nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒08‒14
ten papers chosen by
Martin Berka, Massey University

  1. The Dollar in an Era of International Retrenchment By Ryan Chahrour; Rosen Valchev
  2. Trilemma revisited with dollar dominance in trade and finance By Vanessa Olakemi Dovonou
  3. An Estimated DSGE Model for Integrated Policy Analysis By Kaili Chen; Marcin Kolasa; Jesper Lindé; Hou Wang; Pawel Zabczyk; Ms. Jianping Zhou
  4. Exchange Rate Pass-Around By Matthieu Crozet; Julian Hinz; Federico Trionfetti
  5. Fiscal Procyclicality in Commodity Exporting Countries: How Much Does it Pour and Why? By Francisco Arroyo Marioli; Carlos A. Vegh
  6. Credit Allocation and Macroeconomic Fluctuations By Karsten Müller; Emil Verner
  7. The Anatomy of Monetary Policy Transmission in an Emerging Market By Kodjovi M. Eklou
  8. Production, Trade, and Cross-Border Data Flows By Qing Chang; Lin William Cong; Liyong Wang; Longtian Zhang
  9. Explaining Long-Term Bond Yields Synchronization Dynamics in Europe By Jesus Crespo Cuaresma; Oscar Fernandez
  10. Price adjustment in the euro area in the low-inflation period: evidence from consumer and producer micro price data By Gautier, Erwan; Karadi, Peter; Conflitti, Cristina; Fabo, Brian; Fadejeva, Ludmila; Fuss, Catherine; Kosma, Theodora; Jouvanceau, Valentin; Martins, Fernando; Menz, Jan-Oliver; Messner, Teresa; Petroulas, Pavlos; Roldan-Blanco, Pau; Rumler, Fabio; Santoro, Sergio; Seward, Domingos; De Veirman, Emmanuel; Wieland, Elisabeth; Wintr, Ladislav; Wursten, Jesse; Zimmer, Hélène; Amann, Juergen; Faber, Riemer; Bachiller, Javier Sánchez; Stanga, Irina

  1. By: Ryan Chahrour; Rosen Valchev
    Abstract: Recent trends suggest the world economy may be tending towards an equilibrium with two distinct trading blocs, each internally integrated, but with significant isolation between the blocs. This paper uses a quantitative theory to explore how far this bifurcation would need to go to pose a threat to the special role of the dollar in international exchange. The theory emphasizes the joint determination of countries' portfolio choices and trading currency. We find that unilateral protectionism on the part of the US could modestly reinforce the dollar's dominant role, but that policies directly supporting the Chinese yuan's use in trade could end the dollar's continued dominance if implemented over a long-enough period. Tit-for-tat responses between just the US and China would likely leave the dollar's role essentially unchanged. If both countries coordinate protectionist policies within their trading blocs, however, a transition away from global dollar dominance becomes far more likely.
    JEL: E44 F02 F33 F41 G15
    Date: 2023–06
  2. By: Vanessa Olakemi Dovonou (University of Orleans)
    Abstract: This paper explores the impact of the US dollar dominance on monetary and exchange rate policies in 51 advanced and developing countries from 1999 to 2021. We introduce a global exposure index to measure countries’ dependence on the US dollar. Our study reveals that the dominant currency framework creates a global monetary cycle driven by the US dollar, exposing non-U.S. economies to the U.S. monetary policy. However, we show that countries can reduce their exposure to the U.S. monetary policy by accumulating reserves and intervening in foreign exchange.
    Keywords: Dominant currency, Trade invoicing, foreign currency-denominated, Trilemma.
    JEL: F
    Date: 2023
  3. By: Kaili Chen; Marcin Kolasa; Jesper Lindé; Hou Wang; Pawel Zabczyk; Ms. Jianping Zhou
    Abstract: We estimate a New Keynesian small open economy model which allows for foreign exchange (FX) market frictions and a potential role for FX interventions for a large set of emerging market economies (EMEs) and some inflation targeting (IT) advanced economy (AE) countries serving as a control group. Next, we use the estimated model to examine the empirical support for the view that interest rate policy may not be sufficient to stabilize output and inflation following capital outflow shocks, and the extent to which FX interventions (FXI) can improve policy tradeoffs. Our results reveal significant structural differences between AEs and EMEs—in particular FX market depth—leading to different transmission of capital outflow shocks which justifies occasional use of FXI in some EMEs in certain situations. Our analysis also highlights the critical importance of accounting for the endogeneity of FXI behavior when assessing FX market depth and policy tradeoffs associated with volatile capital flows in past episodes.
    Keywords: Integrated Policy Framework; Emerging Markets; Monetary Policy; Foreign Exchange Intervention; Endogenous Risks; Incomplete Financial Markets; Bayesian Estimation
    Date: 2023–06–30
  4. By: Matthieu Crozet (RITM - Réseaux Innovation Territoires et Mondialisation - Université Paris-Saclay); Julian Hinz; Federico Trionfetti
    Abstract: In January 2015, The Swiss Franc (CHF) appreciated unexpectedly against the Euro by approximately 15%. We document a new fact: French firms that exported to both the Swiss market and the Eurozone also exhibited a sudden change in their export prices to the Eurozone. We coin this the "exchange rate pass-around" effect. We rationalise this fact with a simple model based on the endogenous decision of some firms to give up pricing-to-market and opt for single-pricing to all markets. An important implication of this finding is that single-pricing may be one of the causes of the incomplete pass-through. This mechanism has so far remained unexplored in the literature, which may have led to overestimating the importance of other factors. Based on monthly French export data, our empirical analysis confirms the existence of the pass-around. Firms directly affected by the CHF exchange rate shock increased their prices in neighboring markets by 0.8% compared to other exporters. The effect was stronger for firms with lower ex-ante price heterogeneity across markets and for firms with smaller trade costs to Switzerland. However, the effect was short-lived. As time passed, exporters tended to decouple the prices they set on the Swiss market from those for the Eurozone, and the pass-around effect faded.
    Keywords: Exchange rate pass-through, International trade, Pricing-to-market
    Date: 2023–04
  5. By: Francisco Arroyo Marioli; Carlos A. Vegh
    Abstract: A large literature has documented that fiscal policy is procyclical in emerging markets and developing economies and acyclical/countercyclical in advanced economies. This paper analyzes fiscal procyclicality in commodity-exporting countries. It first shows that the degree of fiscal procyclicality is twice as high in commodity exporters than in non-commodity exporters. Further, while fiscal procyclicality has been falling in commodity exporters over the past 15 years, it is still pervasive and has fallen slower than in non-commodity exporting countries. In addition to testing the main theories behind fiscal procyclicality in commodity exporters and the role of institutional variables, the paper makes two novel contributions. First, based on the idea of fiscal procyclicality as a "when it rains, it pours" phenomenon (that is, contractionary fiscal policy amplifies the effects of a fall in commodity prices), the paper shows that, on average, government spending amplifies the business cycle by 21 percent of the initial drop in output following a fall in commodity prices. Put differently, the pours component accounts for 17 percent of the total fall in output. Second, the paper estimates the welfare costs of fiscal procyclicality at 2.6 percent of the costs associated with the regular business cycle in commodity exporters.
    JEL: F41 F44 H3
    Date: 2023–07
  6. By: Karsten Müller; Emil Verner
    Abstract: We study the relationship between credit expansions, macroeconomic fluctuations, and financial crises using a novel database on the sectoral distribution of private credit for 117 countries since 1940. We document that, during credit booms, credit flows disproportionately to the non-tradable sector. Credit expansions to the non-tradable sector, in turn, systematically predict subsequent growth slowdowns and financial crises. In contrast, credit expansions to the tradable sector are associated with sustained output and productivity growth without a higher risk of a financial crisis. To understand these patterns, we show that firms in the non-tradable sector tend to be smaller, more reliant on loans secured by real estate, and more likely to default during crises. Our findings are consistent with models in which credit booms to the non-tradable sector are driven by easy financing conditions and amplified by collateral feedbacks, contributing to increased financial fragility and a boom-bust cycle.
    JEL: E0 F30 G01 G02
    Date: 2023–06
  7. By: Kodjovi M. Eklou
    Abstract: Monetary policy transmission in EMs has been found to be weak historically due to under-developed financial markets and heavy central bank intervention in FX markets that undermine the exchange rate channel. Against this background, this paper investigates the transmission of monetary policy, including the role of external factors, in Malaysia and highlight findings that could be relevant for other EMs. We find an important role for the credit and the exchange rate channels. Further, we also find a complementary role for policy tools including Foreign Exchange Intervention (FXI) and liquidity tools such as Statutory Reserve Requirement in shaping the transmission of monetary policy. We then explore the spillover effects of external global factors including global monetary policy and global commodity prices on monetary policy transmission in a small open economy such as Malaysia. The results show that while global commodity prices do not impair monetary policy transmission, global monetary policy tightening could complement domestic efforts to achieve price stability by inducing a global disinflation. Finally, monetary policy transmission is delayed and weakened in high inflationary environment, with the implication that more aggressive and preemptive policy actions may be needed in such cases.
    Keywords: Monetary Policy; Emerging markets; Exchange rate; Credit; Inflation; Economic activity; Global monetary policy
    Date: 2023–07–07
  8. By: Qing Chang; Lin William Cong; Liyong Wang; Longtian Zhang
    Abstract: We build a two-country general equilibrium model to analyze the effects of cross-border data flows and pre-existing development gaps in data economies on each country's production and international trade. Raw data as byproducts of consumption can be transformed into various types of working data (information) to be used by both domestic and foreign producers. Because data constitute a new production factor for intermediate goods, a large extant divide in data utilization can reduce or even freeze trade. Cross-border data flows mitigate the situation and improve welfare when added to international trade. Data-inefficient countries where data are less important in production enjoy a "latecomer's advantage'' with international trade and data flows, contributing more raw data from which the data-efficient countries generate knowledge for production. Furthermore, cross-border data flows can reverse the cyclicity of working data usage after productivity shocks, whereas shocks to data privacy or import costs have opposite effects on domestic and foreign data sectors. The insights inform future research and policy discussions concerning data divide, data flows, and their implications for trade liberalization, the data labor market, among others.
    JEL: F15 F29 F43
    Date: 2023–06
  9. By: Jesus Crespo Cuaresma (Department of Economics, Vienna University of Economics and Business); Oscar Fernandez (Department of Economics, Vienna University of Economics and Business)
    Abstract: We examine the empirical determinants of sovereign yield synchronization dynamics in the European Monetary Union. Using a time-varying measure of (long-term) government bond yields synchronization and Bayesian Model Averaging methods, we show that the persistence of synchronization measures differs significantly between GIIPS countries (Portugal, Italy, Ireland, Greece, and Spain) and the rest of the monetary union, as well as across periods characterized by whether the zero lower bound of interest rates was binding or not and the post-Draghi whatever it takes era. The degree of synchronization in inflation rates with the rest of the currency area is a robust predictor of the synchronization of sovereign yields, as opposed to economic fundamentals describing the fiscal positions of individual countries. An out-of-sample forecasting exercise reveals that accounting for the most relevant economic fundamentals within the monetary union can lead to improvements in the directional accuracy of the forecasts of yield synchronization rates only for GIIPS countries.
    Keywords: Long-term government bond yields, European Monetary Union, Synchronization measures, Bayesian Model Averaging
    JEL: C11 C33 C52 F45 H63
    Date: 2023–07
  10. By: Gautier, Erwan; Karadi, Peter; Conflitti, Cristina; Fabo, Brian; Fadejeva, Ludmila; Fuss, Catherine; Kosma, Theodora; Jouvanceau, Valentin; Martins, Fernando; Menz, Jan-Oliver; Messner, Teresa; Petroulas, Pavlos; Roldan-Blanco, Pau; Rumler, Fabio; Santoro, Sergio; Seward, Domingos; De Veirman, Emmanuel; Wieland, Elisabeth; Wintr, Ladislav; Wursten, Jesse; Zimmer, Hélène; Amann, Juergen; Faber, Riemer; Bachiller, Javier Sánchez; Stanga, Irina
    Abstract: This paper documents five stylised facts relating to price adjustment in the euro area, using various micro price datasets collected in a period with relatively low and stable inflation. First, price changes are infrequent in the core sectors. On average, 12% of consumer prices change each month, falling to 8.5% when sales prices are excluded. The frequency of producer price adjustment is greater (25%), reflecting that the prices of intermediate goods and energy are more flexible. For both consumer and producer prices, cross-sectoral heterogeneity is more pronounced than cross-country heterogeneity. Second, price changes tend to be large and heterogeneous. For consumer prices, the typical absolute price change is about 10%, and the distribution of price changes shows a broad dispersion. For producer prices, the typical absolute price change is smaller, but nevertheless larger than inflation. Third, price setting is mildly state-dependent: the probability of price adjustment rises with the size of price misalignment, mainly reflecting idiosyncratic shocks, but it does not increase very sharply. Fourth, for both consumer and producer prices, the repricing rate showed no trend in the period 2005-19 but was more volatile in the short run. Fifth, small cyclical variations in frequency did not contribute much to fluctuations in aggregate inflation, which instead mainly reflected shifts in the average size of price changes. Consistent with idiosyncratic shocks as the main driver of price changes, aggregate disturbances affected inflation by shifting the relative number of firms increasing or decreasing their prices, rather than the size of price increases and decreases. JEL Classification: E3, E5
    Keywords: consumer prices, price stickiness, producer prices, scanner data.
    Date: 2023–07

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