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on Open Economy Macroeconomics |
| By: | M. Ayhan Kose; Franziska L. Ohnsorge; Carmen M. Reinhart; Kenneth S. Rogoff |
| Abstract: | Debt in emerging market and developing economies (EMDEs) is at its highest level in half a century. In about nine out of 10 EMDEs, debt is higher now than it was in 2010 and, in half of the EMDEs, debt is more than 30 percentage points of gross domestic product higher. Historically, elevated debt levels increased the incidence of debt distress, particularly in EMDEs and particularly when financial market conditions turned less benign. This paper reviews an encompassing menu of options that have, in the past, helped lower debt burdens. Specifically, it examines orthodox options (enhancing growth, fiscal consolidation, privatization, and wealth taxation) and heterodox options (inflation, financial repression, debt default and restructuring). The mix of feasible options depends on country characteristics and the type of debt. However, none of these options comes without political, economic, and social costs. Some options may ultimately be ineffective unless vigorously implemented. Policy reversals in difficult times have been common. The challenges associated with debt reduction raise questions of global governance, including to what extent advanced economies can cast their net wider to cushion prospective shocks to EMDEs. |
| JEL: | E32 E63 F34 F44 F62 H6 H63 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29266&r= |
| By: | Marcus Hagedorn |
| Abstract: | This paper proposes an equilibrium theory of nominal exchange rates, which offers a new perspective on various issues in open economy macroeconomics. The nominal exchange rate and portfolio choices are jointly determined in equilibrium, thus providing a new approach to overcoming the indeterminacy results in Kareken and Wallace (1981). The distinctive features of this theory are that the nominal exchange rate is determined in international financial markets, that the risk premium and UIP deviations are fully endogenous equilibrium objects and that the real exchange rate inherits its properties from the nominal exchange rate. In terms of policy, this novel theory implies that a country with an exchange rate peg and free asset mobility faces a tetralemma and not a trilemma, because it loses not only monetary policy independence but also fiscal policy independence. |
| Keywords: | exchange rate, determinacy, incomplete markets, monetary and fiscal policy, international asset flows |
| JEL: | D52 E31 E43 E52 E62 E63 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9290&r= |
| By: | Galina Hale; Luciana Juvenal |
| Abstract: | At the onset of the COVID-19 economic crisis, as in other crisis episodes, the flight to safety was accompanied by a rapid appreciation of “safe haven” currencies. We quantify currency-induced balance sheet effects for total external positions as well as for individual asset classes using new data on the currency composition of cross-border stocks for 48 countries for the first quarter as well as for the full year 2020. We also conduct the stock-flow reconciliation of net international investment positions to measure overall valuation effects. We show that for many countries currency-induced valuation gains mitigated losses that resulted from declining asset prices in the first quarter of 2020. Moreover, for countries with excess capital out flows during this period, the impact on external balance sheet positions was mitigated by valuation gains. This is because, in contrast with past financial crises, many emerging markets did not experience negative external balance sheet effects from their currency depreciation, partly due to currency-induced valuation gains on equity positions offsetting losses on debt positions, partly due to reduced currency mismatch on their external debt positions. |
| JEL: | F32 F34 G15 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29277&r= |
| By: | Rohan Kekre; Moritz Lenel |
| Abstract: | We study a business cycle model of the international monetary system featuring a time-varying demand for safe dollar bonds, greater risk-bearing capacity in the U.S. than the rest of the world, and nominal rigidities. A flight to safety generates a dollar appreciation and decline in global output. Dollar bonds thus command a negative risk premium and the U.S. holds a levered portfolio of capital financed in dollars. We quantify the effects of safety shocks and heterogeneity in risk-bearing capacity for global macroeconomic volatility; U.S. external adjustment; and the international transmission of monetary and fiscal policies, including dollar swap lines. |
| JEL: | E44 F44 G15 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29238&r= |
| By: | Daniel Spiro |
| Abstract: | What is a good reduced-form representation of Ramsey-Cass-Koopmans. (RCK) model? Solow’s model (despite non-optimizing agents) provides predictions largely consistent with a closed-economy RCK but fundamentally differs regarding open-economy income convergence. Where RCK predicts partial income and consumption convergence between open economies Solow predicts full convergence. This paper presents, by a small modification of the savings behavior in the Solow model, a framework that matches RCK’s properties in closed and open economies. The model, labeled rSolow, is analytically tractable, allowing closed-form solutions of all variables, thus makes several explicit and novel predictions. This includes how income and inequality depend on country size; that income growth will be a U-shaped function of initial income thus creating differentiated convergence; and that poor countries bene.t from higher saving but rich countries may not. |
| Keywords: | convergence, Ramsey, Solow, inequality, growth |
| JEL: | E10 E21 F21 F43 O11 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9293&r= |
| By: | Felix Kapfhammer; Vegard H. Larsen; Leif Anders Thorsrud |
| Abstract: | The positive relationship between real exchange rates and natural resource income is well understood and studied. However, climate change and the transition to a lower-carbon economy now challenges this relationship. We document this by proposing a novel news media-based measure of climate change transition risk and show that when such risk is high, major commodity currencies experience a persistent depreciation and the relationship between commodity price fluctuations and currencies tends to become weaker. |
| Keywords: | exchange rates, climate, risk, commodities |
| JEL: | C11 C53 D83 D84 E13 E31 E37 |
| Date: | 2020–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2020_18&r= |
| By: | Caselli, Francesco; Koren, Miklos; Lisicky, Milan; Tenreyro, Silvana |
| Abstract: | A widely held view is that openness to international trade leads to higher income volatility, as trade increases specialization and hence exposure to sector-specific shocks. Contrary to this common wisdom, we argue that when country-wide shocks are important, openness to international trade can lower income volatility by reducing exposure to domestic shocks and allowing countries to diversify the sources of demand and supply across countries. Using a quantitative model of trade, we assess the importance of the two mechanisms (sectoral specialization and cross-country diversification) and show that in recent decades international trade has reduced economic volatility for most countries. |
| Keywords: | 313164; 240852 |
| JEL: | E32 F41 |
| Date: | 2020–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:101615&r= |
| By: | Ghassan, Hassan B.; Alhajhoj, Hassan R.; Balli, Faruk |
| Abstract: | The study explores the impacts of the bi-demographic structure on the current account and gross domestic product (GDP) growth. Using structural vector autoregressive modeling (SVAR), we track the dynamic impacts on these underlying variables. New insights about the dynamic interrelation between bi-population age dependency rate, current account, and GDP growth have been developed. In the short and medium-term, the reactions of GDP growth to both shocks of native and immigrant working-age populations move unsteadily in opposite directions. However, in the long-run, both effects become moderately positive. Additionally, the positive long-run contribution of immigrant workers to the current account growth largely compensates for the negative contribution of the native population. We find a negative hump-shaped reaction of Saudi Age Dependency Rate to immigration policy shocks during a generation. When the shocks emanate from immigrants’ working age, there is a complex mechanism from the complementarity process to the substitutability process between immigrants and the Saudi workforce. In the short and medium-term, the immigrant workers are more complements than substitutes for native workers. |
| Keywords: | Native population, Immigrant population, Current account, GDP Growth, Cointegration, SVAR |
| JEL: | C51 F22 F41 J15 J23 |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:109772&r= |
| By: | Lloyd, Simon (Bank of England); Manuel, Ed (Bank of England); Panchev, Konstantin (University of Oxford) |
| Abstract: | We study how foreign financial developments influence the conditional distribution of domestic GDP growth. Within a quantile regression setup, we propose a method to parsimoniously account for foreign vulnerabilities using bilateral-exposure weights when assessing downside macroeconomic risks. Using a panel data set of advanced economies, we show that tighter foreign financial conditions and faster foreign credit-to-GDP growth are associated with a more severe left tail of domestic GDP growth, even when controlling for domestic indicators. The inclusion of foreign indicators significantly improves estimates of ‘GDP-at-Risk’, a summary measure of downside risks. In turn, this yields time-varying estimates of higher GDP growth moments that are interpretable and provide advanced warnings of crisis episodes. Decomposing historical estimates of GDP-at-Risk into domestic and foreign sources, we show that foreign shocks are a key driver of domestic macroeconomic tail risks. |
| Keywords: | Financial stability; GDP-at-Risk; international spillovers; local projections; quantile regression; tail risk |
| JEL: | E44 E58 F30 F41 F44 G01 |
| Date: | 2021–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0940&r= |
| By: | Ila Patnaik (National Institute of Public Finance and Policy); Rajeswari Sengupta (Indira Gandhi Institute of Development Research) |
| Abstract: | We analyse India's exchange rate regime through the prism of exchange market pressure. We estimate the various regimes that India's exchange rate has been through during the period from 2000 to 2020. We find four specific regimes of the Indian rupee differentiated by the degree of flexibility. We document the manner in which EMP in India has either been resisted through foreign exchange market intervention, or relieved through exchange rate change, across these four exchange rate regimes. We find that in only one of the four regimes the rupee-dollar exchange rate was relatively more flexible and the share of exchange rate in EMP absorption was the highest. This regime corresponded with the aftermath of the 2008 global crisis. In contrast, after 2013 the exchange rate was actively managed using spot as well as forward market intervention. We also find that the RBI has been intervening in the foreign exchange market in an asymmetric fashion to prevent the rupee from appreciating. |
| Keywords: | Exchange rate regime, Forex intervention, Reserves, Exchange market pressure, Structural change |
| JEL: | E58 F31 F41 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2021-022&r= |