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on Open Economy Macroeconomics |
| By: | Mariano Kulish (University of Sydney); James Morley (University of Sydney); Nadine Yamout (American University of Beirut); Francesco Zanetti (University of Oxford) |
| 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. |
| Keywords: | Dutch Disease, commodity prices, unemployment, structural change, structural transformation |
| JEL: | E52 E58 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2420 |
| By: | Philippe Bacchetta; J. Scott Davis; Eric van Wincoop |
| Abstract: | Recent theories of exchange rate determination have emphasized limited UIP arbitrage by international financial institutions. New regulations since 2008 have also lead to imperfect CIP arbitrage. We show that under limited CIP arbitrage the exchange rate and CIP deviation are jointly determined by equilibrium in the FX spot and swap markets. The model is used to investigate the impact of a wide range of financial shocks. The exchange rate is affected by a new set of financial shocks that operate through the swap market, which have no effect under perfect CIP arbitrage. More familiar financial shocks that impact the spot market have an amplified effect on the exchange rate as a result of their feedback to the swap market. Implications of the model are consistent with a broad range of evidence. |
| JEL: | F30 F31 G15 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32876 |
| By: | Campana, Juan Manuel |
| Abstract: | The article develops a stylized medium-run post-Kaleckian open economy model with conflict inflation and combines two existing specifications of the income share targets of workers and firms. In the model, only the target of firms is directly affected by the real exchange rate. Workers do not set nominal wages in direct consideration of international relative prices. The target of workers is affected by the rate of capacity utilization, which reflects their wage bargaining position. We analyze the dynamic stability of the model, where a profit-led domestic demand regime or a weakly wage-led domestic regime with low nominal wage setting power of workers and a negative or sufficiently small direct impact of the real exchange rate on the trade balance are necessary conditions for stability. It is shown that the effects of a devaluation on aggregate demand, growth, trade balance, and inflation are generally ambiguous and highly contingent on the parameter constellation of the economy. The effectiveness of a currency devaluation as a stabilization policy remains unclear, its adoption is not without risk, and its negative social and distributional consequences may be large. |
| Keywords: | currency devaluation, distribution conflict, inflation, open economy, Kaleckian model |
| JEL: | E11 E12 E31 F31 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ipewps:301876 |
| By: | Federico S. Mandelman (Federal Reserve Bank of Atlanta); Yang Yu (Shanghai Jiao Tong University); Francesco Zanetti (University of Oxford; Centre for Economic Policy Research (CEPR)); Andrei Zlate (Federal Reserve Board) |
| Abstract: | We document a steady decline in low-skilled immigration that began with the onset of the Great Recession in 2007, which was associated with labor shortages in low-skilled service occupations and a decline in the skill premium. Falling returns to high-skilled jobs coincided with a decline in the educational attainment of native-born workers. We develop and estimate a stochastic growth model with endogenous immigration and training to account for these facts and study macroeconomic performance and welfare. Lower immigration leads to higher wages for low-skilled workers and higher consumer prices. Importantly, the decline in the skill premium discourages the training of native workers, persistently reducing aggregate productivity and welfare. Stimulus policies during the COVID-19 pandemic, amid a widespread shortage of low-skilled immigrant labor, exacerbated the rise in consumer prices and reduced welfare. We show that the 2021-2023 immigration surge helped to partially alleviate existing labor shortages and restore welfare. |
| Keywords: | Immigration, skill premium, task upgrading, heterogeneous workers |
| JEL: | F16 F22 F41 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2429 |
| By: | Pierfederico Asdrubali; Soyoung Kim; Haerang Park |
| Abstract: | International risk sharing in OECD countries weakens during domestic recessions, when its role is most needed. Instead, no significant changes emerge during boom periods or in relation to the global business cycle. The asymmetry in the risk sharing response to cyclical fluctuations is driven mainly by dissmoothing effects in the capital market channel and the credit market channel. Specifically, interest payments to abroad and credit constraints of households increase during domestic recessions, limiting the smoothing role of risk sharing channels. However, countries with more internationally integrated financial markets and corporate disclosure can mitigate the dis-smoothing effects of these two channels and thus the asymmetry in international risk sharing. These findings contribute to rationalise heterogeneous results in the literature on the impact of globalisation and of financial frictions on international risk sharing. From an analytical viewpoint, they caution against assessments of international risk sharing over time which do not take the business cycle into account. From a policy perspective, they establish that, contrary to part of the literature on financial frictions, financial integration and corporate disclosure do affect international risk sharing during recessions. Since our results carry over to EU countries, they support the pursuit of the Capital Markets Union and further elimination of financial barriers to the completion of the Single Market. They also call for a more active role of counter-cyclical fiscal policy: during a recession, when a negative (positive) output shock hits, net government savings should fall (rise) along with net private savings, in order to preserve consumption stability. |
| JEL: | E00 E21 F15 G15 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:euf:dispap:205 |
| By: | Lampe, Florian |
| Abstract: | The West African Economic and Monetary Union (WAEMU) is a currency and customs union that is made up of the eight low-income countries Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. Except for Guinea-Bissau, all member countries of the WAEMU have a shared history as former French colonies. The WAEMU's common currency, the CFA franc, is today pegged to the euro at a fixed exchange rate that is guaranteed by the French treasury. France's influence on monetary policy issues of the WAEMU is still highly present and increasingly contested by political economists, and part of the member countries' civil society. These critics denounce the bilateral exchange rate arrangements as monetary colonialism that outlasted the political independence process from 1954 till 1960 and prevents the West African countries from implementing growth-oriented macroeconomic policies. The proponents of the fixed exchange-rate regime emphasize monetary stability in the form of relatively low inflation rates and a stable external value of the domestic currency. Indeed, the WAEMU zone has shown a remarkably long period of exchange rate stability for the past 30 years. This distinguishes it from Developing and Emerging Economies (DEE) in Latin American or Asian countries in the 1990s and early 2000s, which reacted to balance of payments crises with the introduction of floating exchange rate regimes. The present paper connects to that controversial debate and addresses the important research question if the argument of monetary stability holds considering the current development path of the WAEMU. More concretely, it contrasts the monetary union's resilience against the adverse effects of exchange rate volatility with international competitiveness and a long-term perspective on external debt. On the theoretical level, the study draws on the post-Keynesian liquidity preference theory to elaborate the exchange rate challenges that DEE with internationally integrated financial markets are confronted with. This approach highlights the hierarchical structure of the international monetary system and the resulting adverse implications for peripheral currency areas regarding monetary stability. Furthermore, monetary Keynesian economist have worked out the limitations of an exchange rate-based stabilization strategy arguing that it comes at the expense of losing international competitiveness and a rising international debtor position. These findings serve as a theoretical basis for studying the sustainability of the WAEMU's development path. |
| Keywords: | WAEMU, CFA franc, Post-Keynesian Economics, international currency hierarchy |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:cessdp:301871 |
| By: | Joshua Aizenman; William Eldén; Yothin Jinjarak; Gazi Salah Uddin; Frida Widholm |
| Abstract: | Expansionary fiscal policies have increased significantly following the subprime crisis in 2007 and the COVID-19 crisis, leading to fiscal dominance concerns, where a growing share of monetary authorities may be forced to deviate from policy targets to accommodate fiscal policies. Meanwhile, peripheral economies are constantly influenced by monetary and fiscal conditions in center economies, with the United States (U.S.) as the predominant force. In light of these developments, we examine the potential international spillovers from U.S. inflationary spells and growing fiscal concerns to the policy interest rates in Emerging Market Economies (EMEs) and Developed Economies (DEs). We introduce a new index of fiscal dominance concerns using Principal Components Analysis, and extend the concept to an international perspective, as opposed to previous literature examining fiscal dominance in a domestic environment. The results are confirmed by robustness analysis and show that greater U.S. fiscal challenges affect negatively the policy rates in both EMEs and DEs, with a greater impact observed in EMEs. Moreover, a low degree of financial repression is associated with more significant spillover effects from greater U.S. fiscal challenges. |
| JEL: | E31 E62 F33 F42 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32868 |
| By: | Kiet Duong (University of York.); Toan Huynh (Queen Mary University of London); Anh Phan (University of Liverpool); Nam Vu (Miami University) |
| Abstract: | We propose a novel explanation for why sanctions on Russian firms might not work as intended: these firms' ability to diversify sanction risks via partner countries friendly with Russia. Using indirect links with partner firms as a plausibly exogenous proxy for this risk-sharing channel, we show that exposed Russian firms were able to leverage these links to alleviate the negative impacts of sanctions in 2014. |
| Keywords: | International risk-sharing, sanction, Russia, firm-level |
| JEL: | F31 F41 F42 F51 |
| Date: | 2024–08 |
| URL: | https://d.repec.org/n?u=RePEc:cgs:wpaper:119 |
| By: | Marco Garofalo (Centre for Macroeconomics (CFM); University of Oxford; Bank of England); Giovanni Rosso (University of Oxford); Roger Vicquery (Bank of England; Centre for Macroeconomics (CFM)) |
| Abstract: | We explore an episode of aggregate transition to dominant currency pricing in a large developed economy, relying on transaction-level data on the universe of UK trade between 2010 and 2022. Until 2016, the majority of UK non-EU exports were invoiced in British pounds, the ”producer” currency. However, in the aftermath of the June 2016 Brexit referendum and the subsequent depreciation of the pound, the share of non-EU UK exports invoiced in pounds started to sharply decrease– by more than 20 percentage points. This was mirrored by an increase of similar magnitude in the share of US dollar invoicing, which by 2019 overtook the pound as the main non-EU export invoicing currency. Using shift-share and event-study identification strategies, we show that large foreign-exchange movements can generate a transition in invoicing choices for firms with low levels of operational hedging, that is whose exports are not denominated in the same currency as their import. We find that that this currency-mismatch valuation channel accounts for most of the transition away from producer currency pricing, above and beyond effects from strategic complementarities and market power. Finally, we show that this shift in export pricing paradigm has important aggregate consequences for export pass-through and the allocative effects of price rigidities. Exports exhibit significantly higher elasticity to USD exchange-rate movements after the Brexit referendum: a USD dollar appreciation depresses demand for exports by twice as much than before this ‘dominant currency pricing transition'. |
| Keywords: | Invoicing currency of trade, Dominant currency pricing, Foreign-exchange mismatch, Firm-level data, Exchange-rate pass-through |
| JEL: | F14 F31 F41 |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:cfm:wpaper:2419 |