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on Open Economy Macroeconomics |
| By: | Krenz, Johanna |
| Abstract: | What are the effects of financial integration on global comovement? Using a standard two-country DSGE model, I show that in response to country-specific supply shocks higher exposure to foreign assets leads to lower cross-country output correlations, while the opposite is true for country-specific demand shocks. I argue that an important, yet overlooked, transmission channel originates in the interplay between financial integration and terms of trade movements in response to the shocks hitting the economy. The transmission channel is independent of whether the agents who hold the foreign assets are financially constrained or not. |
| Keywords: | Business cycle comovement, Financial cycle comovement, Financial integration, Demand versus supply shocks, Terms of trade, Transfer Problem, Balance sheet effect |
| JEL: | E30 E44 F41 F44 G15 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:uhhwps:281784&r=opm |
| By: | James Costain; Galo Nuño Barrau; Carlos Thomas |
| Abstract: | We build an arbitrage-based model of the yield curves in a heterogeneous monetary union with sovereign default risk, which can account for the asymmetric shifts in euro area yields during the Covid-19 pandemic. We derive an affine term structure solution, and decompose yields into term premium and credit risk components. In an extension, we endogenize the peripheral default probability, showing that it decreases with central bank bond-holdings. Calibrating the model to Germany and Italy, we show that a "default risk extraction" channel is the main driver of Italian yields, and that flexibility makes asset purchases more effective. |
| Keywords: | sovereign default, quantitative easing, yield curve, affine model, Covid-19 crisis, ECB, pandemic emergency purchase programme |
| JEL: | E5 G12 F45 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1165&r=opm |
| By: | Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Andreas Schrimpf (Bank for International Settlements (BIS) - Monetary and Economic Department; Centre for Economic Policy Research (CEPR); University of Tuebingen); Yuan Zhang (Shanghai University of Finance and Economics) |
| Abstract: | We develop a continuous time general equilibrium model with intermediaries at the heart of international financial markets. Global intermediaries bargain with households and extract rents from providing access to foreign claims. By tilting state prices, intermediaries’ market power breaks monetary neutrality and makes international risksharing inefficient. Despite having zero net positions, markups charged by intermediaries significantly distort international asset prices and exchange rate dynamics and their response to shocks. Our model can reproduce patterns consistent with several well-known exchange rate puzzles, such as deviations from Uncovered and Covered Interest Parity. All equilibrium quantities are derived in closed form, allowing us to pin down the underlying economic mechanisms explicitly. |
| Keywords: | Financial Intermediation, Exchange Rates, Uncovered Interest Parity, Covered Interest Parity Deviations |
| JEL: | E44 E52 F31 F33 G13 G15 G23 |
| Date: | 2024–01 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2401&r=opm |
| By: | Jing Cynthia Wu; Yinxi Xie; Ji Zhang |
| Abstract: | Motivated by empirical evidence, we propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We find financial integration features an amplification for a domestic monetary policy shock and a negative spillover for a foreign shock. These results hold for conventional and unconventional monetary policies. Among various aspects of financial integration, the bond duration plays a major role, and our results cannot be replicated by a standard model of perfect risk sharing between households. Finally, we observe an important interaction between financial integration and trade openness and demonstrate trade alone does not have an economically meaningful impact on monetary policy transmission. |
| Keywords: | central bank research; international financial markets; monetary policy transmission |
| JEL: | E44 E52 F36 F42 |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:24-3&r=opm |
| By: | Maria Siranova (Slovak Academy of Sciences); Menbere Workie Tiruneh (Slovak Academy of Sciences & Webster Vienna Private University); Brian Konig (Slovak Academy of Sciences & University of Economics in Bratislava) |
| Abstract: | In this paper we study role of ‘abnormal FDI‘ as a potential driver of sudden stops during the 2009-2019 period. The unexplained part of country fixed effects in a bilateral gravity regression is used to calculate the abnormal FDI. We then construct three measures of ‘FDI abnormalcy‘ that assess: i) the possible role of an economy as financial centre or tax haven, ii) the contribution of ‘FDI abnormalcy‘ to total FDI position, and iii) the exposure toward territories considered as tax havens or financial centres. Determinants of sudden stops are analysed by the panel probit model. We find that economies labelled as tax havens or financial centres and economies with comparably higher shares of inward ‘abnormal FDI’ were associated with a lower incidence of sudden stops. In contrast, the presence of capital inflows linked to tax haven or financial centre territories may increase the likelihood of a sudden stop event. |
| Keywords: | Sudden stop, FDI, illicit financial flows, tax havens, international financial centres |
| JEL: | F G |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:inf:wpaper:2024.02&r=opm |
| By: | Richard Chisik (Department of Economics, Toronto Metropolitan University, Toronto, Canada); Nazanin Behzadan (Department of Economics, University of Prince Edward Island, Charlottetown, Canada) |
| Abstract: | We develop a new model of international trade with non-homothetic preferences whereby within-country income distribution affects the pattern of trade and economic growth. Alternative forms of foreign transfers, such as foreign aid and remittances, interact with the income distribution in dissimilar manners, which in turn generates differences in spending patterns, production patterns, and the pattern of international trade. In a three sector model with international trade and production we show that while remittances foster economic growth, foreign aid can cause economic stagnation. A production shift to the sector with less long-run growth potential is known as the Dutch disease and in our model the disease is triggered by within-country income differences and the form of the foreign transfer. We empirically verify these hypotheses with data from a panel covering the years 1991-2009 while controlling for the issues of omitted variable bias and the possible endogeneity of foreign aid and remittances. |
| Date: | 2024–02 |
| URL: | http://d.repec.org/n?u=RePEc:rye:wpaper:wp089&r=opm |