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on Open Economy Macroeconomics |
| By: | Jonas Ljungberg (Lund University); Anders Ögren (Lund University) |
| Abstract: | "It is well known that a country by manipulating the value of its currency can push up its competitiveness in international markets. This notwithstanding, it is much overlooked how exchange rates have influenced economic growth and convergence of income among nations in a longer perspective. In particular, among countries involved in market integration, one could presume that those on a lower level of income should have a higher inflation. The higher inflation, with a concomitant rise of wages, should then erode their competitiveness and counteract convergence. A somehow flexible exchange rate might compensate for this loss and contribute to the catch-up of countries still behind. The theoretical point of departure in this paper is that countries with lower levels of income have also lower levels of prices and wages than richer countries. When poorer countries catch-up with the richer, they necessarily have higher inflation and wage growth. Unless these asymmetries in prices and wages are compensated for by nominal exchange rates, the poorer countries will decline in relative competitiveness. Since we deal with trends over longer periods and not temporary shocks, it is not necessary to determine when a currency is undervalued or overvalued. Instead, the focus can be on the relative change of exchange rates and their long term effects. The paper examines how exchange rate movements have interacted with economic growth and price changes across European countries since 1870. In that purpose, we look at how exchange rates have exposed countries to each other through foreign trade. The contribution of the paper is that effective exchange rates are brought into a long-term analysis of (mostly west-) European growth and convergence. The next section of the paper shortly reviews the treatment of exchange rates and growth in the literature. Section three introduces the history of exchange rates across seventeen European countries, and how the effective exchange rates are estimated. Section four explores the pattern of long-term convergence and divergence of GDP per capita in Western Europe. Section five discusses the interaction between growth, prices, and exchange rates over 1870-2010 divided in five different sub-periods. Section six concludes with a discussion of further implications." |
| Keywords: | "exchange rates, economic growth, convergence, Europe" |
| JEL: | E43 E58 E65 |
| Date: | 2017–04 |
| URL: | http://d.repec.org/n?u=RePEc:ehs:wpaper:17022&r=opm |
| By: | Auer, Raphael; Burstein, Ariel; Lein, Sarah M. (University of Basel) |
| Abstract: | The removal of the lower bound on the EUR/CHF exchange rate in January 2015 provides a unique setting to study the implications of a large and sudden appreciation in an otherwise stable macroeconomic environment. Using transaction-level data on non-durable goods purchases by Swiss consumers, we measure the response of border and consumer retail prices to the CHF appreciation and how household expenditures responded to these price changes. Consumer prices of imported goods and of competing Swiss-produced goods fell by more in product categories with larger reductions in border prices and a lower share of CHF-invoiced border prices. These price changes resulted in substantial expenditure switching between imported and Swiss-produced goods. While the frequency of import retail price reductions rose in the aftermath of the appreciation, the average size of these price reductions fell (and more so in product categories with larger border price declines and a lower share of CHF-invoiced border prices), contributing to low pass-through into import prices. |
| Keywords: | Large exchange rate shocks; exchange rate pass-through; invoicing currency; expenditure switching; price-setting; nominal and real rigidities; monetary policy |
| JEL: | D4 E31 E50 F41 L11 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:bsl:wpaper:2018/23&r=opm |
| By: | Semyon Malamud; Andreas Schrimpf |
| Abstract: | We develop a general equilibrium model with intermediaries at the heart of international financial markets. In our model, intermediaries bargain with their customers and extract rents for providing access to foreign claims. The behavior of intermediaries, by tilting state prices, generates an explicit, non-linear risk structure in exchange rates. We show how this endogenous risk structure helps explain a number of anomalies in foreign exchange and international capital markets, including the safe haven properties of exchange rates and the breakdown of covered interest parity. |
| Keywords: | financial intermediation, exchange rates, safe haven, covered interest parity deviations |
| JEL: | E44 E52 F31 F33 G13 G15 G23 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:743&r=opm |
| By: | Renée Fry-McKibbin; Rodrigo da Silva Souza |
| Abstract: | This paper empirically addresses the hypothesis that of the external commodity based sector, Chinese resource demand is the most important driver of emerging market economy business cycles using Brazil as a representative case. Using a structural VAR to examine the effects of Chinese resource demand, world commodity prices and foreign output on domestic macroeconomic variables, we show that shocks to Chinese demand induce an expansion in Brazilian resource exports, the non-tradeable primary commodity sector and other domestic activity. Commodity price shocks are less favorable than Chinese resource demand shocks. Our findings identify the important role of the interest rate in amplifying the real effects of the commodity sector boom, in contrast to the role of the interest rate in developed countries. By incorporating Chinese resource demand in addition to commodity prices, commodity prices play a smaller role in explaining the variance of domestic output than found in previous literature. |
| Keywords: | Brazil, EME business cycles, Dutch disease, SVAR |
| JEL: | C51 E32 F43 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2018-45&r=opm |
| By: | Ilhyock Shim; Kwanho Shin |
| Abstract: | We investigate if financial stress in countries where international banks are headquartered is a major driver of banking outflows from emerging market economies (EMEs). We find that when financial stress measured by sovereign or bank CDS spread or corporate bond spread increases, international banks decrease their lending to EMEs, which acts as a major driver of capital outflows from EMEs. In particular, financial stress in lender countries is a more important driver than the local financial conditions and macroeconomic fundamentals of EMEs. Such results generally hold even after the Global Financial Crisis (GFC) period, but to a lesser extent. When we divide the total amount of international lending into subcomponents, cross-border lending to EMEs is more susceptible to financial stress in lender countries than is local lending, and that local lending in foreign currency is more stable than is cross-border lending. Our findings suggest that it is desirable for EME policymakers to promote diversification of lender countries and induce more borrowing from local subsidiaries than cross-border lenders. |
| Keywords: | capital outflows, cross-border claims, emerging market economies, financial stress, local claims |
| JEL: | E44 F15 F21 F34 |
| Date: | 2018–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:745&r=opm |
| By: | BIKAI, J. Landry; OWOUNDI F., Ferdinand |
| Abstract: | This article examines the incidence of exchange rate regime on the real exchange rate misalignments in Sub-Saharan African countries. To this end, we compare misalignments of 17 countries classified into two groups according to the exchange rate regime. For the equilibrium real exchange rate determination, we rely on a NATREX-based approach which we compare to the behavioral model (BEER), to prove results consistency. Relying on annual data between 1980 and 2011, our estimates made simultaneously by the Pooled Mean Group method (PMG), the Dynamic OLS (DOLS) and the Fully Modified OLS (FMOLS) show that misalignments do not differ in average from one group to another. Put another way, no exchange rate regime is going to bail an economy out of deviations of its exchange rate. |
| Keywords: | Real Exchange Rate, Misalignments, Exchange Rate Regime |
| JEL: | C23 F31 F43 O24 |
| Date: | 2016–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:89110&r=opm |
| By: | Fatma Taşdemir (Department of Economics, Middle East Technical University, Ankara, Turkey); Erdal Özmen (Department of Economics, Middle East Technical University, Ankara, Turkey) |
| Abstract: | This study investigates whether the impacts of the main common push (global financial conditions, GFC) and country-specific pull (growth) factors on capital inflows are invariant to the prevailing exchange rate regimes (ERRs) in emerging market economies. Our results suggest that endogenously estimated ERR thresholds do matter especially for the impact of GFC. The impact of GFC is substantially high under more flexible ERRs for all capital inflow types except FDI. FDI inflows are basically determined by the pull factor across all ERRs. Portfolio inflows are mainly determined by GFC. The sensitivity of aggregate and other investment inflows to the pull factor seems to be much higher under more rigid ERRs. Our results are broadly in line with the literature suggesting that credible managed ERRs encourage capital inflows by allowing countries to import monetary policy credibility of the center country and to provide exchange rate guarantee. |
| Keywords: | Capital Inflows, Emerging Market Economies, Exchange Rate Regimes, Global Financial Conditions, Panel Threshold Model |
| JEL: | F21 F30 F32 G01 F32 F31 C33 C13 F41 |
| Date: | 2018–10 |
| URL: | http://d.repec.org/n?u=RePEc:met:wpaper:1810&r=opm |