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on Open Economy Macroeconomics |
| By: | In Kyung Kim (Department of Economics, Sogang University, Seoul, Korea); Jinhyuk Lee (Department of Economics, Korea University); Hyejoon Im (School of Economics & Finance, Yeungnam University) |
| Abstract: | Using retail scanner data from Kazakhstan, an emerging economy with significant and un-expected exchange rate fluctuations, we observe an incomplete yet substantial exchange rate pass-through (ERPT) into prices. Specifically, we note a 50% change occurring a year after the initial shock. The ERPT demonstrates asymmetry in response to exchange rate movements. Notably, the direction of this asymmetry is opposite for imported versus domestic products. Furthermore, our findings indicate that ERPT is non-linear; the price response is more pro-nounced when the exchange shock is small, aligning with the existence of menu costs. Our results also reveal that larger retailers exhibit a greater ERPT compared to smaller or medium-sized retailers, regardless of the exchange rate shock direction. Understanding these asymmetric and non-linear price responses to exchange rate shocks may be crucial for formulating effective inflation targeting policies, especially in emerging economies prone to high inflation. |
| Keywords: | exchange rate pass-through, consumer prices, scanner data, inflation dynamics |
| JEL: | F31 L16 F41 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:sgo:wpaper:2303&r=opm |
| By: | Alessandro Moro (Bank of Italy); Valerio Nispi Landi (Bank of Italy) |
| Abstract: | We examine the global implications of carbon taxation using a two-country environmental DSGE model, with a specific focus on the strategic interactions between countries, the case for cooperation, and the impact on the balance of payments. From a normative perspective, we show that, assuming a convex disutility of pollution, carbon taxes are strategic substitutes across countries: when one country increases carbon taxation, the other country finds it optimal to reduce it. From a positive perspective, a country imposing unilateral carbon taxation experiences a reduction in its production, a decrease in its interest rates, a depreciation of its currency on impact and an appreciation thereafter, higher debt, and equity outflows to the rest of the world. |
| Keywords: | carbon tax, climate change, capital flows, international policy transmission, DSGE |
| JEL: | F31 F32 F41 F42 Q58 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1445_24&r=opm |
| By: | Lloyd, S. P.; Marin, E. A. |
| Abstract: | How does the conduct of optimal cross-border financial policy change with prevailing trade agreements? We study the joint optimal determination of trade policy and capital-flow management in a two-country, two-good model with trade in goods and assets. While the cooperative optimal allocation is efficient and involves no intervention, a country planner acting unilaterally can achieve higher domestic welfare by departing from free trade in addition to levying capital controls. However, time variation in the optimal tariff induces households to over- or under-borrow through its effects on the real exchange rate. In response to fluctuations where incentives for the planner to manipulate the terms of trade inter-and intra-temporally are aligned-e.g., the availability of domestic goods changes, or when faced with trade disruptions to imports-optimal capital controls are larger when used in conjunction with optimal tariffs. In contrast, when the incentives are misaligned, the optimal trade tariff partly substitutes for the use of capital controls. Accounting for strategic interactions, we show that committing to a free-trade agreement can reduce incentives to engage in costly capital-control wars. |
| Keywords: | Capital-Flow Management, Free-Trade Agreements, Ramsey Policy, Tariffs, Trade Policy |
| JEL: | F13 F32 F33 F38 |
| Date: | 2023–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camjip:2307&r=opm |
| By: | Jun Hee Kwak (Department of Economics, Sogang University, Seoul, Korea) |
| Abstract: | I build a dynamic quantitative model in which both firms and the government can default. Rising endogenous corporate debt increases sovereign default risk, as tax revenues are expected to decrease. Externalities arise because it can be privately optimal but socially suboptimal for firms to default given their limited liability, rationalizing macroprudential interventions in corporate debt markets. I propose a set of such optimal policies that reduce the number of defaulting firms, increase fiscal space, and boost household consumption during financial crises. Contrary to conventional wisdom, countercyclical debt policy can be counterproductive, as the countercyclical policy induces more firmdefaults. |
| Keywords: | Sovereign Debt, Corporate Debt, Default, Macroprudential Policy, Externalities |
| JEL: | F34 F38 F41 E44 E61 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:sgo:wpaper:2306&r=opm |
| By: | Rogelio Mercado Jr. (The South East Asian Central Banks (SEACEN) Research and Training Centre); Luca Sanfilippo (International Finance Corporation) |
| Abstract: | Portfolio bond flows to emerging and developing market economies (EDMEs) from multi-sector bond funds (MSBFs) are volatile and highly concentrated, rendering them potentially risky. This paper uses a recent MSBF flows dataset to shed more light on capital flow push and pull factors and to provide new evidence on the effectiveness of capital account tightening measures in reducing volatile MSBF flows. The results show: (i) higher U.S. monetary policy rates and global risk aversion significantly reduce aggregate MSBF flows and those denominated in hard currencies, while stronger global commodity price growth and global liquidity significantly increase them; (ii) global and domestic GDP growth (surprisingly) have a countercyclical impact on MSBF flows during our sample period, and, importantly, (iii) capital account tightening measures that target fixed income investment funds are effective in reducing MSBF flows to EDMEs, especially during periods of increased stress. Together, these results provide new insights into multi-sector bond funds and the importance of designing and implementing targeted capital control measures. |
| Keywords: | multi-sector bond funds, portfolio bond flows, and capital controls |
| JEL: | G23 F21 F38 F41 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:sea:wpaper:wp53&r=opm |
| By: | Christopher J. Erceg; Marcin Kolasa; Jesper Lindé; Mr. Haroon Mumtaz; Pawel Zabczyk |
| Abstract: | We study alternative approaches to the withdrawal of prolonged unconventional monetary stimulus (“exit strategies”) by central banks in large, advanced economies. We first show empirically that large-scale asset purchases affect the exchange rate and domestic and foreign term premiums more strongly than conventional short-term policy rate changes when normalizing by the effects on domestic GDP. We then build a two-country New Keynesian model that features segmented bond markets, cognitive discounting and strategic complementarities in price setting that is consistent with these findings. The model implies that quantitative easing (QE) is the only effective way to provide monetary stimulus when policy rates are persistently constrained by the effective lower bound, and that QE is likely to have larger domestic output effects than quantitative tightening (QT). We demonstrate that “exit strategies” by large advanced economies that rely heavily on QT can trigger sizeable inflation-output tradeoffs in foreign recipient economies through the exchange rate and term premium channels. We also show that these tradeoffs are likely to be stronger in emerging market economies, especially those with fixed exchange rates. |
| Keywords: | Monetary Policy; Quantitative Easing; International Spillovers |
| Date: | 2024–03–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/073&r=opm |
| By: | Delgado, Martha Elena (Fedesarrollo); Herreño, Juan (UCSD); Hofstetter, Marc (Universidad de los Andes); Pedemonte, Mathieu (FRB Cleveland) |
| Abstract: | We estimate the causal effects of a shift in the expected future exchange rate of a local currency against the US dollar on a representative sample of firms in an open economy. We survey a nationally representative sample of firms and provide the one-year-ahead nominal exchange rate forecast published by the local central bank to a random sub-sample of firm managers. The treatment is effective in shifting exchange rate and inflation expectations and perceptions. These effects are persistent and larger for non-exporting firms. Linking survey responses with administrative census data, we find that the treatment affects the dynamics of export and import quantities and prices at the firm level, with differential effects for exports to destination countries that use the US dollar as their currency. We instrument exchange rate expectations with the variation induced by the treatment and estimate a positive elasticity of a future expected depreciation in import expenditures. |
| Keywords: | Expectations; exchange rate; firms |
| JEL: | E31 E71 F31 G41 |
| Date: | 2024–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:col:000089:021114&r=opm |
| By: | Roland Beck; Antonio Coppola; Angus J. Lewis; Matteo Maggiori; Martin Schmitz; Jesse Schreger |
| Abstract: | We assess the pattern of Euro Area financial integration adjusting for the role of “onshore offshore financial centers” (OOFCs) within the Euro Area. The OOFCs of Luxembourg, Ireland, and the Netherlands serve dual roles as both hubs of investment fund intermediation and centers of securities issuance by foreign firms. We provide new estimates of Euro Area countries' bilateral portfolio investments which look through both roles, attributing the wealth held via investment funds to the underlying holders and linking securities issuance to the ultimate parent firms. Our new estimates show that the Euro Area is less financially integrated than it appears, both within the currency union and vis-a-vis the rest of the world. While official data suggests a sharp decline in portfolio home bias for Euro Area countries relative to other developed economies following the introduction of the euro, we demonstrate that this pattern only remains true for bond portfolios, while it is artificially generated by OOFC activities for equity portfolios. Further, using new administrative evidence on the identity of non-Euro Area investors in OOFC funds, we document that the bulk of the positions constituting missing wealth in international financial accounts are now accounted for by United Kingdom counterparts. |
| JEL: | E0 F0 G0 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32275&r=opm |
| By: | Nina Boyarchenko; Leonardo Elias |
| Abstract: | Do global credit conditions affect local credit and business cycles? Using a large cross-section of equity and corporate bond market returns around the world, we construct a novel global credit factor and a global risk factor that jointly price the international equity and bond cross-section. We uncover a global credit cycle in risky asset returns, which is distinct from the global risk cycle. We document that the global credit cycle in asset returns translates into a global credit cycle in credit quantities, with a tightening in global credit conditions predicting extreme capital flow episodes and declines in the stock of country-level private debt. Furthermore, global credit conditions predict the mean and left tail of real GDP growth outcomes at the country level. Thus, the global pricing of corporate credit is a fundamental factor in driving local credit conditions and real outcomes. |
| Keywords: | global financial cycle; corporate bond returns; return predictability; international capital flows; credit and real activity outcomes |
| JEL: | F30 F44 G15 G12 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:98024&r=opm |
| By: | Yushi Yoshida; Junko Shimizu; Takatoshi Ito; Kiyotaka Sato; Taiyo Yoshimi; Uraku Yoshimoto |
| Abstract: | Japanese exporters’ choice of invoice currencies is investigated using newly available official Customs declaration data, which records detailed information, including the trading partners’ names, invoicing currency, and product descriptions. The strategic complementarity mechanism, that is, choosing the same invoice currency as others in the same industry or the same destination market, is found among Japanese exporters. We propose the “broad two-way exporters” whose export destinations and import origins do not necessarily match and the “narrow two-way exporters” whose export destination and import origins match in the same year. It is found that currency matching for exports and imports is as essential as strategic complementarity for two-way exporters, regardless of dominant currency, producer currency, or local currency invoicing. However, as one of this paper’s novelty, we found evidence that newly entering two-way exporters are less concerned about currency matching. Therefore, the currency matching mechanism for two-way exporters is gradually formed as they continue to survive in international markets. |
| JEL: | F14 F31 F61 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32276&r=opm |