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on Open Economy Macroeconomics |
| By: | Shangshang Li |
| Abstract: | This paper evaluates gains from international monetary policy cooperation between the financial centre and periphery countries in a two-country open economy model consistent with global financial cycles. Compared to the non-cooperative Nash equilibrium, the optimal cooperative equilibrium robustly fails to benefit both countries simultaneously. The financial periphery is more likely to gain from cooperation if it raises less foreign currency debt or is relatively small. These results also hold when considering the transitional gains and losses of moving from non-cooperation to cooperation. The uneven distribution of gains from cooperation persists when both countries adopt implementable policy rules with and without cooperation. Nevertheless, both countries gain when transitioning from the Nash to the cooperative implementable rules. Regardless of the financial centre's policy, rules responding to the exchange rate dominate over purely inward-looking rules for the financial periphery. |
| Keywords: | policy cooperation, global financial cycle, currency mismatch |
| JEL: | E44 E52 E58 E61 F34 F42 |
| URL: | http://d.repec.org/n?u=RePEc:liv:livedp:202405&r=opm |
| By: | Pym Manopimoke; Nuwat Nookhwun; Jettawat Pattararangrong |
| Abstract: | This paper examines the stabilization role of flexible exchange rates for emerging economies within the Latin America and Asia regions. Based on a structural VAR model, we utilize zero and sign restrictions as well as introduce novel exchange rate pass-through restrictions to identify structural macroeconomic shocks. Overall, we find that exogenous exchange rate shocks drive more than half of total exchange rate fluctuations in emerging economies. Despite this predominant role, we find that exchange rates do not act as a source of shocks to the real economy, but instead absorb and reduce output growth and inflation volatilities. We further find that this shock-insulation property is highly shockdependent, where the benefits of flexible exchange rates are most evident for demand and global shocks, while exchange rate movements tend to amplify output growth volatilities in the face of global supply shocks. Also, based on counterfactual analyses, we find that the net benefits of flexible exchange rates as a shock absorber are in general larger for emerging economies in Latin America than in Asia, particularly during crises periods. Finally, while we find that the stabilization role of exchange rates hinges upon the nature of underlying structural shocks, there is also a positive association with structural determinants such as a country’s degree of exchange rate flexibility and trade openness. |
| Keywords: | Flexible exchange rate; Shock absorber; Exchange rate pass-through; Shock dependency; Structural VAR |
| JEL: | C32 E44 F31 F41 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:pui:dpaper:220&r=opm |
| By: | Federico Trionfetti (Aix-Marseille Univ., CNRS, AMSE, Marseille, France); Julien Jinz (Bielefeld University and Kiel Institute for the World Economy.); Matthieu Crozet (Université Paris-Saclay) |
| Abstract: | The strongest empirical regularity about the exchange rate pass-through is that it is incomplete. We provide a new theoretical explanation based on the unwillingness of some firms to price discriminate between markets. These firms set a single price to all destinations and adjust it when the exchange rate shock occurs. But the adjustment is not necessarily proportional since the change in the single price affects revenues in all markets. The single price strategy also implies a “pass-around” effect: The exchange rate shock has repercussions of price changes to all export markets. The analysis of price changes operated by French exporters in different markets after the EUR/CHF shock of 2015 provides evidence in favour of our theoretical explanation. |
| Keywords: | Exchange rate pass-through, international trade, Pricing-to-market |
| JEL: | F14 F31 F61 F62 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2412&r=opm |
| By: | Mariano Kulish; James Morley; Nadine Yamout; Francesco Zanetti |
| Abstract: | We examine the relevance of Dutch Disease through the lens of an open-economy multisector model that features unemployment due to labor market frictions. Bayesian estimates for the model quantify the effects of both business cycle shocks and structural changes on the unemployment rate. Applying our model to the Australian economy, we find that the persistent rise in commodity prices in the 2000s led to an appreciation of the exchange rate and fall in net exports, resulting in upward pressure on unemployment due to sectoral shifts. However, this Dutch Disease effect is estimated to be quantitatively small and offset by an ongoing secular decline in the unemployment rate related to decreasing relative disutility of working in the non-tradable sector versus the tradable sector. The changes in labor supply preferences, along with shifts in household preferences towards non-tradable consumption that are akin to a process of structural transformation, makes the tradable sector more sensitive to commodity price shocks but a smaller fraction of the overall economy. We conclude that changes in commodity prices are not as relevant as other shocks or structural changes in accounting for unemployment even in a commodity-rich economy like Australia. |
| Date: | 2024–04–24 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:1045&r=opm |
| By: | Luciana Juvenal; Ivan Petrella |
| Abstract: | We examine the impact of commodity price changes on the business cycles and capital flows in emerging markets and developing economies (EMDEs), distinguishing between their role as a source of shock and as a channel of transmission of global shocks. Our findings reveal that surges in export prices, triggered by commodity price shocks, boost domestic GDP, an effect further amplified by the endogenous decline of country spreads. However, the effects on capital flows appear muted. Shifts in U.S. monetary policy and global risk appetite drive the global financial cycle in EMDEs. Eased global credit conditions, attributed to looser U.S. monetary policy or lower global risk appetite, lead to a rise in export prices, higher output, a decrease in government borrowing costs, and stimulate greater capital flows. The endogenous response of export prices amplifies the output effects of a more accommodative U.S. monetary policy while country spreads magnify the impact of shifts in global risk appetite. |
| Date: | 2024–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/082&r=opm |
| By: | Heimonen, Kari; Rönkkö, Risto |
| Abstract: | This study examines the role of the Chinese renminbi (RMB) as an international anchor currency. After China abandoned its tight US dollar (USD) peg in 2005, the RMB found greater popularity as a reserve currency. This change in the RMB's role reflected China's growing presence in the global economy, even challenging the USD in some of the 155 countries that signed on to the Belt and Road initiative (BRI). Modifying the approach of Ahmed (2021) to estimate basket weights in exchange rate policy for the currencies of 63 advanced and emerging economy currencies, we account for potential drivers of the exchange rate omitted in previous studies to obtain unbiased anchor weight estimates. Unlike earlier studies, we find that the RMB's anchor weight in exchange rate policies remains low irrespective of China's global role. Overall, the weight of the RMB averaged 6 %, compared to an average share of 58 % for the USD and 35 % for the euro. We also find that the USD, euro and yen anchor choices are strongly interlinked. A change in the anchor weight of any of these three currencies results in a strong opposite change in the weights of other two. Changes in RMB anchoring, however, do not materially impact USD, euro and yen weights. An increase in financial markets volatility leads developing countries to increase anchor weights of the developed countries currencies USD, euro and yen. Heightened geopolitical uncertainty only increases the weights of the USD and euro. |
| Keywords: | exchange rate, currency peg, RMB |
| JEL: | F31 F33 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bofitp:290408&r=opm |
| By: | Jens H. E. Christensen; Xin Zhang |
| Abstract: | We assess the impact of large-scale asset purchases, commonly known as quantitative easing (QE), conducted by Sveriges Riksbank and the European Central Bank (ECB) on bond risk premia in the Swedish government bond market. Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond-specific safety premia, we find that Sveriges Riksbank’s bond purchases raised inflation and short-rate expectations, lowered nominal and real term premia and inflation risk premia, and increased nominal bond safety premia, suggestive of signaling, portfolio rebalance, and safe asset scarcity effects. Furthermore, we document spillover effects of ECB’s QE programs on Swedish bond markets that are similar to the Swedish QE effects only after controlling for exchange rate fluctuations, highlighting the importance of exchange rate dynamics in the transmission of QE spillover effects. |
| Keywords: | term structure modeling; financial market frictions; safety premium; unconventional monetary policy |
| JEL: | C32 E43 E52 F41 F42 G12 |
| Date: | 2024–04–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:98075&r=opm |
| By: | Luca Fornaro; Christoph Grosse-Steffen |
| Abstract: | We provide a theory of financial fragmentation in monetary unions. Our key insight is that currency unions may experience of symmetry: that is episodes in which identical countries react differently when exposed to the same shock. During these events part of the union suffers a capital flight, while the rest acts as a safe haven and receives inflows. The central bank then faces a difficult trade-off between containing unemploymnet in capital-flight countries, and inflationary pressures in safe-haven ones. By counteracting private capital flows with public ones, unconventional monetary interventions mitigate the impact of financial fragmentation on employment and inflation, thus helping the central bank to fulfill its price stability mandate. |
| Keywords: | Monetary unions, Euro area, fragmentation, optimal monetary policy in openeconomies, capital flows, fiscal crises, unconventional monetary policies, Inflation, endogenous breaking of symmetry, Optimum |
| JEL: | E31 E52 F32 F41 F42 F45 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1883&r=opm |
| By: | Christopher J. Erceg; Marcin Kolasa; Jesper Lindé; Mr. Andrea Pescatori |
| Abstract: | Many countries have used energy subsidies to cushion the effects of high energy prices on households and firms. After documenting the transmission of oil supply shocks empirically in the United States and the Euro Area, we use a New Keynesian modeling framework to study the conditions under which these policies can curb inflation. We first consider a closed economy model to show that a consumer subsidy may be counterproductive, especially as an inflation-fighting tool, when applied globally or in a segmented market, at least under empirically plausible conditions about wage-setting. We find more scope for energy subsidies to reduce core inflation and stimulate demand if introduced by a small group of countries which collectively do not have much influence on global energy prices. However, the conditions under which consumer energy subsidies reduce inflation are still quite restrictive, and this type of policy may well be counterproductive if the resulting increase in external debt is high enough to trigger sizeable exchange rate depreciation. Such effects are more likely in emerging markets with shallow foreign exchange markets. If the primary goal of using fiscal measures in response to spikes in energy prices is to shield vulnerable households, then targeted transfers are much more efficient as they achieve their goals at lower fiscal cost and transmit less to core inflation. |
| Keywords: | Energy Prices; Energy Subsidies; Monetary Policy; International Spillovers |
| Date: | 2024–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/081&r=opm |
| By: | Aquilante, Tommaso (Bank of England); Dogan, Aydan (Bank of England); Firat, Melih (International Monetary Fund); Soenarjo, Aditya (London School of Economics) |
| Abstract: | This paper explores the link between the UK’s participation in global value chains (GVCs) and inflation dynamics. Using sectoral data, we find evidence indicating that UK industries with higher proportions of imported inputs from emerging market economies (EMEs) exhibit a flatter Phillips curve. We then build a two-country model with input-output linkages and demonstrate analytically that an increased reliance on imported intermediate goods, serving as a proxy for GVCs, results in a flatter Phillips curve. Additionally, GVC integration affects inflation dynamics through the influence of cyclical forces that shape firms’ marginal costs via terms of trade fluctuations. Specifically, we highlight how the limited business cycle correlation between the UK economy and EMEs reduces the pass-through of domestic shocks to prices. |
| Keywords: | Global value chains; inflation dynamics; Phillips curve |
| JEL: | E30 E31 E32 F10 F14 |
| Date: | 2024–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:1060&r=opm |
| By: | Otaviano Canuto |
| Abstract: | Recent initiatives and policy moves by China and other countries to extend the reach of use of the renminbi in the international monetary system, while the U.S. dollar share in global reserves has slightly shrunk in relative terms, have sparked frequent discussions about a hypothetical “de-dollarization” of the global economy. We approach here what that would mean in terms of global currency functions as means of payment and store of value. While we point out a relative decline of the U.S. dollar weight in those functions more recently, we also highlight gravitational factors that tend to uphold its position. Therefore, the “exorbitant privilege” that the U.S. dollar has provided to its issuer is likely to remain. |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:ocp:ppaper:pb21-23&r=opm |
| By: | Mr. Eugenio M Cerutti; Mr. Jiaqian Chen; Martina Hengge |
| Abstract: | The rapid growth of crypto assets raises important questions about their cross-border usage. To gain a better understanding of cross-border Bitcoin flows, we use raw data covering both on-chain (on the Bitcoin blockchain) and off-chain (outside the Bitcoin blockchain) transactions globally. We provide a detailed description of available methodologies and datasets, and discuss the crucial assumptions behind the quantification of cross-border flows. We then present novel stylized facts about Bitcoin cross-border flows and study their global and domestic drivers. Bitcoin cross-border flows respond differently than capital flows to traditional drivers of capital flows, and differences appear between on-chain and off-chain Bitcoin cross-border flows. Off-chain cross-border flows seem correlated with incentives to avoid capital flow restrictions. |
| Keywords: | Crypto assets; Bitcoin; Cross-border flows; Capital flows |
| Date: | 2024–04–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/085&r=opm |
| By: | Alexander Karaivanov; Benoit Mojon; Luiz Awazu Pereira da Silva; Albert Pierres Tejada; Robert M Townsend |
| Abstract: | We model a reinsurance mechanism for the national unemployment insurance programs of euro area member states. The proposed risk-sharing scheme is designed to smooth country-level unemployment risk and expenditures around each country's median level, so that participation and contributions remain incentive-compatible at all times and there are no redistributionary transfers across countries. We show that, relative to the status quo, such scheme would have provided nearly perfect insurance of the euro area member states' unemployment expenditures risk in the aftermath of the 2009 sovereign debt crisis if allowed to borrow up to 2 percent of the euro area GDP. Limiting, or not allowing borrowing by the scheme would have still provided significant smoothing of surpluses and deficits in the national unemployment insurance programs over the period 2000-2019. |
| Keywords: | unemployment insurance, risk sharing, reinsurance, euro area, fiscal policy, mechanism design, limited commitment |
| JEL: | E62 J65 F32 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1180&r=opm |
| By: | Afees A. Salisu (Centre for Econometrics & Applied Research, Ibadan, Nigeria; Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Ahamuefula E. Ogbonna (Centre for Econometrics & Applied Research, Ibadan, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Qiang Ji (Institutes of Science and Development, Chinese Academy of Sciences, Beijing, China; School of Public Policy and Management, University of Chinese Academy of Sciences, Beijing, China) |
| Abstract: | In this paper, we employ the generalized autoregressive conditional heteroscedasticity-mixed data sampling (GARCH-MIDAS) framework to forecast the daily volatility of 19 dollar-based exchange rate returns based on monthly metrics of oil price uncertainty (OPU), and relatively broader global and country-specific energy market-related uncertainty indexes (EUI) over the daily period of January, 1996 to September, 2022. We find that the global EUIs tend to perform better than the OPU, in terms of their respective GARCH-MIDAS-based forecast performances relative to the benchmark (GARCH-MIDAS-realized volatility (RV)) model, highlighting the need to look beyond the oil market to capture energy related uncertainties. This line of reasoning is further enhanced when we observe the relative (to the United States) country-specific EUIs to outperform the benchmark in a statistically significant manner for at least 14 currencies across the short-, medium-, and long-term forecasting horizons. Our findings have important implications for currency traders. |
| Keywords: | Monthly Oil Price and Energy Market Uncertainties, Daily Exchange Rate Returns Volatility, GARCH-MIDAS, Forecasting |
| JEL: | C32 C53 F31 F37 Q02 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:202418&r=opm |
| By: | Toptancî, Alî |
| Abstract: | Recently, there has been a significant increase in the number of international trade companies in the Kurdistan Region. This is crucial evidence that the Kurdistan Region can influence the world economy and politics. The economic integration between the Kurdistan Region and Eurozone countries is the result of international companies in the Kurdistan Region in Eurozone countries; investment, production, and trade show that the international division of labor and economic integration will be more robust between the Kurdistan Region and Eurozone countries and that this economic integration can be significant in world trade. The study will examine the economic integration between the Kurdistan Region, which has recently achieved significant agricultural production and export momentum, and the Eurozone countries. Accordingly, the study states that the agricultural products produced in the Kurdistan Region will be essential for both parties politically and economically and will provide many advantages as international trade companies established in the Kurdistan Region integrate with the Eurozone countries and enter the Eurozone markets. International economic research and analyses that have been conducted for a long time indicate that international trade companies in the Kurdistan Region will strongly impact the worldwide development of economic integration with Eurozone countries. |
| Keywords: | Kurdistan Region, Eurozone, Economic Integration, Customs Union, International Trade Companies. |
| JEL: | F02 F13 F15 F23 F43 F62 F63 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120573&r=opm |