|
on Open Economy Macroeconomics |
| By: | Gopinath, Gita; Meyer, Josefin; Reinhart, Carmen M.; Trebesch, Christoph |
| Abstract: | Theory suggests that corporate and sovereign bonds are fundamentally different, also because sovereign debt has no bankruptcy mechanism and is hard to enforce. We show empirically that the two assets are more similar than you think, at least when it comes to high-yield bonds over the past 20 years. We use rich new data to compare high-yield US corporate ("junk") bonds to high-yield emerging market sovereign bonds 2002-2021. Investor experiences in these two asset classes were surprisingly aligned, with (i) similar average excess returns, (ii) similar average risk-return patterns (Sharpe ratios), (iii) similar default frequency, and (iv) comparable haircuts. A notable difference is that the average default duration is higher for sovereigns. Moreover, the two markets co-move differently with domestic and global factors. US "junk" bond yields are more closely linked to US market conditions such as US stock returns, US stock price volatility (VIX), or US monetary policy. |
| Keywords: | Sovereign debt and default, default risk, corporate bonds, corporate default, junk |
| JEL: | F3 G1 F4 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:ifwkwp:315469 |
| By: | Mai Dao; Pierre-Olivier Gourinchas |
| Abstract: | We study the behavior of Covered Interest Parity (CIP) deviations – aka the CIP basis - in Emerging Markets (EM). A major challenge in computing the CIP basis in EM’s lies in measuring local currency interest rates which are free of local credit risk. To do so, we construct a ‘purified’ CIP basis for eight major EM currencies using supranational bonds issued in EM local currencies and US dollar going back twenty years. We show that this ‘purified’ CIP basis aligns well with theory-implied predictions. In the cross-section and the timeseries, the basis correlates with fundamental forces driving supply and demand for dollar forwards. Shocks to global dollar funding costs, global intermediary’s balance sheet capacity, and the demand for dollar safe assets interact with currency-specific dollar hedging and funding needs in moving the CIP basis in EM’s. |
| Keywords: | Covered Interest Parity; intermediation frictions; emerging markets; forward exchange rates |
| Date: | 2025–03–28 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/057 |
| By: | Tumisang Loate; Vincent Dadam |
| Abstract: | This paper investigates the effect of commodity price shocks in a commodity-exporting small open economy, and the role of fiscal policy in transmitting these shocks to the rest of the economy. Using South African data, we first estimate an empirical model using a Bayesian vector autoregression model. We then develop a New Keynesian small open economy with labour market hysteresis and commodity price shocks. We find that a commodity price shock typically has an expansionary effect as real GDP and employment increase, which translates into higher tax revenue. |
| Keywords: | Fiscal policy, Commodity trading, Price shocks |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:unu:wpaper:wp-2025-22 |
| By: | Maria Bas; Lionel Fontagné; Irene Iodice; Gianluca Orefice; Lionel Gérard Fontagné |
| Abstract: | This paper investigates the role played by firms’ managerial skills in the heterogeneous reaction of exporters to common exogenous changes in their international competitiveness (here captured by changes in the real exchange rate). Relying on a simple theoretical framework, we show that firms with better managerial skills have higher profits, market power, and are able to adapt their markup more when faced with a competitiveness shock. We test this prediction relying on detailed firm-product-destination level export data from France for the period 1995-2007 matched with specific information on the firms’ share of managers. Our findings show that managerial intensive firms have larger exporter price elasticity to real exchange rate variations. The effect is not trivial: in the wake of a depreciation, exporters whose management intensity is one standard deviation higher than the average, increase their prices by 51% to 73% more than the average exporter. This finding is robust to controlling for the alternative explanations suggested by the previous literature to explain the heterogeneous pass-through of firms. |
| Keywords: | exchange rate pass-through, heterogeneous pricing-to-market, managerial skills |
| JEL: | F12 F14 F31 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11750 |
| By: | Ralf R. Meisenzahl; Friederike Niepmann; Tim Schmidt-Eisenlohr |
| Abstract: | This paper documents a new dollar channel that transmits monetary policy across borders. Exploiting unique features of the syndicated loan market for identification, we show that changes in the euro-dollar exchange rate around ECB monetary policy announcements that are orthogonal to simultaneous changes in euro-area interest rates and stock prices affect U.S. leveraged loan spreads. Specifically, in response to dollar appreciation, investors require higher compensation for risk, and borrowing costs for U.S. firms increase. These findings imply a causal link between the U.S. dollar and investors’ risk appetite. |
| Keywords: | loan pricing, monetary policy spillovers, dollar, institutional investors, risk taking |
| JEL: | F15 G15 G21 G23 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11777 |
| By: | Evans, Olaniyi |
| Abstract: | The study provides evidence on the effects of changes in oil price, inflation, interest rate, budget balance, economic growth, external debt, domestic investment, and current account balance on exchange rate fluctuations in using the ARDL approach for the period 1970-2015 for the case of the Naira and Dollar. The study shows that changes in oil price, inflation, the current account and domestic investment have significant effects on exchange rate fluctuations both in the short and long run. Changes in external debt has significant effects on exchange rate fluctuations only in the long run. Changes in interest rate, budget balance and economic growth have significant effects on exchange rate only in the short run. In other words, a significant proportion of the high volatility of exchange rate in Nigeria is as a result of changes in oil price, inflation, interest rate, budget balance, economic growth, external debt, domestic investment, and current account balance. The logical conclusion is that in order to stabilize exchange rate in Nigeria, measures should be aimed at diversifying the economy, improving the current account position as well as reducing inflation. |
| Keywords: | Naira-Dollar exchange rate fluctuations, Oil Price, Debt, Inflation, Interest, Growth, Investment, Budget, Current Account, ARDL |
| JEL: | F4 F41 M2 M21 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:124158 |
| By: | Li, Jieying (Financial Stability Department, Central Bank of Sweden); Myers, Samantha (Financial Stability Department, Central Bank of Sweden) |
| Abstract: | The global non-bank sector has experienced significant growth since the global financial crisis, raising concerns that this shift represents a financial stability risk. We consider the drivers of this growth in Sweden: a small, open economy whose non-bank sector has grown rapidly. In contrast with the existing literature for the US, we find no evidence that growth in the Swedish non-bank sector is driven by regulatory arbitrage from banks. Instead, we find that the main drivers are the growing and increasingly complex pension investments, together with returns on global equity markets. While this provides some evidence that growth may be driven for search for yield, we also find that the non-bank sector appears to make its global investment choices on relatively conservative grounds. We conclude that trend-consistent growth may be driven by different factors depending on the jurisdiction. Our findings do not rule out financial stability risks, but further work is required to assess other channels by which these risks could propagate, including further analysis of cross border non-bank activities. |
| Keywords: | non-bank financial institutions; cross-border capital flows; shadow banking; regulatory arbitrage |
| JEL: | F32 F41 F44 G15 G18 G22 G23 G28 |
| Date: | 2025–02–01 |
| URL: | https://d.repec.org/n?u=RePEc:hhs:rbnkwp:0448 |
| By: | Jongrim Ha; M. Ayhan Kose; Christopher Otrok; Eswar S. Prasad |
| Abstract: | We develop a new dynamic factor model to jointly characterize global macroeconomic and financial cycles and the spillovers between them. The model decomposes macroeconomic cycles into the part driven by global and country-specific macro factors and the part driven by spillovers from financial variables. We consider cycles in macroeconomic aggregates (output, consumption and investment) and financial variables (equity and house prices and interest rates). The global macro factor plays a major role in explaining G-7 business cycles, but there are also sizeable spillovers from equity and house price shocks onto macroeconomic aggregates, at least over the past two decades, accounting for up to 20 percent of the variation in global business cycle fluctuations. These spillovers operate mainly through the global macro factor rather than the country-specific macro factors (i.e., these spillovers affect business cycles in all G-7 economies) and are stronger in the period leading up to and following the global financial crisis. We find weaker evidence of spillovers from macroeconomic cycles to financial variables, perhaps reflecting the predictive power of global financial markets. |
| Keywords: | global business cycles; global financial cycles; common shocks; international spillovers; dynamic factor models |
| JEL: | E32 F4 C32 C1 |
| Date: | 2025–04–22 |
| URL: | https://d.repec.org/n?u=RePEc:fip:feddwp:99897 |
| By: | Yuanchen Cai (Boston College); Pablo Guerron-Quintana (Boston College) |
| Abstract: | This paper studies the macroeconomic consequences of asymmetric interest rate shocks at which small open economies borrow in international financial markets. Empirically, we document that borrowing spreads have two distinct regimes. The first one features stable borrowing rates, i.e., low risk. In contrast, the second phase displays large spreads with significant volatility and –asymmetry, high risk. We fit the spreads to a rich statistical process that allows for changes in the level, volatility, skewness and kurtosis of the spread’s distribution. Each of the spread regimes is estimated to be highly persistent. When we embed the estimated spreads in a standard small-open economy model, we find that 1) spread shocks alone explain a large fraction of the volatility in consumption and investment in the data; 2) interest shocks of similar magnitude have stronger contractionary effects in an economy where only low risk exists than in one with changes between high and low risk; 3) the transition from an economy with only low-risk interest rate shocks to one like in the data results in a significant and persistent contraction. The welfare cost of this transition equals 2.4% of consumption. Finally, an unexpected increase in skewness pushes the economy into a recession with output, consumption, and investment dropping by as much as 1%, 2%, and 5%, respectively. This contraction resembles those experienced by developing countries during sudden stop episodes. |
| Keywords: | Borrowing spreads, risk, skewness, business cycles, welfare cost, sudden stops |
| JEL: | F4 C2 |
| Date: | 2025–04–16 |
| URL: | https://d.repec.org/n?u=RePEc:boc:bocoec:1088 |
| By: | Thuy Hang Duong; Weifeng Larry Liu |
| Abstract: | From the 1990s until COVID-19, the world experienced a sustained period of low and stable inflation, alongside a marked increase in trade integration among countries. This paper examines the impacts of international trade on inflation through production networks. We first construct a theoretical model of an open economy to illustrate how input-output networks propagate the price impacts of trade shocks. Using Australia as a case study, we find that the network impacts of trade shocks on inflation are as significant as their direct impacts, and primarily propagate upstream, based on data of 47 manufacturing industries from 2000 to 2023. Australia’s low inflation before COVID benefited from increasing exposure to China’s low-cost exports, while inflation surged during COVID due to global supply chain disruptions, among other factors. This paper underscores the importance of economic globalization for inflation through production networks, and offers several implications for monetary and trade policies. |
| Keywords: | inflation, international trade, production networks, propagation of shocks |
| JEL: | C67 D57 E31 F13 F41 |
| Date: | 2025–04 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2025-23 |