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on Open Economy Macroeconomics |
| By: | Mikhail Chernov; Valentin Haddad; Oleg Itskhoki |
| Abstract: | Financial markets play two roles with implications for the exchange rate: they accommodate risk sharing and act as a source of shocks. In prevailing theories, these roles are seen as mutually exclusive and individually face challenges in explaining exchange rate dynamics. However, we demonstrate that this is not necessarily the case. We develop an analytical framework that characterizes the link between exchange rates and finance across all conceivable market structures. Our findings indicate that full market segmentation is not necessary for financial shocks to explain exchange rates. Moreover, financial markets can accommodate a significant extent of international risk sharing without leading to the classic exchange rate puzzles. We identify plausible market structures where both roles coexist, addressing challenges faced when examined separately. |
| JEL: | E44 F31 G15 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32436&r= |
| By: | Charles Yuji Horioka |
| Abstract: | The finding of Feldstein and Horioka (1980) that domestic saving and domestic investment are highly correlated across countries despite the rapid globalization and liberalization of financial markets in recent decades has been regarded as a Puzzle or Paradox. However, in this paper, we show that countries as a whole may not be able to transfer their capital abroad and that the Feldstein-Horioka Finding of domestic saving and domestic investment being highly correlated across countries may arise even if there are no frictions in financial markets and even if individual investors can freely transfer their capital abroad if there are frictions in goods markets such as transport costs, tariffs, nontariff barriers, the cost of regulatory compliance, etc. In fact, there is evidence that frictions in goods markets are a more serious impediment to countries as a whole being able to transfer their capital abroad than frictions in financial markets, especially in the short run. |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:dpr:wpaper:1243&r= |
| By: | Mauricio Barbosa-Alves; Javier Bianchi; César Sosa-Padilla |
| Abstract: | This paper develops a framework to study the management of international reserves when a government faces the risk of a rollover crisis. In the model, it is optimal for the government to reduce its vulnerability by initially lowering debt, and then increasing both debt and reserves as it approaches a safe zone. Furthermore, we find that issuing additional debt to accumulate reserves can lead to a reduction in sovereign spreads. |
| JEL: | E4 E5 F32 F34 F41 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32393&r= |
| By: | Cécile Couharde; Carl Grekou; Valérie Mignon; Florian Morvillier |
| Abstract: | This paper provides an in-depth analysis of the link between exchange rate misalignments and economic growth for a large sample of 170 countries over the 1973-2019 period. We rely on new cross-country data on multilateral currency misalignments and cross-quantile regressions to demonstrate that the seemingly divergent views of the Washington Consensus and the export-led growth theory on the role of currency undervaluations in promoting economic growth can be reconciled. Although any significant departures from the equilibrium exchange rate levels are found undesirable, we show that undervaluations are more likely to stimulate economic growth in developing countries. However, this positive impact is observed only up to certain thresholds of development level and currency undervaluation. Consequently, strategies in the poorest countries that systematically undervalue currencies in real terms to foster growth should be carefully tailored, as they raise the risk for these economies of switching from a positive to a less favorable growth regime, depending on both their specific wealth level and the extent of their currency undervaluation. |
| Keywords: | Cross-quantile Regressions;Economic Growth;Multilateral Currency Misalignments;Undervaluations |
| JEL: | F31 O47 C32 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:cii:cepidt:2024-06&r= |
| By: | Ida, Daisuke; Okano, Mitsuhiro; Hoshino, Satoshi |
| Abstract: | This note examines the role of stock price stabilization in a small open new Keynesian model. We show that stabilizing stock prices is desirable to attain a unique rational expectations equilibrium and that the open economy effect has a significant impact on the determinacy condition. |
| Keywords: | Stock prices; Monetary policy rules; Terms of trade; Indeterminacy; Taylor principle; |
| JEL: | E52 E58 F41 |
| Date: | 2024–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:121050&r= |
| By: | Haishi Li; Zhi Li; Ziho Park; Yulin Wang; Jing Wu |
| Abstract: | How do firms in neutral developing countries adjust their supply chains in response to geopolitical and economic fragmentation? Do they comply with or circumvent Western sanctions on Russia? Using comprehensive transaction-level bill of lading data from major developing countries, we study these questions in the context of the Russo-Ukrainian War. We find that firms in non-sanctioning countries significantly reduced exports of sanctioned products to Russia (and Belarus) if their headquarters are located in sanctioning countries (i.e., sanctioning MNEs), highlighting MNEs’ role in propagating sanctions globally. Domestic firms in developing countries observed a relative increase in such exports, weakening the effect of Western sanctions. Sanctioning MNEs expanded exports of sanctioned products to both sanctioning and Russia-friendly countries, indicating a blend of compliance and non-compliance. Sanctioning MNEs significantly reduced imports from Russia (and Belarus) in financially risky sectors, consistent with the effect of financial sanctions. To strengthen the effectiveness of sanctions, sanctioning countries should use their MNE networks, induce domestic firms in neutral countries to comply, and prevent sanction avoidance of MNEs through indirect exports. |
| Keywords: | global supply chains, geopolitical risk, international conflict |
| JEL: | F14 F63 O19 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11110&r= |
| By: | Lasha Arevadze (Macroeconomic Research Division, National Bank of Georgia); Shalva Mkhatrishvili (Head of Macroeconomics and Statistics Department, National Bank of Georgia); Saba Metreveli (Macroeconomic Research Division, National Bank of Georgia); Giorgi Tsutskiridze (Macroeconomic Research Division, National Bank of Georgia); Tamar Mdivnishvili (Macroeconomic Research Division, National Bank of Georgia); Nika Khinashvili (PhD candidate, Geneva Graduate Institute.) |
| Abstract: | Last couple of decades of research has significantly advanced New Keynesian DSGE modeling. While each of such models faces its own important limitations, it can still contribute to robust policy analysis as long as we consolidate relevant macroeconomic features in it and remain conscious of the limitations. With this paper we are introducing a DSGE model for Georgia with features relevant for Emerging Market Economies (EMEs), characterized with large number of real and nominal imperfections. While some model features are already standard to existing DSGE frameworks, we also emphasize aspects particularly relevant to EMEs. These include dominant currency invoicing, forward premium puzzle, breakdown of Ricardian equivalence, impaired expenditure switching mechanism, decoupled domestic and imported price levels impacting real exchange rate trend, and other non-stationarities. Additionally, we distinguish between global financial centers and other trade partner economies. This LEGO model with these building blocks is planned to be expanded further with other properties in the future to make the model suitable for analyzing FX interventions and macroprudential policies, in addition to monetary and fiscal policies. The model is intended to become the workhorse model for macro-financial analysis in Georgia, representing a key addition to the NBG’s existing FPAS, though its adaptability can extend to other country contexts as well. |
| Keywords: | Non-tradable sticky prices; Monetary policy credibility; Core inflation |
| JEL: | E10 E31 E52 E58 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:aez:wpaper:2024-02&r= |
| By: | Stéphane Auray; Michael B. Devereux; Aurélien Eyquem |
| Abstract: | Monetary rules may have a large effect on the outcome of trade wars if central banks target the CPI inflation rate or more generally changes in the relative price of traded goods. We lay out a two-country open-economy model with sticky prices where countries engage in trade wars. In the presence of monopoly pricing markups, we show that the final level of tariffs and welfare losses from trade wars critically depend on the design of monetary policy. If central banks adopt a fixed nominal exchange rate or even better target the CPI inflation rate, trade wars are much less intense than those under PPI inflation targeting. We further show that an optimally delegated monetary rule that internalizes the formation of non-cooperative trade policy can actually completely eliminate a trade war, and even act to partly offset the welfare cost of monopoly markups. |
| JEL: | F30 F40 F41 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32451&r= |
| By: | Philémon Votsoma (UGa - Université de Garoua); Votsoma Djekna (UPVD - Université de Perpignan Via Domitia); Itchoko Motande Mondjeli Mwa Ndjokou |
| Abstract: | The objective of this paper is to assess the effect of trade openness on economic growth. Using a panel of five countries from the Central African Economic and Monetary Community (CAEMC), we examine three trade openness measures over the period 1995 to 2017: the real ratio, the adjusted ratio, and the composite trade ratio. The results show a positive correlation between economic growth and the real trade ratio on the one hand, and between economic growth and the adjusted and composite ratios on the other. These countries therefore have an interest in further intensifying their trade and particularly trade flows related to export diversification. |
| Abstract: | L'objectif de cet article est d'évaluer l'effet de l'ouverture commerciale sur la croissance économique. À partir d'un panel de cinq pays de la Communauté économique et monétaire des États de l'Afrique centrale (CEMAC) sur la période allant de 1995 à 2017, nous spécifions le ratio d'ouverture commerciale réel, le ratio commercial ajusté et le ratio commercial composé. Les résultats montrent une corrélation positive entre la croissance économique et, d'une part, le ratio commercial réel, et, d'autre part, le ratio commercial ajusté et le ratio commercial composé. Ces pays ont donc intérêt à intensifier davantage leurs échanges commerciaux et particulièrement les flux commerciaux liés à la diversification des exportations. Classification JEL : F43, F40, C30 |
| Keywords: | Croissance économique, Ouverture commerciale, CEMAC |
| Date: | 2024–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-04560475&r= |
| By: | Francesco Zanetti; Mariano Kulish; James Morley; Nadine Yamout |
| 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. |
| Date: | 2024–04 |
| URL: | http://d.repec.org/n?u=RePEc:cnn:wpaper:24-011e&r= |
| By: | Kaan Celebi; Werner Roeger; Paul J. J. Welfens |
| Abstract: | This paper re-evaluates the US external deficit which has considerably widened over the 1990s. US safe asset provision to the rest of the world is the dominant explanation for the persistent nature of the US external deficit. We suggest that apart from the safe asset hypothesis, there is an important role for technology shocks originating in US multinational companies that have a strong foreign direct investment presence. It is shown that technology shocks that increase the market value of FDI assets are loosening the sustainability constraint on the trade balance and therefore generate persistent trade balance deficits. Our analysis suggests that this channel can explain why the US tech-boom in the 1990s has contributed significantly to the increase of the US current account deficit and its duration. Technology shocks have been neglected as a reason for longer lasting current account deficits since for these shocks, standard open economy DSGE models can only generate temporary external deficits. We show that our enhanced DSGE-model – covering both trade and FDI – not only matches well the dynamics of the US external balance but can also account for the observed evolution of FDI related components of the external balance. In particular, US technology shocks can match the increase in net FDI income and a rising FDI capital balance. Our analysis suggests that FDI flows and their determinants should play a more important role in monitoring external imbalances by international organizations. |
| Keywords: | Foreign direct investment, current account imbalance, USA, DSGE, technology shocks |
| JEL: | D5 F21 F23 F32 O3 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp2074&r= |
| By: | Maideu-Morera, Gerard |
| Abstract: | The European Sovereign debt crises (2010-2012) showcased how excessive private leverage can threaten sovereign debt sustainability, making the existing fiscal rules targeting only public debt insufficient. In this paper, I study the optimal joint design of fiscal rules and macroprudential policies with sovereign default risk. I first consider a stylized two-period model of a small open economy where both the local government and a representative household borrow internationally. A central authority internal-izes externalities from sovereign default by the local government and designs fiscal rules and macroprudential policies. The model yields two insights: (i) it provides a novel rationale for macroprudential policies, and (ii) sovereign debt limits that are a function of the quantity of private debt (private-debt-dependent fiscal rules) can im-plement the optimal allocation. Then, I generalize these results to a multiperiod model with heterogeneous households, aggregate risk, and a rich asset structure. Finally, I calibrate a quantitative version of the model to compute the private-debt-dependent fiscal rules and the size of the macroprudential wedges. |
| Keywords: | Fiscal rules; macroprudential policy; sovereign default; endogenous borrowing constraints; economic unions |
| JEL: | F34 F41 F45 E44 G28 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:129336&r= |
| By: | Raphael Porcherot (IDHES - Institutions et Dynamiques Historiques de l'Économie et de la Société - UP1 - Université Paris 1 Panthéon-Sorbonne - UP8 - Université Paris 8 Vincennes-Saint-Denis - UPN - Université Paris Nanterre - UEVE - Université d'Évry-Val-d'Essonne - CNRS - Centre National de la Recherche Scientifique - ENS Paris Saclay - Ecole Normale Supérieure Paris-Saclay, CEPN - Centre d'Economie de l'Université Paris Nord - LABEX ICCA - UP13 - Université Paris 13 - Université Sorbonne Nouvelle - Paris 3 - CNRS - Centre National de la Recherche Scientifique - UPCité - Université Paris Cité - Université Sorbonne Paris Nord - CNRS - Centre National de la Recherche Scientifique - Université Sorbonne Paris Nord, Université Sorbonne Paris Nord); Mariano Féliz (IdIHCS - Instituto de Investigaciones en Humanidades y Ciencias Sociales [La Plata] - CONICET - Consejo Nacional de Investigaciones Científicas y Técnicas [Buenos Aires] - FaHCE - Facultad de Humanidades y Ciencias de la Educación [La Plata] - UNLP - Universidad Nacional de la Plata [Argentine], CONICET - Consejo Nacional de Investigaciones Científicas y Técnicas [Buenos Aires], UNLP - Universidad Nacional de la Plata [Argentine]) |
| Abstract: | In Marxist dependency theory, the uneven and combined development of productive forces across core and periphery is a key feature of capitalism. The unity of such sys- tematically differing components of the world economy is defined by the combination of borders and nation-wide productivity and labour remuneration standards. Periph- eral value spaces stand in a relationship of dependency with core value spaces, which provides the economic rational for the political domination of the latter over the former. The foundation of this dependency lies in the interaction between unequal exchange dynamic and the heightened exploitation of labour. Indeed, super-exploiting labour allow peripheral capitals to partially compensate for the value their are losing as a consequence of unequal exchange. For that reason, peripheral value spaces exhibit a fundamentally heteronomous and extroverted mode of development. This interaction takes place through the evolution of exchange rates, whose main functions is to verify the monetary character of the various currencies. Through the latter's perpetual comparison, they reproduce the general equivalent whose existence is a structural necessity for any market-based economy, such is capitalism. Doing so, exchange rates formally mediate value spaces that nonetheless retain systematically diverging characteristics. However, on the one hand, Marxist dependency theory does not offer an unified exchange rate theory. On the other, within Marxist economic literature, while several attempts at expounding a model of exchange rate determination are to be found, they yield differing conclusions and more importantly were not integrated with the debates on dependency. This article proposes to revise differing Marxist understanding of the exchange rate, seeing the latter's determination as key mechanisms leading to the reproduction of dependency. It thus discusses insights from Shaikh, Carchedi, Astarita and Ricci with the dependency tradition originating in Marini's work. On this basis, we suggest that as they contributes to the verification of the socially acknowledged monetary character of the various currencies, exchange rates determine the magnitude of unequal exchange. Consequently, the latter is best seen not as a transfer of value but as a loss of value, in contrast with the traditional "phlogistic" understanding of unequal exchange that can be found in the literature on unequal ex- change, especially in Emmanuel's writings. Finally, the point is to explore how the mediating role of exchange rate necessarily implies the super-exploitation of labour-power. |
| Keywords: | exchange rate, dependency, Value transfers, Unequal exchange |
| Date: | 2024–06–03 |
| URL: | https://d.repec.org/n?u=RePEc:hal:cepnwp:hal-04599634&r= |
| By: | Efrem Castelnuovo; Lorenzo Mori; Gert Peersman |
| Abstract: | We employ a structural VAR model with global and US variables to study the relevance and transmission of oil, food commodities, and industrial input price shocks. We show that commodi-ties are not all alike. Industrial input price changes are almost entirely endogenous responses to other shocks. Exogenous oil and food price shocks are relevant drivers of global real and financial cycles, with food price shocks exerting the greatest influence. We then conduct counterfactual estimations to assess the role of systematic monetary policy in shaping these effects. The results reveal that pro-cyclical policy reactions exacerbate the real and financial effects of food price shocks, whereas counter-cyclical responses mitigate those of oil shocks. Finally, we identify dis-tinct mechanisms through which oil and food shocks affect macroeconomic variables, which could also justify opposing policy responses. Specifically, along with a sharper decrease in nondurable consumption, food price shocks raise nominal wages and core CPI, intensifying inflationary pres-sures. Conversely, oil price shocks act more like adverse aggregate demand shocks absent mone-tary policy reactions, primarily through a decrease in durable consumption and spending on goods and services complementary to energy consumption, which are amplified by financial frictions. |
| Keywords: | commodity price shocks, transmission mechanisms, monetary policy |
| JEL: | E32 E52 F44 G15 Q02 |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:een:camaaa:2024-36&r= |