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on Open Economy Macroeconomics |
| By: | Arroyo Marioli, Francisco; Vegh, Carlos A. |
| Abstract: | A large literature has documented that fiscal policy is procyclical in emerging markets and developing economies and acyclical/countercyclical in advanced economies. This paper analyzes fiscal procyclicality in commodity-exporting countries. It first shows that the degree of fiscal procyclicality is twice as high in commodity exporters than in non-commodity exporters. Further, while fiscal procyclicality has been falling in commodity exporters over the past 15 years, it is still pervasive and has fallen slower than in non-commodity exporting countries. In addition to testing the main theories behind fiscal procyclicality in commodity exporters and the role of institutional variables, the paper makes two novel contributions. First, based on the idea of fiscal procyclicality as a “when it rains, it pours” phenomenon (that is, contractionary fiscal policy amplifies the effects of a fall in commodity prices), the paper shows that, on average, government spending amplifies the business cycle by 21 percent of the initial drop in output following a fall in commodity prices. Put differently, the “pours” component accounts for 17 percent of the total fall in output. Second, the paper estimates the welfare costs of fiscal procyclicality at 2.6 percent of the costs associated with the regular business cycle in commodity exporters. |
| Date: | 2023–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10428 |
| By: | Horn, Sebastian Andreas; Parks, Bradley Christopher; Reinhart, Carmen M.; Trebesch, Christoph |
| Abstract: | This paper shows that China has launched a new global system for cross-border rescue lending to countries in debt distress. It builds the first comprehensive dataset on China’s overseas bailouts between 2000 and 2021 and provide new insights into China’s growing role in the global financial system. A key finding is that the global swap line network put in place by the People’s Bank of China is increasingly used as a financial rescue mechanism, with more than USD 170 billion in liquidity support extended to crisis countries, including repeated rollovers of swaps coming due. The swaps bolster gross reserves and are mostly drawn by distressed countries with low liquidity ratios. In addition, we show that Chinese state-owned banks and enterprises have given out an additional USD 70 billion in rescue loans for balance of payments support. Taken together, China’s overseas bailouts correspond to more than 20 percent of total IMF lending over the past decade and bailout amounts are growing fast. However, China’s rescue loans differ from those of established international lenders of last resort in that they (i) are opaque, (ii) carry relatively high interest rates, and (iii) are almost exclusively targeted to debtors of China's Belt and Road Initiative. These findings have implications for the international financial and monetary architecture, which is becoming more multipolar, less institutionalized, and less transparent. |
| Date: | 2023–03–27 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10380 |
| By: | de Boer, Jantke; Eichler, Stefan |
| Abstract: | We empirically test Gabaix and Maggiori (2015)'s prediction that currencies are repriced by the country's external capital dependence when financial constraints of FX intermediaries change. Using solvency indicators, we develop a novel intermediary constraints index capturing riskbearing capacity. We find that constraints are a priced risk factor in currency portfolios sorted by countries' net foreign assets. Portfolios of external debtors (creditors) have higher (lower) intermediary risk premia, but pay lower (higher) returns when constraints tighten. Tightening constraints are associated with a depreciation of countries with low net foreign assets, particularly emerging markets with high net debt and low FX reserves. |
| Keywords: | Foreign exchange, financial intermediation, net foreign assets |
| JEL: | E44 F31 F32 F37 G12 G15 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:rwirep:311303 |
| By: | Rufai, Aliyu; Udaah, Isaiah; Salisu, Afees |
| Abstract: | This study utilizes a newly constructed index for financial stress to examine its predictive value for exchange rate volatility in sub-Saharan Africa (SSA). Using a methodology that accounts for the key features of the predictive model, we find that financial stress significantly and positively affects exchange rate volatility in SSA. This indicates that increased financial stress is linked to higher levels of exchange rate volatility in the region. A robustness check conducted on OECD countries shows that financial stress does not elevate exchange rate volatility in those countries. These findings support the purchasing power parity (PPP) theory in SSA, where financial stress amplifies exchange rate fluctuations, whereas in OECD countries, the effects are weaker and less statistically significant. In light of these findings, policymakers in sub-Saharan Africa should prioritize enhancing the financial system stability to better protect against external shocks. |
| Keywords: | Exchange rate volatility; Financial stress; Sub-Saharan Africa; Purchasing power parity |
| JEL: | C58 D53 G15 |
| Date: | 2023–12–23 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123573 |