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on Open MacroEconomics |
| By: | Guillermo A. Calvo; Alejandro Izquierdo; Luis-Fernando MejÃa |
| Abstract: | Using a sample of 110 developed and developing countries for the period 1990-2004 we analyze the empirical characteristics of systemic sudden stops (3S) in capital flows --understood as large and largely unexpected capital account contractions that occur in periods of systemic turmoil -- and the relevance of balance sheet effects in the likelihood of their materialization. We conjecture that large real exchange rate (RER) fluctuations come hand in hand with 3S. A small supply of tradable goods relative to their domestic absorption -- a proxy for potential changes in the real exchange rate -- and large foreign-exchange denominated debts towards the domestic banking system, denoted Domestic Liability Dollarization, DLD, are claimed to be key determinants of the probability of 3S, conforming a balance-sheet effect that impacts on the probability of 3S in non-linear fashion. Regarding financial integration, the larger is the latter, the larger is likely to be the probability of Sudden Stop; however, beyond a critical point the relationship gets a sign reversion. |
| JEL: | F31 F32 F34 F41 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14026&r=opm |
| By: | Kazuo Nishimura (Kyoto University - Kyoto University); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Makoto Yano (Kyoto University - Kyoto University) |
| Abstract: | This paper investigates the interlinkage in the business cycles based on sunspot fluctuations of large-country economies in a free-trade equilibrium. We consider a two-country, two-good, two-factor general equilibrium model with Cobb-Douglas<br />technologies, sector-specific externalities and linear preferences. We also assume constant social returns in the investment good sector but decreasing social returns in the consumption good sector. We first identify the determinants of each country's accumulation pattern in autarky equilibrium, and second we show that some country's sunspot fluctuations may spread throughout the world once trade opens even if the other country has determinacy under autarky. We thus prove that under free-trade, globalization and market integration may have destabilizing effects on a country's competitive equilibrium. Finally, we characterize a configuration in which opening to international trade improves the stationary welfare at the world level but deteriorates the stationary welfare of the country which imports investment goods and exports consumption goods. We thus show that in opposition to the standard belief, international trade may not be beneficial to all trading partners in the long run. Moreover, we prove that for some country, international trade may have contrasted consequences as it may at the same time improve the stationary welfare and have a destabilizing effect. |
| Keywords: | Two-country general equilibrium model, free-trade, local indeterminacy, sunspot fluctuations, capital intensities, decreasing social retur |
| Date: | 2008–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00281377_v1&r=opm |
| By: | Miki Matsuo (Kyoto University - Kyoto University); Kazuo Nishimura (Kyoto University - Kyoto University); Tomoya Sakagami (Kumamoto Gakuen University - Gakuen University); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579) |
| Abstract: | In this paper, we study the two-sector CES economy with sector-specific externality (feedback effects) following Nishimura and Venditti \(2004). We characterize the equilibrium paths in the case that allows negative externality. That equilibrium paths were not explicitly discussed by Nishimura and Venditti and show how the degree of externality may generate equilibrium cycles around the steady state. |
| Keywords: | Two-sector economy, sector-specific externalities, indeterminacy, period-two cycles, capital-labor substitution |
| Date: | 2008–05–26 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00282089_v1&r=opm |
| By: | Jeffrey A. Frankel; Shang-Jin Wei |
| Abstract: | The paper offers a new approach to estimate de facto exchange rate regimes, a synthesis of two techniques. One is a technique that the authors have used in the past to estimate implicit de facto weights when the hypothesis is a basket peg with little flexibility. The second is a technique used by others to estimate the de facto degree of exchange rate flexibility when the hypothesis is an anchor to the dollar or some other single major currency, but with a possibly-substantial degree of flexibility around that anchor. Since many currencies today follow variants of Band-Basket-Crawl, it is important to have available a technique that can cover both dimensions, inferring weights and inferring flexibility. We try out the technique on twenty-some currencies, over the period 1980-2007. Most are currencies that have officially used baskets as anchors for at least part of this sample period. But a few are known floaters or known simple peggers. In general the synthesis technique seems to work as it should. |
| JEL: | F31 F41 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14016&r=opm |
| By: | Gavin Murphy (Economic and Social Research Institute (ESRI)); Iulia Siedschlag (Economic and Social Research Institute (ESRI)) |
| Abstract: | We estimate the euro effect on Irish export patterns using a panel of industry data over the period 1993-2004. Our innovation is to account for country and industry specific omitted trending variables bias. We find that the euro effect on Irish exports to the euro area countries relative to the rest of the trading partners of Ireland has been positive, significant and increasing since 2000. Furthermore, we find heterogeneous euro effects across industries. We find consistent significant positive euro effects for industries characterised by increasing returns to scale. |
| Keywords: | EMU,trade,Ireland |
| JEL: | F14 F15 F41 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp243&r=opm |
| By: | Stéphane Dées (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); M. Hashem Pesaran (Cambridge University and USC; The Old Schools, Trinity Lane, Cambridge CB2 1TN, United Kingdom.); L. Vanessa Smith (Centre for Financial Analysis and Policy (CFAP), Judge Business School, University of Cambridge, Trumpington Street, Cambridge CB2 1AG, UK.); Ron P. Smith (Birkbeck, University of London, Malet Street, Bloomsbury, London WC1E 7HX, UK.) |
| Abstract: | New Keynesian Phillips Curves (NKPC) have been extensively used in the analysis of monetary policy, but yet there are a number of issues of concern about how they are estimated and then related to the underlying macroeconomic theory. The first is whether such equations are identified. To check identification requires specifying the process for the forcing variables (typically the output gap) and solving the model for inflation in terms of the observables. In practice, the equation is estimated by GMM, relying on statistical criteria to choose instruments. This may result in failure of identification or weak instruments. Secondly, the NKPC is usually derived as a part of a DSGE model, solved by log-linearising around a steady state and the variables are then measured in terms of deviations from the steady state. In practice the steady states, e.g. for output, are usually estimated by some statistical procedure such as the Hodrick-Prescott (HP) filter that might not be appropriate. Thirdly, there are arguments that other variables, e.g. interest rates, foreign inflation and foreign output gaps should enter the Phillips curve. This paper examines these three issues and argues that all three benefit from a global perspective. The global perspective provides additional instruments to alleviate the weak instrument problem, yields a theoretically consistent measure of the steady state and provides a natural route for foreign inflation or output gap to enter the NKPC. JEL Classification: C32, E17, F37, F42. |
| Keywords: | Global VAR (GVAR), identification, New Keynesian Phillips Curve, Trend-Cycle decomposition. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080892&r=opm |
| By: | Lippi, Francesco; Nobili, Andrea |
| Abstract: | We consider an economy where the oil price, industrial production, and other macroeconomic variables fluctuate in response to a variety of fundamental shocks. We estimate the effects of different structural shocks using robust sign restrictions suggested by theory using US data for the 1973-2007 period. The estimates show that identifying the shock underlying the oil price change is important to predict the sign and the magnitude of its correlates with the US production. The results offer a natural explanation for the smaller correlation between oil prices and US production in the recent years compared to the seventies. |
| Keywords: | Business cycle; Oil prices; Sign Restrictions; Structural VAR |
| JEL: | C32 E3 F4 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6830&r=opm |
| By: | Christian Broda; David E. Weinstein |
| Abstract: | The empirical literature in international finance has produced three key results about international price deviations: borders give rise to flagrant violations of the law of one price, distance matters enormously for understanding these deviations, and most papers find that convergence rates back to purchasing power parity are inconsistent with the evidence of micro studies on nominal price stickiness. The data underlying these results are mostly comprised of price indexes and price surveys of goods that may not be identical internationally. In this paper, we revisit these three stylized facts using massive amounts of US and Canadian data that share a common barcode classification. We find that none of these three main stylized facts survive. We use our barcode level data to replicate prior work and explain what assumptions caused researchers to find different results from those we find in this paper. Overall, our work is supportive of simple pricing models where the degree of market segmentation across the border is similar to that within borders. |
| JEL: | F1 F15 F31 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14017&r=opm |
| By: | Michele Ca’ Zorzi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Micha? Rubaszek (National Bank of Poland, ul. ?wi?tokrzyska 11/21, 00-919 Warsaw, Poland and Warsaw School of Economics, al. Niepodleg?osci 162, 02-554 Warsaw, Poland.) |
| Abstract: | In this paper we present a novel approach to the empirical validation of the intertemporal approach to the current account. We develop a calibrated model highlighting the role of consumption smoothing and capital accumulation in the economic convergence process. After solving the model, we derive the theoretical values for the euro area countries’ current account, testing to what extent they match reality. The model explains most of the dispersion in the current account and saving ratio, though cannot equally well capture differences in the investment ratios. The conclusion that we draw is that consumption smoothing, based on expectations of economic convergence, is driving the current account of the euro area countries over medium-term horizons. Capital accumulation appears to play a less pronounced role. JEL Classification: D91, F36, F41. |
| Keywords: | General equilibrium models, intertemporal optimisation, current account, euro area. |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080895&r=opm |
| By: | Li-gang Liu (Research Department, Hong Kong Monetary Authority); Andrew Tsang (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This paper estimates pass-through of exchange rate changes to domestic inflation in Hong Kong in a two-step approach. We first estimate exchange rate pass-through to import prices and then from import price to domestic inflation using a Phillips-Curve model. We find that Hong Kong¡¦s exchange rate pass-through to import prices is relatively high compared to the OECD average, although Hong Kong also witnessed a decline of pass-through after 1991. With respect to exchange rate pass-through to domestic prices, we find that a 10% depreciation of the US dollar against all currencies except for the Hong Kong dollar would lead domestic prices to increase by 0.82 and 1.61 percent in the short run and medium run, respectively. These results are also broadly consistent with those obtained from a calibration exercise that estimates exchange rate pass-through to domestic prices via channels of the tradable and non-tradable goods. |
| Keywords: | Exchange rate pass-through, Phillips Curve, Hong Kong |
| JEL: | F3 F4 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0802&r=opm |
| By: | Kazuo Nishimura (Kyoto University - Kyoto University); Carine Nourry (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579) |
| Abstract: | In this paper we consider a Ramsey-type aggregate model with general preferences and technology, endogenous labor and factor-specific<br />productive external effects arising from average capital and labor. First, we show that indeterminacy cannot arise when there are only<br />capital externalities but that it does when there are only labor external effects. Second, we prove that only the additively-separable and linear homogeneous specifications for the utility function allow to get local indeterminacy under small externalities and plausible restrictions on the main parameters. Third, we show that the existence of sunspot fluctuations is intimately related to the occurrence of periodic cycles through a Hopf bifurcation. |
| Keywords: | Indeterminacy, endogenous cycles, infinite-horizon model,<br />endogenous labor supply, capital and labor externalities |
| Date: | 2008–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:hal:papers:halshs-00281428_v1&r=opm |
| By: | Frank Leung (Research Department, Hong Kong Monetary Authority); Philip Ng (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This paper estimates the equilibrium path of the Hong Kong dollar real effective exchange rate (REER) and compares it with the actual path of the Hong Kong dollar REER to assess the extent of real exchange rate misalignment. Empirical results from various approaches of exchange rate assessment adopted in this study generally suggest that there was no obvious evidence of exchange rate misalignment for the Hong Kong dollar in 2006. This is consistent with the observation that there were no obvious signs of macroeconomic imbalances in the Hong Kong economy. |
| Keywords: | Real effective exchange rate, Hong Kong dollar |
| JEL: | F32 F41 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0721&r=opm |
| By: | Alessandro Calza (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper tests whether the proposition that globalisation has led to greater sensitivity of domestic inflation to the global output gap (the “global output gap hypothesis”) holds for the euro area. The empirical analysis uses quarterly data over the period 1979-2003. Measures of the global output gap using two different weighting schemes (based on PPPs and trade data) are considered. We find little evidence that global capacity constraints have either explanatory or predictive power for domestic consumer price inflation in the euro area. Based on these findings, the prescription that central banks should specifically react to developments in global output gaps does not seem to be justified for the euro area. JEL Classification: E3, F4. |
| Keywords: | Globalisation, inflation, global output gap. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080890&r=opm |
| By: | Dong He (Research Department, Hong Kong Monetary Authority); Frank Leung (Research Department, Hong Kong Monetary Authority); Philip Ng (Research Department, Hong Kong Monetary Authority) |
| Abstract: | This paper studies the significance of Mainland-related shocks in determining Hong Kong money market interest rates after controlling for the influences of US variables. Analysis using a vector auto-regression model suggests that an unexpected rise in the Mainland policy interest rate, or a higher-than-expected growth in Mainland output or money supply, in general produces a positive and hump-shaped effect on the three-month HIBOR. Forecast error variance decomposition shows that US shocks still dominate, but Mainland shocks have become more important in accounting for the unexpected fluctuations in HIBOR in recent years. A historical decomposition shows that from autumn 2003 to spring 2005 the large negative spread between HIBOR and LIBOR was mainly due to Mainland factors. Thus, while the HIBOR-LIBOR spread is expected to be bounded inside a band that reflects the width of the Convertibility Zone of the Linked Exchange Rate system, Mainland-related shocks could exert a significant influence on the actual size of the spread. |
| Keywords: | Hong Kong, HIBOR, Linked Exchange Rate system |
| JEL: | E4 F36 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0717&r=opm |