nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒07‒17
fourteen papers chosen by
Martin Berka
Massey University

  1. Trade Wars, Nominal Rigidities and Monetary Policy By Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
  2. Exchange Controls As A Fiscal Instrument By Stephanie Schmitt-Grohé; Martín Uribe
  3. Global Liquidity: Drivers, Volatility and Toolkits By Linda S. Goldberg
  4. Recent advances in the literature on capital flow management By Beck, Roland; Brüggemann, Axel; Eijking, Carlijn; Eller, Markus; Marsilli, Clement; Moder, Isabella; Naef, Alain; Landi, Valerio Nispi; Scheubel, Beatrice; Theofilakou, Anastasia; Wesołowski, Grzegorz; Berganza, Juan Carlos; Cezar, Rafael; Fuentes, Alberto; Alves, Joel Graça; Kreitz, Lilian; Sánchez, Luis Molina; Hove, Floriane Van Den
  5. Global models for a global pandemic: the impact of COVID-19 on small euro area economies By Pablo Garcia; Pascal Jacquinot; ÄŒrt LenarÄ iÄ; Matija Lozej; Kostas Mavromatis
  6. Comparing different features of a fiscal stimulus in the euro area By Caroline Bozou; Jérôme Creel
  7. Time-Varying Parameters in Monetary Policy Rules: A GMM Approach By Christina Anderl; Guglielmo Maria Caporale
  8. Financing imports, the Triffin dilemma and more By Alessandro Saccal
  9. Unravelling the Tapestry: Understanding the Factors Shaping Current Account Imbalances in Ghana By Yeboah, Samuel
  10. Macroeconomic news, the financial cycle and the commodity cycle: the Chinese footprint By Flavia Corneli; Fabrizio Ferriani; Andrea Gazzani
  11. GDP and Temperature: Evidence on Cross-Country Response Heterogeneity By Kimberly A. Berg; Chadwick C. Curtis; Nelson Mark
  12. Investigating Integration and Exchange Rate Pass-Through in World Maize Markets Using Inferential LASSO Methods By Yan, Hongqiang; Goodwin, Barry K.; Caner, Mehmet
  13. Dollar Exchange Rate volatility and Productivity Growth in Emerging Markets: Evidence from Firm Level Data By Kodjovi M. Eklou
  14. Shining a Light on Debt By Pazarbasioglu, Ceyla; Reinhart, Carmen

  1. By: Stéphane Auray; Michael B. Devereux; Aurélien Eyquem
    Abstract: This paper shows that the outcome of trade wars for tariffs and welfare will be affected by the monetary policy regime. The key message is that trade policy interacts with monetary policy in a way that magnifies the welfare costs of discretionary monetary policy in an international setting. If countries follow monetary policies of flexible inflation targeting, trade wars are relatively mild, with low equilibrium tariffs and small welfare costs. Discretionary monetary policies imply much higher tariffs, high inflation rates, and substantially larger welfare costs. We quantify the effects of a global trade war among major economies using estimates of trade elasticities, economic size, net foreign assets and trade openness. We find large welfare benefits of an inflation targeting monetary policy for all countries.
    JEL: F30 F40 F41
    Date: 2023–06
  2. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: About 20 percent of countries have in place dual, multiple, or parallel exchange rates. Exchange controls represent a form of distortionary commercial policy. We study an optimal taxation problem of a government with chronic fiscal deficits and two distortionary instruments, money creation and exchange controls. We calibrate the model to Argentina, which over the past decade has experienced significant exchange controls and persistent fiscal deficits. We show that exchange controls can generate sizable fiscal revenue. However, the optimal level of exchange controls is virtually zero. Financing the fiscal deficit with exchange controls is possible, but entails large welfare losses.
    JEL: E5 E63 F41
    Date: 2023–06
  3. By: Linda S. Goldberg
    Abstract: Global liquidity refers to the volumes of financial flows—largely intermediated through global banks and non-bank financial institutions—that can move at relatively high frequencies across borders. The amplitude of responses to global conditions like risk sentiment, discussed in the context of the global financial cycle, depends on the characteristics and vulnerabilities of the institutions providing funding flows. Evidence from across empirical approaches and using granular data provides policy-relevant lessons. International spillovers of monetary policy and risk sentiment through global liquidity evolve in response to regulation, the characteristics of financial institutions, and actions of official institutions around liquidity provision. Strong prudential policies in the home countries of global banks and official facilities reduce funding strains during stress events. Country-specific policy challenges, summarized by the monetary and financial trilemmas, are partially alleviated. However, risk migration across types of financial intermediaries underscores the importance of advancing regulatory agendas related to non-bank financial institutions.
    Keywords: global liquidity; global dollar cycle; trilemma; exchange market pressure; risk sensitivity; safe haven; capital flows; non-bank financial intermediaries; risk migration
    JEL: E44 F30 G15 G18 G23
    Date: 2023–06–01
  4. By: Beck, Roland; Brüggemann, Axel; Eijking, Carlijn; Eller, Markus; Marsilli, Clement; Moder, Isabella; Naef, Alain; Landi, Valerio Nispi; Scheubel, Beatrice; Theofilakou, Anastasia; Wesołowski, Grzegorz; Berganza, Juan Carlos; Cezar, Rafael; Fuentes, Alberto; Alves, Joel Graça; Kreitz, Lilian; Sánchez, Luis Molina; Hove, Floriane Van Den
    Abstract: Large swings in cross-border capital flows can have consequences for domestic stability and open a channel for the transmission of shocks and spillovers across economies, including the euro area. Against this backdrop, the present paper reviews new evidence for the effectiveness of capital flow management policies in achieving macroeconomic and financial stability. Particular attention is paid to literature that has been used by the International Monetary Fund (IMF) to underpin its so-called Integrated Policy Framework, in which the roles of monetary, exchange rate, macroprudential and capital flow management policies are considered jointly. The literature published since the global financial crisis continues to affirm the effectiveness of capital flow management measures (CFMs) in addressing financial stability risks resulting from capital flow reversals; at the same time, however, it also continues to underscore that such policies should not substitute for warranted economic adjustments and structural reforms. Even so, recent literature also provides a case for considering, under certain circumstances, “precautionary” CFMs which could be applied to capital inflows to prevent a boom-and-bust cycle from being set in motion. This paper also highlights the need for further work on the long-term effects of such precautionary instruments, as well as their joint use with monetary policy instruments. Regarding capital flow management policies within the domain of central banks, the literature points to the usefulness of foreign exchange interventions (FXIs) in mitigating financial stability risks in countries with specific characteristics such as currency mismatches, borrowing constraints and shallow foreign exchange markets that are common to emerging market and developing economies alike. However, the literature also warns that such measures may reduce economic agents’ incentives to hedge against currency risks, with the result that unfavourable initial conditions beco JEL Classification: F32, F38
    Keywords: capital controls, short-term capital movements
    Date: 2023–06
  5. By: Pablo Garcia; Pascal Jacquinot; ÄŒrt LenarÄ iÄ; Matija Lozej; Kostas Mavromatis
    Abstract: We analyse the COVID-19 pandemic shock on small open economies (SOEs) in the euro area in a unified modelling framework: the Euro Area and the Global Economy model. We find strong negative international spillovers affecting each of the modelled SOEs, stemming not only from the rest of the euro area, but also from the United States and the rest of the world. A lower bound on nominal interest rates in the euro area amplifies these spillovers, especially within the euro area. Furthermore, we find some positive spillovers from the fiscal measures implemented in the Euro area to combat the pandemic, including the new Next Generation EU instrument.
    Keywords: DSGE Modelling, International Spillovers; Monetary Union; Euro Area; COVID-19
    JEL: C53 E32 E52 F45
    Date: 2023–06
  6. By: Caroline Bozou (UP1 - Université Paris 1 Panthéon-Sorbonne); Jérôme Creel (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: We build a two-country DSGE model where we distinguish the core from the periphery of a monetary union. First, we highlight the spillovers of fiscal shocks across countries. Then, we evaluate and compare the macroeconomic effects of the European recovery plan NGEU with national plans. In all settings, we distinguish public consumption shocks from public investment ones, and funding via loans or grants. We also generate a post-Covid situation where we add a zero-lower bound and demand shocks and compare the outcomes to the former scenarios. We find that the stimulus is more effective when it is financed by grants, interestingly enough especially for public consumption, that public investment spending has a higher multiplier effect in the long run and that a European fiscal stimulus has always more impact per country than a national stimulus plan. A side-result permits to assess the opportunity cost of accepting loans.
    Keywords: fiscal policy, open economy, euro area, spillovers, DSGE, NGEU, RRF
    Date: 2023–02–08
  7. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper assesses time variation in monetary policy rules by applying a Time-Varying Parameter Generalised Methods of Moments (TVP-GMM) framework. Using monthly data until December 2022 for five inflation targeting countries (the UK, Canada, Australia, New Zealand, Sweden) and five countries with alternative monetary regimes (the US, Japan, Denmark, the Euro Area, Switzerland), we find that monetary policy has become more averse to inflation and more responsive to the output gap in both sets of countries over time. In particular, there has been a clear shift in inflation targeting countries towards a more hawkish stance on inflation since the adoption of this regime and a greater response to both inflation and the output gap in most countries after the global financial crisis, which indicates a stronger reliance on monetary rules to stabilise the economy in recent years. It also appears that inflation targeting countries pay greater attention to the exchange rate pass-through channel when setting interest rates. Finally, monetary surprises do not seem to be an important determinant of the evolution over time of the Taylor rule parameters, which suggests a high degree of monetary policy transparency in the countries under examination.
    Keywords: Taylor rules, monetary policy rules, Generalised Methods of Moments, Time-varying parameters
    JEL: C14 C52 E52 E58
    Date: 2023
  8. By: Alessandro Saccal
    Abstract: This paper presents a formal proof of the notion by which a country devoid of tradable assets and without access to foreign borrowing and lending must systematically pay for its imports in foreign currency through its exports alone, provided a demand for them to begin with. It likewise sets forth a formal proof of the Triffin dilemma, by which a country whose external currency enjoys the status of an international reserve currency is bound to incur a trade deficit and an attendant excess of extant foreign net borrowing in relation to its tradable assets, meanwhile advancing an innovative, orderly model of the balance of payments. Currency regimes, sudden stops in foreign net borrowing, international reserve currencies and changes in private and public consumption are additionally examined. This monograph completes its study of the dynamics pertaining to exports and foreign borrowing by means of a static deterministic partial equilibrium (SDPE) model, via stability analysis.
    Keywords: Balance of payments; exports; imports; international reserve currency; Triffin dilemma; tradable assets.
    JEL: E12 F13 F30 F31 F41 F45 F52 N10
    Date: 2023–06–04
  9. By: Yeboah, Samuel
    Abstract: This research aims to unravel the factors shaping current account imbalances in Ghana, with a focus on understanding the underlying causes and implications for the country's economic stability. The study explores the multifaceted nature of these imbalances by examining structural factors, exchange rate dynamics, monetary policy, external factors, and capital flows. It identifies limited diversification of the economy, inadequate infrastructure, and low productivity levels as significant structural constraints that hinder Ghana's ability to reduce import dependency and achieve a more balanced current account. Furthermore, it highlights the role of currency depreciation, inconsistent monetary policies, and inflationary pressures in contributing to trade imbalances and capital flight, exacerbating current account deficits. The study also considers external factors such as commodity price fluctuations, global trade patterns, and regional integration, which can influence Ghana's current account imbalances. Additionally, it explores the implications of these imbalances for external debt sustainability, terms of trade, and overall economic performance. The research provides policymakers and stakeholders with valuable insights into the factors driving Ghana's current account imbalances, informing the formulation of effective policy measures to address these imbalances and promote sustainable economic development.
    Keywords: Current account imbalances; Ghana; Trade deficit; Balance of payments; Structural factors; Diversification of the economy; Infrastructure; Productivity levels; Exchange rate dynamics; Monetary policy; Currency depreciation; Inflationary pressures; External factors; Commodity price fluctuations; Global trade patterns; Regional integration; Capital flows; Foreign direct investment; Portfolio investment; External debt sustainability; Terms of trade; Economic performance
    JEL: F32 F41 F43 F47 O11 O16
    Date: 2023–04–18
  10. By: Flavia Corneli (Bank of Italy); Fabrizio Ferriani (Bank of Italy); Andrea Gazzani (Bank of Italy)
    Abstract: China has become a major player in the global economy. Our new and original database of Chinese macroeconomic surprises shows the significant impact they have on equity markets worldwide. These surprises also affect commodity prices, the US nominal effective exchange rate and the VIX Index. Finally, we establish that positive Chinese macroeconomic news is associated with the expansion of global trade and industrial production. Overall, we provide evidence of the growing role of the Chinese economy as a driving force for both the real and the financial global cycle.
    Keywords: global financial cycle, China macroeconomic announcements, international spillovers, commodity prices
    JEL: E44 F21 F40 G15
    Date: 2023–06
  11. By: Kimberly A. Berg; Chadwick C. Curtis; Nelson Mark
    Abstract: We use local projections to estimate the cross-country distribution of real GDP per capita growth impulse responses to global and idiosyncratic temperature shocks. Negative growth responses to global temperature at longer horizons are found for all Group of Seven countries while positive responses are found for seven of the nine poorest countries. Global temperature shocks have negative effects on growth for around half of the countries and seemingly anomalous positive effects for the other half. After controlling for latitude and average temperature, positive growth responses to global temperature shocks are more likely for countries that are poorer, have experienced slower growth, are less educated (lower high school attainment), less open to trade, and more authoritarian.
    JEL: E23 O13 O50
    Date: 2023–06
  12. By: Yan, Hongqiang; Goodwin, Barry K.; Caner, Mehmet
    Keywords: International Relations/Trade, Research Methods/Statistical Methods, Marketing
    Date: 2023
  13. By: Kodjovi M. Eklou
    Abstract: This paper examines the impact of Dollar exchange rate volatility on firm productivity in Emerging Markets economies (EMs). Using firm level data covering 16 EMs over the period 1998 -2019, the paper shows that dollar exchange rate volatility reduces firm productivity growth. Exploring channels, its finds that the results are driven by countries with low level of financial development, high dollar invoicing, high bilateral trade with the US, high collective bargaining coverage and open capital account. Exploring the role of policy, it finds that Foreign Exchange Interventions (FXI) dampen this impact on firm productivty. Further, exploiting firm level data, the paper shows that dollar exchange rate volatility operates also through the financial friction channel, reducing contemporaneous investments, especially at firms with low liquidity buffers and weak balance sheet (high leverage). The role of financial frictions is confirmed through the finding that younger firms, more likely to face financial constraints, are also found to be more vulnerable to dollar exchange rate volatility. In addition, we also find evidence of a large and persistent effect on firms with highly irreversible investment, lending support for the real option channel of uncertainty on the dollar exchange rate. These findings are robust to a battery of tests, including controlling for uncertainty, financial crises and using an instrumental variable strategy exploiting US monetary policy shocks as an exogenous source of variation in dollar exchange rate volatility.
    Keywords: Dollar exchange rate; volatility; Productivity growth; Investment; Firm heterogeneity and spillovers; dollar exchange rate volatility; exchange rate volatility; firm Level data; dollar invoicing; volatility shock com; Exchange rates; Productivity; Financial sector development; Total factor productivity; Employment protection; Global
    Date: 2023–05–26
  14. By: Pazarbasioglu, Ceyla; Reinhart, Carmen
    Abstract: As the COVID-19 crisis lingers, emerging market and developing economies are entering perilous waters that evoke memories of past debt defaults. Although all countries amassed debt to fight the pandemic, the economic recovery in these economies substantially lags their advanced economy counterparts. Tighter monetary policies in advanced economies are poised to push up international interest rates, which tends to put pressure on currencies and heighten the odds of default. To complicate matters, the extent of many emerging market and developing economy liabilities and their terms aren’t fully known. If they are to foster a sustained recovery and limit the risk of a crisis, they must make a full accounting of hidden debts, both public and private.
    Keywords: public debt, private debt, transparency, banks, bad loans, hidden debts
    JEL: E0 F3 F34 G0 G01 G2 G21
    Date: 2022–03–01

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