nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒10‒30
fourteen papers chosen by
Martin Berka, Massey University

  1. Global Flight to Safety, Business Cycles, and the Dollar By Martin Bodenstein; Pablo A. Cuba-Borda; Nils M. Gornemann; Ignacio Presno; Andrea Prestipino; Albert Queraltó; Andrea Raffo
  2. Effect of Macroprudential Policies on Sovereign Bond Markets: Evidence from the ASEAN-4 Countries By Aizenman , Joshua; Uddin, Gazi Salah; Luo , Tianqi; Jayasekera , Ranadeva; Park, Donghyun
  3. Regional Trade Policy Uncertainty By Céline Poilly; Fabien Tripier
  4. The Risk of External Financial Crisis By Cavallo, Eduardo A.; Fernández-Arias, Eduardo
  5. Fiscal Rules and Optimal Currency Composition of Sovereign Debt in Emerging Economies By Valencia, Oscar; Rodriguez, Luis Alberto; Siachoque, Juan Pablo
  6. Sovereign spreads, central bank collateral frameworks, and periphery premia in the Eurozone By Schuster, Florian
  7. China's macroeconomic policies and spillover effects By Niemeläinen, Julia
  8. Self-Fulfilling Debt Crises with Long Stagnations By Ayres, JoaÞo; Navarro, Gaston; Nicolini, Juan Pablo; Teles, Pedro
  9. The Cyclicality of Official Bilateral Lending: Which Cycle do Flows Follow? By Galindo, Arturo; Avellán, Leopoldo; Gómez, Tomás; Lotti, Giulia
  10. Multinationals and Structural Transformation By Alviarez, Vanessa; Chen, Cheng; Pandalai-Nayar, Nitya; Varela, Liliana; Yi, Kei-Mu; Zhang, Hongyong
  11. Measuring Persistent Global Economic Factors with Output, Commodity Price, and Commodity Currency Data By Arabinda Basistha; Richard Startz
  12. Who's Most Exposed to International Shocks? Estimating Differences in Import Price Sensitivity across U.S. Demographic Groups By Colin J. Hottman; Ryan Monarch
  13. The twin deficits, monetary instability and debt crises in the history of modern Greece By Alogoskoufis, George
  14. Variations in Pass-Through from Global Agricultural Commodity Prices to Domestic Food Inflation By Daniel Hyun; Jacky Lee

  1. By: Martin Bodenstein; Pablo A. Cuba-Borda; Nils M. Gornemann; Ignacio Presno; Andrea Prestipino; Albert Queraltó; Andrea Raffo
    Abstract: We develop a two-country macroeconomic model that we fit to a set of aggregate prices and quantities for the U.S. and the rest of the world. In addition to a standard array of shocks, the model includes time variation in agents’ preference for safe bonds. We allow for a component of this time variation to be common across countries and biased toward dollar-denominated safe assets, and refer to this component as global flight to safety (GFS). We find that GFS shocks are the most important shocks driving world business cycles, and are also important drivers of activity in the U.S. and especially abroad. An adverse GFS shock lowers global GDP and inflation, widens global corporate credit spreads, and appreciates the dollar. These effects are very close to those obtained from a structural VAR which uses the excess bond premium (Gilchrist and Zakrajšek, 2012) as proxy for global flight to safety.
    Keywords: Econometrics and economic theory; International economics; Macroeconomic activity
    JEL: E32 F30 H22
    Date: 2023–10–02
  2. By: Aizenman , Joshua (University of Southern California); Uddin, Gazi Salah (Linköping University); Luo , Tianqi (Trinity College Dublin); Jayasekera , Ranadeva (Trinity College Dublin); Park, Donghyun (Asian Development Bank)
    Abstract: This paper examines whether prudential policies help to reduce sovereign bond vulnerability to global spillover risk in ASEAN-4 countries (Indonesia, Malaysia, the Philippines, and Thailand). We measure sovereign vulnerability within a risk connectedness network among sovereign bonds. The direct effect is that markets with tighter prudential policies have significantly smaller spillovers from the Treasury yield shocks of other regional and global economies. The sum of indirect and direct effects indicates that prudential policies reduce sovereign spillover risk in the long term. These findings suggest prudential policies have dual efficiency in sovereign risk regulation and Treasury internationalization
    Keywords: sovereign bond; prudential policy; risk networks; connectedness; ASEAN
    JEL: E52 E58 F42
    Date: 2023–10–10
  3. By: Céline Poilly (Aix-Marseille Univ., CNRS, AMSE, France.); Fabien Tripier (Université Paris Dauphine, PSL Research University, LEDa, France, & CEPREMAP)
    Abstract: Higher uncertainty about trade policy has recessionary effects in U.S. states. First, this paper builds a novel empirical measure of regional trade policy uncertainty, based on the volatility of national import tariffs at the sectoral level and the sectoral composition of imports in U.S. states. We show that a state which is more exposed to an unanticipated increase in tariff volatility suffers from a larger drop in real output and employment, relative to the average U.S. state. We then build a regional open-economy model and we argue that the transmission channels of uncertainty shocks, in particular the precautionary-pricing channel, are magnified in regions that feature the highest import share and a strongest export intensity. Furthermore, we show that an expansionary monetary policy may amplify the regional divergence since it worsens the recession in the most-exposed region to trade policy uncertainty.
    Keywords: uncertainty shocks, regional effects, precautionary pricing, monetary policy
    JEL: E32 E52 F41
    Date: 2023–10
  4. By: Cavallo, Eduardo A.; Fernández-Arias, Eduardo
    Abstract: This paper explores the empirical determinants of external crises on a world panel dataset of 62 countries over the fifty-year period 1970-2019 and estimates their risk trade-offs with the aim of informing macrofinancial prudential policies. The determinants include countries external balance sheets, macroeconomic imbalances, and structural and global factors. It finds that information on the composition of gross positions in countries external financial portfolios is required to gauge the risk of external crisis: debt liabilities are the riskiest component, FDI liabilities are half as risky, and FDI assets are the most protective. Macroeconomic imbalances increase risk but are usually not the key drivers of crises. Adverse global shocks significantly leverage domestic risks. International reserves are powerful risk mitigants that provide high insurance value. The evidence shows that advanced economies are structurally more resilient to withstand exposure to weak external portfolios, macroeconomic imbalances, and global shocks. For the average country the risk of external crisis is on a declining trend mainly driven by improvements in the composition of external portfolio assets magnified by increasing financial integration as well as rising international reserves.
    Keywords: External crisis;Financial crisis;Macroeconomic imbalances;External debt;Foreign Direct Investment;External assets and liabilities;External balance sheet;International reserves
    JEL: F30 F34 G01 G15 H63
    Date: 2022–11
  5. By: Valencia, Oscar; Rodriguez, Luis Alberto; Siachoque, Juan Pablo
    Abstract: Total public debt in most emerging markets grew before and after the pandemic with a sizable share in foreign currency. Along this trend, interest payments increased even in the presence of active fiscal rules in some countries. How should debt management of public debt be set under a fiscal rule? This document studies how optimal currency composition reduces the cost of debt and facilitates fiscal rule compliance but increases budget risk. Using a small open economy model, we provide evidence that optimal foreign currency holdings in Chile, Colombia, and Mexico depart considerably from observed; remaining low (high) in periods of favorable (adverse) external or domestic macroeconomic and financial conditions.
    Keywords: sovereign debt management;scal rules;currency composition
    JEL: E61 E62 H63
    Date: 2023–01
  6. By: Schuster, Florian
    Abstract: This paper studies the emergence of sovereign bond yield spreads in the Eurozone prior to the financial crisis. While spreads were close to zero in European government debt markets until the mid-2000s, they have persistently widened since then in many member states. We employ a difference-in-differences approach to analyze this phenomenon. We find that the Eurosystem's move from unconditional to conditional collateral eligibility of sovereign bonds, as part of the 2005 Single List reform, was the institutional change triggering the emergence of sovereign spreads in the Euro Area. Conditional eligibility becomes effective predominantly through a periphery premium: higher yields have been demanded from countries whose business cycles deviate most from the average Eurozone cycle. In contrast, spreads did not arise in response to adverse macroeconomic and fiscal fundamentals.
    Date: 2023
  7. By: Niemeläinen, Julia
    Abstract: This paper provides a brief overview of China's capital controls, external asset holdings and the real interest rate, and analyzes the quantitative effects of China's macroeconomic policies between 2000 and 2015, including capital controls, interest rate policy, exchange rate policy and fiscal policy, on the dynamics of China's trade balance vis-a-vis the United States and the world real interest rate. In my analysis, I take into account the demographic differences between the countries, which affect the external imbalances directly and indirectly by affecting the transmission of the macroeconomic policies. Capital controls in China remain stringent even though they have somewhat eased in 2010s, and its gross external asset holdings differ from its peer countries both in terms of the largest functional categories and by type of investment. The average interest rate spread with the US has narrowed down. According to my analysis, the macroeconomic policies overall, and mainly the undervaluation of the real exchange rate, have had a positive impact on China's trade balance. The impact of the macroeconomic policies on the real interest rate has been positive, countering the negative trend induced by demographic factors.
    Keywords: capital controls, capital flows, China
    JEL: F21 F41 F42 G28
    Date: 2023
  8. By: Ayres, JoaÞo; Navarro, Gaston; Nicolini, Juan Pablo; Teles, Pedro
    Abstract: We assess the quantitative relevance of expectations-driven sovereign debt crises, focusing on the Southern European crisis of the early 2010s and the Argentine default of 2001. The source of multiplicity is the one in Calvo (1988). Key for multiplicity is an output process featuring long periods of either high growth or stagnation that we estimate using data for those countries. We find that expectations-driven debt crises are quantitatively relevant but state dependent, as they only occur during stagnations. Expectations are a major driver explaining default rates and credit spread differences between Spain and Argentina.
    Keywords: Self-fulfilling debt crises;sovereign default;Multiplicity;Stagnations
    JEL: E44 F34
    Date: 2023–02
  9. By: Galindo, Arturo; Avellán, Leopoldo; Gómez, Tomás; Lotti, Giulia
    Abstract: Using a large panel of official bilateral loan data for 111 borrowing countries and 78 lending countries between 1980 and 2020, this paper shows that international government borrowing from bilateral sources is acyclical with respect to the economic cycle of the borrower, but procyclical with respect to the cycle of the lending country. This holds in the case of loans both from advanced economies and from China, currently the largest supplier of official bilateral lending to the average developing country. We find this form of procyclicality most often among middle-income recipient countries across most regions of the world. We also find that bilateral loans follow economic links captured through bilateral trade, and political ties measured by the alignment of votes in the United Nations. The results are consistent across a battery of robustness tests.
    Keywords: Bilateral debt;Cyclicality;Capital flows;International government debt
    JEL: E60 F32 F34
    Date: 2022–12
  10. By: Alviarez, Vanessa; Chen, Cheng; Pandalai-Nayar, Nitya; Varela, Liliana; Yi, Kei-Mu; Zhang, Hongyong
    Abstract: We study the role of multinationals (MNCs) in facilitating firm-level and aggregate structural transformation. Using a stylized model of multinational production and trade, we show that an inward multinational liberalization in the manufacturing sector raises employment in host country firms, and decreases manufacturing employment, while also raising services employment, in the parent firms. We also show the conditions under which aggregate structural transformation occurs. We test the models firm-level predictions by using confidential microdata from Japan. We study the response of Japanese MNC parents and their affiliates in China to an exogenous change in China's openness to foreign direct investment (FDI). We find that in industries where inward FDI was encouraged, Japan MNCs' affiliates in China experienced increases in their employment. We also find that MNC parents in the encouraged industries experienced decreases in home country manufacturing employment and increases in home country services and R&D employment. Finally, using microdata for several advanced and middle-income countries, we decompose the change in overall manufacturing employment shares into MNC and non-MNC components. We find a significant role for MNCs across all countries, suggesting the mechanism we highlight is an important global driver of structural transformation.
    Keywords: Multinational Firms;structural transformation;Manufacturingemployment
    JEL: F41 F44
    Date: 2023–02
  11. By: Arabinda Basistha (West Virginia University); Richard Startz (University of California, Santa Barbara)
    Abstract: In this study we use monthly G7 industrial production data, commodity price index data, and commodity currency exchange rate data in a dynamic factor model to examine the global economic factors useful for commodity price prediction. We differentiate between the dynamic factors by specifying a persistent factor and a non-persistent factor, both as a single global factor using all data and as factors for each category of data. The in-sample predictive performances of the three persistent factors together are better than the non-persistent factors and the single global factors. Out-of-sample outcomes based on forecast combinations also support the presence of predictive information in the persistent factors for overall commodity prices and for most sub-categories of commodity price indexes relative to their means. The gains in forecast accuracy are heterogeneous; ranging from 5 to 7 percent in the 1 to 6 months horizon for the overall commodity prices to a high of around 20 percent for fertilizers in the 12 month horizon in the recent sample. We further show that the information in the persistent factors, especially in the commodity currency exchange rate based persistent factor, can be integrated with other global measures to further improve the predictive performances of the global measures.
    Keywords: Dynamic factor model, industrial production, commodity price, commodity currency
    JEL: C51 C53 F62 Q02
    Date: 2023–10
  12. By: Colin J. Hottman; Ryan Monarch
    Abstract: Differences in consumption patterns across demographic groups mean that international price shocks differentially affect such groups. We construct import price indexes for U.S. consumer groups that vary by age, race, sex, education, and urban status. Black consumers and college graduates experienced significantly higher import price inflation from 1996-2018 compared to other groups, such as high school dropouts, rural consumers, and consumers over 60. Sensitivity to international price shocks varies widely, implying movements in exchange rates and foreign prices, both during our sample and during the Covid-19 pandemic, drove sizable differences in import price inflation – and total inflation – across groups.
    Keywords: Import price inflation; Exchange-rate passthrough; Inequality
    JEL: D12 E31 F31
    Date: 2023–09–27
  13. By: Alogoskoufis, George
    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
    JEL: N10 N20 N40
    Date: 2023–10–02
  14. By: Daniel Hyun; Jacky Lee
    Abstract: This paper examines factors that affect the transmission of fluctuations in global agricultural commodity prices to domestic food inflation. Using panel regressions on data from 53 advanced and emerging-market countries, we investigate how factors such as local crop production conditions, the extent of food industry development and the net agricultural trade status interact with global agricultural prices to affect pass-through to local food prices. Results show that pass-through varies significantly based on these factors. Pass-through decreases during better-than-normal crop conditions, highlighting the importance of local production. Countries with less-developed food industries experience higher pass-through, likely due to the greater importance of raw commodities in diets and less-complex supply chains. Interestingly, net exporters of agricultural commodities exhibit greater pass-through, potentially due to strategic trade adjustments that take advantage of global supply and demand dynamics. These variations in pass-through suggest potential avenues for managing food price inflation in response to shocks to global food prices under different scenarios.
    Keywords: Inflation and prices; International topics
    JEL: E31 Q02 Q11 Q17 Q18
    Date: 2023–10

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