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on Open Economy Macroeconomics |
| By: | Alok Johri; Johnny Cotoc |
| Abstract: | The average cost of borrowing on international financial markets varies widely from nation to nation even after controlling for the varying levels of indebtedness of their governments. This suggests that markets assign country specific default risk assessments. In this paper we focus on one natural source of this difference – the quality of their institutions. We begin by showing that the average sovereign spread is positively related to the average percentage of a government contract that must be given as a “gift” in order to secure the contract. We then build a sovereign default model where the government is constrained to use corrupt bureaucrats to deliver public goods and services and manage its accounts. Using the gift data as a measure of the public resources diverted by bureaucrats, and the Rule of Law index as a measure of institutional quality, we estimate the diversion policy of bureaucrats and use it to calibrate our model to international data. We use the model to generate an artificial international data set where countries vary only in the institutional quality parameter. Running the same regressions on our artificial data, we find that average spreads are positively associated with the bribe (gift) rate and with average debt levels. The model implies that when revenue streams are low, a benefit of default is that public services net of bureaucratic diversion actually increase. Since the net gain in public services obtained by defaulting is decreasing in the level of institutional quality, international lenders assign lower default risk to those countries. |
| Keywords: | Sovereign default; country spreads; bureaucratic corruption; bribes; provision of public goods |
| JEL: | D73 F34 F41 G15 H63 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2021-02&r=all |
| By: | Robert Kollmann |
| Abstract: | This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These "expectations-driven" liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a "fundamentals-driven" liquidity trap. |
| Keywords: | Zero lower bound, expectations-driven and fundamentals-driven liquidity traps, domestic and international shock transmission, terms of trade, exchange rate, net exports |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2013/316780&r=all |
| By: | Dennis Bonam; Gavin Goy; Emmanuel de Veirman |
| Abstract: | At least since the euro area sovereign debt crisis, it is evident that country risk premium shocks have adverse economic effects, not only in emerging economies, but advanced economies as well. Using a Bayesian Panel Vector Autoregression model, we find that increases in the risk premium lower output under monetary union, yet not in countries with flexible exchange rates and independent monetary policies. We study the transmission mechanism in a two-country New Keynesian model and show that capital controls substantially attenuate the effects of risk premium shocks. However, the welfare gain of imposing capital controls hinges on the nature of the shock and the prevailing exchange rate regime. |
| Keywords: | Bayesian panel VAR; capital controls; exchange rate regime; welfare |
| JEL: | F32 F38 F41 F45 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:702&r=all |
| By: | Joscha Beckmann (Universität Greifswald); Mariarosaria Comunale (Bank of Lithuania & Vilnius University) |
| Abstract: | This paper assesses the financial channel of exchange rate fluctuations for emerging countries and the link to the conventional trade channel. We analyse whether the effective exchange rate affects GDP growth, the domestic credit and the global liquidity measure as the credit in foreign currencies, and how global liquidity affects GDP growth. We make use of local projections in order to look at the shocks transmission covering 11 emerging market countries for the period 2000Q1-2016Q3. We find that foreign denominated credit plays an important macroeconomic role, operating through various transmission channels. The direction of effects depends on country characteristics and is also related to the policy stance among countries. We find that domestic appreciations increase demand with regard to foreign credit, implying positive effects on investment and GDP growth. However, this is valid only in the short-run; in the medium-long run, an increase of credit denominated in foreign currency (for instance, due to appreciation) decreases GDP. The financial channel works mostly in the short-run except for Brazil, Malaysia and Mexico, where the trade channel always dominates. Possibly there is a substitution effect between domestic and foreign credit in the case of shocks in exchange rates. |
| Keywords: | emerging markets, financial channel, exchange rates, global liquidity |
| JEL: | F31 F41 F43 G15 |
| Date: | 2020–12–29 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:83&r=all |
| By: | Povilas Lastauskas (Bank of Lithuania, Vilnius University); Mariarosaria Comunale (Bank of Lithuania, Vilnius University, and Australia National University); Justas Dainauskas (London School of Economics and Political Science) |
| Abstract: | International trade flows are volatile, imbalanced, and fragmented across off-shored supply chains. Yet, not much is known about the mechanism through which trade flows adjust in response to shocks over time. This paper derives a dynamic gravity equation from a theory of habits in the supply chains that generates autocorrelated bilateral trade flows that are heterogeneous across different country pairs. We estimate our version of the dynamic gravity equation for 39 countries over the period of 1950-2014 and find that the transmission of local and global trade shocks is fundamentally different. We show that the trade persistence coefficient falls from 0.91 to 0.35 when we depart from the existing empirical gravity models that draw inference from the pooled coefficient estimates without controlling for the variation in the unobservable global factors. Thus, our approach escapes the excess trade persistence puzzle and adds to the explanation of the sharp decline and the rapid recovery of the global trade flows during the "Great Trade Collapse" of 2008-09. In addition to the traditional variables in the gravity equation, we also show that a cross-country habit asymmetry creates bilateral and multilateral trade imbalances, which are an important determinant of bilateral trade flows both theoretically and empirically. |
| Keywords: | Dynamic Gravity Equation; Habits; Trade Persistence; Trade Imbalance; Global Shocks; Parameter Heterogeneity |
| JEL: | C23 F14 F41 F62 |
| Date: | 2021–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:85&r=all |
| By: | António Afonso; Florence Huart; João Tovar Jalles; Piotr Stanek |
| Abstract: | We analyse the international transmission of interest rates by focusing onthe role of the accumulation of international reserves and on the financing of sovereign debt. An increase in foreign exchange reserves is expected to moderate the influence of U.S. interest rates.However,a high level of government debt raises the sovereign risk premium. Moreover, an increase in the stock ofgovernment debt denominated in foreign currency may increasethe expected rate of depreciation of the domestic currency. We explain the theoretical mechanisms in a model, which describes the money market equilibrium in an economy with capital account openness. Then, we test the predictions of the model for a panel of advanced and developing economies over the period 1970-2018. Our main findings are: i) significant spillovers from the U.S. interest rates to other countries, mostly for Advanced Economies; ii) a dampening effect of the share of external liabilities in the domestic currency, clearly a determinant of risk premium; iii)a negative effect of international reserves on interest rates, as expected; iv) higher reserves decrease risk premia, for long-term interest rates; v)the significanceof spilloversfades once the sovereign debtreaches100% of GDPin developed countries. |
| Keywords: | interest rates, international reserves, government debt, spillover effects, monetary policy, fiscal policy, panel analysis |
| JEL: | C23 E43 E63 F31 F34 G15 H60 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ise:remwps:wp01562021&r=all |
| By: | Torsten Ehlers; Mathias Hoffmann; Alexander Raabe |
| Abstract: | US net capital inflows drive the international synchronization of house price growth. An increase (decrease) in US net capital inflows improves (tightens) US dollar funding conditions for non-US global banks, leading them to increase (decrease) foreign lending to third-party borrowing countries. This induces a synchronization of lending across borrowing countries, which translates into an international synchronization of mortgage credit growth and, ultimately, house price growth. Importantly, this synchronization is driven by non-US global banks’ common but heterogenous exposure to US dollar funding conditions, not by the common exposure of borrowing countries to non-US global banks. Our results identify a novel channel of international transmission of US dollar funding conditions: As these conditions vary over time, borrowing country pairs whose non-US global creditor banks are more dependent on US dollar funding exhibit higher house price synchronization. |
| Keywords: | House price synchronization, US dollar funding, global US dollar cycle, global imbalances, capital inflows, global banks, global banking network |
| JEL: | F34 F36 G15 G21 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:374&r=all |
| By: | Erlan Konebayev (NAC Analytica, Nazarbayev University) |
| Abstract: | This paper adapts the DSGE (dynamic stochastic general equilibrium) model of Medina and Soto (2007) in the context of Kazakhstani economy, and fully estimates it using Bayesian methods. The main goal of the paper is to contribute to the scarce macroeconomic modeling literature on Kazakhstan. Overall, we find that the oil price shock is key in explaining the variance of virtually all the variables of interest - in particular, it accounts for more than 40% of variance in real exchange rate over the long-term horizon. Furthermore, while the oil price and commodity (oil) production shocks contributed positively to the country's GDP growth in real terms before the Great Recession, their effects have been primarily negative during the two major economic crises of 2007 and 2015, and the fiscal policy has had mixed success in counteracting them. |
| Keywords: | DSGE; Bayesian analysis; small open economy |
| JEL: | C11 E30 E32 E37 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:ajx:wpaper:6&r=all |
| By: | Markus Kirchner; Malte Rieth |
| Abstract: | This paper examines the role of sovereign default beliefs for macroeconomic fluctuations and stabilization policy in a small open economy where fiscal solvency is a critical problem. We set up and estimate a DSGE model on Turkish data and show that accounting for sovereign risk significantly improves the fit of the model through an endogenous amplification between default beliefs, exchange rate and inflation movements. We then use the estimated model to study the implications of sovereign risk for stability, fiscal and monetary policy, and their interaction. We find that a relatively strong fiscal feedback from deficits to taxes, some exchange rate targeting, or a monetary response to default premia are more effective and efficient stabilization tools than hawkish inflation targeting. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:896&r=all |
| By: | Thomas Torslov (KU - University of Copenhagen = Københavns Universitet); Ludvig Wier (University of California [Berkeley] - University of California); Gabriel Zucman (University of California [Berkeley] - University of California, NBER - National Bureau of Economic Research - National Bureau of Economic Research) |
| Abstract: | By exploiting new macroeconomic data known as foreign affiliates statistics, we showthat affiliates of foreign multinational firms are an order of magnitude more profitable thanlocal firms in low-tax countries. By contrast, affiliates of foreign multinationals are lessprofitable than local firms in high-tax countries. Leveraging this differential profitability,we estimate that close to 40% of multinational profits are shifted to tax havens globally.We analyze how the location of corporate profits would change if all countries adopted thesame effective corporate tax rate, keeping global profits and investment constant. Profitswould increase by about 15% in high-tax European Union countries, 10% in the UnitedStates, while they would fall by 60% in today's tax havens. We provide a new internationaldatabase of GDP, trade balances, and factor shares corrected for profit shifting, showingthat the rise of the corporate capital share is significantly under-estimated in high-tax countries. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-03022293&r=all |