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on Open Economy Macroeconomics |
| By: | António Afonso; José Alves; João Jalles; Sofia Monteiro |
| Abstract: | This study examines the effects of geopolitical risk and global uncertainty on energy prices, conditioned by different exchange rate regimes, for 185 economies over the period 1980-2023. The central question is how uncertainty impacts energy prices and whether exchange rate flexibility mediates these effects. Using panel data techniques, including OLS and Panel VAR, we assess both demand and supply-side channels, exploring country-specific differences. Our key findings indicate that uncertainty shocks significantly raise energy prices, particularly in countries with flexible exchange rates, where currency depreciation amplifies global price fluctuations. Asymmetric results are found regarding emerging markets, with flexible exchange rates, which tend to have lower energy prices, while oil-exporting countries and OPEC members experience distinct pricing dynamics. These results underscore the importance of exchange rate policy choices in shaping energy market responses to global shocks. Policymakers may need to adopt complementary measures to manage the volatility arising from global uncertainty. |
| Keywords: | Geopolitical Risk; World Uncertainty Index; Global Energy Markets; Exchange Rate Regimes; Asymmetric Effects. |
| JEL: | C23 E44 G32 H63 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:ise:remwps:wp03442024 |
| By: | Kristy Jansen; Hyun Song Shin; Goetz von Peter |
| Abstract: | How do exchange rates affect the asset allocation of bond portfolio investors? Using detailed security-level holdings, we find that euro area-based investors systematically shed sovereign bonds as the dollar strengthens, confirming the role of the dollar as a global risk factor even for euro-based investors. More distinctively, they also shed local currency bonds when the euro strengthens, due to currency mismatches on their own balance sheets. There is no such effect for foreign currency bonds of the same sovereign issuers. These findings are consistent with a Value-at-Risk portfolio choice model that brings out separate roles for local, foreign and reference currencies. |
| Keywords: | Currency mismatch, balance sheet effects, emerging markets, exchange rates, institutional investors, sovereign bonds |
| JEL: | F31 G11 G15 G23 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:bis:biswps:1210 |
| By: | Bulent Guler; Yasin Kürsat Önder; Temel Taskin (-) |
| Abstract: | This paper studies debt and default dynamics under alternative disclosure arrangements in a sovereign default model. The government can access both observable and hidden debt. We show, both theoretically and quantitatively, that when debt is not fully disclosed, the government does not internalize the full effects of hidden debt choices on bond prices, thereby reducing the cost of holding hidden debt. We find that switching to a full disclosure regime shifts the portfolio from hidden to observable debt, exacerbating the debt dilution problem. Thus, contrary to conventional wisdom, this switch generates welfare losses. |
| Keywords: | Hidden debt, Debt disclosure, Sovereign debt, Sovereign default, Sovereign-to- sovereign lending |
| JEL: | E31 F34 F45 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:rug:rugwps:24/1094 |
| By: | Shekhar Aiyar (National Council of Applied Economic Research, Delhi); Franziska Ohnsorge (Australian National University) |
| Abstract: | Geoeconomic fragmentation—the phenomenon of international transactions being increasingly restricted to politically aligned partners—creates risks for individual countries but also opportunities that some hope to seize by becoming “connector†countries. We formalize the concept of connectedness as the property of transacting with international partners drawn from across the ideological spectrum, and explore various policy correlates of connectedness. We show that more open and financially developed countries tend to be the ones that are more connected. Higher tariffs (including those used for industrial policy) are associated with less connectedness. Using a new database of geoeconomic vulnerabilities and geoeconomic connectedness for trade and financial transactions, we document that rising fragmentation since 2016 has been accompanied by broad-based cutbacks in both vulnerability and connectedness, especially in exports and FDI. The largest cutbacks have occurred in countries that were initially the most vulnerable. |
| Keywords: | geoeconomic fragmentation, geopolitics, economic vulnerability, database, trade, international lending, foreign direct investment, portfolio investment, BIS-reporting banks. |
| JEL: | F02 F15 F21 F41 F60 |
| Date: | 2024–05–24 |
| URL: | https://d.repec.org/n?u=RePEc:nca:ncaerw:173 |
| By: | Chetan Ghate (Indian Statistical Institute – Delhi); Kenneth Kletzer (University of California); Mahima Yadav (Indian Statistical Institute – Delhi) |
| Abstract: | India accumulated a sizable stock of foreign reserves over the past two decades, in common with many other emerging economies. Its current reserves comfortably surpass conventional thresholds for adequacy used by the International Monetary Fund and others. An assessment of whether the stock of reserves is appropriate should depend on an evaluation of the benefits and costs of reserves looking forward. Reserves provide self-insurance against sudden financial outflows by non-resident investors or resident savers and liquidity for managing exchange rates. While India’s reserves appear to be ample for meeting both these needs, additional reserves can reduce vulnerability to capital flow reversals that can be crisis inducing. The empirical analysis of India’s external portfolio capital flows finds that reserves lower outflows in the event of global financial distress at the margin. Reserve holdings reduce the volatility of portfolio debt flows in response to relative policy interest rate shocks. The results indicate that additions to reserves reduce the economy’s exposure to global financial risk. The precautionary benefits of reserves could well increase as India becomes further integrated to international financial markets. Estimates of the costs of holding reserves give evidence that increases in the reserves to output ratio reduce the risk premium on reserves, so that the sovereign interest rate spread overestimates the marginal cost of reserves. |
| Keywords: | Foreign exchange reserves, foreign portfolio flows, precautionary reserves, global financial shocks. |
| JEL: | F31 F32 E52 |
| Date: | 2024–05–24 |
| URL: | https://d.repec.org/n?u=RePEc:nca:ncaerw:168 |
| By: | Manuel González-Astudillo; Juan Guerra-Salas; Avi Lipton |
| Abstract: | We build a small open economy DSGE model to evaluate the macroeconomic e?ects of ?scal consolidations in commodity-exporting countries. The ?scal block includes productive public capital, utility-augmenting government consumption, transfers to hand-to-mouth households, and taxes on labor and capital income as well as consumption. A country risk premium that depends on the level of foreign debt is crucial for the transmission of ?scal policy. This premium in?uences consumption and saving decisions of the ?nancially unconstrained households, and the rest of the economy through general-equilibrium e?ects. We estimate the model with Bayesian methods using data from Ecuador, an economy with a high dependence on oil exports. We then study the macroeconomic e?ects of di?erent tax and expenditure instruments. We consider a full consolidation program following the agreement between Ecuador and the IMF for the 2020-2025 period. The program reduces the country premium, which promotes private investment. Consumption of ?nancially unconstrained households is adversely a?ected by higher labor income taxes, but consumption of hand-to-mouth households increases due to the expansion of government transfers under the program. In aggregate terms, GDP declines by about 1% relative to trend. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1015 |
| By: | Elias Albagli; Luis Ceballos; Sebastian Claro; Damian Romero |
| Abstract: | We evaluate the behavior of the UIP relationship around monetary policy and global uncertainty shocks using event studies. We find that the covariance between exchange rate movements and changes in long-term yield differentials is conditional on the nature of shocks. A model of partial arbitrage between domestic and US bond markets predicts that tighter US monetary policy appreciates the dollar while increasing US yields relative to domestic bonds, a response that is consistent with UIP forces, while global uncertainty shocks appreciate the dollar while raising domestic yields relative to US bonds, exacerbating the widely documented UIP violation. The empirical analysis supports these mechanisms, specially for developed economies. For emerging economies, both relationships are weaker, consistent with more pervasive currency stabilization policies that mute the FX response at the expense of higher volatility in longer yields. Our results suggest a more nuanced interpretation of the unconditional failure of the UIP. |
| Date: | 2024–03 |
| URL: | https://d.repec.org/n?u=RePEc:chb:bcchwp:1007 |
| By: | Jakree Koosakul; Ms. Longmei Zhang; Maryam Zia |
| Abstract: | After decades of increasing global economic integration, the world is facing a growing risk of geoeconomic fragmentation, with potentially far-reaching implications for the global economy and the international monetary system. Against this background, this paper studies how geopolitical proximity, along with other economic factors, affects the usage of five SDR currencies in cross-border transactions. Since World War II, the global currency landscape has remained relatively stable, with the U.S. dollar serving as the dominant currency. Using country-level SWIFT transaction data, our analysis confirms the importance of inertia, trade and financial linkages in shaping the currency landscape, consistent with existing studies. On geopolitical proximity, we find that closer proximity can boost the use of the euro and renminbi, notably among emerging market and developing economies, although the impact is rather muted in the full sample. The effect on RMB usage in the full sample is more pronounced during periods of heightened trade policy uncertainty. These findings suggest that in a more geoeconomically fragmented world, alternative currencies could play a greater role. |
| Date: | 2024–09–06 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2024/189 |
| By: | Sebastian Horn; David Mihalyi; Philipp Nickol; César Sosa-Padilla |
| Abstract: | How reliable are public debt statistics? This paper quantifies the magnitude, characteristics, and timing of hidden debt by tracking ex post data revisions across a comprehensive new database of more than 50 vintages of World Bank debt statistics. In a sample of debt data covering 146 countries and 53 years, the paper establishes three new stylized facts: (i) debt statistics are systematically under-reported; (ii) hidden debt accumulates in boom years and tends to be revealed in bad times, often during IMF programs and sovereign defaults; and (iii) in debt restructurings, higher hidden debt is associated with larger creditor losses. The novel data is used to numerically discipline a quantitative sovereign debt model with hidden debt accumulation and an endogenous monitoring decision that triggers revelations. Model simulations show that hidden debt has adverse effects on default risk, debt-carrying capacity and asset prices and is therefore welfare detrimental. |
| JEL: | F34 G01 H63 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32947 |
| By: | Mikhail Chernov; Magnus Dahlquist; Lars A. Lochstoer |
| Abstract: | We show that a small set of emerging markets with floating exchange rates expand the investment frontier substantially relative to G10 currencies. The frontier is characterized by an out-of-sample mean-variance efficient portfolio that prices G10- and emerging markets-based trading strategies unconditionally as well as conditionally. Our approach reveals that returns to prominent trading strategies are largely driven by factors that do not command a risk premium. After real-time hedging of such unpriced risks, the Sharpe ratios of these strategies increase substantially, providing new benchmarks for currency pricing models. For instance, the Sharpe ratio of the carry strategy increases from 0.71 to 1.29. The unpriced risks are related to geographically-based currency factors, while the priced risk that drives currency risk premiums is related to aggregate consumption exposure. |
| JEL: | F31 G12 G15 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:32900 |
| By: | Bonga-Bonga, Lumengo |
| Abstract: | This paper makes a significant contribution to the literature on the policy trilemma by evaluating potential policy combinations that are relevant for the BRICS grouping within the context of the Impossible Trinity. Additionally, the paper introduces a new modeling approach for assessing the policy trilemma, based on establishing a boundary for the linear combination of variables related to the trilemma. The findings reveal that adopting a fixed exchange rate system presents considerable challenges for BRICS countries within the framework of the Impossible Trinity. Specifically, the results suggest that if BRICS countries opt for a fixed exchange rate system, they would likely have to forgo free capital flow. This loss of flexibility could be particularly detrimental, given their significant international influence and their role as major recipients of capital flows for trade and financial transactions. |
| Keywords: | impossible trinity; exchange stability; monetary policy independence; BRICS. |
| JEL: | C2 E61 F4 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:121839 |