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on Open Economy Macroeconomics |
| By: | Acedański, Jan; Dąbrowski, Marek A. |
| Abstract: | This paper provides novel insights into the Feldstein-Horioka puzzle. The famous finding of Feldstein and Horioka (1980) is that despite perfect international capital mobility, domestic saving does not flow among countries to equalise yields but instead is tightly related to domestic investment. We observe that the link between empirical results and their theoretical foundations rarely goes beyond the saving-investment identity, and the research is dominated by empirical approaches coupled with advanced econometric techniques. This paper harnesses open economy macroeconomic models to demonstrate that the saving-retention coefficient informs about the relative importance of shocks rather than the degree of international capital mobility. Using the Monte Carlo experiments and the open economy RBC model, we show that the dominance of spending and foreign shocks moves the distribution of the estimated coefficient towards zero, whereas the prevalence of investment (productivity) shocks shifts the distribution towards one. On the empirical side, we proxy shocks to saving with debt and current account surprises constructed from the IMF's forecasts and employ them to instrument the saving ratio. Using the CCE estimator, we uncover that, in line with the theoretical framework, the saving-retention coefficient is significantly lower in the instrumental variable regressions than in the regressions without instruments. Finally, we replicate the puzzling finding that investment-saving correlations are higher in advanced economies than in emerging market economies only in a few regressions without instrumentation and demonstrate that the difference disappears when the endogeneity of the saving rate is adequately remedied. |
| Keywords: | Feldstein-Horioka puzzle; capital mobility; capital flows; open economy macroeconomics; saving and investment |
| JEL: | E44 F32 F41 G15 |
| Date: | 2024–11–27 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122800 |
| By: | Sarthak Behera; Hyeongwoo Kim; Soohyon Kim |
| Abstract: | This paper investigates the asymmetric out-of-sample predictability of macroeconomic variables for the real exchange rate between the United States and Korea. While conventional models often suggest that the bilateral real exchange rate is primarily driven by the relative economic performance of the two countries, our research highlights the superior predictive power of latent factors obtained from U.S. economic variables, while Korean factors fail to enhance predictability and often act as noise. We attribute the strong predictability of U.S. factors to significant cross-correlations observed among a panel of bilateral real exchange rates vis-Ã -vis the U.S. dollar, indicating a limited role for idiosyncratic factors associated with smaller economies. Our major findings are based on data from the pre-COVID19 era. We further explore how economic crises disrupt this relationship, resulting in temporary yet persistent disconnects between the real exchange rate and macroeconomic fundamentals. |
| Keywords: | Dollar/Won Real Exchange Rate; Asymmetric Predictability; Principal Component Analysis; Partial Least Squares; LASSO; Out-of-Sample Forecast |
| JEL: | C38 C53 C55 F31 G17 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:abn:wpaper:auwp2025-01 |
| By: | Yakhin, Yossi |
| Abstract: | The paper introduces foreign exchange interventions (FXIs) into a standard New-Keynesian small open economy model. It solves for the optimal FXI policy, suggests an implementable policy rule, and studies the transmission mechanism of FXIs. Relying on the portfolio balance channel, deviations from the uncovered interest rate parity (UIP) reflect financial inefficiencies. Therefore, a policy rule that stabilizes the UIP premium moves the economy toward its optimal allocation, regardless of the type of shocks it faces. Augmenting the rule with foreign reserves smoothing further improves welfare. The paper discusses the conditions under which strict targeting of the UIP premium is optimal. FXIs are transmitted by affecting the UIP premium. Purchasing foreign reserves increases the UIP premium, thereby raising the effective return home agents face and depreciating the domestic currency. Consequently, domestic demand contracts and export expands. The results are robust to a variety of modeling alternatives for the financial sector. |
| Keywords: | Foreign Exchange Interventions; Policy Rule; UIP Premium; Monetary Policy; Open Economy Macroeconomics |
| JEL: | E44 E58 F30 F31 F41 G15 |
| Date: | 2024–12–12 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:122948 |
| By: | Miguel Acosta-Henao; Andrés Fernández; Patricia Gomez-Gonzalez; Ṣebnem Kalemli-Özcan |
| Abstract: | Using comprehensive administrative data on Chilean firms, we examine whether credit lines and government-backed credit guarantees mitigated the impact of the large sudden stop event during the pandemic—the abrupt withdrawal of international capital. Our analysis employs a regression discontinuity design to demonstrate that firms eligible for these programs increased their borrowing from domestic lenders at a relatively lower cost. By reducing the cost of domestic currency debt relative to foreign currency debt, these policies effectively lowered the relative cost of domestic capital in the short term. This reduction in borrowing costs is conditional on selection effects at both the firm and bank levels, where only policy-eligible firms benefit from the lower credit costs from the same lender that non-eligible firms also borrow from. An open economy model with heterogeneous firms and financial frictions helps explain our findings: government interventions eased the higher cost of capital during the sudden stop by relaxing firms’ domestic collateral constraints, which in turn reduced domestic financial intermediaries’ risk aversion and boosted the supply of domestic credit in the face of shrinking international capital flows. |
| JEL: | F32 F41 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33283 |
| By: | Segal, Paul; Moatsos, Michail |
| Abstract: | This paper shows that cross-country comparisons of elite incomes vary widely and systematically depending on the conception of real income used. It is well known that between-country income inequality is higher using market exchange rates than PPP exchange rates, due to a combination of traded sector bias and the Balassa-Samuelson effect, and we empirically confirm that this is the case for comparing top 1 percent incomes across countries. In contrast, we argue that measuring real incomes of elites using entitlements over labour (ELs), which take local wage costs as the numeraire, leads to the opposite effect: since the non-traded sector is relatively labour-intensive, incomes in the sense of ELs demonstrate non-traded sector bias relative to PPP incomes. They therefore provide a complement, or opposite bound, to the traded-sector bias of market exchange rates. Consistent with this argument, we find that between-country inequality among the world’s national elites is indeed lower using ELs than either PPP or market exchange rates. But elite incomes in ELs do not merely converge: elites in poorer countries leapfrog or overshoot their rich country counterparts, enjoying higher real incomes in terms of their command over domestic labour. |
| Keywords: | Balassa-Samuelson effect; elites; entitlements over labour; inequality; PPP exchange rates |
| JEL: | D31 E01 |
| Date: | 2024–11–06 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:126101 |
| By: | Steven Brakman; Charles van Marrewijk |
| Abstract: | The literature on international transfers has studied the possibility of transfer paradoxes; the donor gains and the recipient loses from a transfer. This can occur in a wide range of circumstances, including perfect competition and the absence of distortions. The literature, however, largely ignores the fact that most transfers are given in the form of money and not in real (consumption) terms. Money holdings reflect postponed consumption and requires that a time dimension enters the analysis. This aspect is ignored in the literature. We focus on money transfers in an otherwise standard set-up of a Walrasian perfect competition model. We determine whether transfer paradoxes are likely. We also study the welfare consequences of financial transfers for the donor and the recipient, and their impact on the Balance-of-Payments. We find that under normal circumstances transfer paradoxes do not occur, the donor's current account deteriorates and the recipient's current account improves. |
| Keywords: | money, transfers, international trade |
| JEL: | F32 F35 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11518 |
| By: | António Afonso; José Alves; João Jalles; Sofia Monteiro |
| Abstract: | This paper examines the impact of current account balances on energy, headline, and core inflation across developed and developing economies from 1980 to 2023. Using Panel OLS fixed effects, Panel-IV 2SLS and Panel Vector Autoregressive models, we find that an improvement in the current account consistently leads to lower inflation, with heterogeneous effects across inflation components, even when controlling for monetary policy. Our analysis also explores regional differences and contrasts the periods before and after the 2008 subprime crisis, revealing that current account surpluses had a stronger deflationary effect in the more recent period. There is also a negative link between cyclical unemployment and inflation supporting the traditional Phillips curve perspective. These results suggest that policies aimed at improving current account balances, particularly in energy-importing countries, could help mitigate inflationary pressures. |
| Keywords: | current account, energy inflation, headline inflation, core inflation, panel data, VAR, subprime crisis, inflation dynamics, monetary policy |
| JEL: | E31 F32 Q43 C33 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11512 |
| By: | Rapetti, Martin |
| Abstract: | This article analyzes economic crises in Latin America (LA) from the 1970s to the 2000s, focusing on two major waves: the "lost decade" of the 1980s and the crises of the 1990s and early 2000s. Both waves followed periods of strong capital inflows, a common feature in developing countries facing financial turmoil. LA’s early integration into international capital markets and frequent crises offer a unique opportunity for comparative analysis. The paper also explores the absence of major crises during the early 2000s, despite intensified capital inflows, and examines the role of fiscal policy and sound macroeconomic management in mitigating vulnerabilities. |
| Keywords: | crisis, exchange rate, balance of payments, debt, Latin America |
| JEL: | F4 F41 O54 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:123169 |
| By: | Cathrin Mohr; Christoph Trebesch |
| Abstract: | We review the literature on geoeconomics, defined as the field of study that links economics and geopolitics (power rivalry). We describe what geoeconomics is and which questions it addresses, focusing on five main subfields. First, the use of geoeconomic policy tools such as sanctions and embargoes. Second, the geopolitics of international trade, especially recent work on coercion and fragmentation. Third, research on the geopolitics of international finance, which focuses on currency dominance and state-directed capital flows. Fourth, the literature on geopolitical risk and its spillovers to the domestic economy, e.g. on investments, credit, and inflation. Fifth, the economics of war, in particular research on trade and war and on military production. As geopolitical tensions grow, we expect the field to grow substantially in the coming years. |
| Keywords: | geoeconomics, geopolitics, political economy, power, trade, international finance, war, sanctions, coercion |
| JEL: | F01 P45 D74 H56 N40 F10 F20 F30 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11564 |
| By: | Felipe Benguria; Felipe Saffie; Shihangyin Zhang |
| Abstract: | We study the uneven effects of a commodity boom, documenting its impact across workers based on their skill and on the region where they live. To this end, we develop a dynamic quantitative model of an economy with many regions connected through interregional trade and migration. Empirically, we focus on the experience of Brazil during the commodity boom of the 2000s and calibrate the model using detailed micro-level data. At the aggregate level, the boom leads to a decline in the skill premium, resulting from a larger increase in the real wages of unskilled than skilled workers. The model indicates that the commodity boom accounts for a quarter of the decline in the skill premium observed during this period, and masks substantial heterogeneity across states and sectors. Finally, using the model to simulate counterfactuals, we show that spatial linkages—interregional migration and interregional trade—play an important role in shaping the impact of the boom. Spatial linkages reduce the decline in the skill premium at the national level, and also reduce the extent of spatial inequality due to the boom. |
| JEL: | E32 F15 F40 |
| Date: | 2024–12 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33287 |
| By: | Elias Hasler |
| Abstract: | This paper explores the global economic and climate spillovers of the European Union Emissions Trading System (EU ETS), leveraging exogenous variations in carbon prices identified through a carbon policy surprise series. Findings reveal that higher EU carbon prices lead to significant and sustained reductions in greenhouse gas (GHG) emissions, both within the Euro Area (EA) and globally, with no evidence of carbon leakage. Structural Scenario Analysis confirms that these reductions are driven by energy efficiency improvements rather than solely by declines in industrial production. The results highlight the transmission of the shock trough the Brussels Effect, where EU carbon policies influence global standards, evidenced by stricter carbon policies abroad and shifts in investor behavior favoring green industries. Furthermore no region benefits economically from EU carbon pricing. Overall, the EU ETS proves effective in reducing emissions without being undermined by carbon leakage. |
| Keywords: | Carbon Leakage, Spillovers, Carbon Pricing, Brussels Effect |
| JEL: | E32 F42 F64 Q54 Q58 |
| Date: | 2025–01 |
| URL: | https://d.repec.org/n?u=RePEc:inn:wpaper:2025-01 |