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on Open MacroEconomics |
| By: | Kose, M. Ayhan (International Monetary Fund); Prasad, Eswar (Cornell University); Terrones, Marco E. (International Monetary Fund) |
| Abstract: | Economic theory has identified a number of channels through which openness to international financial flows could raise productivity growth. However, while there is a vast empirical literature analyzing the impact of financial openness on output growth, far less attention has been paid to its effects on productivity growth. This paper provides a comprehensive analysis of the relationship between financial openness and total factor productivity (TFP) growth using an extensive dataset that includes various measures of productivity and financial openness for a large sample of countries. We find that de jure capital account openness has a robust positive effect on TFP growth. The effect of de facto financial integration on TFP growth is less clear, but this masks an important and novel result. We find strong evidence that FDI and portfolio equity liabilities boost TFP growth while external debt is actually negatively correlated with TFP growth. The negative relationship between external debt liabilities and TFP growth is attenuated in economies with higher levels of financial development and better institutions. |
| Keywords: | financial openness, capital account liberalization, capital flows, external assets and liabilities, foreign direct investment, portfolio equity, debt, total factor productivity |
| JEL: | F41 F36 F43 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3634&r=opm |
| By: | Deren Unalmis; Ibrahim Unalmis; Derya Filiz Unsal |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0802&r=opm |
| By: | Antoine Berthou (CES, University Paris 1 and Paris School of Economics, 106-112, Bd de l’Hôpital - 75647 Paris Cedex 13, France.) |
| Abstract: | The reaction of exports to real exchange rate movements can differ according to the nature of the destination country. We derive and estimate a gravity equation for 20 OECD exporting countries and 52 developed and developing importing countries. We test how trade costs dampen the effect of real exchange rate movements on bilateral exports, and show that the elasticity on the real exchange rate is reduced when (i) the destination country has a low quality of institutions, (ii) this country is more distant, and (iii) the efficiency of customs is low in both the importing and exporting countries. These results are highly consistent with the existence of an hysteresis effect of real exchange rate movements on trade, as suggested by Baldwin and Krugman (1989). JEL Classification: F10, F32, D73. |
| Keywords: | Trade, Exchange Rate Movements, Institutions. |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080920&r=opm |
| By: | Enrique Martinez-Garcia; Jens Søndergaard |
| Abstract: | This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing-to-market akin to those in Chari, et al. (2002) and Steinsson (2008) to illustrate the link between real exchange rate dynamics and what the model assumes about physical capital. We show that adding capital accumulation to the model facilitates consumption smoothing and significantly impedes the model's ability to generate volatile real exchange rates. Our analysis, therefore, caveats the results in Steinsson (2008) who shows how real shocks in a sticky-price model without capital can replicate the observed real exchange rate dynamics. Finally, we find that the CKM (2002) persistence anomaly remains robust to several alternative capital specifications including set-ups with variable capital utilization and investment adjustment costs (see, e.g., Christiano, et al., 2005). In summary, the PPP puzzle is still very much alive and well. |
| Keywords: | Globalization ; Foreign exchange ; International finance ; Forecasting ; Mathematical models |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:17&r=opm |
| By: | Landon, Stuart; Smith, Constance |
| Abstract: | Aggregate and sector-level investment equations that incorporate the exchange rate are estimated for a panel of 17 OECD countries using an error correction methodology. A real currency depreciation is found to have a significant negative effect on aggregate investment in both the short run and the long run. This effect is negative in all sectors in the short run, is significant in six of nine sectors, and is particularly persistent in service sectors, sectors that do not generally benefit directly from an expansion of demand following a currency depreciation. Movements in another explanatory variable, the real wage, have an insignificant impact on investment in the short run in most sectors, but a rise in the real wage has a significant negative long run effect on aggregate investment and on investment in six of nine sectors. A simulation shows that movements in the real exchange rate and the real wage can explain a large proportion of cross-country differences in investment. |
| Keywords: | investment; exchange rate |
| JEL: | E22 F3 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9958&r=opm |
| By: | Mark M. Spiegel |
| Abstract: | A number of studies have recently noted that monetary integration in the European Monetary Union (EMU) has been accompanied by increased financial integration. This paper examines the channels through which monetary union increased financial integration, using international panel data on bilateral international commercial bank claims from 1998-2006. I decompose the relative increase in bilateral commercial bank claims among union members following monetary integration into three possible channels: A "borrower effect," as a country's EMU membership may leave its borrowers more creditworthy in the eyes of foreign lenders; a "creditor effect," as membership in a monetary union may increase the attractiveness of a nation's commercial banks as intermediaries, perhaps through increased scale economies enjoyed by commercial banks themselves or through an improved regulatory environment after the advent of monetary union; and a "pairwise effect," as joint membership in a monetary union increases the quality of intermediation between borrowers and creditors when both are in the same union. This pairwise effect could be attributed to mitigated currency risk stemming from monetary integration, but may also indicate that monetary union integration increases borrowing capacity. I decompose the data into a series of difference-in-differences specifications to isolate these three channels and find that the pairwise effect is the primary source of increased financial integration. This result is robust to a number of sensitivity exercises used to address concerns frequently associated with difference-in-differences specifications, such as serial correlation and issues associated with the timing of the intervention. |
| Keywords: | Banks and banking - Europe ; Euro ; European Monetary System (Organization) |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-11&r=opm |
| By: | Mark M. Spiegel |
| Abstract: | The literature appears to have reached a consensus that financial globalization has had a "disciplining effect" on monetary policy, as it has reduced the returns from--and hence the temptation for--using monetary policy to stabilize output. As a result, monetary policy over recent years has placed more emphasis on stabilizing inflation, resulting in reduced inflation and greater output stability. However, this consensus has not been accompanied by convincing empirical evidence that such a relationship exists. One reason is likely to be that de facto measures of financial globalization are endogenous, and that instruments for financial globalization are elusive. In this paper, I introduce a new instrument, financial remoteness, as a plausibly exogenous instrument for financial openness. I examine the relationship between financial globalization and median inflation levels over an 11 year cross-section from 1994 through 2004, as well as a panel of 5-year median inflation levels between 1980 and 2004. The results confirm a negative relationship between median inflation and financial globalization in the base specification, but this relationship is sensitive to the inclusion of conditioning variables or country fixed effects, precluding any strong inferences. |
| Keywords: | Monetary policy ; Inflation (Finance) ; Globalization |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-10&r=opm |
| By: | Sophie Guilloux; Enisse Kharroubi |
| Abstract: | The aim of this paper is to evaluate the impact of globalization, if any, on inflation and the inflation process. We estimate standard Phillips curve equations on a panel of OECD countries over the last 25 years. While recent papers have concluded that globalization has had no significant impact, this paper highlights that trying to capture globalization effects through simple measures of import prices and/or imports to GDP ratios can be misleading. To do so, we try to extend the analysis following two different avenues. We first separate between commodity and non-commodity imports and show that the impact on inflation of commodity import price inflation is qualitatively different from the impact of noncommodity import price inflation, the former depending on the volume of commodity imports while the latter being independent of the volume of non-commodity imports. This first piece of evidence highlights the role of contestability and the insufficiency of trade volume statistics to properly describe the impact of globalization. This leads us to adopt a more systematic approach to capture the contents and not only the volume of trade. Focusing on the role of intra-industry trade, we provide preliminary evidence that this variable can account (i) for the low pass-through of import price to consumer price and (ii) for the flattening of the Phillips curve, i.e. the lower sensitivity of inflation to changes in output gap. We hence conclude that different facets of globalization, especially changes in the nature of goods traded, can be an important channel through which globalization affects the inflation process. |
| Keywords: | Globalization ; Inflation (Finance) ; Time-series analysis ; International trade |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:18&r=opm |
| By: | Roland Beck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ebrahim Rahbari (London Business School, Economics Department, Regent’s Park, London, NW1 4SA, United Kingdom.) |
| Abstract: | We analytically derive optimal central bank portfolios in a minimum variance framework with two assets and "transaction demands" caused by sudden stops in capital inflows. In this model, the transaction demands become less important relative to traditional portfolio objectives as debt to reserve ratios decrease. We empirically estimate optimal dollar and euro shares for 24 emerging market countries and find that optimal reserve portfolios are dominated by anchor currencies and, at current debt to reserve ratios, introducing transactions demand has a relatively modest effect. We also find that euro and dollar bonds act as "safe haven currencies" during sudden stops. Dollars are better hedges for global sudden stops and for regional sudden stops in Asia and Latin America, while the euro is a better hedge for sudden stops in Emerging Europe. We reproduce qualitatively the recent decline in the share of the dollar in emerging market reserves and find that the denomination of foreign currency debt has very little importance for optimal reserve portfolios. JEL Classification: F31, F32, F33, G11. |
| Keywords: | Foreign exchange reserves, currency composition, sudden stops. |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080916&r=opm |
| By: | Zbigniew Polanski (Narodowy Bank Polski and Warsaw School of Economics, ul. Swietokrzyska 11/21, 00-919 Warsaw, Poland.); Adalbert Winkler (Frankfurt School of Finance and Management, Sonnemannstrasse 9-11, 60314 Frankfurt am Main, Germany.) |
| Abstract: | This paper reviews selected aspects of economic relations between the EU and Russia, focusing on the impact that the last two waves of EU enlargement have had on Russia, as well as the role of the euro in Russia. The analysis suggests that if EU enlargement has had any diversion effects on trade between the EU and Russia at all, they have been minimal, while robust growth in both the EU and Russia, as well as high oil and gas prices, has boosted trade. Likewise, FDI to and from Russia has increased, with the direct impact of enlargement again difficult to disentangle from other factors. Use of the euro by Russian residents and authorities in international transactions has increased, albeit at an uneven pace. While, in general, the US dollar remains the major foreign currency used by Russian residents, the euro has gained importance as an anchor and reserve currency in Russian exchange rate policies. This has happened in the context of an overall monetary policy strategy aiming at a gradual shift from an exchange rate-oriented monetary policy to inflation targeting. JEL Classification: F14, F15, F21, F36. |
| Keywords: | Economic integration, trade diversion, foreign direct investment, international currencies. |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080093&r=opm |