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on Open Economy Macroeconomics |
| By: | Suman Basu; Emine Boz; Gita Gopinath; Francisco Roch; Filiz Unsal |
| Abstract: | We develop a tractable small-open-economy framework to characterize the constrained e cient use of the monetary policy rate, foreign exchange (FX) intervention, capital controls, and domestic macroprudential measures. ‘e model features dominant currency pricing, positive premia on local currency debt arising from €nanciers’ portfolio constraints, and occasionally-binding external and domestic borrowing constraints. We characterize the conditions under which the traditional prescription—relying solely on the policy rate and exchange rate ƒexibility—remains su cient, even in the presence of externalities. By contrast, to manage noise trader ƒows into and out of the local currency debt market, FX intervention and in some cases capital inƒow taxes should be used instead of the traditional prescription. Moreover, if a country faces a mix of local currency premia and external borrowing constraints, we establish that certain regulations to limit FX mismatch may alleviate the external borrowing constraint but exacerbate the local currency premia. Finally, we show that capital controls may dominate domestic macroprudential measures in cases when external shocks trigger stress in domestic housing markets. |
| Keywords: | integrated policy framework, monetary policy, capital controls, foreign exchange intervention, macroprudential policies |
| JEL: | E58 F38 F41 G28 |
| URL: | https://d.repec.org/n?u=RePEc:udt:wpecon:2025-10 |
| By: | Ariel Dvoskin (Universidad Nacional de San Martín (UNSAM) y CONICET. San Martín, Argentina.); Germán Feldman (Universidad Nacional Arturo Jauretche (UNAJ) y CONICET. Buenos Aires, Argentina.); Gabriel Montes-Rojas (Universidad de Buenos Aires. Facultad de Ciencias Económicas. Instituto Interdisciplinario de Economía Política (IIEP). Buenos Aires, Argentina.) |
| Abstract: | This paper studies, both theoretically and empirically, the dynamics of profit rates of tradable and non-tradable goods in a small peripheral economy under exchange rate controls and parallel markets. It develops hypotheses about how official and parallel exchange rates affect sectoral profitability and provides empirical evidence using data from the Argentine experience. |
| Keywords: | Exchange rate; Sectoral profitability; Argentina; Open economy |
| JEL: | E31 F41 |
| Date: | 2024–04 |
| URL: | https://d.repec.org/n?u=RePEc:ake:iiepdt:2024-88 |
| By: | Francesco PappadÃ; Yanos Zylberberg |
| Abstract: | This paper examines how the dynamics of informality affects optimal fiscal policy and default risk. We build a model of sovereign debt with limited commitment and informality to assess the consequences of dynamic distortions induced by fiscal policy. In the model, fiscal policy has a persistent impact on taxable activity, which affects future fiscal revenues and thus default risk. The interaction of tax distortions and limited commitment strongly constrains the dynamics of optimal fiscal policy and leads to (i) more frequent default episodes and (ii) costly fluctuations in consumption. |
| Date: | 2025–04–02 |
| URL: | https://d.repec.org/n?u=RePEc:bri:uobdis:25/795 |
| By: | Saba, Danladi Ndayezhin |
| Abstract: | This paper constructs a GVAR model that allows us to compare the propagation of interest rate shocks from AEs on the one hand and EMEs on the other to Small Open Economies (SOEs) of Mexico, Indonesia, Nigeria, and Turkey (MINT). We also explore the relative effect of these shocks on MINT compared to BRICS. We find that MINT countries generally responded to both AEs and EMEs' interest rate shocks, with EMEs exerting a stronger effect. Considering the MINT countries individually, we observed considerable differences in their response patterns, pointing towards heterogeneity. Finally, we also documented that while a shock to AEs and EMEs' interest rates boosts real GDP for MINT countries, the effect on BRICS is beggar-thy-neighbor. |
| Keywords: | International monetary policy; Spillovers; Advanced economies; Small open economies; MINT countries; Global VAR model |
| JEL: | E0 E5 E52 |
| Date: | 2024–11–25 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126271 |
| By: | Arturo Huerta G. |
| Abstract: | For Matias Vernengo and Esteban Perez Caldentey (2020), the MMT literature overemphasizes the choice of the exchange rate regime and the relevance of a flexible exchange rate regime, as well as the ultimate effect of that choice upon the policy space. In addition, they argue that the role of capital flows is underexplored, and that the relevance of the balance-of-payments constraint is often underestimated. Vernengo and Perez's criticism fails to consider that exchange-rate flexibility makes it possible to use flexible fiscal and monetary policies as well, to boost growth and employment, and to reduce the balance-of-payments constraint. |
| Keywords: | Capital Mobility; Currency; Exchange Rate; Financial Sector; Fiscal Policy; Foreign; Exchange Policy; Government Spending; Interest Rates; Monetary Policy; Real Activity |
| JEL: | E42 E43 E44 O23 O24 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1052 |
| By: | Laura Lisset Montiel-Orozco |
| Abstract: | This working paper contrasts the neo-Keynesian and post-Keynesian theories of monetary policy for an open economy, highlighting the irrelevance of the orthodox theory and the explanatory capacity of heterodoxy for an emerging economy such as Mexico. It focuses on the role of the central bank and the case of the Mexican currency during the economic recovery after the Great Lockout. In the first section, we criticize two proposals of the 3-Equation New-Keynesian model, concluding that, implicitly, both models reaffirm the extreme neutrality of money and the exchange rate in both the short and the long runs. In contrast, we analyze the post-Keynesian exchange rate model proposed by John T. Harvey (2009). In addition, we rely on the fundamentals of the heterodox school of thought such as the financial instability hypothesis of Hyman Minsky (1994) and the relevance of capital flows for the determination of the exchange rate and its implications for economic growth and prices by Jan Kregel (2008). Finally, the erratic behavior of the excessive appreciation of the Mexican Super Peso against the dollar after the recovery of the COVID-19 crisis and in the context of global risk is presented. |
| Keywords: | Monetary Policy; New Keynesian Economics; post-Keynesian Economics; Foreign Exchange Rate; Mexico |
| JEL: | E31 E52 E10 E12 F31 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1057 |
| By: | Arturo Huerta G. |
| Abstract: | The article analyzes Mexico under globalization, particularly on the free mobility of capital. It argues that globalization has detrimentally impacted the productive and external sectors, causing the economy to become excessively reliant on volatile capital inflows from abroad. The Mexican government--instead of undoing the structural problems that lead to external deficits--implements policies that resolve the short-term liquidity needs and go against economic growth, as if they are promoting capital inflows. The national currency has appreciated greatly and acts only in favor of the financial sector and in detriment of the productive and the external sector. The Mexican economy has fallen into a context of high external vulnerability since it rests on capital inflows. Capital inflows are highly fragile and volatile. They depend not only on internal problems, but also on the world economy and expectations. For this reason, the reliance on capital inflows to appreciate the peso is unsustainable. Given the meager growth of the world economy and trade, globalization is being questioned and various countries are implementing industrial and protectionist policies. If Mexico continues to bet on outward growth through nearshoring, it will have no chance of overcoming the problems it faces. Mexico cannot continue with an economic policy that does not generate endogenous conditions to growth and that has made the economy dependent on the behavior of international financial markets which generate recurrent crises. |
| Keywords: | Capital Inflow; Capital Mobility; Exchange Rate; Foreign Investment; Free Trade; Interest Rates; International Capital Movement; Monetary Policy; Stabilization; Trade; Liberalization |
| JEL: | E43 E52 F13 F21 O24 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1053 |
| By: | Karina Lima |
| Abstract: | This paper challenges the prevailing view in the sovereign debt literature by arguing that sovereign debt markets, in many respects, behave similarly to other credit markets. These markets are hierarchical rather than flat, inherently hybrid in nature, blending elements of public order and private markets, and regularly suffer from liquidity stress. Therefore, sovereigns, similarly to private actors in the market, are subject to liquidity stress and insolvency crises in a way that is integral to the global financial architecture. Critically, the legal and institutional design of the international monetary system exacerbates this stress. Structural asymmetries, notably the uneven distribution of monetary power, lead to liquidity stress being more pronounced in the periphery than at the apex or core of the system, rendering the former inherently more vulnerable to sovereign debt crises. The paper argues that such considerations should assume a central role in global policy discussions concerning the most appropriate mechanisms for addressing sovereign debt crises. It advocates for a reformed global financial architecture, emphasizing the necessity of a legally binding framework for sovereign debt restructuring that draws upon principles of corporate restructuring law, with the UK Companies Act 2006 (CA 2006) providing relevant analogies. This approach aims to ensure timely, equitable, and efficient restructuring processes, thereby confronting the challenges posed by the current ad hoc and often inequitable sovereign debt restructuring processes. Originally issued as EDI Working Paper No. 17, March 2024. |
| Keywords: | Sovereign Debt; Monetary Sovereignty; Monetary Power; Currency Hierarchy; Sovereign Debt Restructuring; International Monetary System; International Financial Architecture; Debt Service Suspension Initiative; Common Framework; Paris Club; China; Insolvency; Standstill; Cramdown; Moratorium |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1068 |
| By: | Torsten Ehlers; Mathias Hoffmann; Alexander Raabe |
| Abstract: | Non-US global banks are an important driver of the international synchronization of house price growth. A loosening (tightening) of US dollar funding conditions leads non-US global banks to expand (contract) their international lending, which is largely denominated in US dollars. This induces a synchronization of lending across borrowing countries, which translates into an international synchronization of house price growth. Borrowing country pairs whose joint exposure to US dollar funding conditions via their non-US creditor banks (dollar co-dependence) is higher, exhibit a higher synchronization of house price growth. Our results identify a novel international spillover channel of US dollar funding conditions, which is not related to common-lender exposures. We show theoretically and empirically that the exposure of non-US global banks to dollar funding conditions is captured by the bilateral treasury basis between the currency of the non-US global creditor banks’ headquarters and the US dollar. As these conditions vary over time, borrowing country pairs whose non-US global creditor banks are more exposed to US dollar funding variations exhibit higher house price synchronization. |
| Keywords: | House prices, synchronization, US dollar funding, global US dollar cycle, US treasury basis, convenience yield, global imbalances, capital flows, global banks, global banking networks |
| JEL: | F34 F36 G15 G21 |
| Date: | 2025–10 |
| URL: | https://d.repec.org/n?u=RePEc:zur:econwp:480 |