Essays in international economics

Abstract

This dissertation is a collection of three independent essays in the field of international economics. A common theme running through the dissertation is that each essay touches upon a key question

that central bankers have been facing in recent years, with important implications for the conduct of central banking in the years to come.

The first essay investigates whether climate change affects the primary mandate of central banks by looking at the effects of country-specific temperature anomalies on inflation, including in the medium-term. Our findings reveal that hot summer temperature anomalies increase food price inflation in the near term, especially in emerging market economies. But over the medium term, the impact across the various price indices tends to be either insignificant or negative. Such effect is largely non-linear, with the impact being more significant for larger shocks and at higher absolute temperatures. Overall, the results obtained suggest that temperature plays a non-negligible role in driving medium-term price developments. This provides some empirical justification for a role for central banks in contributing to the joint effort in tackling climate change.

The second essay studies how the health of the banking system affects firm access to external financing. For this purpose, we build a unique dataset where credit rejections experienced by euro area firms are matched with firm and bank characteristics. This allows us to simultaneously study the role that bank and firm weakness had in the credit reduction observed in the euro area during the sovereign debt crisis, and in credit developments characterising the post-crisis recovery. Compared with the existing literature matching borrower and lender characteristics, our dataset provides a better representation of euro area firms of small and medium size. Our findings suggest that, while firm balance sheet factors have been strong determinants of credit rejections, in the crisis period bank weakness made it harder to obtain external finance for firms located in stressed countries of the euro area. These findings suggest that policy makers should pay particular attention to maintaining a healthy banking system.

Finally, the third essay looks at whether a flexible exchange rate regime contributed to increase countries’ resilience to global financial conditions in the years preceding the Global Financial Crisis and in the post-crisis period. It shows that, in the run-up to the Global Financial Crisis, open emerging market economies with a peg experienced a stronger credit growth compared to countries with a flexible exchange rate regime and a closed capital account. In the post-crisis period, deleveraging was much stronger in open economies with a fixed exchange rate regime compared with those with wider restrictions on capital movements and a floating exchange rate regime. Interestingly, in both time periods, credit developments in closed countries with a flexible exchange rate regime did not differ from those of countries with the same exchange rate regime but a higher degree of financial openness. Macroprudential rules also helped to contain domestic credit growth in periods of global leveraging. Overall, the findings of this essay suggest that a floating exchange can be regarded as an effective policy tool in the hands of policy makers in emerging market economies.