nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒09‒04
nine papers chosen by
Martin Berka, Massey University

  1. Measuring Financial Integration: More Data, More Countries, More Expectations By Menzie D. Chinn; Hiro Ito
  2. On the empirical relevance of the exchange rate as a shock absorber at the zero lower bound By Finck, David; Hoffmann, Mathias; Hürtgen, Patrick
  3. Analyzing the Impact of Foreign Capital Inflows on the Current Account Balance in Developing Economies: A Panel Data Approach By Ali, Amjad; Audi, Marc
  4. The Network Gravity of Global Banking By Minetti, Raoul; Romanini, Giacomo; Ziv, Oren
  5. Current External Challenges to the Economic Expansion of Emerging Markets By Juan Carlos Moreno-Brid; Lorenzo Nalin; Edgar Perez-Medina
  6. The Role of Foreign Investors and Local Agents in the Derivatives Market and their Impact on the Exchange Rate in Colombia: A Wavelet Analysis By Fredy Gamboa-Estrada
  7. Convenient but risky government bonds By Kaldorf, Matthias; Röttger, Joost
  8. The words have power: the impact of news on exchange rates By Teona Shugliashvili
  9. Current Account Balance and External Adjustment in Turkiye By Hakan Kara; Cagri Sarikaya

  1. By: Menzie D. Chinn; Hiro Ito
    Abstract: We assess market mediated financial integration over the last fifty years. We first systematically lay out several definitions of financial integration, and then review the evidence regarding whether covered interest parity, uncovered interest parity, and real interest parity hold across industrial and non-industrial countries. Finally we examine what the determinants of real interest differentials are.
    JEL: F30 F40
    Date: 2023–07
  2. By: Finck, David; Hoffmann, Mathias; Hürtgen, Patrick
    Abstract: We estimate the effects of a negative asymmetric demand shock on the real exchange rate for the euro area vis-à-vis the United States, Canada, and Japan by state-dependent sign-restricted local projection methods. We find a real depreciation when interest rates are not at the ZLB, but also when they are. The exchange rate can accomodate considerable variations in output, confirming its shock-absorbing capacity before and during the ZLB episode. The stabilizing role of the exchange rate is accompanied by a significant expansion of the ECB's balance sheet at the ZLB, while it remained unaffected in the pre-ZLB period. Our empirical results can be reconciled with an open economy New Keynesian model extended with unconventional monetary policy measures when interest rates are at the ZLB.
    Keywords: Zero Lower Bound, Exchange Rate, Local Projections, State-dependent Effects, Unconventional Monetary Policy, Demand Shocks
    JEL: F31 E31 E37 C54
    Date: 2023
  3. By: Ali, Amjad; Audi, Marc
    Abstract: This research has explored the effects of foreign capital inflows on the current account deficit in developing countries from 1995 to 2020. The study considers various factors such as import demand, export demand, foreign direct investment, foreign debt, economic growth, foreign remittances, and foreign reserves as independent variables. The analysis utilizes the panel autoregressive distributed lag approach to examine both the long-run and short-run relationships between the dependent and independent variables. Moreover, the study employs the Panel Granger causality test to evaluate the causal connections among the selected variables. The results indicate that import demand, foreign debt, and remittance inflows positively affect the current account deficit in developing countries. Conversely, export demand, foreign direct investment, economic growth, and foreign reserves have a negative impact on the current account deficit. Consequently, it is recommended that developing countries prioritize the augmentation of stable and substantial foreign reserves as a strategy to alleviate the level of the current account deficit.
    Keywords: Capital inflow, current account deficit, economic growth, export demand, foreign reserves, import demand, foreign debt, foreign direct investment, foreign remittances
    JEL: F21 F24 F32 F43 O24
    Date: 2023–07
  4. By: Minetti, Raoul (Michigan State University, Department of Economics); Romanini, Giacomo (Bank of Italy); Ziv, Oren (Michigan State University, Department of Economics)
    Abstract: A substantial fraction of international banking is intermediated through banking hubs and complex multi-national routing. These flows are ignored or unaccounted for, both theoretically and empirically. We develop an N-country DSGE model of lending where banks choose the path of lending through a network of partner institutions in multiple countries. Banking hub countries arise endogenously as central nodes in the intermediation network. The model provides a framework to rationalize observable international statistics with theoretical models of banking gravity. It generates a set of bilateral locational flow of funds that conceptually matches aggregate (BIS LBS) statistics, as distinct from the ultimate demand and supply of lending. Using a series of calibrations for both node and edge shocks, we show that accounting for the network is crucial for understanding the propagation of shocks and the impact of banking consolidation on aggregate fluctuations. The analysis reveals that neglecting the multinational banking network can lead to biased conclusions about the aggregate effects of banking unions.
    Keywords: Heterogeneous Banks; Gravity; Intermediation Network; Contagion
    JEL: F40 G20
    Date: 2023–08–17
  5. By: Juan Carlos Moreno-Brid (Universidad Nacional Autonoma de México); Lorenzo Nalin (Universidad Nacional Autonoma de México); Edgar Perez-Medina (Universidad Nacional Autonoma de México)
    Abstract: We present a small analytical framework, built in the Balance of Payments Constrained Growth (BPCG) tradition, tailored to identify how specific financial and structural vulnerabilities of emerging economies (EMEs) restrict their expansion. This framework is applied to shed light on the impact of global shocks and of major macro policy changes in developed countries on the growth path of six economies. As we show, this impact is conditioned by the vulnerabilities and dynamics of their insertion on international trade and capital markets and their exposure to policy changes in the developed centers. Our work shows that the BPCG-approach is a relevant, simple tool to identify EMEs' challenges in the post-covid 19 era.
    Keywords: Balance of Payment Constraint Growth Model, Current account deficit, Emerging markets' vulnerabilities, Cross-border flows
    JEL: F32 F43
    Date: 2023–02–14
  6. By: Fredy Gamboa-Estrada (Banco de la Republica)
    Abstract: Changes in net positions of foreign and local investors in the forward market may have differential effects on the spot exchange rate. This paper assesses the role of different sectors in the derivatives market and their potential impact with other fundamentals on the spot exchange rate in Colombia. Using wavelet band spectrum regressions, I find that changes of net forward positions of foreign investors impact the exchange rate at short terms scales. There is evidence that the real sector has a significant and permanent effect on the spot exchange rate at different frequencies that is higher in the long term. Other fundamentals such as the interest rate differential, CDS, and oil prices affect the exchange rate at lower frequencies, which is consistent with the exchange rate determination puzzle. This approach differs substantially from traditional regression methods such as ordinary least squares (OLS) which are not suitable to identify the relationship between variables at different frequencies over time.
    Keywords: Foreign investors; local investors; exchange rate; wavelet analysis; band spectrum regression
    JEL: C1 C22 C58 F31 G11
    Date: 2023–08–13
  7. By: Kaldorf, Matthias; Röttger, Joost
    Abstract: How does convenience yield interact with sovereign risk and the supply of government bonds? We propose a model of sovereign debt and default in which convenience yield arises because investors are able to pledge government bonds as collateral on financial markets. Convenience yield is dependent on the valuation of collateral, which is negatively dependent on the supply of government bonds, and haircuts that increase with sovereign risk. Calibrated to Italian data, convenience yield contributes substantially to the public debt-to-GDP ratio and can rationalise prolonged periods of negative bond spreads, even in the presence of default risk. We show that the debt elasticity of convenience yield is the most important driver of our results. Decomposing it into the debt elasticity of a collateral valuation and a haircut component, we find that, under empirically relevant conditions, a higher debt elasticity of haircuts can reduce fiscal discipline.
    Keywords: Sovereign risk, convenience yield, haircuts, debt management
    JEL: G12 G15 H63
    Date: 2023
  8. By: Teona Shugliashvili
    Abstract: Using the big data of news texts and a novel, news extended exchange rate model, we investigate the impact of media news on major exchange rates. To present the impact of the U.S. Dollar related news on EUR/USD and GBP/USD, we first use a machine learning model and detect which news topics relate to U.S. Dollar. Next, we calculate the attention to the U.S. Dollar related news topics over time. Eventually, we visualize how Exchange rates react to shocks in the attention to the U.S. Dollar related news topics. The impulse response functions of U.S. Dollar bilateral rates show that exchange rates respond to the U.S. Dollar related news and to the economic uncertainty news shocks with statistical significance in several periods after the shock. Forecast error decomposition documents that 25-27% of exchange rate variation in the long run comes from the news. The results reveal, that news add valuable information to macroeconomic fundamentals for identifying exchange rates, and exchange rates are better identified when both, macroeconomic and news information are used together. These findings are important for exchange rate modeling.
    Keywords: Foreign Exchange, News, Taylor rules, Text mining, LDA, Natural Language Processing (NLP)
    JEL: C55 D80 D84 F31 G14
    Date: 2023–06–02
  9. By: Hakan Kara (Bilkent University, Department of Economics, Ankara, Turkiye); Cagri Sarikaya (Akbank Gen. Müd., Sabancı Center, Istanbul, Turkiye)
    Abstract: This paper identifies the cyclical drivers of the current account balance (CAB) in Türkiye and assesses the relevant macro policy implications. We employ the notion of “underlying current account”, which corrects for cyclical factors such as global and domestic growth, terms of trade, as well as other exogenous factors including data revisions and idiosyncratic shocks to balance on services. We show that excessive fluctuations in the headline external deficit in recent years can be largely attributed to a combination of unusually large external shocks such as the pandemic and the war, in conjunction with a record-low domestic real interest rates. Special emphasis is put on the role of gold trade and its relation to domestic macro policies. Accounting for the impact of all factors, we estimate that the underlying CAB has shrunk from -6.4% in 2010 to a range of -0.9% to -1.6% in 2023, suggesting a substantial improvement in the external balance during the past decade. However, the underlying balance has significantly deteriorated after 2022, as the jump in inflation coupled with the quasi-fixed exchange rate regime implemented through active use of central bank reserves quickly eroded the competitiveness gains of past years. Besides, as the domestic agents have increased their demand for physical goods/assets to hedge against high inflation under ultra-low real rates, the upward shift in the demand for gold and other imported goods started to feed through the structural component of the CAB. These observations imply that, it may be challenging to lock in the recent gains in the external balance unless the authorities eventually deliver the necessary cyclical adjustment and restore the credibility of the macroeconomic policy framework by re-establishing a nominal anchor.
    Keywords: Underlying current account, Turkish economy.
    JEL: E32 E65 F32
    Date: 2023–08

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