalances
    JEL: F01 F33
    Date: 2022–02
  12. By: Jackson, Emerson Abraham; Kamara, Purity; Kamara, Abdulsalam
    Abstract: This paper examines the determinants of inflation in Sierra Leone using monthly time series data from 2010M1 to 2021M12, with the application of the ARDL model. The emphasis of the empirical study as outlined in the objectives is to examine both supply-side and demand-side pressure as observed in the outcome of the short and long-run relationships. Taking into account the characteristics of the Sierra Leonean economy, which is also backed by recent studies on inflation dynamics, the constructed ARDL model emphasizes the effects of the exchange rate, RGDP, Fiscal Balance (FBAL), Currency in Circulation, and Lending Rate (LR) factors on inflation dynamics in the economy. The empirical results show that in the long-run, the main determinants of inflation in Sierra Leone are the exchange rate, Real Gross Domestic Product (RGDP), Fiscal Balance, Currency in Circulation, and Lending Rate. In the short run, all the variables except RGDP and Exchange Rate manifested significant effects on inflation dynamics. Finally, the error correction term (-0.063) was proven to be negative and statistically significant, thereby suggesting the rapid rate of adjustment to its long-run state
    Keywords: Inflation Targeting, Supply-Side, Demand-Side, Shocks, Sierra Leone
    JEL: C22 E20 E3 E31
    Date: 2022–09–01
  13. By: Chen Fengxian; Lv Xiaoyao
    Abstract: Based on the panel data of 283 prefecture-level cities in China from 2006 to 2019, this paper measures the extent and mechanism of the impact of RMB real effective exchange rate fluctuations on carbon emission intensity. The results show that: (1) For every 1% appreciation of the real effective exchange rate of RMB, the carbon emission intensity decreases by an average of 0.463 tons/10000 yuan; (2) The "carbon emission reduction effect" of RMB real effective exchange rate appreciation is more obvious in the eastern regions, coastal areas, regions with high urbanization levels, and areas with open information; (3) The appreciation of RMB real effective exchange rate can reduce carbon dioxide emission intensity by improving regional R&D and innovation ability, restraining foreign trade and foreign investment, promoting industrial structure optimization and upgrading, and improving income inequality.
    Date: 2023–04

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