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on Open Economy Macroeconomics |
| By: | Dominick Bartelme; Ting Lan; Mr. Andrei A Levchenko |
| Abstract: | This paper estimates the impact of external demand shocks on real income. We utilize a first order approximation to a wide class of small open economy models that feature sector-level gravity in trade flows, which allows us to measure foreign shocks and characterize their welfare impact in terms of reducedform elasticities. We use machine learning techniques to group 4-digit manufacturing sectors into a smaller number of clusters, and show that the cluster-level elasticities of income with respect to foreign shocks can be estimated using high-dimensional statistical techniques. Foreign demand shocks in complex intermediate and capital goods have large positive impacts on real income, whereas impacts in other sectors are negligible. We showthat the estimates imply that countries that specialize in these sectors enjoy greater gains from increased openness, and that (small) export subsidies to these sectors are welfare-improving. Finally, a calibrated multisector production and trade model with input-output linkages and external economies of scale can match the empirical estimates. |
| Keywords: | trade specialization; real income; gravity; k-means clustering |
| Date: | 2024–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/051&r=opm |
| By: | Vasco Curdia; Fernanda Nechio |
| Abstract: | We assess how within euro area labor mobility impacts economic dynamics in response to shocks. In the analysis we use an estimated two-region monetary union dynamic stochastic general equilibrium model that allows for a varying degree of labor mobility across regions. We find that, in contrast with traditional optimal currency area predictions, enhanced labor mobility can either mitigate or exacerbate the extent to which the two regions respond differently to shocks. The effects depend crucially on the nature of shocks and variable of interest. In some circumstances, even when it contributes to aligning the responses of the two regions, labor mobility may complicate monetary policy tradeoffs. Moreover, the presence and strength of financial frictions have important implications for the effects of labor mobility. If the periphery’s risk premium is more responsive to its indebtedness than our estimates, there are various shocks for which labor mobility may help stabilize the economy. Finally, the euro area’s economic performance following the Global Financial Crisis would not have been necessarily smoother with enhanced labor mobility. |
| Keywords: | monetary unions; labor mobility; credit frictions |
| JEL: | F41 F45 E44 E3 E4 |
| Date: | 2024–03–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:97975&r=opm |
| By: | Florian Schuster; Ms. Marwa Alnasaa; Lahcen Bounader; Il Jung; Jeta Menkulasi; Joana da Mota |
| Abstract: | Many countries find themselves with elevated debt levels, increased debt vulnerabilities, and tight financing conditions, while also facing increased spending needs for development and transition to a greener economy. This paper aims to place the current debt landscape in a historical context and investigate the drivers of debt surges, to what degree they result in a crisis as well as examine post-surge debt trajectories and under what conditions debt follows a non-declining path. We find that fiscal policy and stock-flow adjustments play important roles in debt dynamics with the valuation effects arising from currency depreciation explaining more than half of stock flow adjustments in LICs. Debt surges are estimated to result in a financial crisis with a probability of 11–20 percent and spending-driven fiscal expansions during debt surges tend to result in a high probability of non-declining debt path. |
| Keywords: | Public debt; debt surges; financial crisis; stock-flow adjustment; exchange rate depreciation; fiscal expansion |
| Date: | 2024–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/050&r=opm |
| By: | Andrea Gazzani (Bank of Italy); Vicente Herrera (SQM/Pontificia Universidad Católica de Chile); Alejandro Vicondoa (Pontificia Universidad Católica de Chile) |
| Abstract: | Commodity price fluctuations are a significant driver of business cycles in Emerging Economies (EMEs). While previous works have emphasized the link between commodity prices and financial conditions, none of them has explored empirically the potentially sign-dependent effects induced by commodity price shocks on domestic macro-financial conditions. Using a non-linear panel local projections model, we show that negative commodity price shocks induce stronger and faster effects on output and investment relative to positive shocks in EMEs. The trade balance improves after a negative shock due to the tightening of domestic financial conditions whereas it is unresponsive after a positive one. The response of financial conditions, both in terms of an increase in country spreads as well as in terms of a fall in net capital flows, is thus crucial in explaining the asymmetric responses. The faster and stronger spillover from faltering - rather than surging - commodity prices to the macro-financial conditions of commodity-exporting EMEs has important implications for the designof optimal policies in EMEs. |
| Keywords: | commodity prices, capital flows, financial frictions, non-linear effects |
| JEL: | F41 F44 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:311&r=opm |
| By: | Juanma Castro-Vincenzi; Gaurav Khanna; Nicolas Morales; Nitya Pandalai-Nayar |
| Abstract: | We characterize how firms structure supply chains under climate risk. Using new data on the universe of firm-to-firm transactions from an Indian state, we show that firms diversify sourcing locations, and suppliers exposed to climate risk charge lower prices. Our event-study analysis finds that firms with suppliers in flood-affected districts experience a decline in inputs lasting two months, followed by a return to original suppliers. We develop a general equilibrium model of firm input sourcing under climate risk. Firms diversify identical inputs from suppliers across space, trading off the probability of a climate shock against higher input costs. We quantify the model using data on 271 Indian districts, showing real wages vary across space and are correlated with geography and productivity. Wages are inversely correlated with sourcing risk, giving rise to a cost minimization-resilience tradeoff. Supply chain diversification unambiguously reduces real wage volatility, but ambiguously affects their levels, as diversification may come with higher input costs. While diversification helps mitigate climate risk, it exacerbates the distributional effects of climate change by reducing wages in regions prone to more frequent shocks. |
| JEL: | E0 F0 F10 F18 F40 F62 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:32218&r=opm |
| By: | Cavallo, Eduardo A.; Hernández, Juan; González Jaramillo, María José; Powell, Andrew |
| Abstract: | Despite an initial reversal of capital inflows, the COVID-19 pandemic resulted in relatively mild impacts on net capital flows to Emerging and Developing Economies. In contrast to previous crises, gross capital inflows offset residents' outflows, resulting in relatively stable net capital flows and modest current account adjustments. Liquid international markets, access to official resources, and sound fundamentals allowed for capital inflows, thus preventing the additional costs of widespread Sudden Stops during the pandemic. Still, we show a relatively simple model predicted Sudden Stops in net flows reasonably well in countries with weaker fundamentals. |
| Keywords: | Sudden stops;Capital flows;balance of payments;Capital Account;COVID-19;Emerging and Developing Economies |
| JEL: | F30 F32 F40 |
| Date: | 2023–10 |
| URL: | http://d.repec.org/n?u=RePEc:idb:brikps:13133&r=opm |
| By: | Linda S. Goldberg; Oliver Zain Hannaoui |
| Abstract: | The share of U.S. dollar assets in the official foreign exchange reserve portfolios of central banks is sometimes taken as an indicator of dollar status. We show that the observed decline in the aggregate share of U.S. dollar assets does not stem from a systematic shift in currency preferences away from holding dollar assets. Instead, a small group of countries with large foreign exchange reserve balances drive the dollar share decline observed in aggregate statistics. This arises either due to countries conducting monetary policy vis-à-vis the euro or due to preference shifts away from dollars. Regression analysis shows that interest rate differentials between traditional and nontraditional reserve currencies can tilt portfolio composition, particularly in relation to the scale of investment tranches within overall central bank portfolios. Geopolitical distance from the United States and financial sanctions are associated with lower U.S. dollar shares, especially if the primary foreign currency liquidity needs of the central bank are already satisfied. |
| Keywords: | foreign exchange reserves; dollar; liquidity; convenience yields; currency of international debt; Foreign Exchange Reserves |
| JEL: | F3 F31 F33 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:97928&r=opm |
| By: | António Afonso; José Alves; Sofia Monteiro |
| Abstract: | Acknowledging the potential detrimental impact that twin-deficits may have on sovereign risk, this study uses a two-step approach to assess the impact of fiscal and external sustainability on sovereign risk dynamics for a panel of 27 European Economies between 2001Q4 and 2022Q3. To do so, we first estimate a country-specific time-varying measure of fiscal sustainability, through the cointegration between government revenues and expenditures, and of external sustainability, derived from the exports-imports cointegration. We then resort to those time-varying coefficients to assess their impact on sovereign risk, proxied by 10-year CDS and CDS spreads (against the US) making use of Weighted Least Squares (WLS) analysis. Noticeably, we show that an improvement of both fiscal and external sustainability lead to a reduction in sovereign risk. This phenomenon becomes notably pronounced, particularly when examining countries experiencing an upward trajectory in their public debt levels. |
| Keywords: | sovereign risk, fiscal sustainability, external sustainability, CDS, CDS spreads |
| JEL: | C23 F45 G23 G32 H63 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_10979&r=opm |
| By: | Barrie, Mohamed Samba; Jackson, Emerson Abraham; Pessima, Joseph |
| Abstract: | This study examines the duality of the exchange rate market in Sierra Leone, delving into the distinct impacts of the official and parallel exchange rates (between the Leone and the United States Dollar) on inflation. Employing the Autoregressive Distributed Lag (ARDL) approach and utilizing annual time series data from 1980 to 2020, the research reveals that the depreciation of the Leone significantly influences inflation. This effect is more pronounced in the case of the parallel exchange rate, where a 1% depreciation results in a 1.26 percentage point increase in inflation, gradually decreasing to 0.92 percentage point over two years. Conversely, the depreciation of the official rate leads to a 0.43 percentage point increase inflation and subsequently to 0.52 percentage point increase in inflation for every 1% depreciation of the official exchange rate in the second year. The findings confirm the significance of both official and parallel exchange rates in influencing inflation, highlighting a substantial difference in their effects on the economy. Nevertheless, the results indicate no statistically significant long-term relationship between inflation and both the official and parallel exchange rates in Sierra Leone. Exchange rate depreciation, particularly in the parallel market, is shown to have a pronounced impact on inflation, necessitating careful oversight and regulation of the parallel market to ensure price stability. The study also uncovers the presence of foreign exchange market fragmentation, posing challenges to effective monetary policy and exchange rate management. Policy implications drawn from the research underscore the importance of regulating the parallel market to enhance transparency and stability. Integrating fragmented foreign exchange markets is deemed crucial for minimizing exchange rate pass through to inflation. Acknowledging the data limitations, the research suggests enriching future investigations by incorporating recent data, global economic factors, and investor sentiments, all of which have the tendency to affect exchange rate movements. |
| Keywords: | Official Exchange Rate, Parallel Exchange Rate, Inflation, exchange-rate-market-duality, Sierra Leone |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:esprep:287775&r=opm |
| By: | Tatsushi Okuda; Tomohiro Tsuruga |
| Abstract: | This paper applies the two-country open-economy model with trade in stocks and bonds of Coeurdacier et al. (2010) to quantify the loss of international diversification benefits for major advanced economies, which have a significant presence in international financial markets, under geoeconomic fragmentation. We perform counterfactual simulations under different hypothetical fragmentation scenarios in which these economies are unable to trade with geopolitically distant countries, as measured by voting disagreement on foreign policy issues at the United Nations General Assembly meetings during 2012-2021. The simulation results imply a potentially significant loss of international diversification benefits of financial openness for the considered advanced economies by limiting trading to partner countries that are geopolitical allies with highly synchronized business cycles. |
| Keywords: | Geopolitical risk; financial integration; international risk sharing |
| Date: | 2024–03–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/048&r=opm |
| By: | Laurent Kemoe; Moustapha Mbohou; Hamza Mighri; Mr. Saad N Quayyum |
| Abstract: | This paper provides new evidence on the exchange rate passthrough to domestic inflation in Sub-Saharan Africa (SSA) using both bilateral US dollar exchange rate and the nominal effective exchange rate (NEER), and monthly data. We find that depreciations cause sizable increases in domestic inflation. The passthrough in SSA is higher than in other regions and its magnitude depends on the exchange rate regime, type of exchange rate (bilateral versus NEER), natural resource endowment and domestic market competitiveness. The passthrough is found to be disproportionately larger and more persistent for large depreciation shocks, and for exchange rate changes that are more persistent. We also find evidence of asymmetry, with passthrough eight times stronger during depreciations than appreciations. Additional findings suggest that improved monetary policy effectiveness is an important driver of our observed declining estimates of exchange rate passthrough over time, supporting the long-standing view that strengthening monetary policy frameworks and credibility helps mitigate the impact of depreciations on inflation. |
| Keywords: | Exchange rage passthrough; inflation; nonlinearities; Sub-Saharan Africa |
| Date: | 2024–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2024/059&r=opm |
| By: | Claire Giordano (Bank of Italy); Enrico Tosti (Bank of Italy) |
| Abstract: | This study analyses the negative shock to Italy's terms of trade since the second half of 2021: the shock was less pronounced than the 1973-74 oil crisis, yet particularly sharp. The terms-of-trade deterioration was driven by energy goods and was greater than in the other euro-area economies due to a higher rise in energy import prices and to a greater share of energy products in total imports. The energy component was also the main driver both of the strong deterioration in the current account balance and of the large negative income effect. At any rate, Italy has successfully weathered the storm: the gradual recovery in the terms of trade since 2022 has led to the return to a positive current account balance and to a positive income effect. |
| Keywords: | terms of trade, energy prices, energy shock |
| JEL: | F10 F40 Q40 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_831_24&r=opm |
| By: | Bertsch, Christoph (Research Department, Central Bank of Sweden); Hull, Isaiah (BI Norwegian Business School; CogniFrame); Lumsdaine, Robin L. (Kogod School of Business, American University; Erasmus University Rotterdam; National Bureau of Economic Research (NBER); Tinbergen Institute; Center for Financial Stability); Zhang, Xin (Research Department, Central Bank of Sweden) |
| Abstract: | This paper introduces a novel database of text features extracted from the speeches of 53 central banks from 1996 to 2023 using state-of-the-art NLP methods. We establish four facts: (1) central banks with floating and pegged exchange rates communicate differently, and these differences are particularly pronounced in discussions about exchange rates and the dollar, (2) communication spillovers from the Federal Reserve are prominent in exchange rate and dollar-related topics for dollar peggers and in hawkish sentiment for others, (3) central banks engage in FX intervention guidance, and (4) more transparent institutions are less responsive to political pressure in their communication. |
| Keywords: | Exchange Rates; Natural Language Processing (NLP); International Spillovers; Monetary Policy |
| JEL: | C55 E42 E50 F31 F42 |
| Date: | 2024–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0432&r=opm |
| By: | Nadav Ben Zeev (BGU); Daniel Nathan (University of Pennsylvania and Bank of Israel) |
| Keywords: | Exchange Rate Determination; Equity Hedging Channel; Foreign Currency Forward Flows; Order Flow; Limits of Arbitrage; FX Dealers; Forward Exchange Rate; Spot Exchange Rate;Global Stock Prices; Institutional Investors; Granular Instrumental Variable; Bayesian Local Projections |
| JEL: | E44 F3 F31 G15 G23 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:bgu:wpaper:2315&r=opm |