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on Open Economy Macroeconomics |
| By: | Juan Carlos Hatchondo; Leonardo Martinez; Yasin Kürsat Önder; Francisco Roch (-) |
| Abstract: | We study a sovereign default model in which the government issues CoCos (contingent convertible bonds) that stipulate a suspension of debt payments upon a sizeable increase of the global risk premium (and thus, of the government’s borrowing cost). We find that CoCos allow the government to smooth out the effects of risk-premium shocks on consumption, but they increase the default frequency. By suspending debt payments, CoCos imply higher debt levels and thus higher default probabilities after adverse shocks. We also study CoCos that in addition to the payment suspension, stipulate debt forgiveness after adverse shocks. In contrast with no-forgiveness CoCos, debt-forgiveness CoCos reduce debt levels after adverse shocks, thereby reducing default probabilities. Debt-forgiveness CoCos also yield larger welfare gains. |
| Keywords: | Sovereign default, CoCos, debt relief, reprofiling, debt forgiveness squares, efficiency, robustness |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:24/1096 |
| By: | Delgado, Martha Elena; Herreño, Juan David; Hofstetter, Marc; Pedemonte, Mathieu |
| Abstract: | We estimate the causal effects of a shift in the future expected exchange rate of a local currency against the US dollar on a representative sample of firms in a small open economy. We survey a nationally representative sample of firms and provide the one-year-ahead nominal exchange rate forecast published by the local central bank to a random sub-sample of firm managers. This information treatment is effective in shifting exchange rate expectations and perceptions. These effects are persistent and larger for non-exporting firms. Linking survey responses with administrative census data, we estimate a positive elasticity of current import expenditures to a future expected depreciation. Our estimates highlight the intertemporal margin of trade to anticipated changes in trade costs. |
| Keywords: | Expectations;exchange rate;Firms;Trade |
| JEL: | E31 E71 F31 G41 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:13761 |
| By: | Marçal, Emerson; Simões, Oscar Rodrigues |
| Abstract: | Current account imbalances significantly impact economic policy, with sharp exchange rate movements often causing disruptions. Hamilton’s [1989] Markov Switching Model introduced a framework for analyzing such dynamics. Few papers have used non-linear multivariate models to study current accounts and real effective exchange rates. This paper documents the existence of non-linearity by estimating a Markov Switching VECM and showing its superiority against a linear benchmark for the Brazilian economy in the period of inflation target and dirty floating regime. The monthly frequency and the sample cover the period from 1999-2 to 2024-3. Two regimes were identified. One regime is related to crisis events and the other to tranquil periods. Both real exchange rate and current account dynamics differ across regimes highlighting the necessity of modelling nonlinearity. |
| Date: | 2024–10–01 |
| URL: | https://d.repec.org/n?u=RePEc:fgv:eesptd:571 |
| By: | Vito Cormun (Santa Clara University, USA); Kim Ristolainen (Turku School of Economics, University of Turku, Finland) |
| Abstract: | Leveraging Wall Street Journal news, recent developments in textual analysis, and generative AI, we estimate a narrative decomposition of the dollar exchange rate. Our findings shed light on the connection between economic fundamentals and the exchange rate, as well as on its absence. From the late 1970s onwards, we identify six distinct narratives that explain changes in the exchange rate, each largely non-overlapping. U.S. fiscal and monetary policies play a significant role in the early part of the sample, while financial market news becomes more dominant in the second half. Notably, news on technological change predicts the exchange rate throughout the entire sample period. Finally, using text-augmented regressions, we find evidence that media coverage explains the unstable relationship between exchange rates and macroeconomic indicators. |
| Keywords: | Exchange rates, big data, textual analysis, macroeconomic news, Wall Street Journal, narrative retrieval, scapegoat |
| JEL: | C3 C5 F3 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:tkk:dpaper:dp167 |
| By: | Knapp, Fabian |
| JEL: | D62 E32 E44 F32 F41 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:vfsc24:302415 |
| By: | António Afonso; José Alves; Lucas Menescal; Sofia Monteiro |
| Abstract: | We examine the effects of World Uncertainty and Geopolitical Risk on Trade flows for 31 European economies between 1995 and 2023. To do so, we resort to Panel estimation techniques, including OLS and Poisson Pseudo Maximum Likelihood (PPML). Our findings reveal that European nations primarily respond to global uncertainty by concentrating their exports and imports among top trading partners particularly their top 5 highest trading partners. This result is more pronounced when uncertainty is driven by low-income countries. Moreover, there is a stronger relationship between imports and global uncertainty compared to exports. Our study underscores the importance of European economies strategically adapting their export and import approaches in response to these challenges. |
| Keywords: | Geopolitical Risk; World Uncertainty; Trade Flows; International Trade; European Economies |
| JEL: | C23 E44 F14 F41 F62 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03462024 |
| By: | António Afonso; Daniel Loureiro |
| Abstract: | We compute a GVAR to estimate the fiscal spillovers on output, consumption, investment, employment, and income, from 2002Q1 to 2021Q4, with 16 Euro Area (EA) countries. We found that a budget balance expansionary shock in Germany would generate positive spillovers on output and employment. Negative cross-country effects on consumption were also found. No significant spillovers on investment or income were observed following this shock. Greater and more significant spillovers were found after an EA global shock. There are also positive effects on private investment. However, a global shock still does not generate significant effects on income and increases the magnitude of the negative short-run spillovers on consumption. Greece is one of the countries more affected by short-run negative spillovers. Finally, national and global fiscal shocks put upward pressure on prices and generate negative effects on public debt. From a policy perspective, we recommend the reinforcement of the fiscal coordination framework. |
| Keywords: | Euro Area, fiscal spillovers, policy coordination, GVAR. |
| JEL: | C32 E62 F42 F45 |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03472024 |