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on Open MacroEconomics |
| By: | John Williamson (Peterson Institute for International Economics) |
| Abstract: | The paper summarizes the current theory of how a floating exchange rate is determined, dividing the subject into what determines the steady state and what determines the transition to steady state. The inadequacies of this model are examined, and an alternative “behavioral” model, which recognizes that the foreign exchange market is populated by both fundamentalists and chartists is presented. It is argued that the main importance of understanding the foreign exchange market for development strategy is to permit a correct appraisal of the dangers of Dutch disease. Empirically it seems that from the standpoint of promoting development it is preferable to have a mildly undervalued rate. The paper concludes by examining implications for exchange rate regimes. |
| Keywords: | Exchange rates; behavioral model; Dutch disease |
| JEL: | F31 F43 O24 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp08-3&r=opm |
| By: | Linda S. Goldberg; Cédric Tille |
| Abstract: | The U.S. dollar holds a dominant place in the invoicing of international trade, along two complementary dimensions. First, most U.S. exports and imports invoiced in dollars. Second, trade flows that do not involve the United States are also substantially invoiced in dollars, an aspect that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that even though exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal policy. |
| JEL: | F3 F4 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13820&r=opm |
| By: | Charles Engel; Jian Wang |
| Abstract: | Data for OECD countries document: 1. imports and exports are about three times as volatile as GDP; 2. imports and exports are pro-cyclical, and positively correlated with each other; 3. net exports are counter-cyclical. Standard models fail to replicate the behavior of imports and exports, though they can match net exports relatively well. Inspired by the fact that a large fraction of international trade is in durable goods, we propose a two-country two-sector model, in which durable goods are traded across countries. Our model can match the business cycle statistics on the volatility and comovement of the imports and exports relatively well. In addition, the model with trade in durables helps to understand the empirical regularity noted in the trade literature: home and foreign goods are highly substitutable in the long run, but the short run elasticity of substitution is low. We note that durable consumption also has implications for the appropriate measures of consumption and prices to assess risk-sharing opportunities, as in the empirical work on the Backus-Smith puzzle. The fact that our model can match data better in multiple dimensions suggests that trade in durable goods may be an important element in open-economy macro models. |
| JEL: | E32 F3 F4 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13814&r=opm |
| By: | Giancarlo Corsetti; Philippe Martin; Paolo Pesenti |
| Abstract: | Most analyses of the macroeconomic adjustment required to correct global imbalances ignore net exports of new varieties of goods and services and do not account for firms' entry in the product market. In this paper we revisit the macroeconomics of trade adjustment in the context of the classic 'transfer problem,' using a model where the set of exportables, importables and nontraded goods is endogenous. We show that exchange rate movements associated with adjustment are dramatically lower when the above features are accounted for, relative to traditional macromodels. We also find that, for reasonable parameterizations, consumption and employment (hence welfare) are not highly sensitive to product differentiation, and change little regardless of whether adjustment occurs through movements in relative prices or quantities. This result warns against interpreting the size of real depreciation associated with trade rebalancing as an index of macroeconomic distress. |
| JEL: | F32 F41 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13795&r=opm |
| By: | George Alessandria; Joseph Kaboski; Virgiliu Midrigan |
| Abstract: | Fixed transaction costs and delivery lags are important costs of international trade. These costs lead firms to import infrequently and hold substantially larger inventories of imported goods than domestic goods. Using multiple sources of data, the authors document these facts. They then show that a parsimoniously parameterized model economy with importers facing an (S, s)-type inventory management problem successfully accounts for these features of the data. Moreover, the model can account for import and import price dynamics in the aftermath of large devaluations. In particular, desired inventory adjustment in response to a sudden, large increase in the relative price of imported goods creates a short-term trade implosion, an immediate, temporary drop in the value and number of distinct varieties imported, as well as a slow increase in the retail price of imported goods. The authors' study of 6 current account reversals following large devaluation episodes in the last decade provides strong support for the model’s predictions. |
| Keywords: | Inventories ; Trade |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:08-3&r=opm |
| By: | Charles P. Thomas; Jaime Marquez; Sean Fahle |
| Abstract: | In this paper we construct a new measure of U.S. prices relative to those of its trading partners and use it to reexamine the behavior of U.S. net exports. Our measure differs from existing measures of the dollar's real effective exchange rate (REER) in that it explicitly incorporates both the difference in price levels between the United States and developing economies and the growing importance of these developing economies in world trade. Unlike existing REERs, our measure shows that relative U.S. prices have increased significantly over the past 15 years. In terms of simple correlations, the relationship between our measure of relative prices and U.S. net exports is much more coherent than that between existing REERs and net exports. To explore this relationship further, we use our measure to construct an index of foreign prices relevant for U.S. export volumes and reexamine several export equations. We find that export equations with the new index dominate those with previous measures in terms of in-sample fit, out-of-sample fit, and parameter constancy. In addition, we find that with the new index of foreign prices the estimated elasticity of U.S. exports with respect to foreign income is a good bit higher than the unitary elasticity found in previous studies using other price measures. This has implications for U.S. current account adjustment. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:917&r=opm |
| By: | Rudiger von Arnim (New School for Social Research, New York, NY) |
| Keywords: | short-run adjustment; current account; imbalances |
| Date: | 2007–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:epa:cepawp:2007-7&r=opm |
| By: | Stéphane Auray; Aurélien Eyquem |
| Abstract: | In this paper, we measure the welfare costs/gains associated with financial market incompleteness in a monetary union. To do this, we build on a two-country model of a monetary union with sticky prices subject to asymmetric productivity shocks. For most plausible values of price stickiness, we show that asymmetric shocks under incomplete financial markets give rise to a lower volatility of national inflation rates, which proves welfare improving with respect to the situation of complete financial markets. The corresponding welfare gains are equivalent to an average increase of 1.8% of permanent consumption. |
| Keywords: | Monetary union, Asymmetric shocks, Price stickiness, Financial market incompleteness, welfare |
| JEL: | E51 E58 F36 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:0748&r=opm |
| By: | Shahbaz Akmal, Muhammad; Naveed, Aamir |
| Abstract: | There is scantiness of empirical research on the specific relationship between financial institutions, capital account liberalization and trade-openness but there is no particular study in the case of Pakistan. This study investigates the importance of financial institutions, net financial capital inflows and trade-openness for financial sector’s development in a small developing economy like Pakistan. Further, it also examines the hypothesis (Zingales and Rajan, 2003), predicts combined influence of capital account liberalization and trade openness on financial sector’s efficiency but insignificant. We employed three approaches (Johansen Test, DOLS and ARDL bounds testing) for the robustness of long run relationships among the variables utilizing the annual data for the period 1971-2006. We found that, under the investigation of three new alternative techniques, results are robust for long run relationships in the case of Pakistan. Coefficient of net capital inflows is having positive impact on financial development in the long run but insignificant in short run. Trade openness is the main source of financial sector’s development both in long run as well as in short run. On the other hand, financial institutions and economic growth also help to improve the development of financial markets in both the periods. Finally, rise in inflation reduces the efficiency of financial markets through its detrimental channels in the economy in short run as well in long run |
| Keywords: | Capital Account Liberalization; Financial development; Trade Openness |
| JEL: | F10 F1 F43 F36 |
| Date: | 2007–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7148&r=opm |
| By: | Selim Elekdag; Rene Lalonde; Douglas Laxton; Dirk Muir; Paolo Pesenti |
| Abstract: | We develop a five-region version (Canada, a group of oil exporting countries, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations of oil prices with large effects on the terms of trade of oil-exporting versus oil-importing countries (in particular, emerging Asia), and result in significant wealth transfers between regions. This is especially true when we consider a sustained increase in productivity growth or a shift in production technology towards more capital- (and hence oil-) intensive goods in regions such as emerging Asia. In addition, we study the implications of higher taxes on gasoline that are used to reduce taxes on labor income, showing that such a policy could increase world productive capacity while being consistent with a reduction in oil consumption. |
| JEL: | E66 F32 F47 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13792&r=opm |
| By: | Cojanu, Valentin; Paun, Cristian; Lupu, Radu |
| Abstract: | Few subjects of international economics are so much exposed to heated debates as the exchange rate problem. From monetary crises and balance-of-payments adjustments to monetary zones, dealing with currency swings seems to embody any economist's worries about the rightfulness of economic models and the relevance of empirical analyses he or she has to choose. Is appreciation or depreciation good for a country's welfare? Would that answer still be valid in the long run? The unsettled character of the problem largely resides in the manifest contradiction between the firm theoretical predictions and their unconvincing empirical testing. One of the least uncontroversial tenets refers to the positive correlation between currency depreciation or devaluation (although of different origins, their effects are generally the same) and a country's current account. This paper attempts to test this prediction on the case of Romanian economy and to conclude on possible explanations of the theoretical-empirical conflict. |
| Keywords: | exports; exchange rate; elasticity |
| JEL: | F4 F2 F1 |
| Date: | 2006–10–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:7060&r=opm |
| By: | Cortes, Maria (Universidad Del Valle) |
| Abstract: | This paper aims to analyse the value of merchandise through a broad category of trade between Australia and nine selected Latin American countries by using a gravity model focusing on the period from 1998 to 2004. The traditional cross-sectional data is a useful tool to understand this bilateral trade focusing on exports and imports through primary products, manufactured products, and total merchandise trade. The general thrust of the analysis regarding trade composition implies that Australian trade with Latin America has been shaped by political and economic variables. The trade of primary products is explained by economic distance, openness, population, and political influence. Economic mass along with economic distance are significant explanatory variables in the trade of manufactured products. Political influence on bilateral trade has been significant in most Latin American countries – captured by a dummy for presidential changes – exceptions are: Argentina, Chile, and Uruguay. |
| Keywords: | trade, gravity model, Latin America, Australia, cross-sectional data. |
| JEL: | F14 F15 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:uow:depec1:wp07-19&r=opm |