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on Open MacroEconomics |
| By: | Eswar S. Prasad; Raghuram Rajan |
| Abstract: | Cross-country regressions suggest little connection from foreign capital inflows to more rapid economic growth for developing countries and emerging markets. This suggests that the lack of domestic savings is not the primary constraint on growth in these economies, as implicitly assumed in the benchmark neoclassical framework. We explore emerging new theories on both the costs and benefits of capital account liberalization, and suggest how one might adopt a pragmatic approach to the process. |
| JEL: | F21 F31 F36 F43 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14051&r=opm |
| By: | Deren Unalmis, Ibrahim Unalmis and Derya Filiz Unsal |
| Abstract: | Since the beginning of 2000s the world economy has witnessed a sub-stantial increase in oil prices, which is seen to be an important source of economic fluctuations, causing high inflation, unemployment and low or negative growth rates. Recent experience, however, has not validated this view. Despite rising oil prices, world output growth has been strong, and although inflation has recently been increasing, it is relatively much lower compared with the 1970s. This paper focuses on the causes of oil price increases and their macroeconomic effects. Different from most of the recent literature on the subject, which understands the price of oil to be an exogenous process, we model the price of oil endogenously within a dynamic stochastic general equilibrium (DSGE) framework. Specifically, using a new Keynesian small open economy model, we analyse the effects of an increase in the price of oil caused by an oil supply shock and an oil demand shock. Our results indicate that the effects of an oil demand shock and an oil supply shock on the small open economy are quite different. In addition, we investigate the sensitivity of the general equilibrium outcomes to the degrees of oil dependence and openness, as well as the strength of the response of monetary policy authority to the inflation. Finally, we evaluate the welfare implications of alternative monetary policy regimes. |
| Keywords: | Oil price, small open economy, demand and supply shocks |
| JEL: | C68 E12 F41 F42 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:08/13&r=opm |
| By: | KOBAYASHI Keiichiro; NUTAHARA Kengo |
| Abstract: | A news-driven business cycle is a business cycle in which positive news about the future causes a current boom defined as simultaneous increases in consumption, labor, investment, and output. Standard real business cycle models do not generate it. In this paper, we find that a fairly popular market friction, sticky prices, can be a source of a news-driven business cycle and that it can be generated due to news about future technology growth, technology level, and expansionary monetary policy shock. The key mechanism is that markups vary through nominal rigidities when the news arrives. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:08018&r=opm |
| By: | Dees, S.; Pesaran, M.H.; Smith, L.V.; Smith, R.P. |
| 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. |
| Keywords: | Global VAR (GVAR), identification, New Keynesian Phillips Curve, Trend-Cycle decomposition. |
| JEL: | C32 E17 F37 F42 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0803&r=opm |
| By: | Gregory Clark; Kevin H. O'Rourke; Alan M. Taylor |
| Abstract: | For two decades, the consensus explanation of the British Industrial Revolution has placed technological change and the supply side at center stage, affording little or no role for demand or overseas trade. Recently, alternative explanations have placed an emphasis on the importance of trade with New World colonies, and the expanded supply of raw cotton it provided. We test both hypotheses using calibrated general equilibrium models of the British economy and the rest of the world for 1760 and 1850. Neither claim is supported. Trade was vital for the progress of the industrial revolution; but it was trade with the rest of the world, not the American colonies, that allowed Britain to export its rapidly expanding textile output and achieve growth through extreme specialization in response to shifting comparative advantage. |
| JEL: | F11 F14 F43 N10 N70 O40 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14077&r=opm |
| By: | Juraj Antal; Frantisek Brazdik |
| Abstract: | In this paper, we investigate the effects of an anticipated future change in monetary policy regime in small open economies targeting either inflation or the exchange rate. The announcement of a future change in the monetary policy regime triggers an immediate change in the behavior of households and firms. As a result the economy starts to behave differently even though the current monetary policy rule remains the same for the whole period before the monetary policy regime change. Thus, the behavior of economic agents over the transitory period to the new monetary policy rule depends not only on the current monetary policy rule in this transitory period, but also on the anticipated future monetary policy regime. Given a common future monetary policy regime, the behavior of inflation and exchange rate targeting economies converges after the announcement. |
| Keywords: | Macroeconomics, new Keynesian DSGE models, small open economy,monetary policy rules, regime change. |
| JEL: | E17 E31 E52 E58 E61 F02 F41 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2007/15&r=opm |
| By: | Chan, Tze-Haw; Chong, Lee Lee; Khong, Wye Leong Roy |
| Abstract: | Using monthly frequency data from 1981 to 2005, we test for the potential mean reversion of Japan-US real exchange rates using newly improved unit root tests allowing for endogenous (unknown) break(s) in the linear as well as non-linear manner. Both countries have contributed vital proportion in global trading on top of being the major trading partner to each other since 1960s. We identify structural breaks in 1985 and 1994 respectively via the Lumsdaine and Papell (1997)’s linear test, but the results were against the PPP hypothesis. The Saikkonen and LÄutkepohl, (2002)’s test, however, provides sufficient supports for non-linear adjustment of real exchange towards long run PPP. In addition, stronger evidence for PPP is found in the post-1994 period, in conjunction with the small persistence of real exchange deviations (half-life less than a year). Also, the exchange rate misalignment is less evident after the Plaza Accord 1985. In brief, our findings reveal that the Japanese authority has shown some form of PPP-oriented rule as a basis for their exchange rate policies, in the presence of structural break(s) and non-linearity. |
| Keywords: | Real Exchange Rates; Endogenous Breaks; Non-linearity; Half-life |
| JEL: | C52 C12 N15 F31 |
| Date: | 2008–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3406&r=opm |
| By: | Oxana Babetskaia-Kukharchuk |
| Abstract: | This paper aims at estimating the exchange rate pass-through (ERPT) for the Czech Republic. The existing empirical literature does not come to a consensus about the degree of pass-through to Czech inflation. Since there is no unique approach regarding how to measure ERPT, we use various specifications found in the pass-through literature for the Czech Republic. In addition, we estimate the pass-through along the distribution chain in the spirit of McCarthy (2007). We try to explore the properties of exchange rate shock transmission into Czech consumer prices by comparing impulse responses among 11 specifications estimated on data transformed in monthly differences and in annual rates. Equilibrium pass-through is estimated with the help of the VEC model. In addition, we try to account for possible variation in time. The simplest approach is a re-estimation of VAR models on two sub-periods. Our second strategy is the estimation of the error correction equation with the Kalman filter. Finally, we explore how the pass-through differs between tradable (3 sub-groups) and non-tradable goods. We find that the speed of exchange rate shock transmission to all prices is quite high. However, in absolute terms, ERPT does not exceed 25 – 30%. |
| Keywords: | Exchange rate pass-through, inflation, Kalman filter, VAR, VECM. |
| JEL: | E31 E52 E58 F31 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2007/12&r=opm |
| By: | Chit, Myint Moe; Rizov, Marian; Willenbockel, Dirk |
| Abstract: | This paper examines the impact of bilateral real exchange rate volatility on real exports of five emerging East Asian countries among themselves as well as to thirteen industrialised countries. We explicitly recognize the specificity of the exports between the emerging East Asian and industrialised countries and employ a generalized gravity model that combines a traditional long-run export demand model with gravity type variables. In the empirical analysis we use a panel comprising 25 years of quarterly data and perform unit-root and cointegration tests to verify the long-run relationship among the regression variables. The results provide strong evidence that exchange rate volatility has a negative impact on the exports of emerging East Asian countries. These results are robust across different estimation techniques and do not depend on the variable chosen to proxy exchange rate uncertainty. |
| Keywords: | Trade; uncertainty; exchange rate fluctuations; East Asia; |
| JEL: | O53 O24 F14 F31 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9014&r=opm |
| By: | Robert J. Sonora (Department of Economics, School of Business Administration, Fort Lewis College); Josip Tica (Faculty of Economics and Business, University of Zagreb) |
| Abstract: | In this paper we investigate purchasing power parity in the CEE and post-War former-Yugoslav states during EU integration process 1994-2006. This work stems from longer term tests of real exchange rate convergence in the former Yugoslavia. This period is of interest on two fronts: First, it investigates real exchange dynamics in the aftermath of war financed in part through seignorage; and second, we investigate the level of economic integration with the European Union following the break up of the former Yugoslavia. Given the short run nature of the available data we use panel unit root tests with and without structural breaks. Preliminary results suggest that real exchange rates between the former Yugoslav states and Germany are stationary when breaks are accounted for. Given the size of nominal shocks in the region, particularly in the early 1990s, preliminary results indicate that convergence to the long run equilibrium is relatively quick. |
| Keywords: | purchasing power parity, Economic Integration, panel unit root tests |
| JEL: | E31 F22 |
| Date: | 2008–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:zag:wpaper:0804&r=opm |
| By: | Irene Andreou; Gilles Dufrenot; Alain Sand-Zantman; Aleksandra Zdzienicka-Durand |
| Abstract: | We propose a measure of the probability of crises associated with an aggregate indicator, where the percentage of false alarms and the proportion of missed signals can be combined to give an appreciation of the vulnerability of an economy. In this perspective, the important issue is not only to determine whether a system produces true predictions of a crisis, but also whether there are forewarning signs of a forthcoming crisis prior to its actual occurrence. To this end, we adopt the approach initiated by Kaminsky, Lizondo and Reinhart (1998), analyzing each indicator and calculating each threshold separately. We depart from this approach in that each country is also analyzed separately, permitting the creation of a more “custom-made” early warning system for each one. |
| Keywords: | Currency Crisis, Early Warning System, Composite Indicator, Eastern Europe. |
| JEL: | F31 F47 |
| Date: | 2007–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2008-901&r=opm |