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on Open Economy Macroeconomics |
| By: | Yushi Yoshida; Takatoshi Ito; Junko Shimizu; Kiyotaka Sato; Taiyo Yoshimi; Uraku Yoshimoto |
| Abstract: | We examine the determinants and the dynamics of the exchange rate pass-through of the Japanese exporters, utilizing the official Customs declaration data. We first estimated the invoicing currency exchange rate pass-through and found that export prices invoiced in producer currency are the most rigid. Among local currency or vehicle currency use, US dollar invoicing is relatively more rigid than non-US dollar invoicing. The destination exchange rate pass-through estimates for local currency invoicing are between 35 and 40 percent, whereas those for Japanese yen or US dollar invoicing are close to complete. In addition, we find these discrepancies are even more accentuated in the longer run by analyzing the dynamics of the exchange rate pass-through. |
| JEL: | F3 F31 F32 F34 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33454 |
| By: | Yan Bai; Patrick J. Kehoe; Pierlauro Lopez; Fabrizio Perri |
| Abstract: | Emerging markets face large and persistent fluctuations in sovereign spreads. To what extent are these fluctuations driven by local shocks versus financial conditions in advanced economies? To answer this question, we develop a neoclassical business cycle model of a world economy with an advanced country, the North, and many emerging market economies, the South. Northern households invest in domestic stocks, domestic defaultable bonds, and international sovereign debt. Over the 2008-2016 period, the global cycle phase, the North accounts for 68% of Southern spreads’ fluctuations. Over the whole 1994-2024 period, however, Northern shocks account for less than 20% of these fluctuations. |
| JEL: | F34 F41 F44 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:33441 |
| By: | Masashige Hamano (Faculty of Political Science and Economics, Waseda University); Yuki Murakami (Graduate School of Economics, Waseda University) |
| Abstract: | We employ a small open economy model with debt-deflation, where agents form expectations regarding sudden stops—typically characterized by a combination of current account reversals and sharp output declines. To this end, we construct a rational expectations regime switching DSGE model with occasionally binding collateral constraints. In environments with frequent sudden stops, agents anticipate future occurrences more strongly. Heightened expectations of losing access to international financial markets prompt collateral-constrained households to increase precautionary savings. These additional savings help sustain consumption and support collateral prices during turbulent periods, counteracting capital flight. However, as sudden stops become more frequent, the welfare loss due to pecuniary externalities intensifies, necessitating stronger macroprudential capital control measures. We provide empirical evidence from emerging economies that aligns with our theoretical findings. |
| Keywords: | Small open economy, capital flows, regime switching |
| JEL: | F41 F44 E44 G01 |
| Date: | 2025–02 |
| URL: | https://d.repec.org/n?u=RePEc:wap:wpaper:2422 |
| By: | Sebastian Andreas Horn; David Mihalyi; Nickol, Philipp; Sosa-Padilla, César |
| 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. |
| Date: | 2024–09–16 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10907 |
| By: | Swapan-Kumar Pradhan; Viktors Stebunovs; Előd Takáts; Judit Temesvary |
| Abstract: | We use bilateral cross-border bank claims by nationality to assess the effects of geopolitics on cross-border bank flows. We show that a rise in geopolitical tensions between countries — disagreements in UN voting, broad sanctions, or sentiments captured by geopolitical risk indices — significantly dampens cross-border bank lending. Elevated geopolitical tensions also amplify the international transmission of monetary policies of major central banks, especially when geopolitical tensions coincide with monetary policy tightening. Overall, our results suggest that geopolitics is roughly as important as monetary policy in driving cross-border lending. |
| Keywords: | Monetary policy; Geopolitical tensions; Cross-border claims; Diff-in-diff estimations |
| JEL: | E52 F34 F42 F51 F53 G21 |
| Date: | 2025–02–12 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedgif:1403 |
| By: | Gill, Indermit S.; Pinto, Brian R. |
| Abstract: | The debt sustainability framework for market access countries has been designed by the International Monetary Fund for all market access countries, a set that includes emerging markets and advanced economies. The debt sustainability framework for market access countries was reviewed in 2021 and renamed the “sovereign risk and debt sustainability framework for market access countries.” A new public debt sustainability analysis template was rolled out in 2022 and became operational in 2023. This paper examines the framework from the perspective of emerging markets, which borrow from and have a policy dialogue with the World Bank. While the debt sustainability analysis template is based on government borrowing in both the home, or local, currency and foreign currency, advanced economies predominantly borrow only in the local currency. Emerging market governments are more likely to borrow in both currencies, are more vulnerable to crises, and have less fiscal and monetary policy space than their advanced economy counterparts. Therefore, a single framework for both advanced economies and emerging markets is unduly restrictive. The paper suggests changes to fit the emerging market debt context better, motivating the recommendations by a contrast between Japan and Sri Lanka. The recommended changes would require a composite real interest rate to be calculated for emerging markets as in the single-currency environment typical of advanced economies. This would facilitate an assessment of debt dynamics based on the debt-to-GDP ratio, primary deficits, and (r-g), or the difference between the real interest and the real growth rate. Further, the composite real interest rate could usefully be broken down into its local and foreign currency components to provide insight into debt dynamics and guide borrowing decisions. These modifications would facilitate a more transparent assessment of near-term risks and medium-term projections, for which the paper suggests that the set of comparator countries exclude advanced economies. |
| Date: | 2024–06–28 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10831 |
| By: | Ayhan Kose; Jongrim Ha; Dohan Kim; Prasad, Eswar S. |
| Abstract: | Conventional empirical models of monetary policy transmission in emerging market economies produce puzzling results: monetary tightening often leads to an increase in prices (the price puzzle) and depreciation of the currency (the foreign exchange puzzle). This paper shows that incorporating forward-looking expectations into standard open economy structural vector autoregressive models resolves these puzzles. Specifically, the models are augmented with novel survey-based measures of expectations based on consumer, business, and professional forecasts. The findings show that the rise in prices following monetary tightening is related to currency depreciation, so eliminating the foreign exchange puzzle helps solve the price puzzle. |
| Date: | 2024–11–14 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10974 |
| By: | Lisa Martin; Mr. Christopher S Adam; Douglas Gollin |
| Abstract: | We develop a spatial dynamic general equilibrium model of a small open agricultural economy to study the impact of global food, fuel and fertilizer price shocks on consumption patterns of heterogeneous households located in different regions, under alternative fiscal responses, including direct price subsidies and household transfers. We show strong spatial heterogeneity in response to shocks, with associated implications for welfare. In particular, while urban households’ consumption baskets are more exposed to the direct effects of global food price shocks, remote rural households’ production and consumption are more exposed to supply-side dislocations associated with shocks to fuel and fertilizer prices. |
| Keywords: | Spatial General Equilibrium; Import Price Shocks; Household Heterogeneity; Food Security; Fiscal Policy; fertilizer price shock; import price shock; No. 25/39; price shock; transport cost; Consumption; Agroindustries; Imports; Food prices; Global; Sub-Saharan Africa |
| Date: | 2025–02–14 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/039 |
| By: | António Afonso; José Alves; Wojciech Grabowski; Sofia Monteiro |
| Abstract: | We employ a cross-quantilogram approach to assess relationships between quantiles of stock returns and sovereign yields, in the U.S. and Germany, in the period 1990-2024. Specifically, we focus on the lowest 5% quantile of stock returns and the highest 5% quantile of bond returns, providing insights into tail dependencies, crucial during market downturns and periods of heightened volatility. We also measure causality in volatilities extending well-known approaches analyzing volatility transmission. We find significant cross-market relationships between U.S. and German stock and bond markets, influenced by economic crises, macroeconomic dynamics, and monetary policy interventions, and financial stress play a crucial role. |
| Keywords: | stock returns, sovereign bond returns, stock-bond relationship, cross-quantilogram, volatility transmission, US, Germany, monetary policy shocks, fiscal stance |
| JEL: | C32 F21 F37 F42 |
| Date: | 2025 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_11667 |
| By: | Forbes, Kristin; Jongrim Ha; Ayhan Kose |
| Abstract: | This paper analyzes cycles in policy interest rates in 24 advanced economies over 1970–2024, combining a new application of business cycle methodology with rich time-series decompositions of the shocks driving rate movements. “Rate cycles” have gradually evolved over time, with less frequent cyclical turning points, more moderate tightening phases, and a larger role for global shocks. Against this backdrop, the 2020–24 rate cycle has been unprecedented in many dimensions: it features the fastest pivot from active easing to a tightening phase, followed by the most globally synchronized tightening, and an unusually long period of holding rates constant. It also exhibits the largest role for global shocks—with global demand shocks still dominant, but an increased role for global supply shocks in explaining interest rate movements. Inflation and the growth in output and employment have, on average, largely returned to historical norms for this stage in a tightening phase. Any recalibration of interest rates going forward should be gradual, however, and account for the interactions between increasingly important global factors and domestic circumstances, combined with uncertainty as to whether rate cycles have reverted to pre-2008 patterns. |
| Date: | 2024–08–20 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:10876 |