nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒07‒10
eight papers chosen by
Martin Berka
Massey University

  1. The Macroeconomic Consequences of Exchange Rate Depreciations By Masao Fukui; Emi Nakamura; Jón Steinsson
  2. The Macroeconomic Effects of Portfolio Equity Inflows By Nick Sander
  3. Which Sectors Go On When There Is a Sudden Stop? An Empirical Analysis By Kónya, István; Váry, Miklós
  4. Credibility and Bias: The Case for Implementing Both a Debt Anchor and a Balanced Budget Rule By Marcela De Castro-Valderrama; Nicol’Moreno-Arias; Juan Josè Ospina-Tejeiro
  5. Policy Packages and Policy Space: Lessons from COVID-19 By Katharina Bergant; Kristin Forbes
  6. Monetary policy transmission in Georgia: empirical evidence By Sergo Gadelia; Tamar Mdivnishvili; Shalva Mkhatrishvili
  7. When Fiscal Discipline meets Macroeconomic Stability: the Euro-stability Bond By Luciano Greco; Francesco Jacopo Pintus; Davide Raggi
  8. International Spillovers of ECB Interest Rates Monetary Policy & Information Effects By Santiago Camara

  1. By: Masao Fukui; Emi Nakamura; Jón Steinsson
    Abstract: We study the consequences of "regime-induced" exchange rate depreciations by comparing outcomes for peggers versus floaters to the US dollar in response to a dollar depreciation. Pegger currencies depreciate relative to floater currencies and these depreciations are strongly expansionary. The boom is not associated with an increase in net exports, or a fall in nominal interest rates in the pegger countries. This suggests that expenditure switching and domestic monetary policy are not the main drivers of the boom. We develop a financially driven exchange rate (FDX) model in which multiple shocks originating in the financial sector drive exchange rates and households and firms can borrow in foreign currencies. Following a depreciation, UIP deviations lower the costs of borrowing from abroad and stimulate the economy, as in the data. The model is consistent with (unconditional) exchange rate disconnect and the Mussa facts, even though exchange rates have large effects on the economy.
    JEL: F31 F41
    Date: 2023–05
  2. By: Nick Sander
    Abstract: I provide evidence that portfolio equity inflows can have expansionary effects on GDP and inflation if not offset by monetary policy. I use a shift-share instrument to estimate equity inflows based on plausibly exogenous timing of inflows into mutual funds with heterogeneous country portfolios. For countries with fixed exchange rates, GDP rises for at least two years following an exogenous inflow with a peak effect of 0.8 percent after 18 months. This is driven by rises in investment and exports, where the latter response is inconsistent with standard expenditure switching channel mechanisms. Non-fixing countries maintain GDP roughly at the same pre-shock levels but achieve this with higher interest rates.
    Keywords: Business fluctuations and cycles; International financial markets; International topics; Monetary policy
    JEL: E32 F32 F44
    Date: 2023–06
  3. By: Kónya, István; Váry, Miklós
    Abstract: This paper analyzes the dynamics of sectoral Real Gross Value Added (RGVA) around sudden stops in foreign capital inflows. We identify sudden stop episodes statistically from changes in gross capital inflows from the financial account, and use an event study methodology to compare RGVA before and after the start of sudden stops. In the baseline specification, we estimate changes in the growth rate of sectoral RGVA during sudden stops and in the few quarters following them. In an additional exercise, we analyze deviations from the sectors’ long-run growth path. Our findings indicate that: (i) tradable sectors, especially manufacturing, face larger damages during sudden stops than nontradable sectors, (ii) but they also lead the recovery after recessions that accompany sudden stops on impact, partly due to the fact that they benefit from the depreciation of the domestic currency that occurs during sudden stops, (iii) construction and professional services are the most seriously hurt nontradable sectors during sudden stops, while information and communication, and financial services grow slower even in the aftermath of the events than before their onset. However, this slowdown only constitutes a return to their long-run sectoral growth paths. Overall, our results suggest a prolonged reallocation of economic activity away from service sectors, towards the production of goods. This is consistent with a traditional view of the role of tradable and nontradable sectors in a sudden stop episode.
    Keywords: sudden stop, sectoral adjustment, capital flows, exchange rate
    JEL: F31 F32 O24 O25
    Date: 2023–06–16
  4. By: Marcela De Castro-Valderrama (Banco de la Republica, Colombia); Nicol’Moreno-Arias (Banco de la Republica, Colombia); Juan Josè Ospina-Tejeiro (Banco de la Republica, Colombia)
    Abstract: Should a government have more than one fiscal rule constraining fiscal aggregates? If so, why? In this paper, we present a dynamic general equilibrium model of a small open economy featuring an incumbent government to assess how and why implementing a budget balance rule and a debt anchor rule is non-redundant and welfare-improving. Our findings suggest that the implementation of a combination of fiscal rules is optimally preferred over a single rule, as each rule has a different effect on credibility and fiscal behaviour. While the debt anchor rule prevents the propagation of the negative effects of imperfect fiscal credibility, the operational rule reduces amplification by avoiding overindebtedness and minimizing the welfare-detrimental effects arising from a deficit-biased government.
    Keywords: Fiscal Rules; Credibility; Deficit Bias; Balanced Budget Rule; Debt Anchor Rule; Fiscal Policy; Welfare
    JEL: E61 E62 H60 H63 F41
    Date: 2023–06–12
  5. By: Katharina Bergant; Kristin Forbes
    Abstract: This paper uses the onset of COVID-19 to examine how countries construct their policy packages in response to a severe negative shock. We use several new datasets to track the use of a large variety of policy tools: announced fiscal stimulus (both above- and below-the-line), monetary policy (through interest rates, asset purchases, liquidity support and swap lines), foreign currency intervention, adjustments to macroprudential regulations (including the countercyclical capital buffer) and changes in capital controls (on inflows and outflows). The results suggest that pre-existing policy space was usually more important than other country characteristics and the extent of “stress” (in economic, financial, and health measures) in determining how a country responded to COVID-19. The notable exception is for fiscal stimulus, for which existing policy space did not act as a significant constraint in advanced economies. This is a sharp contrast to results for earlier episodes—although advanced economies with higher debt levels may have been constrained in how they provided stimulus (with more below-the-line commitments). Moreover, the use of (and space available) for each policy tool usually did not affect a country’s use of other policies. This suggests that countries are not coordinating their tools optimally in an integrated framework, especially when policy space is limited for certain tools.
    JEL: E5 E6 F3 H5 H6
    Date: 2023–05
  6. By: Sergo Gadelia (Junior Researcher, Private Sector Development Research Center (PCDRC), ISET Policy Institute (ISET PI)); Tamar Mdivnishvili (Macroeconomic Research Division, National Bank of Georgia); Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department, National Bank of Georgia)
    Abstract: The strength of monetary policy transmission mechanism is what defines central banks’ ability to influence a real economy and overall prices. This is what we analyse empirically within this paper. Namely, using structural vector autoregressions and based on data since 2009 when the NBG switched to an inflation targeting regime, we estimate the strength of interest rate and exchange rate channels in Georgia. The results suggest that both are relatively strong. Namely, an increase in interest rates seems to generate all three: smaller output gap, exchange rate appreciation and, consequently, lower inflation, underlining the improved transmission mechanism since the estimates from a decade ago. The reaction of inflation to an interest rate change peaks after 4 quarters, in line with other studies as well as the NBG’s communication. Moreover, a variance decomposition analysis shows that inflation is mostly driven by supply shocks with demand shocks having only a negligible effect. In principle, this may be in line with the presumption that it is the central bank’s systematic reaction function that neutralizes the effects of demand shocks on inflation, leaving the supply side as the major driver of inflation data.
    Keywords: Monetary policy; Transmission mechanism; Structural vector autoregressions; Inflation targeting.
    JEL: C13 E43 E52 F31
    Date: 2021–11
  7. By: Luciano Greco (University of Padova); Francesco Jacopo Pintus (University of Padova); Davide Raggi (University Ca’ Foscari of Venice)
    Abstract: We describe a new Euro-stability bond that implies sovereign debt mutualization in the Eurozone without any significant short-term redistribution across countries or perverse incentives to fiscal profligacy. In a simple structural model of the economy, we theoretically show that the proposed Euro-stability bond is able to reproduce the market fiscal discipline while increasing the social welfare of all countries with respect to real market discipline. Relying on a GVAR model including the Eurozone coun- tries, the U.S., Japan and China, we then analyze the future evolution of public debt (and other key macroeconomic variables) over time by comparing the predicted forecast in the baseline scenario and in a counterfactual scenario with the Euro-stability bond. We find no significant differences in the future path of interest expenditures- and public debt-to-GDP ratios in the two scenarios, but a consistent reduction in the uncertainty of the estimates in the counterfactual scenario (around 68 % on average after 5 years). The reduced uncertainty of forecasts of public debt and other macroeconomic variables highlights the capacity of the Euro-stability bond to immunize the Eurozone from classical macroeconomic instability shocks that derive by the very existence of high sovereign debts and the related significant rollover risk in a framework of decentralized fiscal policies. To this extent, we finally exploit the results of the GVAR model to assess the capacity of the proposed scheme to reduce the probability of adverse macroeconomic events.
    Keywords: Eurobonds, Fiscal stability, GVAR, Macroeconomic forecasts
    Date: 2023–05
  8. By: Santiago Camara (Northwestern University)
    Abstract: This paper shows that disregarding the information effects around the European Central Bank monetary policy decision announcements biases its international spillovers. Using data from 23 economies, both Emerging and Advanced, I show that following an identification strategy that disentangles pure monetary policy shocks from information effects lead to international spillovers on industrial production, exchange rates and equity indexes which are between 2 to 3 times larger in magnitude than those arising from following the standard high frequency identification strategy. This bias is driven by pure monetary policy and information effects having intuitively opposite international spillovers. Results are present for a battery of robustness checks: for a sub-sample of “close” and “further away” countries, for both Emerging and Advanced economies, using local projection techniques and for alternative methods that control for “information effects”. I argue that this biases may have led a previous literature to disregard or find little international spillovers of ECBrates
    Keywords: ECB monetary policy; Information Effects; International Spillovers; Emerging Markets; Advanced Economies.
    JEL: F1 F4 G32
    Date: 2023–06

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