|
on Open Economy Macroeconomics |
| By: | Mariano Kulish (School of Economics, University of Sydney); James Morley (School of Economics, University of Sydney); Yamout Nadine (Department of Economics, American University of Beirut); Zanetti Francesco (Department of Economics, 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. Bayesianestimates 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 onunemployment 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: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:aoz:wpaper:336 |
| By: | Mavrigiannakis, Konstantinos; Sakkas, Stelios |
| Abstract: | This paper aims at assessing quantitatively the macroeconomic impact of EU sanctions against Russia for the economy of Cyprus. To this end, we use a medium-scale micro-founded DSGE model of a small open economy participating in a currency union like the euro area calibrated to the economy of Cyprus. The model features two sectors of production, namely the tradable and the non-tradable one. In this model, EU sanctions influence the sanctioning economy (i.e. Cyprus) through a mix of foreign shocks that hit in principle the tradable sector. In particular, to mimic the economic environment (namely, how all this started in 2022), we analyze first the effects of an energy-type shock modeled as a standard cost-push shock on imported goods. In turn, we add to this economic environment the impact of policy reactions like EU sanctions against Russia. In this context and given the strong trade ties of Cyprus with Russia we model sanctions as two simultaneous negative exogenous shocks, that is, a temporary decrease in the exported goods reflecting primarily reductions observed in tourism and financial services, and inward foreign direct investment (FDI). Contrary to the mild impacts reported in the literature for the majority of EU countries we find non negligible adverse effects for the economy of Cyprus which range from -1.28% to -3.36% in terms of average output loss in the short run. Given Cyprus’s vulnerable external position we show that the impact of sanctions depend crucially on the degree of tightening financing conditions which are likely to hit particularly more countries with high initial current account deficits and debt stocks. |
| Keywords: | Cyprus; economic sanctions; trade disintegration |
| JEL: | F16 F51 |
| Date: | 2024–09–01 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125336 |
| By: | Fourné, Marius; Li, Xiang |
| Abstract: | This study employs bilateral data on external assets to examine the impact of climate policies on the reallocation of international capital. We find that the stringency of climate policy in the destination country is significantly and positively associated with an increase in the allocation of portfolio equity and banking investment to that country. However, it does not show significant effects on the allocation of foreign direct investment and portfolio debt. Our findings are not driven by valuation effects, and we present evidence that suggests diversification, suasion, and uncertainty mitigation as possible underlying mechanisms. |
| Keywords: | capital flows, climate change policy, green investment, international asset allocation |
| JEL: | F21 F36 F64 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:iwhdps:302560 |
| By: | Anh Thi Ngoc Nguyen; Ha Nguyen |
| Abstract: | This paper investigates the impact of natural disasters on exchange rate movements in different country groups with different exchange rate regimes. Using a panel local projection model with a high-frequency monthly dataset of 177 countries during 1970M1-2019M12, we find that exchange rate movements are more sensitive to natural disasters in emerging markets and developing countries (EMDEs) than in advanced economies (AEs). Furthermore, exchange rate reactions to natural shocks depend on exchange rate regimes adopted by EMDEs. On average, both nominal and real exchange rates could depreciate up to 6 percents two years after the disasters in non-pegged regimes. Our findings suggest that EMDEs with flexible exchange rate regimes would observe a faster recovery through nominal and real depreciations, although they should be mindful about policy implications that may arise from large exchange rate fluctuations caused by natural disaster shocks. |
| Keywords: | Natural disasters; exchange rates; exchange rate regimes; flexible exchange rate regimes; fixed exchange rate regimes; structural changes |
| Date: | 2024–08–30 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/186 |
| By: | Tibor Hlédik; Joana Madjoska; Mite Miteski; Mr. Jan Vlcek |
| Abstract: | This paper presents a calibrated DSGE model of the economy of North Macedonia that was developed at the National Bank of the Republic of North Macedonia (NBRNM) within a technical assistance project delivered jointly by the International Monetary Fund (IMF) and the Czech National Bank (CNB). The model structure reflects the specific characteristics of the economy of North Macedonia. Namely, it is a small open economy DSGE model featuring a fixed exchange rate regime functioning in an economy experiencing structural changes over time. The paper provides a detailed overview of the theoretical structure of the model, including optimization problems of economic agents and first-order optimality conditions. A particular emphasis is put on model calibration, as well as on model evaluation, including the analysis of impulse responses, shock decompositions and historical in-sample simulation. Compared to other empirical papers focusing on DSGE models, our approach explicitly includes additional trends and wedges needed to capture non-stationary great ratios as well as the Balassa-Samuelson effect. The model has been developed to complement the existing analytic tools used at the NBRNM for policy analyses and to improve the understanding of the underlying drivers of the business cycle of the domestic economy. |
| Keywords: | DSGE model; calibration; economy of North Macedonia; fixed exchange rate |
| Date: | 2024–08–30 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/187 |
| By: | Sander, Harald (RS: GSBE MSM, RS: GSBE other - not theme-related research, MSM Global Education - Academics); Kleimeier, Stefanie (RS: GSBE MORSE, Finance) |
| Abstract: | Cross-border finance matters for cross-border trade and, hence, the global financial conditions driven by a global financial cycle, in which the U.S. dollar’s nominal effective exchange rate plays a key role. Utilizing empirical gravity models for both trade and finance, we explore the relevance of cross-border loans for bilateral trade. We also detail how a global dollar cycle affects exports both directly and indirectly via a finance-trade channel. In line with the macroeconomic literature, we confirm that also on a bilateral level these effects are particularly strong if one trading partner is an emerging market or developing economy. By developing a finance-augmented trade gravity model, we are also shedding new light on the workings of classical gravity variables, such as physical distance and common borders, but also currency unions and regional trade agreements on the gravity of trade. |
| JEL: | F10 F30 G15 G21 |
| Date: | 2024–09–10 |
| URL: | https://d.repec.org/n?u=RePEc:unm:umagsb:2024012 |
| By: | Goldbach, Stefan; Nitsch, Volker |
| Abstract: | This paper explores a monetary experiment, the adoption of Bitcoin as legal tender in El Salvador in 2021, to analyze the impact of digital currencies on international capital flows. Using a difference-in-differences approach, we find that, instead of making transfers easier, El Salvador's official cross-border financial activity has decreased after the monetary change. This finding may reflect an increase in uncertainty. However, it is also in line with findings that link digital assets to illegal activity as previously officially recorded financial transfers may have been replaced by unrecorded activities. |
| Keywords: | crypto-assets, digital currency, legal tender, bitcoin |
| JEL: | E42 E58 F21 F32 F38 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:darddp:302552 |
| By: | Mauro Sayar Ferreira (Cedeplar/UFMG); Joice Marques Figueiredo (Siglasul Consultoria) |
| Abstract: | Global and sovereign risk shocks significantly influence the business cycle in emerging markets. We examine their impact on the nominal and real term structure of interest rates (TIR) and the respective inflation risk premium (irp)) using a SVAR model for Brazil that also includes key macroeconomic variables. An adverse global uncertainty shock steepens both nominal and real TIR by reducing short-term yields, while irp shows less responsiveness. A positive shock to the US 3-year rate (us3yr) elevates nominal and real TIR but flattens their slopes due to a lesser increase at longer maturities; meanwhile, irp rises and becomes steeper. An adverse sovereign risk shock similarly pushes nominal and real TIR, and irp, upward, increasing their slopes. The sign of the covariance of irp with economic activity and inflation is shock-dependent, as is the relationship between the covariance of these variables and irp. Global uncertainty shocks explain approximately 22% of the forecast error variance (FEV) for 1-year real rate, being less impactful for longer maturities, nominal rates, and irp. Shocks to us3yr account for at least 25% of the FEV for nominal and real rates, and irp. Sovereign risk shocks also contribute substantially for FEV of nominal and real yields, and irp. |
| Keywords: | Term structure of interest rate, inflation risk premium, sovereign risk, uncertainty, US interest rate, SVAR. |
| JEL: | C32 E43 E44 E47 F41 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:cdp:texdis:td674 |
| By: | Linderoth, Gabriella (Uppsala Universitet); Meuller, Malte |
| Abstract: | This paper provides novel estimations of a non-linear exchange rate pass-through dependent on inflation for Sweden using a logistic smooth transition vector autoregressive model. The model enables smooth transitions between high and low inflation regimes, mirroring the dynamics of the economy and capturing regime-specific effects. The results show that the pass-through from an exchange rate depreciation shock to consumer prices depends on the level of inflation, reaching 17.4% in the high inflation regime and 6.9% in the low inflation regime. The estimations utilize data from the period 1995Q1 to 2023Q2, covering periods of both low and high inflation, as well as substantial exchange rate depreciations. The pass-through is also estimated for producer and import prices, establishing a decreasing pass-through along the pricing chain. We find limited evidence of a regime dependent pass-through to producer prices and no evidence for import prices. The findings suggest stronger monetary policy reactions following a depreciation of the exchange rate in high-inflation environments to limit the pass-through and, by extension, the impact on consumer prices. |
| Keywords: | Exchange Rate Pass-Through; Sweden; Inflation; Non-Linear; Logistic Smooth Transition Vector Autoregressive |
| JEL: | C32 E31 E52 |
| Date: | 2024–08–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0439 |
| By: | Laser, Falk Hendrik; Mihailov, Alexander; Weidner, Jan |
| Abstract: | This policy brief presents a new comprehensive dataset on the currency compositions of international reserves of 64 economies from 1996 to 2023. The dataset contains country-specific shares in international reserves for the eight major international currencies, i.e. the United States Dollar (USD), the Euro (EUR), the Japanese Yen (JPY), the British Pound (GBP), the Canadian Dollar (CAD), the Australian Dollar (AUD), the Chinese Yuan or Renminbi (CNY), and the Swiss Franc (CHF). The dataset provides an up-to-date and comprehensive account of publicly available data on the denomination of international reserves, including data on international currencies other than the USD, EUR, JPY, and GBP. While the USD and the EUR remain the dominant global reserve currencies, the data indicate their significance has diminished as countries diversify their reserves. Currencies, including the CNY, have gained prominence, hinting at a gradual fragmentation of the international monetary system. While the USD should retain its leading role in the medium term, ongoing geoeconomic shifts suggest a move towards a multipolar reserve currency landscape. The eventual look of this landscape will depend on the credibility of reserve currency candidates and their ability to retain the characteristics that make them desirable as reserve currencies in the face of future economic and political developments. |
| Keywords: | International reserves, currency composition, central banks, monetary system |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bofitb:302554 |