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on Open Economy Macroeconomics |
| By: | Douglas A. Irwin; Maurice Obstfeld |
| Abstract: | Korea’s real exchange rate has displayed a mild downward trend since the 1980s, with fluctuations of ±20 percent around that trend. This pattern is surprising because the classic Harrod-Balassa-Samuelson framework suggests that countries experiencing rapid growth in the productivity of their tradable industries should experience real currency appreciation over time. We decompose the sources of change behind the Korean won’s real exchange rate into internal price drivers (the relative price of nontradable goods) and external price drivers (the international relative price of tradable consumption goods, which is heavily dependent on the nominal exchange rate). We find that, on average, the variability in Korea’s real exchange rate, even over long periods, is overwhelmingly due to external price factors. Given the persistent medium-term effects of nominal exchange rate changes on the real exchange rate, the Korean policy of intervening in foreign exchange markets to smooth exchange rate fluctuations appears prudent. However, we also find that over the entire period 1985-2023, internal price factors are the main explanator of the won’s real depreciation. This finding poses a puzzle for standard accounts of the linkage between productivity growth and real exchange rates. |
| JEL: | F30 F31 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32769 |
| By: | Enrique G. Mendoza; Vincenzo Quadrini |
| Abstract: | Research has shown that the unilateral accumulation of international reserves by a country can improve its own macro-financial stability. However, we show that when many countries accumulate reserves, the induced general equilibrium effects weaken financial and macroeconomic stability, especially for countries that do not accumulate reserves. The issuance of public debt by advanced economies has the opposite effect. We derive these results from a two-region model where private defaultable debt has a productive use. Quantitative counterfactuals show that the surge in reserves (public debt) contributed to reduce (increase) world interest rates but also to increase (reduce) private leverage. This in turn increased (decreased) volatility in both emerging and advanced economies. |
| JEL: | F31 F41 F62 F65 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32810 |
| By: | Kim, Taehoon (Korea Institute for Industrial Economics and Trade); Han, Jung Min (Korea Institute for Industrial Economics and Trade) |
| Abstract: | Recently, the behavior of the Korean won (KRW) versus the US dollar (USD) has exhibited significant volatility. In 2023 alone, the exchange rate fluctuated by more than KRW 10 on over 50 different days, which has made it difficult to predict future trends. In this paper, we explore how the volatility of the KRW-USD exchange rate has influenced the fortunes of domestic Korean manufacturers. Specifically, we quantitatively examine the impact of exchange rate fluctuations on corporate performance through an empirical analysis of exchange rate data and financial records, and use the findings of the analysis to determine implications for policy. For this work we utilized real effective exchange rate data from the Organisation for Economic Co-operation and Development (OECD) and Japanese think tank Research Institute of Economy, Trade, & Industry (RIETI). Real effective exchange rate data present exchange rate data in terms of a currency’s purchasing power relative to foreign currencies. A decrease in the real effective exchange rate implies a decrease in any given currency’s purchasing power compared to foreign currencies. Thank you for reading this abstract of a paper by the Korea Institute for Industrial Economics and Trade! We are South Korea's premier think tank studying the nexus where trade and industry intersect. |
| Keywords: | exchange rates; exchange rate risk; exchange rate volatility; manufacturing; manufacturing industry; industrial competitiveness; Korean won; US dollar; KRW-USD exchange rate; exchange rate fluctuations; corporate performance; Korea; KIET |
| JEL: | F30 F31 O24 |
| Date: | 2024–05–31 |
| URL: | https://d.repec.org/n?u=RePEc:ris:kieter:2024_015 |
| By: | Charles Engel; Steve P.Y. Wu |
| Abstract: | Exchange-rate models fit very well for the U.S. dollar in the 21st century. A “standard” model that includes real interest rates and a measure of expected inflation for the U.S. and the foreign country, the U.S. comprehensive trade balance, and measures of global risk and liquidity demand is well-supported in the data for the U.S. against other G10 currencies. The monetary and non-monetary variables play equally important roles in explaining exchange rate movements. In the 1970s – early 1990s, the fit of the model was poor but the fit (as measured by t- and F-statistics, and R-squareds) has increased almost monotonically to the present day. We make the case that it is better monetary policy (inflation targeting) that has led to the improvement, as the scope for self-fulfilling expectations has disappeared. We provide a variety of evidence that links changes in monetary policy to the performance of the exchange-rate model. |
| JEL: | F31 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32808 |
| By: | Olivier CARDI; Kübra HÖKE; Romain RESTOUT |
| Abstract: | By exploiting the downward trend of OECD countries profits’ taxation rooted into international competition to attract capital, we identify exogenous variations in corporate income taxes. Our SVAR-based evidence reveals that a permanent decline in profits’ taxation leads to significant technology improvements which are concentrated in traded industries and generates an expansionary effect on hours which is concentrated in the non-traded sector. While technology dramatically improves in English-speaking and Scandinavian countries, hours significantly increase in continental Europe. A twosector open economy model with endogenous technology decisions can rationalize the evidence conditional on a set of elements which characterize households’ preferences and firms’ ability to improve technology. In line with our estimates, traded technology must display a high elasticity w.r.t. both the domestic and international stock of knowledge in former countries while the weight attached to consumption habits along with wage stickiness shape the expansionary effect on nontradable hours in continental Europe. |
| Keywords: | Corporate taxation; SVAR; Open economy; Endogenous technological change; R&D; Hours worked; Tradables and non-tradables; Labor reallocation; Wage stickiness. |
| JEL: | E23 E62 F11 F41 H25 O33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ulp:sbbeta:2024-29 |
| By: | Jaqueline Terra Marins; Marta Baltar Areosa; José Valentim Machado Vicente |
| Abstract: | The Covid-19 pandemic period was unprecedented. In this paper, we analyze the behavior of the Brazilian real exchange rate during that period. To this end, we estimate an equilibrium |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:bcb:wpaper:596 |
| By: | Juan R. Hernández (Division of Economics, CIDE); Mateo Hoyos (Division of Economics, CIDE); Daniel Ventosa-Santaulària (Division of Economics, CIDE) |
| Abstract: | In this paper, we examine the impact of global uncertainty on the effectiveness of monetary policy in reducing inflation in emerging market economies (EMEs). Specifically, we explore the repercussions of: (i) global financial stress; (ii) disruptions in the global supply chain; (iii) heightened levels of global geopolitical uncertainty; and (iv) anomalies attributed to climate change. Our main contribution is to demonstrate that monetary policy in EMEs is effective, albeit to a lesser extent, in reducing inflation when uncertainty is heightened due to global factors. We also find that, among the shocks we study, disruptions in the global supply chain affect the most the policy trans- mission mechanisms. To identify the monetary policy shocks, we use a trilemmabased instrument exploiting surprises in the federal funds rate, and cross section variation in capital account openness of each EME. Our results un derscore the complexities inherent in navigating monetary policy within an uncertain global outlook for EMES. |
| Keywords: | Inflation, Monetary Policy, Emerging Market Economies, Financial Volatility, Global Supply Chain, Policy Uncertainty, Climate Change |
| JEL: | C23 C26 C54 E31 E52 F41 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:emc:wpaper:dte634 |
| By: | Martin Hodula; Jan Janku; Simona Malovana; Ngoc Anh Ngo |
| Abstract: | In our paper, we provide a review of the literature to identify the main transmission channels through which geopolitical risks (GPR) influence macro-financial stability. We begin by analyzing the existing measures of geopolitical tensions and uncertainty, showing that GPR impacts economic and financial uncertainty episodically, with significant but transient spikes during major geopolitical events. The review then identifies the two principal channels through which GPR affects macro-financial stability: the financial channel, operating through increased uncertainty and heightened risk aversion, leading to shifts in investment portfolio allocations and cross-border capital flows; and the real economy channel, impacting global trade, supply chains, and commodity markets. Using data from the past two to three decades, we provide graphical analyses that confirm the findings in the literature, highlighting the episodic nature of the impact of GPR. These insights underscore the need for policymakers and financial institutions to adopt event-specific approaches to effectively mitigate the adverse effects of geopolitical risks on economic and financial systems. |
| Keywords: | Financial stability, geopolitical risk, global economy, macro-financial impact, uncertainty shocks |
| JEL: | D80 E32 F44 F51 G2 G15 H56 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2024/8 |
| By: | Jaromir Baxa; Tomas Sestorad |
| Abstract: | This paper proposes a novel approach to decompose the Economic Policy Uncertainty indices of European countries into the common and country-specific components using the time-varying total connectedness. Then, by employing a Bayesian panel VAR model, we assess how common and country-specific uncertainty shocks influence economic activity, prices, and monetary policy, with the shocks identified using zero and sign restrictions. Our results reveal that only common shocks have significant effects on all macroeconomic variables. This result is robust across alternative samples and structural identifications. Therefore, our findings imply that policymakers should focus on uncertainty shocks that are synchronized across countries. |
| Keywords: | Common uncertainty, economic policy uncertainty, panel VAR, spillovers |
| JEL: | C32 F42 F45 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cnb:wpaper:2024/9 |