nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2024‒05‒06
ten papers chosen by
Martin Berka

  1. Sectoral Dynamics of Safe Assets in Advanced Economies By Madalen Castells Jauregui; Dmitry Kuvshinov; Björn Richter; Victoria Vanasco
  2. Exchange Rates and Sovereign Risk: A Nonlinear Approach Based on Local Gaussian Correlations By Reinhold Heinlein; Gabriella D. Legrenzi; Scott M. R. Mahadeo; Gabriella Deborah Legrenzi
  3. Inequality and Asset Prices during Sudden Stops By Sergio Villalvazo
  4. Unemployment in a Commodity-Rich Economy: How Relevant Is Dutch Disease? By Mariano Kulish; James Morley; Nadine Yamout; Francesco Zanetti
  5. The Performance of Emerging Markets During The Fed’s Easing and Tightening Cycles: A Cross-Country Resilience Analysis By Joshua Aizenman; Donghyun Park; Irfan A. Qureshi; Gazi Salah Uddin; Jamel Saadaoui
  6. Dominant Currency Pricing Transition By Marco Garofalo; Giovanni Rosso; Roger Vicquéry
  7. Fragmented Monetary Unions By Luca Fornaro; Christoph Grosse-Steffen
  8. Heterogeneous Impacts of Trade Shocks on Workers By Patrick Arni; Peter H. Egger; Katharina Erhardt; Matthias Gubler; Philip Sauré
  9. Surging commodity prices explain a lot By Theo Janse van Rensburg; Erik Visser
  10. Quantitative Easing, Bond Risk Premia and the Exchange Rate in a Small Open Economy By Christensen, Jens H. E.; Zhang, Xin

  1. By: Madalen Castells Jauregui; Dmitry Kuvshinov; Björn Richter; Victoria Vanasco
    Abstract: What is the sectoral composition of the market for safety, and does it matter for economic stability? To address these questions, we construct a novel dataset of sectoral safe asset positions in 24 advanced economies since 1980. We document that the ratio of safe to total financial assets has remained stable in most countries, despite considerable growth in gross and net safe-asset positions relative to GDP. We find that fluctuations in safe-asset positions are mainly driven by the financial and the foreign sectors, with the real economy playing a muted role, indicating that financials in advanced economies have been increasingly intermediating safety within and across borders. We conclude by showing that increases in safe asset demand by foreigners -- or its counterpart, the supply by financials, -- are associated with expansions in domestic risky credit and lower subsequent output growth.
    Keywords: safe assets, Capital flows, financial accounts, Business cycles, financial stability
    JEL: E42 E44 E51 F33 F34 G15
    Date: 2024–04
  2. By: Reinhold Heinlein; Gabriella D. Legrenzi; Scott M. R. Mahadeo; Gabriella Deborah Legrenzi
    Abstract: We empirically assess the interlinkages between sovereign risk, measured in terms of CDS spreads, and exchange rates for a sample of emerging markets. Our period of analysis includes periods of severe stress, such as the Global Financial Crisis, the COVID-19 pandemic and the Ukrainian War. Using the most recent developments in local Gaussian partial correlation analysis and the associated nonlinear Granger causality tests, we are able to uncover linkages between assets across different segments of their joint distributions. Disentangling the effect of global factors, we show that the information on sovereign risk of other emerging economies is more relevant for the sovereign risk-exchange rate relationship than the state of developed markets risk for all countries in our sample and for all segments of the assets distribution. The same considerations apply for the movements of the US dollar relative to other currencies, where knowledge on movements of emerging currencies is of particular interest. Nonlinear Granger causality tests show bi-directional causality for most countries, confirming the importance of multiple transmission channels. Taken together, our results are of interest for international investors and policymakers, showing all interlinkages between sovereign risk and exchange rates across their entire distribution.
    Keywords: CDS, correlation, emerging markets, exchange rate, nonlinear causality, sovereign risk
    JEL: F31 G15
    Date: 2024
  3. By: Sergio Villalvazo
    Abstract: This paper studies the cross-sectional dimension of Fisher’s debt-deflation mechanism that triggers Sudden Stop crises. Analyzing microdata from Mexico, we show that this dimension has macroeconomic implications that operate via opposing effects. We propose a small open economy, asset-pricing model with heterogeneous-agents and aggregate risk to measure the effects of inequality during crises. In contrast to a representative-agent model, heterogeneity generates persistent current account reversals with smaller drops in asset prices and larger drops in consumption driven by the leveraged households. Moreover, in a lower inequality calibration, we find that crises are less severe, as observed in the data.
    Keywords: Inequality; Sudden Stops; Debt-deflation; Asset-pricing; Household leverage
    JEL: D31 E21 E44 F32 F41 G01
    Date: 2024–03–29
  4. By: Mariano Kulish; James Morley; Nadine Yamout; Francesco Zanetti
    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. Bayesian estimates 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 on unemployment 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.
    Date: 2024–08
  5. By: Joshua Aizenman; Donghyun Park; Irfan A. Qureshi; Gazi Salah Uddin; Jamel Saadaoui
    Abstract: We investigate the determinants of emerging markets performance during five U.S. Federal Reserve monetary tightening and easing cycles during 2004–2023. We study how macroeconomic and institutional conditions of an Emerging Market (EM) at the beginning of a cycle explain EM resilience during each cycle. More specifically, our baseline cross-sectional regressions examine how those conditions affect three measures of resilience, namely bilateral exchange rate against the USD, exchange rate market pressure, and country-specific Morgan Stanley Capital International index (MSCI). We then stack the five cross-sections to build a panel database to investigate potential asymmetry between tightening versus easing cycles. Our evidence indicates that macroeconomic and institutional variables are associated with EM performance, determinants of resilience differ during tightening versus easing cycles, and institutions matter more during difficult times. Our specific findings are largely consistent with economic intuition. For instance, we find that current account balance, international reserves, and inflation are all important determinants of EM resilience.
    JEL: E58 F32 F36 F44 G12
    Date: 2024–04
  6. By: Marco Garofalo; Giovanni Rosso; Roger Vicquéry
    Abstract: We explore an episode of aggregate transition to dominant currency pricing in a large developed economy, relying on transaction-level data on the universe of UK trade between 2010 and 2022. Until 2016, the majority of UK non-EU exports were invoiced in British pounds, the ”producer” currency. However, in the aftermath of the June 2016 Brexit referendum and the subsequent depreciation of the pound, the share of non-EU UK exports invoiced in pounds started to sharply decrease – by more than 20 percentage points. This was mirrored by an increase of similar magnitude in the share of US dollar invoicing, which by 2019 overtook the pound as the main non-EU export invoicing currency. Using shift-share and event-study identification strategies, we show that large foreign-exchange movements can generate a transition in invoicing choices for firms with low levels of operational hedging, that is whose exports are not denominated in the same currency as their import. We find that that this currency-mismatch valuation channel accounts for most of the transition away from producer currency pricing, above and beyond effects from strategic complementarities and market power. Finally, we show that this shift in export pricing paradigm has important aggregate consequences for export pass-through and the allocative effects of price rigidities. Exports exhibit significantly higher elasticity to USD exchange-rate movements after the Brexit referendum: a USD dollar appreciation depresses demand for exports by twice as much than before this ‘dominant currency pricing transition’.
    Date: 2024–03–21
  7. By: Luca Fornaro; Christoph Grosse-Steffen
    Abstract: We provide a theory of financial fragmentation in monetary unions. Our key insight is that currency unions may experience of symmetry: that is episodes in which identical countries react differently when exposed to the same shock. During these events part of the union suffers a capital flight, while the rest acts as a safe haven and receives inflows. The central bank then faces a difficult trade-off between containing unemploymnet in capital-flight countries, and inflationary pressures in safe-haven ones. By counteracting private capital flows with public ones, unconventional monetary interventions mitigate the impact of financial fragmentation on employment and inflation, thus helping the central bank to fulfill its price stability mandate.
    Keywords: Monetary unions, euro area, fragmentation, optimal monetary policy in openeconomies, Capital flows, fiscal crises, unconventional monetary policies, inflation, endogenous breaking of symmetry, Optimum
    JEL: E31 E52 F32 F41 F42 F45
    Date: 2024–04
  8. By: Patrick Arni; Peter H. Egger; Katharina Erhardt; Matthias Gubler; Philip Sauré
    Abstract: This paper identifies the causal effects of trade shocks on worker outcomes. We exploit a unique setting based on three pillars: (i) a large, unanticipated appreciation of the Swiss franc in 2015, (ii) detailed data with firm-level exposure to trade via output markets (both domestic and foreign) and imported inputs (distinguished by their foreign labor content), which we match to (iii) worker-level panel data with rich information on labor-market outcomes. We find that increased competition in output markets induces negative effects on earnings for workers of affected firms. Conversely, a price drop of foreign inputs generates positive effects for workers of importing firms, but less so the higher the labor content of these imported inputs. All these patterns are consistent with a parsimonious model of task-based production. Moreover, positive and negative earnings effects are especially strong for workers in the lower tail of the within-firm wage distribution and, in particular, for workers who change their employer, pointing at involuntary (voluntary) job separations from firms that are negatively (positively) affected by the exchange rate appreciation.
    Keywords: trade and labor, exchange rate shock, matched employer-employee data
    JEL: F14 F16 J46
    Date: 2024
  9. By: Theo Janse van Rensburg; Erik Visser
    Abstract: The surge in commodity prices is strongly correlated with upward surprises in global inflation outcomes and a major driver of emerging market exchange rate appreciation, including the rand. For South Africa, the improvement in the terms of trade have significantly improved the current account, boosted real incomes and welfare as well as the fiscus, and aided the recovery from the COVID-19 pandemic. Higher commodity prices have increased the cyclical fiscal revenue component to nearly 5% of GDP in 2020/21 thereby almost fully offsetting the negative effects of the conventionally-measured increase in the output gap (caused by lower consumption and production). If the revenue boost from the terms of trade unwinds before other spending and growth have increased (and the output gap has closed), fiscal deficits will increase sharply. We estimate an income gap and use a command GDP concept to show that demand may be less suppressed than suggested by the output gap. Nonetheless, given the size of the boost to income, factors such as higher taxes and more saving lean against higher spending. In these conditions, monetary policy may have limited impact.
    Date: 2022–06–24
  10. By: Christensen, Jens H. E. (Federal Reserve Bank of San Francisco,); Zhang, Xin (Research Department, Central Bank of Sweden)
    Abstract: We assess the impact of large-scale asset purchases, commonly known as quantitative easing (QE), conducted by Sveriges Riksbank and the European Central Bank (ECB) on bond risk premia in the Swedish government bond market. Using a novel arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for bond- specific safety premia, we find that Sveriges Riksbank's bond purchases raised inflation and short-rate expectations, lowered nominal and real term premia and inflation risk premia, and increased nominal bond safety premia, suggestive of signaling, portfolio rebalance, and safe asset scarcity effects. Furthermore, we document spillover effects of ECB's QE programs on Swedish bond markets that are similar to the Swedish QE effects only after controlling for exchange rate fluctuations, highlighting the importance of exchange rate dynamics in the transmission of QE spillover effects.
    Keywords: term structure modeling; nancial market frictions; safety premium; unconventional monetary policy
    JEL: C32 E43 E52 E58 F41 F42 G12
    Date: 2024–04–01

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