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on Open Economy Macroeconomics |
| By: | Rogelio Mercado Jr.; Luca Sanfilippo |
| 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: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2024-28&r=opm |
| By: | Ṣebnem Kalemli-Özcan; Filiz D. Unsal |
| Abstract: | Contrary to historical episodes, the 2022–2023 tightening of US monetary policy has not yet triggered financial crisis in emerging markets. Why is this time different? To answer this question, we analyze the current situation through the lens of historical evidence. In emerging markets, the financial channel–based transmission of US policy historically led to more adverse outcomes compared to advanced economies, where the trade channel fails to smooth out these negative effects. When the Federal Reserve increases interest rates, global investors tend to shed risky assets in response to the tightening global financial conditions, affecting emerging markets more severely due to their lower credit ratings and higher risk profiles. This time around, the escape from emerging market assets and the increase in risk spreads have been limited. We document that the historical experience of higher risk spreads and capital outflows can be largely explained by the lack of credible monetary policies and dollar-denominated debt. The improvement in monetary policy frameworks combined with reduced levels of dollar-denominated debt have helped emerging markets weather the recent Federal Reserve hikes. |
| JEL: | F30 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32329&r=opm |
| By: | Menzie D. Chinn; Jeffrey A. Frankel; Hiro Ito |
| Abstract: | We begin by examining determinants of aggregate foreign exchange reserve holdings by central banks (size of issuing country’s economy and financial markets, ability of the currency to hold value, and inertia). But understanding the determination of reserve holdings probably requires going beyond the aggregate numbers, instead observing individual central bank behavior, including characteristics of the holding country (bilateral trade with the issuing country, bilateral currency peg, and proxies for bilateral exposure to sanctions), in addition to the characteristics of the reserve currency issuer. On a currency-by-currency basis, US dollar holdings are somewhat well explained by several issuer characteristics; but the other currencies are less successfully explained. It may be that the results from currency-by-currency estimation are impaired by insufficient sample size. This consideration offers a motivation for pooling the data across the major currencies and imposing the constraints that reserve holdings are determined in the same way for each currency. In this setting, most economic determinants enter with significance: economic size as measured by GDP, size of financial markets as measured by foreign exchange turnover, bilateral currency peg, and bilateral trade share. However, geopolitical variables (bilateral alliance, bilateral sanctions) usually do not enter with significance. |
| JEL: | F33 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32387&r=opm |
| By: | Valentina Bruno; Michele H. Dathan; Yuriy Kitsul |
| Abstract: | We use a merged global data set of security-level corporate bond issuance and firm-level financial statement data to show that, in contrast to earlier periods of financial stress, during the COVID pandemic nonfinancial firms around the world were more likely to issue bonds, driven by a boom in local-currency-denominated issuance. We observe a distinct cross-regional difference in the characteristics of issuing firms, finding that in advanced economies issuance during COVID was driven by less risky firms, as predicted by existing theories; in emerging markets, only issuance of U.S. dollar denominated bonds came from larger or less risky firms. |
| Keywords: | Corporate bonds; Issuance; COVID; Crises |
| JEL: | F30 G15 G30 |
| Date: | 2024–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1390&r=opm |
| By: | Joana Garcia; João Amador |
| Abstract: | We analyze how firms choose the currency in which they price their transactions in services trade and explore to what extent the U.S. dollar has a dominant role in those transactions, as documented by earlier literature for goods trade. Using a new granular dataset detailing the currency used by Portuguese firms in extra and intra-EU trade, we show that currency choices in services trade are active firm-level decisions. Services exporters that are larger and that rely more on inputs priced in foreign currencies are less likely to use the domestic currency in their services exports. Moreover, we document that the U.S. dollar has a dominant role as a vehicle currency in services trade, but it is less prevalent than in goods trade. Our results are consistent with this difference arising from a lower openness of services markets and from a stronger reliance of services in domestic inputs. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202316&r=opm |
| By: | Puch González, Luis Antonio; Ruiz, Jesús |
| Abstract: | This paper investigates the asymmetrical effects of supply chain disruptions on oil prices and inflation. To this purpose, we identify anticipated (news) shocks associated to the global supply chain. Then we estimate the effects of these shocks on oil prices and inflation in the US. We allow 'escalating' (restrictive) and 'deescalating' (expansionary) supply chain news shocks tohave differing effect sizes. Our empirical findings reveal that anticipated supply chain disruptions exert a substantial and statistically significant influence on both oil prices and inflation. We uncover a significant asymmetry in these effects: 'escalating news' shocks exhibit a markedly stronger and more persistent impact compared to 'deescalating news' shocks. Consequently, the oil price is less sensitive to an alleviation of supply chain strain than to an exacerbation. Our results can be rationalized by a small open economy model which is used to assess the validity of our empirical approach. Furthermore, we demonstrate that the mechanisms governing thetransmission of supply chain news shocks in the model align closely with observed empirical patterns. Failing to account for this asymmetry could lead to misjudgments regarding the repercussions of supply chain pressures. |
| Keywords: | News shocks; Inflation; Oil prices; Supply chain disruption; Expectations |
| JEL: | E2 E6 E32 E44 Q42 Q43 Q58 |
| Date: | 2024–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:43758&r=opm |
| By: | Carlos Cantú; Rocío Gondo; Berenice Martinez |
| Abstract: | We quantify the trade-offs of using reserve requirements (RR) as a financial stability tool. A tightening in RR reduces the amplitude of the credit cycle. This lowers the frequency and strength of financial stress episodes but at a cost of lower growth in credit and economic activity. We find that the gains from a lower probability and magnitude of financial stress episodes are greater than the costs from the initial reduction in economic activity. In addition, we find that RR have a stronger effect on emerging market economies than in advanced economies, both in terms of costs and benefits. Finally, we find that uniform RR have a stronger effect than RR that differenciate by maturity or currency. |
| Keywords: | reserve requirements, macroprudential policy, financial stress episodes, early-warning system, financial cycle |
| JEL: | E44 E58 F41 G01 G28 |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:1182&r=opm |
| By: | Sónia Cabral; Cláudia Duarte; José R. Maria |
| Abstract: | High-quality economic analysis requires high-quality data. We construct quarterly industrylevel databases for Portugal and the euro area with a rich and homogeneous breakdown since 1995. The data facilitate international comparisons based on value added, wages, producer prices, hours worked and capital, disaggregated by industries, viz. construction, wholesale and retail trade or human health and social work activities. As an illustration we compare Portugal and the euro area in manufacturing and accommodation and food service activities over 1995Q1-2022Q4. We show that Portuguese value added and real producer wages, per hour, are consistently below those of the euro area in both industries. Capital per hour in manufacturing is systematically lower in Portugal, but not in accommodation and food service activities since the late 2000s. In both economies, manufacturing witnessed an upward trend in value added, real wages and capital stock, all per hour. In contrast, accommodation and food service activities recorded a downward trend in value added per hour and real hourly wages. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:o202302&r=opm |
| By: | Lilian Muchimba (Bank of Zambia); Mimoza Shabani (University of East London); Alexis Stenfors (University of Portsmouth); Jan Toporowski (University of Portsmouth) |
| Abstract: | The paper adopts a TVP-VAR methodology to investigate the dynamics of inflation components for three countries: the UK, the US and Japan from 1993 to 2023. We deconstruct the CPI into components to examine the actual price changes that make up the CPI and the degree to which changes in those prices influence each other. By doing so, we uncover the connectedness and spillovers between domestic inflation components. We find that whilst connectedness of price changes has been moderate over the last three decades it has increased significantly since the CPI started to soar in late 2021, suggesting the existence of a spillover effect among price-setting firms in the economy. Furthermore, our empirical evidence shows that the transmission mechanism across domestic CPI components varies significantly across countries and over time. From a monetary policy perspective, the findings suggest that a signalling process among consumer market producers complements the signalling by central banks in relation to inflation. Lastly, the cross-country variations over time imply that “no size fits all”, thus emphasizing the importance of domestic spillovers. |
| Keywords: | Consumer Prices, Dynamic Connectedness, Inflation, Monetary policy, Signalling, TVP-VAR |
| JEL: | C81 E31 E52 D43 |
| Date: | 2024–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:pbs:ecofin:2024-04&r=opm |
| By: | António Afonso; José Alves; Sofia Monteiro |
| Abstract: | In this article, we study the effects of geopolitical risks and world uncertainty on time-varying fiscal and external sustainability coefficients. We use Schlicht’s (2021) methodology to estimate time-varying fiscal and external sustainability coefficients for the EU for 27 economies between 2001Q4 and 2022Q3. While fiscal sustainability coefficients derive from the government revenues and expenditures relationship, external sustainability coefficients were computed from the exports’ responses to changes in imports. Our results show that geopolitical risks are always associated with lower fiscal and external sustainability, although with a stronger effect when took into consideration the home geopolitical risk. Moreover, the effects of geopolitical tensions are much stronger on external accounts’ sustainability than on fiscal sustainability. The magnitude of GPR detrimental effects on external sustainability can be 3 to 6 times higher, approximately, when compared to public finances’ sustainability. Lastly, geopolitical tensions in border countries have a negative spillover effect on the sustainability of domestic external accounts. |
| Keywords: | economic integration, geopolitical risks, fiscal sustainability, external sustainability, time-varying coefficients |
| JEL: | E62 F15 F42 H62 H87 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11067&r=opm |