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on Open Economy Macroeconomics |
| By: | Ha, Jongrim; Liu, Haiqin; Rogers, John |
| Abstract: | Emerging markets and developing economies (EMDEs) exhibit significantly greater volatility in asset returns than advanced economies. The commonalities in these returns (and flows) across countries are particularly strong for EMDEs. If these occur independently of the exchange rate regime and if these global financial cycle effects are furthermore independent of countries’ financial openness, the result is Obstfeld (2022)’s “Lemma”: countries can do nothing to decouple from the global financial cycle. Under the prevalent view that U.S. monetary policy is the key driver of the global financial cycle, countries then inherit U.S. monetary policy no matter what they do on exchange rates or capital control policies. Using structural vector autoregression models for 78 countries over 1995–2019, as well as different methods of identifying U.S. monetary policy shocks from the literature, this paper tests the proposition that countries with less open capital accounts exhibit systematically smaller responses to U.S. monetary policy shocks than low capital control countries. This paper also considers the role of other institutional features such as exchange rate regimes and foreign exchange interventions in explaining cross-country differences in the responses to the shocks. The empirical results suggest that more stringent capital controls exhibit smaller responses of interest rates and exchange rates to U.S. monetary policy shocks and that this result holds more firmly for EMDEs than advanced economies. In contrast, the analysis finds only weak evidence that the degree of exchange rate flexibility affects U.S. spillovers to foreign interest rates and exchange rates. |
| Date: | 2023–10–04 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10582 |
| By: | Khalil, Makram; Osten, David; Strobel, Felix |
| Abstract: | In recent years, major exporting economies experienced rising geopolitical risk. From the perspective of the US and the euro area, we employ detailed product data panels to study the consequences of trading-partner geopolitical risk shocks on bilateral imports. We find that these shocks lower import volumes and raise import prices. The decline in imports is stronger when the shocks hit countries that exhibit greater geopolitical distance to the US and the euro area, or when geopolitical risk shocks hit countries that are under US sanctions. Thus, increasing geopolitical risk triggers dynamics that are conducive to a fragmentation of global trade. A case in point are large effects for geopolitical risk shocks originating in China. We find that US and euro area imports from non-Chinese trading partners are also affected by such shocks, which also owes to US dollar and global oil price movements as well as trading-partner value chain linkages with China. |
| Keywords: | Geopolitical risk, imports, United States, euro area |
| JEL: | F14 F41 F61 F62 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:bubdps:311836 |
| By: | de Boer, Jantke |
| Abstract: | The position of countries in a network of external portfolio investments provides a novel macroeconomic characteristic to explain violations of uncovered interest rate parity. I derive a network centrality measure, where central countries are highly integrated with key suppliers of tradeable financial assets. Currency risk premia decrease as network centrality increases. Asset pricing tests confirm that the centrality risk factor is priced in the cross-section. Further, negative global shocks appreciate central countries' currencies and depreciate peripheral ones. In a consumption-based capital asset pricing model, central countries experience lower consumption growth in high marginal utility states, leading to currency appreciation. |
| Keywords: | Exchange rates, currency risk premia, external portfolios, financial network, asset pricing |
| JEL: | F31 E43 E44 G12 G15 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:rwirep:312406 |
| By: | Masashige Hamano (Waseda University) |
| Abstract: | This paper documents that product quality in international trade is negatively correlated with the number of traded varieties in global data. We account for this substitutability between trade variety and quality by developing a two-country international business cycle model with heterogeneous firms that endogenously determine product quality while entering and exiting export markets. Our theoretical model successfully replicates the wedge-shaped pattern of cross-correlations between the number of product varieties and the quality of trade, along with key statistics on U.S. trade dynamics. |
| Keywords: | business cycle; product variety; product quality; firm heterogeneity |
| JEL: | F12 F41 F43 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2419 |
| By: | Lebrand, Mathilde Sylvie Maria; Vasishtha, Garima; Yilmazkuday, Hakan |
| Abstract: | This paper investigates the effects of real energy price shocks on the current account balances of 45 emerging market and developing economies using country-specific structural vector autoregression models. The empirical results suggest that a 1 percent increase in real oil prices results in up to 0.11 percentage point cumulative improvement in the current account balances of oil exporters after five years, while a similar shock to real natural gas prices results in up to 0.06 percentage point improvement in the current account balances of natural gas exporters after five years. Real coal price shocks result in higher current account balances of oil exporters and natural gas exporters, suggesting substitution of coal with oil and natural gas in such cases. When the contributions of alternative real energy prices to the variance of current account balances are compared, oil price shocks dominate those of natural gas and coal prices. On the source of oil price shocks, the results support the view that the effects of oil demand shocks on current account balances are different from those of oil supply shocks. The results are robust to alternative specifications and identification schemes. |
| Date: | 2023–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10623 |
| By: | David Baqaee; Hannes Malmberg |
| Abstract: | What are the long-run effects of permanent changes to the economy? We characterize long-run comparative statics for a broad class of models in terms of expenditure shares, substitution elasticities, and capital supply elasticities. Our key insight is that long-run analysis can be performed using an as-if static economy where capital is treated as an intermediate input subject to endogenous markups. These markups, which measure deviations from the Golden Rule of savings, equal the ratio of capital income to investment. This reframing yields a surprising result: long-run consumption responses follow second-best principles even in efficient economies. In particular, reallocations have first-order effects since the envelope theorem does not apply. Furthermore, sales alone do not summarize industries’ importance for long-run consumption. To show how these points matter in practice, we develop a quantitative model of the world economy to study how markups, tariffs, and productivities affect long-run consumption. The model features input-output linkages, imperfectly elastic capital supply, heterogeneous returns, and endogenous net foreign asset positions. We find large negative first-order effects of tariffs and markups, even when initial tariffs and markups are zero. We also find that the productivities of industries upstream of investment goods have substantially larger long-run consumption effects than their sales shares would suggest. |
| JEL: | E0 E01 E1 E10 E16 E2 E20 F0 F10 F11 F3 F30 F4 F40 O10 O11 O41 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33504 |
| By: | Bou Habib, Chadi |
| Abstract: | This paper investigates the similarities between the economy of 1912 Mount Lebanon on the eve of the famine of 1916 and the economy of 2004 Lebanon that set the stage for the major economic and social crisis of 2019. A simple general equilibrium simulation shows that, as long as the Lebanese economy remains reliant on foreign inflows, crises will persist, with different manifestations. Regardless of the period considered, foreign inflows increase domestic prices and induce real appreciation. Low productive capacities and insufficient job creation lead to high emigration. Emigration increases the reliance on foreign inflows, which in turn increase domestic prices and reduce competitiveness, hence triggering further emigration and further reliance on foreign inflows. Income and prices increase, but exports decline, and growth remains volatile. The interruption of the flows of capital and goods and the impossibility to migrate due to the First World War drove Lebanon into starvation in 1916. The interruption of inflows of capital in 2019 led to a major crisis and massive outmigration, as predicted through the simulations based on the structure of the Lebanese economy in 2004. The simulations effectively capture the impact of external shocks on the Lebanese economy and closely align with the actual changes in economic variables during 2005 to 2020. |
| Date: | 2024–02–01 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10688 |