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on Open Economy Macroeconomics |
| By: | Kamila Kuziemska-Pawlak; Jakub Mućk |
| Abstract: | This paper proposes an extension of the fundamental equilibrium exchange rate (FEER) model that accounts for the trade linkages within the Global Value Chains (GVCs). In the modified FEER framework, both backward and forward linkages are taken into consideration. To demonstrate the empirical relevance of the complex nature of existing trade linkages, the proposed FEER model is applied to analyze exchange rate fluctuations of the selected Central and Eastern European countries against the euro. It is documented that in Czechia, Hungary, and Poland the standard FEER framework predicts rapid appreciation of the equilibrium exchange rate after 2010, which implies deepening undervaluation of the actual real exchange rate towards the end of the analysed period. Instead, when the GVCs' linkages are taken into account in the framework, actual real exchange rates are broadly in line with the fundamental equilibrium exchange rates, and hence the missing real appreciation of the Czech krone, the Hungarian forint and the Polish zloty is to a large extent an equilibrium phenomenon. |
| Keywords: | exchange rate, current account, foreign trade, Global Value Chains |
| JEL: | C32 C33 F12 F31 F32 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:sgh:kaewps:2024100&r= |
| By: | Zhengyang Jiang |
| Abstract: | I propose a dynamic model of the reserve currency paradigm that centers on the liquidity demand for safe assets. In global recessions, the demand for the U.S. safe bond increases and raises its convenience yield, giving rise to a stronger dollar and a countercyclical seigniorage revenue. The seigniorage revenue raises the U.S. wealth and consumption shares in recessions, despite the U.S. suffering portfolio losses from its external positions. This asset demand channel also connects exchange rate dynamics to the marginal utility over bond holding, which provides new perspectives on exchange rate disconnect and on the relationship between exchange rates and capital flows. Under this safe-asset view, exorbitant privilege does not require exorbitant duty. |
| JEL: | E44 F32 G15 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32454&r= |
| By: | Graña-Colella, Santiago; Silva Neira, Ignacio |
| Abstract: | Extensive economic literature has covered the effect of a natural resource boom on the performance of the manufacturing sector. Specifically, the Dutch Disease hypothesis establishes that increases in commodity prices should lead to a decrease in manufacturing exports, due to significant inflows of foreign currency that subsequently appreciate the real exchange rate. In 2003, a substantial increase in commodity prices, coupled with a pronounced appreciation of the real exchange rate, triggered a process of export primarization in Latin American countries. The paper aims to empirically assess whether the Dutch Disease framework can provide a suitable explanation for this phenomenon in Argentina and Chile. Despite both countries heavily depending on natural resources, they exhibit notable differences in economic scale, composition, and evolution of manufacturing exports, as well as their economic policy approaches throughout the designated period. This task is performed through the estimation of one VAR model for each country (2003-2019). The main results indicate that while there is insufficient evidence to assert that Argentina suffered from the Dutch Disease, the evidence for Chile remains inconclusive. These divergent results could potentially find clarification in an examination of disparities in export composition and integrated technology and thereby suggest a broader analysis regarding the policy implications. |
| Keywords: | Dutch Disease, VAR models, Argentina, Chile, manufacture export, commodity price boom |
| JEL: | C32 E12 F31 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ipewps:296489&r= |
| By: | Andrés Blanco; Andrés Drenik; Emilio Zaratiegui |
| Abstract: | We study the distribution of labor income during large devaluations. Across countries, inequality falls after large devaluations within the context of a surge in inflation and a fall and subsequent recovery of real labor income. To better understand inequality dynamics, we use a novel administrative dataset covering the 2002 Argentinean devaluation. We show that following a homogeneous fall in real labor income across workers, the bottom of the income distribution recovers faster than the top. Low labor mobility and lack of union coverage among high-income workers explain their slow recovery. |
| JEL: | F0 F31 F41 F44 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32494&r= |
| By: | Accominotti, Olivier; Albers, Thilo; Oosterlinck, Kim |
| Abstract: | This paper explores how selective default expectations affect the pricing of sovereign bonds in a historical laboratory: the German default of the 1930s. We analyze yield differentials between identical government bonds traded across various creditor countries before and after bond market segmentation. We show that, when secondary debt markets are segmented, a large selective default probability can be priced in bond yield spreads. Selective default risk accounted for one third of the yield spread of German external bonds over the risk-free rate during the 1930s. Selective default expectations arose from differences in the creditor countries’ economic power over the debtor. |
| Keywords: | sovereign risk; debt default; secondary markets; creditor discrimination; The research leading to these results has received funding from the People Programme (Marie Curie Actions) of the European Union’s Seventh Framework Programme FP7/2007-2013/Under REA grant agreement 608129; OUP deal |
| JEL: | F34 G12 G15 H63 N24 N44 |
| Date: | 2023–12–04 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:120657&r= |
| By: | Markus Brueckner; Sudyumna Dahal; Haiyan Lin |
| Abstract: | The average country in Asia-Pacific experiences more natural disasters than the average country of other developing regions. This paper presents stylized facts on natural disasters, human development, and external debt in Asia-Pacific. The paper also contains estimates of the effects that natural disasters have on human development. Controlling for country and time fixed effects, dynamic panel model estimates show that external debt has a mitigating effect on the adverse impacts that natural disasters have on human development: In countries with low external debt-toGDP ratios, natural disasters significantly decrease the human development index; but not so in countries with high external debt-to-GDP ratios. External debt (i.e. borrowing from abroad) is a financial contract for obtaining resources from abroad (i.e. imports of goods and services). When a country experiencing a natural disaster borrows from abroad to increase imports of goods and services, the population suffers less when a natural disaster strikes. Natural disasters destroy goods and capital (e.g. food, machinery, buildings, and roads) in the country in which they occur. If imports of goods and services do not increase, then the population has less goods and services to consume following a natural disaster. By increasing imports, which are mirrored on the financial side by an increase in external debt, the population of a country that was struck by a natural disaster can smooth consumption. As the incidence of natural disasters increases globally, a policy recommendation for disaster-prone countries, supported by the empirical results of this paper, is the need for deeper and innovative mechanisms of access to international financing, including reforms in both domestic and international financial systems. |
| Keywords: | Natural Disasters, Shocks, Debt, Human Development |
| JEL: | F3 Q54 H6 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:acb:cbeeco:2024-699&r= |
| By: | Colicev, A.; Hoste, J.; Konings, J. |
| Abstract: | We use retailer scanner data to analyze the impact of a large and sudden exchange rate shock on the cost of living of consumers. While the marginal cost of foreign-sourced products increases by 7 percent more than the costs of locally-sourced products, the retail markup on foreign products decreases by 4 percent relative to local products. At the same time, we document increased entry and exit of both foreign and local varieties around the depreciation. To analyze the impact on consumers we decompose the change in the cost of living into a cost, a retail markup, a substitution, and a variety effect. As richer consumers spend, on average, more on foreign varieties, we find that they are disproportionally affected by the cost effect. However, lower retail markups on foreign products offset this relative cost increase. Since richer consumers have lower elasticities of substitution and benefit more from changes in product variety, their cost of living increased only by 16 percent, while for poor consumers the cost of living increased by 24 percent. |
| Keywords: | Currency depreciation, Pass-through into consumer prices, Cost-of-living |
| JEL: | F33 F61 |
| Date: | 2024–06–12 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camjip:2419&r= |
| By: | Dainauskas, J.; Lastauskas, P. |
| Abstract: | We show that U.S. trade protectionism shocks cause the cyclical component of the aggregate U.S. price markup to increase significantly over time. However, if trade barrier announcements are covered by the media, which may help form expectations about the future, we find that the aggregate U.S. price markup response is zero upon impact, if not negative, before it eventually rises. We develop a simple canonical model of trade adjustment dynamics driven by habits in consumer preferences that replicates these empirical responses and use it to quantify the welfare implications. In the model, firms cut markups preemptively in anticipation of future trade barriers by factoring in the time that it takes to wean addicted consumers off of imported varieties. |
| Keywords: | Trade Adjustment Dynamics, Trade Protectionism, Announcements, Anticipation, Deep Habits, Welfare Gains from Trade. |
| JEL: | C11 C32 F13 F17 F62 |
| Date: | 2024–06–12 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2431&r= |
| By: | Hakan Yilmazkuday (Department of Economics, Florida International University) |
| Abstract: | This paper investigates the effects of global geopolitical risk on stock prices of 29 economies by using the local projections method for the monthly period between 1985M1-2023M9. The results show that a positive unit shock of global geopolitical risk (normalized to one standard deviation) reduces stock prices (normalized to one standard deviation) in a statistically significant way by 0.80 in Latvia, 0.71 in China, 0.62 in the Euro Area, 0.50 in Sweden, 0.42 in the United Kingdom, 0.39 in the United States, 0.38 in Switzerland, 0.34 in Israel, 0.28 in Canada, and 0.21 in Denmark in a year following the shock, whereas it increases those only in Iceland by 0.28 that can be used to hedge against any geopolitical risk. Subsample analyses further suggest that the negative effects of the same shock exist in several economies (including the United States, China and Euro Area) during the first half of the sample period that coincides with the geopolitical events that the United States is involved with, whereas they only exist in Russia, Poland, Euro Area and the United Kingdom for the second half of the sample period, suggesting that the Russo-Ukrainian War has mostly affected the stock prices in these nearby economies. It is implied that the geographical location of geopolitical events as well as the countries involved are important indicators to understand the effects of any global geopolitical risk on stock prices. |
| Keywords: | Geopolitical Risk, Stock Prices, Local Projections Method |
| JEL: | G15 G41 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:fiu:wpaper:2407&r= |
| By: | Roshen Fernando; Warwick McKibbin |
| Abstract: | Antimicrobial resistance (AMR) is a growing global health threat that led to 1.27 million deaths in 2019. Given the widespread use of antimicrobials in healthcare, agriculture, and industrial applications and a range of factors affecting AMR, including demographic trends and physical climate risks, an economy-wide approach is essential to understand and assess the economic consequences of AMR. We model the global economic impacts of AMR under six alternative scenarios. These scenarios are designed to incorporate assumptions about changes in AMR-related disease incidence, the impact of a central scenario about future demographic change on AMR over time, and explore the sensitivity of assumptions about the effects of AMR on agriculture productivity. We also examine the additional impacts of changing climate risks on the evolution of AMR (focusing on one climate scenario), the consequences of changes in country risk premia due to the differential im-pacts of the evolution of AMR on countries, and the global economic impacts of changes in government expenditure in response to AMR. Our results find a significant global economic burden of worsening AMR due to demographic change and climate change risks, as well as significant eco-nomic benefits of taking action to address AMR. We emphasize that a “one-health†approach to managing AMR will have substantial economic benefits over the coming decades. |
| Keywords: | antimicrobial resistance, antibiotic resistance, infectious diseases, macroeconomic modelling |
| JEL: | C51 C53 C54 C55 C63 C68 E37 F01 F41 Q51 Q54 I10 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-41&r= |
| By: | Yasuhiro Nakamoto (Faculty of Informatics, Kansai University); Kazuo Mino (Institute of Economic Research, Kyoto University); Yunfang Hu (Graduate School of Economics, Kobe University) |
| Abstract: | This study integrates the dynamic 2×2×2 Hechscher-Ohlin model with the neoclassical growth model, considering heterogeneous households, to explore the relationship between preference structures, wealth distribution, and international trade in a unified setting. We demonstrate that if households have homothetic utility functions, the long-run trade pattern depends solely on the initial distribution of capital between two countries. Conversely, if preferences are non-homothetic, the initial distribution of wealth among households also influences long-run trade patterns. Numerical examples further examine the wealth distribution in each country, showing that the initially poor can catch up with the initially rich. |
| Keywords: | Dynamic Hecksher-Ohlin model, Non-homothetic preference, Heterogeneous households, Wealth distribution |
| JEL: | D31 E20 F11 F43 O41 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:kyo:wpaper:1105&r= |