nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒10‒16
eleven papers chosen by
Martin Berka, Massey University

  1. Sovereign Defaults and Public Investment (Capital) By Tamon Asonuma; Hyungseok Joo
  2. Unbalanced Financial Globalization By Damien Capelle; Bruno Pellegrino
  3. Financial Integration, Excess Consumption Volatility, and the World Real Interest Rate By YAMADA, Haruna
  4. The Twin Deficits, Monetary Instability and Debt Crises in the History of Modern Greece By George Alogoskoufis
  5. Technological Rivalry and Optimal Dynamic Policy in an Open Economy By Yan Bai; Keyu Jin; Dan Lu
  6. Capital Inflows and Income Inequality:Evidence from Panel VAR Approach By Jinyeong Yun
  7. Assessing the macroeconomic impact of weather shocks in Colombia By Jose Vicente Romero; Sara Naranjo-Saldarriaga; Jonathan Alexander Munoz
  8. Banks’ portfolio of government debt and sovereign risk By António Afonso; José Alves; Sofia Monteiro
  9. The International Monetary System and International Financial System as an Analogy to the Copernican Heliocentric system: A simple multi-layers network model with simultaneous regime changes By Michael D. Bordo; Cécile Bastidon
  10. Illiquid Lemon Markets and the Macroeconomy By Aimé Bierdel; Andres Drenik; Juan Herreño; Pablo Ottonello
  11. Nonbank Lenders as Global Shock Absorbers: Evidence from US Monetary Policy Spillovers By David Elliott; Ralf R. Meisenzahl; José-Luis Peydró

  1. By: Tamon Asonuma (International Monetary Fund); Hyungseok Joo (University of Surrey)
    Abstract: Sovereigns' public investment (capital) influences sovereign debt crises and resolution. We compile a dataset on public expenditure composition in 1975{2020 for 75 countries. We show that during sovereign debt restructurings with private external creditors, public investment (i) experiences a severe decline and a slow recovery, (ii) differs from public consumption and transfers, and (iii) relates with restructuring delays. We develop a theoretical model of defaultable debt that embeds endogenous public capital accumulation, expenditure composition, production and multi-round debt renegotiations. The model quantitatively shows public investment dynamics delay debt settlement (i.e., \capital accumulation delays"). Data support theoretical predictions.
    JEL: F34 F41 H63
    Date: 2023–08
  2. By: Damien Capelle; Bruno Pellegrino
    Abstract: We examine the impact of the last five decades of financial globalization on world GDP and income distribution, using a novel multi-country dynamic general equilibrium model that incorporates a demand system for international assets. We introduce, estimate and validate new country-level measures of inward and outward Revealed Capital Account Openness (RKO), derived from wedge accounting. The implementation of our framework requires only minimal data, which is available as early as 1970 (national income accounts, external assets and liabilities positions). Our RKO wedges reveal enormous heterogeneity in the pace of capital account liberalization, with richer countries liberalizing much faster than poorer ones. We call this pattern Unbalanced Financial Globalization. We then simulate a counterfactual trajectory of the world economy where the RKO wedges are fixed at their pre-globalization levels. We find that unbalanced financial globalization led to a worsening of capital allocation, a 2.8% lower world GDP, a 12% rise in the cross-country dispersion of GDP per capita, lower wages in poorer countries and lower cost of capital in high-income countries. These findings starkly contrast with the predictions of standard models of financial markets integration, where capital account barriers decline symmetrically across countries. In a counterfactual scenario where countries open their capital account in a symmetric or convergent fashion, we find diametrically opposite effects: significant improvements in capital allocation efficiency and lower cross-country inequality, higher wages in poor countries, etc... Our results highlight the pivotal role played by country heterogeneity in shaping the real consequences of capital markets integration.
    Keywords: capital flows, capital allocation, capital misallocation, globalization, international finance, open economy
    JEL: F20 F30 F40 F60
    Date: 2023
  3. By: YAMADA, Haruna
    Abstract: Contrary to classical macroeconomic theory, the volatility of consumption relative to income has risen in emerging markets despite the international financial integration. This study presents a theoretical mechanism of this phenomenon by developing a small open economy model with an occasionally binding borrowing constraint, named the Interest Coverage Ratio-based borrowing constraint. Calibration exercises show that financial integration improves consumption smoothing and mitigates income shocks. Meanwhile, the foreign debt limit is more sensitive to changes in the world real interest rate. An increase in the world real interest rate tightens the borrowing constraint and decreases consumption significantly for the repayment. Financial integration would make consumption more vulnerable to the world real interest rate changes, resulting the higher volatility in emerging markets.
    Keywords: Financial Integration, Excess Consumption Volatility, Emerging Market Economy, World Real Interest Rate, Occasionally Binding Borrowing Constraint
    JEL: E21 E41 E44 F62
    Date: 2023–09
  4. By: George Alogoskoufis
    Abstract: This paper reviews, analyses and interprets the determinants and the implications of the twin, fiscal and current account, deficits in the history of modern Greece. The analysis focuses on the determinants and the dynamic interactions among the twin deficits, domestic monetary regimes, and access to international borrowing. Two are the main conclusions: First, when Greece did not have access to international borrowing, fiscal imbalances usually led to monetary destabilization and inflation. Second, when it did have access to international borrowing, fiscal imbalances were generally larger, led to external deficits and, eventually, sovereign debt crises and defaults. The monetary and exchange rate regime also mattered. The 1950s and 1960s were the only prolonged period in which the twin deficits were tackled effectively and, as a result, the only period in which Greece enjoyed high economic growth, monetary stability, and external balance simultaneously.
    Keywords: Modern Greece, economic history, institutions, fiscal policy, monetary policy, debt crises
    Date: 2023–10
  5. By: Yan Bai; Keyu Jin; Dan Lu
    Abstract: What are a country's policy options in the face of emerging technologies development in a global economy? To answer this question, we examine optimal dynamic policies in an open economy where technology is endogenously accumulated through R&D innovation. Our key insight is that a country has incentives to influence foreign innovation efforts across sectors and over time---giving rise to optimal policies even when the private innovation allocations are (Pareto) efficient. We derive explicit expressions for optimal taxes linked to both an intratemporal and an intertemporal motive to manipulate foreign technology. A country would want to levy higher tariffs in sectors in which it has a comparative advantage, at the same time invoking domestic innovation subsidies during transition. By contrast, optimal policies under exogenous technology call for uniform tariffs across sectors and no innovation policies.
    JEL: E23 F12 F63 O38
    Date: 2023–09
  6. By: Jinyeong Yun (University of Giessen)
    Abstract: In this paper, I document empirical evidence that an external shock in capital inflows leads to an increase in income inequality in advanced economies and causes a decline in income inequality in emerging market economies. I estimate a panel VAR model with an annual dataset on 53 countries over the period 1990-2020 to study the effects of capital inflows on income inequality within countries. To distinguish the external capital inflow shocks driven by global financial conditions from other shocks, I identify the structural external shocks to capital inflows using sign restrictions. The analysis is performed separately in advanced and emerging market economies since the two groups show significant differences in the level of economic development and the degree of capital market openness. The results are statistically and economically significant. By income class, a capital inflow shock increases primarily the income share of the rich in advanced economies and the poorest half in emerging market economies. These empirical findings suggest that capital inflows have different impacts on income inequality across countries, and policymakers should pay attention to the possibility of adverse distributional effects of capital inflows.
    Keywords: Capital inflows, Income inequality, Panel VAR, Sign restrictions
    JEL: D63 F32 F38
    Date: 2023
  7. By: Jose Vicente Romero (Banco de la Republica); Sara Naranjo-Saldarriaga (Banco de la Republica); Jonathan Alexander Munoz (Banco de la Republica)
    Abstract: In this paper, we investigate the impact of adverse weather shocks on Colombian economic activity, with a particular emphasis on the effects on agricultural output, food and headline inflation. Existing literature and empirical evidence suggest that adverse weather shocks, such as those related to the El Nino event in 2015-2016, lead to decreases in agricultural output and increases in inflation without significantly affecting total GDP growth. To further assess this result, we evaluate the impact of ENSO fluctuations using a BVAR-X model. Based on these findings, we propose a small open economy New Keynesian model that introduces a novel channel through which relative prices (agricultural vs. non-agricultural) are affected by weather shocks, allowing us to incorporate this empirical evidence into a structural model for Colombia.
    Keywords: Weather shocks; El Nino Southern Oscillation (ENSO); Small Open Economy New Keynesian Models
    JEL: Q54 E52 E31
    Date: 2023–09–14
  8. By: António Afonso; José Alves; Sofia Monteiro
    Abstract: We analyze domestic, foreign, and central banks holdings of public debt for 31 countries for the period of 1989-2022, applying panel regressions and quantile analysis. We conclude that an increase in sovereign risk raises the share of domestic banks’ portfolio of public debt and reduces the percentage holdings in the case of central banks. Better sovereign ratings also increase (decrease) the share of commercial (central) banks’ holdings. Furthermore, the effects of an increment in the risk for domestic investors have increased since the 2010 financial crisis.
    Keywords: Banking; Sovereign Debt; Sovereign risk; Financial crisis; Ratings.
    JEL: C21 E58 G24 G32 H63
    Date: 2023–10
  9. By: Michael D. Bordo; Cécile Bastidon
    Abstract: The evolution of the IMS and IFS in the past several hundred years can be viewed through the lens of the Copernican heliocentric system developed over 500 years ago. We trace out the evolution across regimes of the IMS and IFS in terms of network representations of the Copernican system. We provide a simple, fully testable theoretical model whose assumptions are based on these representations. The IMS and IFS are described by a two-layer graph whose three key features (hub, core, distances) are affected by nonlinear joint regime changes linked to a technological, institutional, geopolitical and regulatory environment variable. We conclude with a discussion of some perspectives of the future of the international monetary and financial systems. Our analysis is based on economic history, theory and some resonant concepts from astrophysics.
    JEL: C3 C82 E42 F33 G15 N2
    Date: 2023–09
  10. By: Aimé Bierdel; Andres Drenik; Juan Herreño; Pablo Ottonello
    Abstract: We study the macroeconomic implications of asymmetric information in capital markets. We build a quantitative capital-accumulation model in which capital is traded in illiquid markets, with sellers having more information about capital quality than buyers. Asymmetric information distorts the terms of trade for sellers of high-quality capital, who list higher prices and are willing to accept lower trading probabilities to signal their type. Led by the model's predictions, we measure the distortions from asymmetric information by studying the relationship between listed prices and trading probabilities in a unique dataset of individual capital units listed for trade. By combining the empirical measurement with the model, we show that information asymmetries can play a quantitatively large role during economic crises when the degree of asymmetric information deteriorates.
    JEL: D82 E22 E32
    Date: 2023–09
  11. By: David Elliott; Ralf R. Meisenzahl; José-Luis Peydró
    Abstract: We show that nonbank lenders act as global shock absorbers from US monetary policy spillovers. We exploit loan-level data from the global syndicated lending market and US monetary policy surprises. When US policy tightens, nonbanks increase dollar credit supply to non-US firms (relative to banks), mitigating the dollar credit reduction. This increase is stronger for riskier firms, proxied by emerging market firms, high-yield firms, or firms in countries with stronger capital inflow restrictions. However, firm-lender matching, zombie lending, fragile-nonbank lending, or periods of low vs higher local GDP growth do not drive these results. Furthermore, the substitution from bank to nonbank credit has firm-level real effects. Consistent with a funding-based mechanism, when US monetary policy tightens, non-US nonbanks increase short-term dollar debt funding, relative to banks. In sum, despite increased risk-taking by less regulated and more fragile nonbanks (relative to banks), access to nonbank credit reduces the volatility in capital flows—and associated economic activity—stemming from US monetary policy spillovers, with important implications for theory and policy.
    Keywords: nonbank lending; international monetary policy; Global financial cycle; Banks
    JEL: E5 F34 F42 G21 G23 G28
    Date: 2023–08

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