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on Open Economy Macroeconomics |
| By: | Zhengyang Jiang; Arvind Krishnamurthy; Hanno Lustig |
| Abstract: | We characterize the relation between exchange rates and their macroeconomic fundamentals without committing to a specific model of preferences, endowment or menu of traded assets. When investors can trade home and foreign currency risk-free bonds, the exchange rate appreciates in states that are worse for home investors than foreign investors. This prediction is at odds with the empirical evidence and can only be overturned if the deviations from U.I.P. are large and exchange rates are highly predictable. Without bond Euler equation wedges, it is impossible to match the empirical exchange rate cyclicality (the Backus-Smith puzzle) and the deviations from U.I.P. (the Fama puzzle) as well as the lack of predictability (the Meese-Rogoff puzzle). To relax this trade-off, we need Euler equation wedges consistent with a home currency bias, home bond convenience yields or financial repression. |
| JEL: | F31 G12 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31851&r=opm |
| By: | Mr. Cian Allen; Deepali Gautam; Luciana Juvenal |
| Abstract: | This paper assembles a comprehensive dataset of the currency composition of countries’ external balance sheets for 50 economies over the period 1990–2020. We document the following findings: (i) the US dollar and the euro still dominate global external balance sheets; (ii) there were striking changes in the currency composition across countries since the 1990s, with many emerging markets having moved from short to long positions in foreign currency, thus moving away from the so-called “original sin”; (iii) financial and tradeweighted exchange rates are weakly correlated, suggesting the commonly used trade indices do not adequately reflect the wealth effects of currency movements, and (iv) the large wealth transfers across countries during COVID-19 and the global financial crises increased global imbalances in the former, and reduced them in the latter. |
| Keywords: | currency composition; international investment position; foreign currency exposure |
| Date: | 2023–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/237&r=opm |
| By: | Johnny Cotoc (McMaster University); Alok Johri (McMaster University); César Sosa-Padilla (University of Notre Dame/NBER) |
| Abstract: | Nations vary widely in how often they are governed by left-wing governments. Using data from 56 nations over 45 years, we find that the propensity of a nation to elect the left is positively correlated with both the average level and volatility of their sovereign spreads. To explain these facts, we build a quantitative sovereign default model in which two policymakers (left and right) alternate in power. Reelection probabilities are increasing in government spending, with the left having a small advantage (as found in the data). We use variation in the responsiveness of reelection probabilities to government spending in order to create economies that elect the left more or less frequently in equilibrium. We call these the left leaning and the right leaning economy. The left leaning economy faces worse borrowing terms due to higher default risk. Moreover, both policymakers have a greater reluctance for fiscal austerity and choose a higher share of government spending as compared to their counterparts in the right leaning economy. These features imply large welfare losses for households. |
| Keywords: | Sovereign default, Interest rate spread, Political turnover, Left-wing, Rightwing, Cyclicality of fiscal policy. |
| JEL: | F34 F41 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:aoz:wpaper:290&r=opm |
| By: | Guilherme Suedekum (IHEID, Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | This paper studies how the presence of foreign investors in local currency sovereign debt markets contributes to the transmission of global financial conditions to emerging market economies. My estimations indicate that the higher the share of local currency government bonds held by foreign investors, the more sensitive the credit risk of these bonds becomes to global financial shocks. When foreign investors’ holdings reach 45 percent, the credit risk of local currency government bonds becomes as sensitive to global financial shocks as the credit risk of foreign currency government bonds. I also explore exogenous foreign investor outflows caused by an unanticipated announcement of country weight rebalancing in the J.P. Morgan GBI-EM Global Diversified index in March 2014. Countries that experienced foreign investor outflows also experienced a decrease in the sensitivity of their local currency sovereign debt markets to changes in global financial conditions. |
| Keywords: | Emerging Market Economies; Local Currency Sovereign Debt; Credit Risk; Global Financial Conditions |
| JEL: | F34 G15 H63 |
| Date: | 2023–11–30 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp19-2023&r=opm |
| By: | Tannous Kass-Hanna; Julien Reynaud; Chris Walker |
| Abstract: | Empirical (employing the Blanchard-Perotti framework) and modeling (using a country-specific DSGE model) approaches are used to estimate fiscal multipliers by policy instrument for Bolivia, to evaluate possible adjustments in a fiscal consolidation strategy. Multipliers are also estimated using alternative assumptions about the accompanying exchange rate regime and capital mobility, highlighting the importance of the policy mix in determining the impact of fiscal adjustments. The study exploits the DSGE modeling structure to assess this interaction of fiscal and monetary policy in a lower middle-income country under different exchange rate regimes. It finds that expenditure multipliers fall into the range of 1/3 to 2/3, with public investment multipliers slightly higher than government consumption multipliers over longer horizons, and multipliers generally higher under a peg than inflation targeting. Tax multipliers are shown to be about half of expenditure multipliers. |
| Keywords: | fiscal multiplier; capital mobility; Bolivia; DSGE model |
| Date: | 2023–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2023/240&r=opm |
| By: | Georgiadis, Georgios; Jarociński, Marek |
| Abstract: | We estimate spillovers from US monetary policy for different measures in the Federal Reserve’s toolkit. We make use of novel measures of exogenous variation in conventional rate policy, forward guidance and large-scale asset purchases (LSAPs) based on high-frequency asset-price surprises around Federal Open Market Committee meetings. The identification relies on relatively weak assumptions and accounts for the possible presence of residual endogenous components—such as central bank information effects—in these monetary policy surprises. We find that: (i) forward guidance and LSAPs trigger much larger spillovers than conventional rate policy; (ii) spillovers transmit predominantly through financial channels centering on global investors’ risk appetite and manifest in changes in equity prices, bond spreads, capital flows and the dollar exchange rate; (iii) LSAPs trigger immediate international portfolio re-balancing between US and advanced-economy bonds, but generally entail only rather limited term premium spillovers;(iv) both forward guidance and LSAPs entail trade-offs for emerging-market-economy central banks, either between stabilizing output and prices or between additionally ensuring financial stability in terms of capital inflows. JEL Classification: F42, E52, C50 |
| Keywords: | central bank information effects, high-frequency identification, Monetary policy spillovers, US monetary policy shocks |
| Date: | 2023–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20232881&r=opm |
| By: | COULIBALY, Niénéyéri Mamadou |
| Abstract: | The aim of this study is to analyse trade between the member countries of the West African Economic and Monetary Union (WAEMU) and those of the European Union (EU) pre-Brexit over the period 2014-2019. It estimates a gravity model based on panel data. Three econometric estimation techniques are used : the WITHIN method, the Generalised Least Squares (GLS) method and the Hausman and Taylor (HT) method. These different estimation techniques are then compared to determine which is the most appropriate. The data used are secondary data from several sources : the International Monetary Fund (World Economic Outlook), the World Bank (World Development Indicators), the United Nations (UN Comtrade) and the ephemeride website. The results show that trade between these two groups of countries is positively and significantly influenced by income in WAEMU countries, infrastructure in WAEMU countries and population in EU countries. They also show that when an EU country is landlocked, its trade flows with WAEMU countries are reduced, while at the same time, the landlocked status of a WAEMU country does not affect its trade with EU countries. Variables such as the bilateral real exchange rate, distance, language and colonial links were found to be insignificant. |
| Keywords: | Trade, trade flows, gravity model, EU, WAEMU and Brexit |
| JEL: | C13 C33 F10 F15 |
| Date: | 2023–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:119277&r=opm |
| By: | Anusha Chari; Karlye Dilts Stedman; Christian Lundblad |
| Abstract: | This paper defines risk-on risk-off (RORO), an elusive terminology in pervasive use, as the variation in global investor risk aversion. Our high-frequency RORO index captures time-varying investor risk appetite across multiple dimensions: advanced economy credit risk, equity market volatility, funding conditions, and currency dynamics. The index exhibits risk-off skewness and pronounced fat tails, suggesting its amplifying potential for extreme, destabilizing events. Compared with the conventional VIX measure, the RORO index reflects the multifaceted nature of risk, underscoring the diverse provenance of investor risk sentiment. Practical applications of the RORO index highlight its significance for international portfolio reallocation and return predictability. |
| JEL: | F21 F31 F36 G11 G15 G17 |
| Date: | 2023–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:31907&r=opm |
| By: | De Grauwe, Paul; Ji, Yuemei |
| Abstract: | We revisit the fragility of the Eurozone which arises because the sovereigns in the Eurozone issue debt in a currency (the euro) over which they have no control. This prevents them from giving a guarantee to bond holders that they will always be repaid at maturity. This fragility can trigger self-fulfilling liquidity crises, such as those that erupted during 2010–12. We document how this fragility has evolved over time and how it has been affected by the reforms in the governance of the Eurozone since the sovereign debt crisis of 2010–12. This will allow us to analyze the most recent episode that started with the emergence of the pandemic in 2020. The latter has, up to now, not led to a new debt crisis in the Eurozone, despite the fact that the shock produced by the pandemic was at least as large as the financial crisis of 2007–08. We document how during the pandemic the new governance of the Eurozone prevented this shock from leading to a new sovereign debt crisis. We end with a discussion of the prospects for the future and ask the question of whether the fragility of the Eurozone is a thing of the past. |
| JEL: | F3 G3 |
| Date: | 2022–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:112543&r=opm |
| By: | Kozo Kiyota (Keio University, Research Institute of Economy, Trade and Industry (RIETI), and Tokyo Center for Economic Research (TCER)) |
| Abstract: | In light of the importance of the machinery trade in global trade, this study examines whether the patterns of machinery exports changed significantly after the COVID19 pandemic. Frameworks of network analysis and structural break analysis are applied to monthly level bilateral export data from January 2016 to March 2022. The main findings are threefold. First, positive structural change is found in exports in major machinery-exporting countries. Second, negative structural change in centrality is found in Japan and some ASEAN Member States (AMS), which implies a decline in the relative importance of these countries in the global machinery network. Third, the decline in Japanese centrality was not caused by the decline in export values or number of destination countries. Rather, it is attributable to the decline in the centrality of Japan's export destination countries such as AMS. Noting that Japan has a relatively strong trade relationship with AMS, these results together suggest that the negative shock of the pandemic spread throughout the supply chain, which led to the decline in the relative importance of some countries - such as Japan - in the global machinery trade network. |
| Keywords: | Machinery trade; COVID-19 pandemic; Network; Centrality |
| JEL: | F14 F40 |
| Date: | 2023–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:era:wpaper:dp-2023-10&r=opm |
| By: | Miguel García Duch (Instituto Complutense de Estudios Internacionales (ICEI), Universidad Complutense de Madrid.) |
| Abstract: | This article examines Thirlwall's Law for a sample of 9 eurozone countries from 1992 to 2019. Thirlwall's Law states that a country's long-run growth rate is determined by the ratio of its income elasticities of demand for exports and imports. Using product level data from COMTRADE, this article constructs 5 main sectors based on technological intensity and estimates exports and imports equations for each sector and country in error correction model form. Estimation techniques are seemingly unrelated regressions for exports and three stages least squares for imports. The results reveal significant variations in the income elasticities across sectors and countries, with a strong correlation between higher elasticities for more technological sectors, especially among the so-called central economies. The article concludes that Thirlwall's Law is both a strong predictor of actual growth rates and a useful tool for understanding the role of external imbalances on Eurozone’s economic performance during the last decades. |
| Keywords: | : Balance-of-Payments-Constrained Growth; Thirlwall’s Law; Multi-Sector Analysis; Current Account Imbalances; Error Correction Models. |
| JEL: | C30 E12 F45 |
| Date: | 2023 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:wpaper:2302&r=opm |