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on Open Economy Macroeconomics |
| By: | Doojav, Gan-Ochir; Luvsannyam, Davaajargal; Enkh-Amgalan, Elbegjargal |
| Abstract: | This paper assesses the effects and transmission mechanisms of global liquidity and commodity market shocks in Mongolia, a commodity-exporting developing economy, using a structural vector autoregression (SVAR) model. Results show that boom and bust cycles in commodity and international financial markets lead to business and financial cycles in the economy as these shocks account for 30, 45, and 60 percent of domestic output, real exchange rate, and lending rate fluctuations, respectively. Commodity demand shocks have more persistent and robust effects on domestic cycles than commodity supply shocks. Trade and financial (resource export revenues, lending rate, and exchange rate) channels play an essential role in transmitting the shocks. Buoyant commodity demand and global liquidity shocks lead to a significant fall in the domestic lending rate, while positive commodity supply and global liquidity shocks appreciate the real exchange rate. |
| Keywords: | Commodity demand shocks, Commodity supply shocks, Global liquidity shocks, Business cycle, Structural VAR, Mongolia. |
| JEL: | C51 E32 F41 F62 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:116831&r=opm |
| By: | Javier Bianchi; Louphou Coulibaly |
| Abstract: | Many central banks whose exchange rate regimes are classified as flexible are reluctant to let the exchange rate fluctuate. This phenomenon is known as “fear of floating”. We present a simple theory in which fear of floating emerges as an optimal policy outcome. The key feature of the model is an occasionally binding borrowing constraint linked to the exchange rate that introduces a feedback loop between aggregate demand and credit conditions. Contrary to the Mundellian paradigm, we show that a depreciation can be contractionary, and letting the exchange rate float can expose the economy to self-fulfilling crises. |
| Keywords: | Self-fulfilling financial crises; Exchange rates |
| JEL: | E52 F45 F41 G01 F36 F33 E44 F34 |
| Date: | 2023–02–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:95598&r=opm |
| By: | Simon P. Lloyd; Emile A. Marin |
| Abstract: | How does the conduct of optimal cross-border financial policy change with prevailing trade agreements? We study the joint optimal determination of trade policy and capital- flow management in a two-country, two-good model with trade in goods and assets. While the cooperative optimal allocation is efficient, a country-planner can achieve higher domestic welfare by departing from free trade in addition to levying capital controls, absent retaliation from abroad. However, time variation in the optimal tariff induces households to over- or under-borrow through its effects on the path of the real exchange rate. As a result, optimal capital controls can be larger when used in conjunction with optimal tariffs in specific cases; and in others, the optimal trade tariff partly substitutes for the use of capital controls. Accounting for strategic retaliation, we show that committing to a free-trade agreement can reduce incentives to engage in costly capital-control wars for both countries. |
| JEL: | F13 F32 F33 F38 |
| Date: | 2023–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31082&r=opm |
| By: | Julien Bengui; Louphou Coulibaly |
| Abstract: | Are unregulated capital flows excessive during a stagflation episode? We argue that they likely are, owing to a macroeconomic externality operating through the economy’s supply side. Inflows raise domestic wages through a wealth effect on labor supply and cause unwelcome upward pressure on marginal costs in countries where monetary policy is trying to drive down costs to stabilize inflation. Yet, market forces are likely to generate such inflows. Optimal capital flow management instead requires net outflows, suggesting topsy-turvy capital flows following markup shocks. |
| Keywords: | Stabilization policy; Capital flow management; Macroeconomic externalities; Stagflation; Current account adjustment |
| JEL: | E32 E44 E52 F32 F41 F42 |
| Date: | 2023–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:95580&r=opm |
| By: | Uluc Aysun (University of Central Florida, Orlando, FL) |
| Abstract: | This paper shows that the cross-country diffusion of innovations forms a critical channel through which macroeconomic shocks are transmitted across economies. This inference is obtained from a two country, medium scale DSGE model that includes an endogenous growth mechanism. R&D activity and innovation are the main components of this mechanism and they are introduced through a labor-augmenting technology. The model features international diffusion of technologies as the innovations by a firm are not only adopted by other firms within a country but also by those in the other country. Estimating the model with US and Euro Area data, I observe that foreign shocks contribute a high share to the macroeconomic volatility in each economy. By contrast, foreign shocks make a negligible contribution when the model is estimated after shutting down technology diffusion. The results, more generally, show that it is not technology shocks, nor any other shock, but the transmission of shocks through the diffusion of new technologies that is the key driver of international business cycles. |
| Keywords: | Research and development, international business cycles, endogenous growth, DSGE, Bayesian estimation. |
| JEL: | F42 F44 O30 O33 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:cfl:wpaper:2023-02ua&r=opm |
| By: | Ioana Octavia Popescu |
| Abstract: | This paper questions the traditionally accepted superiority of flexible exchange rate regimes in o↵setting commodity price fluctuations. Employing an updated measure of the commodity terms-of-trade, a comparison of exchange rate regime classifications and more recent data than much of literature supporting this assertion, I find little evidence that flexible regimes deliver better outcomes in this regard. Although previous results are reproducible with the use of a certain terms-of-trade measure, their significance dissipates when employing an arguably more comprehensive measure. The results are similarly sensitive to the use of an alternative exchange rate regime classification. Notably, any significance found with either measure vanishes in the period after 2004, potentially indicative of a structural break in the transmission of terms-of-trade improvements to economic growth. In light of these findings, I suggest that, with updated measures and awareness of a potential structural break in hand, it may be time to re-evaluate the way in which terms-of-trade shocks have been understood to transmit in developing economies and what kind of exchange rate regime is best suited to this transmission mechanism. |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:csa:wpaper:2023-01&r=opm |
| By: | Anusha Chari |
| Abstract: | Over the last two decades, the unprecedented increase in non-bank financial intermediation, particularly open-end mutual funds and ETFs, accounts for nearly half of the external financing flows to emerging markets exceeding cross-border lending by global banks. Evidence suggests that investment fund flows enhance risk-sharing across borders and provide emerging markets access to more diverse forms of financing. However, a growing body of evidence also indicates that investment funds are inherently more vulnerable to liquidity and redemption risks during periods of global financial market stress, increasing the volatility of capital flows to emerging markets. Benchmark-driven investments, namely passive funds, appear particularly sensitive to global risk shocks such as tightening US dollar funding conditions relative to their active fund counterparts. The procyclicality of investment fund flows to emerging markets during times of global stress poses financial stability concerns with implications for the role of macroprudential policy. |
| JEL: | F21 F32 F36 F65 G11 G15 G23 |
| Date: | 2023–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31143&r=opm |
| By: | Gigout, Timothee (Banque de France); London, Melina (European Commission) |
| Abstract: | We study how international trade networks react to natural disasters. We combine exhaustive firm-to-firm trade credit and disaster data and use a dynamic difference-in-differences identification strategy. We establish the causal effect of natural disasters abroad on the size, shape and quality of French exporters' international trade networks. We find evidence of large and persistent disruptions to international buyer-supplier relationships. This leads to a restructuring of the trade network of the largest French exporters and a change in trade finance sources for affected countries. We find strong and permanent negative effects on the trade credit sales of French suppliers to affected destinations. The largest firms are driving the response, both on the supplier and buyer side. Trade network restructuring towards unaffected destinations is higher for large multinationals trading more homogeneous products. This effect operates exclusively through a reduction in the number of buyers. This induces a negative shift in the distribution of the quality of buyers in the destination affected by the natural disaster. |
| Keywords: | Firm Dynamics; Trade Networks; Natural Disaster, Granularity |
| JEL: | E32 F14 F23 F44 L14 |
| Date: | 2023–02 |
| URL: | http://d.repec.org/n?u=RePEc:jrs:wpaper:202302&r=opm |