International Macroeconomics Research Articles

From dominant to producer currency pricing: Dynamics of Chilean exports

We revisit a central question for international macroeconomics: the response of export prices and quantities to movements in the exchange rate (ER). We use granular export data for Chile and study how the effects of ER movements vary over time with the currency of invoicing and the destination of exports. For prices, we find that the short-run effects of bilateral ER movements vanish when controlling for U.S. dollar ER, which supports dominant currency pricing. However, over longer horizons a more significant role is played by bilateral ER movements, in line with the predictions of producer currency pricing. These dynamics do not depend on the invoicing currency. The results we find for quantities support the view that bilateral exchange rate movements contribute to macroeconomic adjustment through export volumes over the medium term.

Exchange rate dynamics and consumption of traded goods

A Constant Elasticity of Substitution (CES) aggregator of domestic and foreign goods is assumed in virtually any model of international macroeconomics with multiple traded goods. If baskets of traded goods are allocated optimally across countries, the CES aggregator links trade flows to exchange rate dynamics implying a condition for optimal allocation of individual traded goods across countries. The condition holds irrespectively of assumptions about preferences or endowment processes. This paper analyzes optimal allocation of traded goods empirically for 9 OECD countries and finds that it is mostly rejected by data. The finding casts doubts on the ability of international macroeconomic models to jointly explain dynamics of consumption and exchange rates.

Whether the Chinese provinces have achieved their potential efficiency in economic growth?

PurposeMost economic growth is concentrated in the eastern and coastal provinces of China, while the western and central provinces have not yet experienced the expected economic growth. This study aims to address the following crucial research questions: Do the central and western provinces achieved potential efficiency in economic growth? Have China’s provinces used their resources effectively in implementing economic growth strategies?Design/methodology/approachThe research design concerns the use of a panel dataset on province-specific economic growth in China over the years to 2000–2020. The methodology used was a stochastic frontier gross domestic product (GDP) model with time-varying technical efficiency over time. The approach uses the existing literature to identify the important variables influencing economic growth at the provincial level to model the stochastic frontier GDP model for empirical analysis.FindingsThis study concludes that the central provinces show the highest rate of efficiency in economic growth, though not 100%, followed by the Eastern and Western provinces. By increasing and improving skilled education institutes and intensifying supply chain opportunities through foreign direct investment (FDI), the central provinces achieving 100% growth efficiency may not be ruled out.Research limitations/implicationsThe modes of economic governance and policies to improve GDP growth have been rapidly changing from increasing incentives to improving competition. Thus, more unique avenues and expansion of the horizon for impending research on provincial, national and international macroeconomics would emerge that would make current methodologies of the growth analysis outdated.Practical implicationsThe empirical analysis highlights the importance of improving skilled education institutes and intensifying supply chain opportunities through FDI for achieving sustained economic growth.Social implicationsThe empirical analysis facilitates finding ways to reduce income inequality across provinces in China.Originality/valueTo the authors' knowledge empirical analysis examining the Chinese province-specific economic growth efficiency explicitly has not been carried out using the recent Chinese panel dataset.

Introduction to INFER special issue on “new aspects of economic and financial integration”

AbstractThis Special Issue (SI) gathers 13 papers presented at the 23rd INFER Annual Conference which took place in Lisbon, 8–10 September 2021, at ISEG – Lisbon School of Economics and Management. The conference was organised by INFER (International Network for Economic Research), UECE (Research Unit on Complexity and Economics), and REM (Research in Economics and Mathematics). The papers of the SI focus on key topics in international macroeconomics, revisit the fiscal policy conduct within a globalised world, investigate how uncertainty and risk affect macroeconomic policies, and analyse the links between labor market outcomes, automation, and economic integration.

Recent advances in international macroeconomics, financial development and globalization: Some policy challenges

Recent advances in international macroeconomics, financial development and globalization: Some policy challenges

Factors influencing the choice of the invoicing currency in international trade: Panel data analysis for 55 countries

Research background: Most transactions in world trade are invoiced in several international currencies. The changes in the distribution of the great economic powers and the strengthening of the position of developing countries make it necessary to consider the factors determining the choice of trade invoicing currency and to assess the prospects of the dollar as an invoicing currency and the possibility of strengthening the position of developing countries' currencies in this function. Purpose of the article: The aim of the paper is to assess the factors influencing the choice of invoicing currency for international trade in 2000?2019. Methods: The analysis of factors influencing the choice of international trade invoicing currency is based on panel data modelling. The study is conducted for a group of 55 countries. It is assumed that the following variables may influence the currency position in the trade invoicing function: the share of the issuer's country in the bilateral trade, inflation and exchange rate. Findings & value added: The analysis showed that despite the decreasing share of the United States in world trade, the U.S. dollar remains the most important export invoicing currency. The main factors influencing the dollar's dominance are the U.S. share of countries' exports, inflation in developing countries, and the exchange rate in advanced economies. The great significance of trade share as a determinant of the position of the trade invoicing currency is an important indication of the strengthening position of developing country currencies, particularly the Chinese yuan. The obtained results confirm, with the use of more complete data, the validity of the dominant currency paradigm and enrich the still underdeveloped analysis in the area of international macroeconomics using panel data analysis.

Monetary Policy and Redistribution in Open Economies

This paper develops an open-economy heterogeneous-agent New Keynesian model in which households differ in their income, wealth, and real and financial integration with international markets. We use the model to reassess classic questions in international macroeconomics from a distributional perspective. Our analysis yields two main takeaways. First, heterogeneity in households’ international integration plays a central role in driving the unequal consumption responses to external shocks, more so than income and wealth. Second, the conduct of monetary policy in open economies faces a stabilization-inequality trade-off, with fixed exchange rate regimes leading to amplified but more equal consumption responses to external shocks.

МІЖНАРОДНА ЕКОНОМІЧНА ДІЯЛЬНІСТЬ: СУТНІСТЬ ТА ПРОБЛЕМАТИКА ТРАКТУВАННЯ

The article systematizes the conceptual-categorical apparatus of the international economy in terms of clarifying the definition of “international economic activity” based on the study of the works of domestic scientists. It has been proven that in the context of national interests, international economic activity should be aimed at ensuring the country's economic security, an innovative model of economic development, strengthening its scientific and technical potential, and developing equal and mutually beneficial relations with other countries of the world. The study of the views of domestic scientists made it possible to establish the relationship between the terms “international microeconomics”, “international macroeconomics” and “international economic activity”. It was established that domestic scientists interpret the concept of “international economic activity” in different ways. A critical analysis of the researched interpretations of the concept of “international economic activity” made it possible to single out the scope of application of this concept and the subject component. A refined definition of “international economic activity” is given. The advantage of the specified term is the determination of the direction of the actions of the subjects (formation, development and implementation of the advantages of international cooperation, international specialization and cooperation), the specification of the purpose of these actions taking into account the realities of today (ensuring the international competitiveness of countries, increasing their economic potential). The authors have systematized the existing interpretations of the term "foreign economic activity" in regulatory and legal acts and scientific literature. The common and distinctive features of the concepts of "foreign economic activity" and "international economic activity" have been determined. It was established that the second concept is a broader concept, because it includes a greater number of forms of economic interaction of subjects in the system of global economic relations and has goals that are more global.

International Macroeconomics: From the Great Financial Crisis to COVID-19, and Beyond

This Mundell–Fleming lecture reviews some of the main developments in international macroeconomics since the early 2000s. It highlights four important areas of progress: (a) on international pricing and invoicing; (b) on sectoral trade and production networks; (c) on the cross-border allocation of capital and the role of global financial intermediaries; (d) on cross-border externalities and prudential policies. It then explores three specific questions, relevant for future research and policy: (a) the implementation of optimal prudential policy via ‘basis control;’ (b) recent developments about the US external balance sheet and its ‘exorbitant privilege;’ and (c) the reform of the International Financial and Monetary System.

Do the determinants of foreign direct investment have a reverse and symmetric impact on foreign direct divestment?

Negative foreign direct investment (divestment) between countries has received little attention in international macroeconomics. This is the first country-level study to investigate whether conventional drivers of bilateral foreign direct investment (FDI) have a reverse, but symmetric, impact on foreign direct divestment (FDD). Using bilateral negative and positive FDI data between 126 countries or territories, from 2005 to 2018, we find that conventional gravity variables that have statistically significant effects on FDI, such as host and source country GDP, distance, and source-country remoteness, have similar-signed effects on FDD, rather than opposite-signed effects. Formal testing of whether coefficients on the determinants of the absolute value of divestment are equal but opposite signed to those for investment rejects this hypothesis. The view that what may lead to more FDI may impede FDD is not supported by our empirical findings.

Effect of economic integration and trade facilitation on Intra-manufacturing export among ECOWAS member states

Institutional trade tariffs and non-tariff barriers are major constraints to exporters and importers. It affects many developing countries' trade flows and intra-trade performance, including ECOWAS member states. From the classical economic background, the economic problems of international macroeconomics can be examined from the position of trade costs. It further states that low trade facilitation policies such as high tariffs and non-tariff barriers alone can account for a 10% loss in a national income. From these backgrounds, the study assesses the interrelation of economic integration and trade facilitation in ECOWAS and how the member states have performed in intra-manufacturing export. Using the general method of moments (GMM) with instrumental variable (IV) estimation on a dynamic model with panel data from 15 members to analyse how regional economic integration and trade facilitation relationship promote intra-regional manufacturing exports. The findings reveal that trade facilitation in ECOWAS member states is below the world average. Due to high bureaucratic processes, thus, are high costs of exporting/importing. Again, the econometric analyses reveal economic integration significantly promotes trade facilitation in member states and can influence intra-manufacturing exports in ECOWAS. At the same time, manufacturing production has a direct and significant role in manufacturing exports. Some policy recommendations that would help facilitate trade and improve manufacturing production and intra exports in the ECOWAS sub-region were made.

Effects of linking national carbon markets on international macroeconomics: An open-economy E-DSGE model

Linking carbon markets in different economies has become an important form of international climate cooperation. However, the complex socioeconomic effects of linking carbon markets need to be fully assessed. This article develops an open-economy environmental dynamic stochastic general equilibrium (E-DSGE) model that incorporates international trade, asymmetric economies, and heterogeneous production sectors. Based on the example of the linkage between EU and China carbon markets, we analyze the international macroeconomic effects of linking standalone national carbon markets. The main findings are as follows: 1) The linked carbon market improved total social welfare of China and the EU, but led to an uneven distribution of social welfare across regions. 2) China and the EU had better economic performances under a linked carbon market than under two separate carbon markets; moreover, the linked carbon market amplified expansionary effects and mitigated negative cross-border spillover effects. 3) Both separate and linked carbon markets functioned as automatic stabilizers of the economy; the linked carbon markets reduced economic fluctuations in the face of supply-side shocks, while the separate carbon markets reduced economic fluctuations in the face of demand-side shocks.

Mr Prebisch on the asymmetric Gold Standard

AbstractPrebisch is responsible for three significant but often ignored contributions to international macroeconomics. First, Prebisch characterised the Gold Standard as an unstable and asymmetric system, which worked for peripheral countries only when there was a balance of payments surplus. Second, Prebisch considered that the increasing importance of the US economy was the main reason for the collapse of the Gold Standard and the Great Depression, and rejected explanations based on the inflexibility of wages and prices. Third, and as response to the abovementioned issues, Prebisch implemented several policies in Argentina during the 1930s, lifting the country out of the crisis. These theoretical insights and the policy prescriptions predated significant contributions by eminent scholars and proved to be successful during the last decades.

International business cycles: Information matters

We propose a mechanism that explains standard stylized facts in both international macroeconomics and international finance. To do so, we develop a New Keynesian DSGE model with financial frictions à la Bernanke et al. (1999), in which we depart from the full-information rational expectations (FIRE) assumption. The key ingredient is home information bias (HIB) in expectations. While the FIRE model predicts high consumption co-movements, no departure from uncovered interest parity (UIP) and procyclical trade balance, assuming HIB makes the model consistent with the data by producing low consumption correlation, solving the quantity puzzle, generating endogenous departures from the UIP and matching a countercyclical trade balance. The mechanism is empirically validated and shown to be robust to the extent of frictions in the economy.

FOREIGN CAPITAL AND DOMESTIC FUNDING CONDITIONS: A MUNDELLIAN TRILEMMA PERSPECTIVE

This study investigates and evaluates the impact of global funding conditions on private sector credit growth and controlling for the Mundellian Trilemma configuration. We contribute to the empirical literature by investigating the role of other conditioning factors such as the size of economies and their level of economic development. The more specific research goals are as follows: (i) To explore the different Trilemma configurations by income group and size of the economies; (ii) to enrich international macroeconomics literature on the role of Trilemma configurations and countries’ idiosyncrasies in assessing the impact of global financial conditions; and (iii) to formulate policy-relevant conclusions. We argue that — when assessing the impact of global financial conditions — the exchange rate regime and financial openness matter and the size of the economy and its income level. The high volatility in gross and net international capital flows redefined many trilemma configurations in the Great Recession aftermath. Many countries decided to shield their financial markets by reducing the degree of financial openness and moving toward intermediate or middle-ground positions in their Trilemma configurations.

Trade and capital flows: Substitutes or complements? An empirical investigation

AbstractThis paper examines the linkages between the trade of goods and financial assets. Do both flows behave as complements (implying a positive correlation) or as substitutes (negative correlation)? Although a classic topic in international macroeconomics, the empirical evidence has remained relatively scarce so far, in particular for the Euro area where trade and financial imbalance played a prominent role in the build‐up of the European sovereign debt crisis. Consequentially, we use a novel dataset, providing estimates for financial flows and its four main categories for 42 countries and covering the period from 2002 to 2012, to test the so‐called trade‐finance nexus. Since theoretical models stress that both flows might be influencing each other simultaneously, we introduce a novel time‐varying instrumental variable based on capital control restrictions to estimate a causal effect. The results of the gravity regressions support theories that underline the complementarity between exports and capital flows. When testing the trade‐finance nexus for different types of capital flows, the estimated coefficient is most pronounced for foreign direct investment, in line with theories stressing informational frictions. Robustness checks in the form of different estimation methods, alternative proxies for capital flows and sample splits confirm the positive relationship. Interestingly, the trade‐finance nexus does not differ among countries belonging to the EMU, the European Union or among core and peripheral Euro area countries.

The Global Economy after Covid-19: Challenges and Policy Resolutions

The COVID-19 pandemic disrupted the world economy in 2020. As of December 23, 2020 the World Health Organization (WHO) reports more than 76 million confirmed cases of COVID-19 and over 1.7 million deaths worldwide. At the intersection of the COVID-19 pandemic and the global economy, numerous issues pose challenges to scholars and policy makers. Financial globalization may help to slow down the de-globalization of trade after COVID-19. As international financial transactions can be easily implemented, international trade transactions would be facilitated. In addition, financial openness may motivate international trade.This special issue of the EAER features seven papers in both international trade and international macroeconomics and finance on the theme of “The Global Economy after COVID-19: Challenges and Policy Resolutions.”

Equity Home Bias When Firms are Indebted

We reassess one of the major puzzles in international macroeconomics, namely the equity home bias puzzle, to shed some light on how it is affected by financial leverage. As corporate debt is generally key to employment, the analysis can provide interesting insights to the mooted argument according to which equity home bias stems from agents’ attempt to insure against changes in their labor income. In a panel of advanced economies spanning the period 1980 through 2018, we find that the non-financial corporate credit-to-GDP ratio is negatively correlated with a standard equity home bias index. The former has increased over time while the latter has decreased, so we attempt to rationalize the data with a two-country, two-good model where firms face borrowing constraints and these constraints reduce agents’ appetite for domestic equities. We show that this happens because the borrowing constraints hinder employment after positive technology shocks, especially those hitting investment. After examining this result with a tractable framework, we find that it can also be true in an extended model, adding financial shocks, trade in bonds and non-unitary elasticity of substitution between goods.

Transition of the Feldstein-Horioka Puzzle

Common factor panel methodologies are applied to investment and savings rates in the context of the Feldstein-Horioka puzzle to derive idiosyncratic components of the two variables for OECD countries, Japan, and Indonesia. The idiosyncratic components of the two variables in the national and regional data are analyzed using panel methodologies of unit root and cointegration tests. Bootstrap confidence intervals of the correlation coefficient and the relative variance ratio for the two variables are estimated to ascertain what, if any, relation exists between the mobility and the relative volatility of the two variables. The empirical examinations presented herein suggest that the puzzle is fading in recent times. This paper presents an attempt to alleviate somewhat contradictory views of the plausibility of this important puzzle in international macroeconomics expressed in the existing literature by presenting empirical results demonstrating the existence of the puzzle in one period, and demonstrating the puzzle fading away in the other periods.

Exogenous and endogenous sterilisation under managed exchange rates

AbstractOne of the most widely debated aspects of international macroeconomics surrounds the efficacy of Central Bank sterilisation. However, ‘exogenous’ sterilisation initiatives by the Central Bank are involuntary if policymakers are to achieve a policy rate objective. Also, in many instances any excess liquidity is able to be sterilised ‘endogenously’ by commercial banks. To demonstrate both forms of sterilisation, this paper employs several structural VAR models. We show that (a) both exogenous and endogenous sterilisation initiatives are more or less involuntary, (b) the impossible trinity can be challenged and (c) why imbalances across the international monetary system can occur and persist.