|
on Open Economy Macroeconomics |
| By: | Clemens M. Graf von Luckner; Josefin Meyer; Carmen M. Reinhart; Christoph Trebesch |
| Abstract: | We study sovereign external debt crises over the past 200 years, with a focus on creditor losses, or “haircuts”. Our sample covers 327 sovereign debt restructurings with external private creditors over 205 default spells since 1815. Creditor losses vary widely (from none to 100%), but the statistical distribution has remained remarkably stable over two centuries, with an average haircut of around 45 percent. The data also reveal that “serial restructurings”, meaning two or more debt exchanges in the same default spell, are on the rise. To account for this trend toward serial renegotiation, we introduce the “Bulow-Rogoff haircut” - a cumulative measure that captures the combined creditor loss across all restructurings during a single debt crisis. Using this measure, we show that longer debt crises deliver larger haircuts and that interim restructurings provide limited debt relief. We further examine past predictors of the size of haircuts and identify “rules of thumb” applicable to future defaults. Poorer countries, first-time debt issuers, and those that borrowed heavily from external creditors all record significantly higher haircuts in case of a default. Geopolitical shocks - such as wars, revolutions, or the break-up of empires – deliver the deepest haircuts. Sovereign debt investment disasters are often linked to (geo-)political disasters. |
| JEL: | F30 G01 G15 N10 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32599 |
| By: | Joshua Aizenman; Donghyun Park; Irfan A. Qureshi; Jamel Saadaoui; Gazi Salah Uddin |
| Abstract: | We investigate the determinants of emerging markets performance during five U.S. Federal Reserve monetary tightening and easing cycles during 2004 - 2023. We study how macroeconomic and institutional conditions of an Emerging Market (EM) at the beginning of a cycle explain EM resilience during each cycle. More specifically, our baseline cross-sectional regressions examine how those conditions affect three measures of resilience, namely bilateral exchange rate against the USD, exchange rate market pressure, and country-specific Morgan Stanley Capital International index (MSCI). We then stack the five cross-sections to build a panel database to investigate potential asymmetry between tightening versus easing cycles. Our evidence indicates that macroeconomic and institutional variables are associated with EM performance, determinants of resilience differ during tightening versus easing cycles, and institutions matter more during difficult times. Our specific findings are largely consistent with economic intuition. For instance, we find that current account balance, international reserves, and inflation are all important determinants of EM resilience. |
| Keywords: | Monetary policy cycle, emerging market, resilience, macroeconomic fundamentals, Federal Reserve. |
| JEL: | E58 F31 F62 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-26 |
| By: | Saroj Bhattarai; Arpita Chatterjee; Gautham Udupa |
| Abstract: | Exogenous global commodity price shocks lead to a significant decline over time in Indian household consumption. These negative effects are heterogeneous along the income distribution: households in lower income groups experience more adverse consumption effects following an exogenous rise in food prices, whereas households in the lowest and the two highest income groups are affected similarly following an exogenous rise in oil prices. We investigate how income and relative price changes contribute to generating these heterogeneous effects. Global food price shocks lead to significant negative wage income effects that mirror the pattern of negative consumption effects along the income distribution. Both global oil and food price shocks pass-through to local consumer prices in India and increase the relative prices of fuel and food respectively. Expenditure share of food increases with such a rise in relative prices, which provides unambiguous evidence for non-homothetic preferences. Using the expenditure share responses together with theory, we show that food, compared to fuel, is a necessary consumption good for all income groups. |
| Keywords: | global price shocks, food prices, oil prices, inequality, household heterogeneity, household consumption, necessary good, non-homotheticity, India |
| JEL: | F41 F62 O11 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-45 |
| By: | Willem THORBECKE; CHEN Chen; Nimesh SALIKE |
| Abstract: | Traditional models indicate that appreciations of the exporting country’s currency relative to the importing country’s currency decrease exports. The dominant currency paradigm (DCP) holds that, since so much trade is invoiced in U.S. dollars (USD), a change in the importing country’s currency relative to the USD rather than relative to the exporting country’s currency influences trade. We seek to choose between these hypotheses for China, the world’s largest exporter. The results indicate that both the traditional model and the DCP framework help to explain China’s exports over the 1995-2018 period. When we focus on the period before renminbi internationalization policies increased renminbi invoicing, we find that the DCP framework no longer has explanatory power, but the bilateral RMB exchange rate does. We find that one reason for this puzzling finding is that exchange rates in countries that provide parts and components to China are correlated with the bilateral RMB rate and influence China’s exports. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:eti:dpaper:24062 |
| By: | Xie, Oliver |
| Abstract: | I develop a theory on the optimal currency choice for invoicing international goods trade in the presence of imperfect financial hedging of currency risk. I demonstrate that the classic irrelevance result—that the cost of external financial hedging does not impact the choice of currency for invoicing—rests on the assumption that sellers set prices ex-ante and commit to fulfill any order size ex-post. I refer to this set-up as sticky prices and flexible quantities. I show that when quantities are also sticky, in the sense that the order quantity is pre-specified, then financial hedging affects the optimal currency of invoicing choice. My theory of jointly sticky prices and quantities incorporates financial frictions into existing theories of real hedging. I show that this financial hedging channel is quantitatively relevant and that it generates a feedback between macroprudential policies that affect the cost of hedging, such as capital controls on domestic versus foreign borrowing, and the optimal currency of invoicing. As a result, macroprudential policies can affect the expenditure switching properties of the exchange rate by inducing a different choice of optimal currency of invoicing. |
| Date: | 2024–06–23 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:v8zdk |
| By: | Ryan Chahrour; Vito Cormun; Pierre De Leo; Pablo A. Guerrón-Quintana; Rosen Valchev |
| Abstract: | We find that variation in expected U.S. productivity explains over half of U.S. dollar/G7 exchange rate fluctuations. Both correctly-anticipated changes in productivity and expectational noise, which influences the expectation of productivity but not its eventual realization, have large effects. This “noisy news” is primarily related to medium-to-long-run TFP growth, and transmits to the exchange rate by causing significant deviations from uncovered interest parity. Together, these disturbances generate many well-known exchange puzzles, including predictable excess returns, low Backus-Smith correlations, and excess volatility. Our findings suggest these puzzles have a common origin, linked to productivity expectations. |
| JEL: | D8 F3 G1 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32596 |
| By: | Viral V. Acharya; Zhengyang Jiang; Robert J. Richmond; Ernst-Ludwig Von Thadden |
| Abstract: | We analyze international trade and health policy coordination during a pandemic by developing a two-economy, two-sector trade model integrated into a micro-founded SIR model of infection dynamics. Disease transmission intensity can differ by goods (manufactured versus services and domestic versus foreign). Governments can adopt containment policies to suppress infection spread domestically, and levy import tariffs to prevent infection from abroad. The globally coordinated policy dynamically adjusts both policy instruments heterogeneously across sectors. The more-infected country aggressively contains the pandemic, raising tariffs and tilting the terms of trade in its favor, while the less-infected country lowers tariffs to share its economic pain. In contrast, in the Nash equilibrium of uncoordinated policies the more infected country does not internalize the global spread of the pandemic, lowering tariffs and its terms of trade, especially in the contact-intensive services sector, while the less infected country counters the spread by raising tariffs. Coordination therefore matters: the health-cum-trade war leads to less consumption and production, as well as smaller health gains due to inadequate global diversification of infection curves. |
| JEL: | F1 F3 I1 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32566 |
| By: | Schmitz, Martin; Dietrich, Andreas; Brisson, Rémy |
| Abstract: | The nominal effective exchange rate (EER) of a currency is an index of the trade-weighted average of its bilateral exchange rates vis-à-vis the currencies of selected trading partners, while the real EER is derived by adjusting the nominal index for relative prices or costs. The nominal EER provides a summary measure of a currency’s external value, while the real EER is the most commonly used indicator of the international price and cost competitiveness of an economy. Additionally, for all individual euro area countries, harmonised competitiveness indicators (HCIs) are published by the European Central Bank (ECB) based on the same methodology as the euro EERs. This paper describes how the calculation of the ECB’s EERs and HCIs has been enhanced to take into account in the underlying trade weights the evolution of international trade linkages and, in particular, the growing importance of trade in services. The paper includes an in-depth description of the methodology used to calculate these enhanced EERs and HCIs. In particular, it presents how to overcome the challenges arising from the inclusion of services trade, foremost in terms of data availability, with imputation and estimation techniques. Importantly, the ECB’s well-established methodology – which in particular accounts for competition faced by euro area exporters in third markets – did not have to be changed with the inclusion of services trade. Finally, the paper provides some evidence on the usefulness of the enhanced indicators for policymakers, economic analysts and the public at large. JEL Classification: C82, F10, F17, F30, F31, F40 |
| Keywords: | competitiveness, effective exchange rate (EER), gravity model, harmonised competitiveness indicator (HCI), nominal effective exchange rate (NEER), real effective exchange rate (REER), services trade, trade weights |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbsps:202449 |
| By: | Mariam Camarero ((University Jaume I and INTECO); Alejandro Muñoz (University of València); Cecilio Tamarit (University of València and INTECO) |
| Abstract: | This paper examines the determinants of portfolio equity and bond investment in the European Union. We estimate the impact of different drivers typical of the gravity model developed by Okawa and van Wincoop (2012). A notable aspect of our study is that it accounts for the effects of tax havens through the recent database of Coppola et al. (2021). Another distinctive trait of our paper is that we model bilateral and multilateral resistance measured as financial restrictions between the country pair (bilateral) and relative to the rest of the world (multilateral). Our findings suggest that gravity variables (distance, economic size, and resistance), as well as historical links and global risk, explain portfolio holdings allocation. Our extended gravity model also captures the positive effect of government quality and financial development on portfolio equity and bonds. Given the differences in nature and risk between assets, we also compare the results for portfolio equity and bonds; we find that while portfolio equity is more mobile, portfolio debt tends to be invested in neighboring countries; more specifically, EU debt tends to remain in the EU. Our results also suggest that portfolio equity is more affected by global risk and multilateral financial restrictions. Finally, our comparative analysis using the IMF CPIS database (constructed under the residence principle) shows that not accounting for tax havens underestimates the gravity and fundamental factors explaining portfolio equity and bonds holdings investment. |
| Keywords: | Gravity, cross-border asset holdings, global frictions, international finance |
| JEL: | G |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:inf:wpaper:2024.7 |
| By: | Juan P. Farah-Yacoub; Clemens M. Graf von Luckner; Carmen M. Reinhart |
| Abstract: | This paper investigates the economic and social consequences of sovereign default on external debt. We focus on the crises’ impact on real per capita GDP, infant mortality, life expectancy, poverty headcounts, and calorie supply per capita. After methodological exclusions, the sample covers 221 default episodes over 1815-2020. The analysis adopts an eclectic empirical strategy that relies on an augmented synthetic control method and local projections. Our findings suggest that sovereign defaults lead to significant adverse economic outcomes, with defaulting economies falling behind their counterparts by a cumulative 8.5 percent of GDP per capita within three years of default. Moreover, output per capita remains nearly 20 percent below that of non-defaulting peers after a decade. Based on the trajectory of the health, nutrition, and poverty indicators we study, we assess that the social costs of sovereign default are significant, broad-based, and long-lived. |
| JEL: | F0 H0 I0 O10 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32600 |
| By: | Ken-ichi Hashimoto (Graduate School of Economics, Kobe University); Kaz Miyagiwa (Department of Economics, Florida International University); Yoshiyasu Ono (Institute of Social and Economic Research, Osaka University; Osaka University of Economics); Matthias Schlegl (Department of Economics, Sophia University, Tokyo, Japan) |
| Abstract: | This paper first presents a dynamic model that features both real and monetary aspects of international trade and is capable of dealing with both full employment and secular unemployment. The model is then utilized to examine the effect of a tariff on the terms of trade, the trade pattern, real consumption and employment of labor. It is shown that with full employment in both countries, a tariff by the home country improves its terms of trade and increases its national welfare at the expense of the foreign country. These results however are reversed in the presence of unemployment in both countries. We also examine the asymmetric cases and calibrate our model to evaluate numerically the effect of large tariff changes. The main ï¬ nding is that the tariff only worsens the economy when it is already stagnant. |
| Keywords: | demand shortage, unemployment, tariffs, secular stagnation |
| JEL: | E24 E31 F13 F41 J20 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:fiu:wpaper:2409 |
| By: | Jesus Fernandez-Villaverde (University of Pennsylvania, NBER, and CEPR); Tomohide Mineyama (International Monetary Fund); Dongho Song (Johns Hopkins University) |
| Abstract: | After decades of rising global economic integration, the world economy is now fragmenting. To measure this phenomenon, we introduce an index of geopolitical fragmentation derived from various empirical indicators. This index is developed using a flexible dynamic factor model with time-varying parameters and stochastic volatility. We then employ structural vector autoregressions and local projections to assess the causal effects of changes in fragmentation. Our analysis demonstrates that increased fragmentation negatively impacts the global economy, with emerging economies suffering more than advanced ones. Notably, we document a key asymmetry: fragmentation has an immediate negative effect, while the benefits of reduced fragmentation unfold gradually. A sectoral analysis within OECD economies reveals that industries closely linked to global markets —such as manufacturing, construction, finance, and wholesale and retail trade— are adversely affected. Finally, we examine the interaction between fragmentation and the economic dynamics of regional economic blocs, highlighting significant differences in the impacts across various geopolitical blocs. |
| Keywords: | Dynamic factor model, causality, geopolitical fragmentation, fragmentation index |
| JEL: | C11 C33 E00 F01 F2 F4 F6 |
| Date: | 2024–06–25 |
| URL: | https://d.repec.org/n?u=RePEc:pen:papers:24-015 |
| By: | Banerjee, Josh |
| Abstract: | The United Kingdom (UK) is typically regarded as the sine qua non case of an economy experiencing chronic external imbalances under the post-war Bretton Woods system, apparently unable to reconcile the divergent objectives of robust economic growth and current account equilibrium. This paper investigates the famed ‘twin deficits hypothesis’, which ascribed responsibility for the UK's current account woes to an excessively lax fiscal policy. Calling on two distinct approaches to identifying fiscal shocks, we find evidence decisively against the traditional twin deficits view, and uncover serious shortcomings in the way that both policymakers and academics conceptualized the transmission of fiscal policy to the current account. Our results demonstrate that factors other than fiscal policy are of considerably greater importance for understanding the UK's historical experience, and we elaborate on the need for a reappraisal of some classic policy debates concerning external adjustment under the Bretton Woods system. |
| Keywords: | current account adjustment; fiscal policy; policy coordination; Wiley deal |
| JEL: | H00 |
| Date: | 2024–06–04 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:122632 |
| By: | Mario Ghossoub; Michael Boyuan Zhu |
| Abstract: | We study Pareto efficiency in a pure-exchange economy where agents' preferences are represented by risk-averse monetary utilities. These coincide with law-invariant monetary utilities, and they can be shown to correspond to the class of monotone, (quasi-)concave, Schur concave, and translation-invariant utility functionals. This covers a large class of utility functionals, including a variety of law-invariant robust utilities. We show that Pareto optima exist and are comonotone, and we provide a crisp characterization thereof in the case of law-invariant positively homogeneous monetary utilities. This characterization provides an easily implementable algorithm that fully determines the shape of Pareto-optimal allocations. In the special case of law-invariant comonotone-additive monetary utility functionals (concave Yaari-Dual utilities), we provide a closed-form characterization of Pareto optima. As an application, we examine risk-sharing markets where all agents evaluate risk through law-invariant coherent risk measures, a widely popular class of risk measures. In a numerical illustration, we characterize Pareto-optimal risk-sharing for some special types of coherent risk measures. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.02712 |
| By: | Hugo Oriola; Jamel Saadaoui |
| Abstract: | This research investigates the intricate dynamics between the catalytic effect of projects financed by international institutions and geopolitical interests. Through the construction of a monthly database, we first examine the impact of the approval of a project financed by one out of five international institutions on the global macroeconomic situation on non-permanent members of the United Nations Security Council (UNSC). More precisely, we study the potential catalytic effect of the International Monetary Fund, the World Bank, the Asian Development Bank, the European Investment Bank and the Asian Infrastructure Investment Bank. We underline the existence of a catalytic effect in non-permanent members of the UNSC that can significantly impact national macroeconomic situations in a positive or negative way. Second, we contribute to the literature by emphasizing the importance of the country’s geopolitical preferences in the existence and nature of the catalytic effect. We measure these geopolitical preferences through the distance between one country’s ideal point in the United Nations General Assembly and the ideal points of UNSC permanent members session after session. |
| Keywords: | International institutions, United Nations, Geopolitical preferences, Catalytic effect, Finance. |
| JEL: | D78 F30 F42 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-25 |