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on Open MacroEconomics |
| By: | Stéphane Dées (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Matthias Burgert (University of Frankfurt, House of Finance, Grüneburgplatz 1, D-60323 Frankfurt am Main, Germany.); Nicolas Parent (Bank of Canada, 234 Wellington Street, Ottawa, Ontario K1A 0G9, Canada.) |
| Abstract: | This paper aims at showing heterogeneity in the degree of exchange rate pass-through to import prices in major advanced economies at three different levels: 1) across destination markets ; 2) across types of exporters (distinguishing developed economy from emerging economy exporters); and 3) over time. Based on monthly data over the period 1991-2007, the results show first that large destination markets exhibit the lowest degree of pass-through. The degree of pass-through for goods imported from emerging economies is also significantly lower than for those from developed economies. Regarding the evolution over time, no clear change in pricing behaviours can be identified and particular events, like large exchange rates depreciations during the Asian crisis, seem to influence the degree of pass-through related to imports from emerging economies. JEL Classification: E31, F3, F41. |
| Keywords: | Pricing to Market, Exchange rate pass-through, Import price modeling. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080933&r=opm |
| By: | Filippo di Mauro (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Rasmus Rueffer (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Irina Bunda (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In addition to its direct effects on the global trading and production structure, the ongoing process of globalisation may have important implications for the interaction of exchange rates and the overall economy. This paper presents evidence regarding possible changes in the role of exchange rates in a more globalised economy. First, it analyses the link between exchange rates and prices, showing that there is at most a moderate decline in exchange rate pass-through for the euro area. Next, it turns to the effect of exchange rate changes on trade flows. The findings indicate that the responsiveness of euro area exports to exchange rate changes may have declined somewhat as a result of globalisation, reflecting mainly shifts in the geographical and sectoral composition of trade flows. The paper also provides a firm-level analysis of the impact of exchange rate changes on corporate profits, which suggests that overall this relationship appears to be relatively stable over time, although there are important crosscountry differences. In addition, it studies the overall impact of exchange rates on GDP and the potential role of valuation effects as a transmission channel in the case of the euro area. JEL Classification: E3, F15, F31. |
| Keywords: | Globalisation, exchange rate, trade exchange rate pass-through, valuation effects. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080094&r=opm |
| By: | Erauskin-Iurrita, Inaki |
| Abstract: | A good deal of time has been devoted to whether more open economies have bigger governments (compensation hypothesis) or sma-ller ones (efficiency hypothesis). However, most of the research has been focused mainly on trade openness, which is clearly restrictive in a world with increasingly integrated financial markets. This paper offers an alternative view to the relationship between financial openness and some key economic variables (the size of the public sector, ...), based on a portfolio approach. A central result of the model is that an open economy implies a higher consumption-wealth ratio, lower growth, higher welfare, and a higher size of the public sector than in a closed economy due to the risk diversification that an open economy allows. The empirical evidence for 22 OECD countries in the period 1970-2004 broadly supports the main results of the model. |
| Keywords: | Financial openness; consumption-wealth ratio; growth; welfare; optimal size of the public sector. |
| JEL: | F41 F43 |
| Date: | 2008–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10564&r=opm |
| By: | Christiane Nickel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Isabel Vansteenkiste (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper analyses the empirical relationship between fiscal policy and the current account of the balance of payments and considers how Ricardian equivalence changes this relationship. To do so, we estimate a dynamic panel threshold model for 22 industrialised countries in which the relationship between the current account and the government balance is allowed to alter according to the government debt to GDP ratio. The results show that for countries with debt to GDP ratios up to 90% the relationship between the government balance and the current account is positive, i.e. an increase in the fiscal deficit leads to a higher current account deficit. For very high debt countries this relationship however turns negative but insignificant, suggesting that a rise in the fiscal deficit does not result in a rise in the current account deficit. Implicitly this result suggests that households in very hight debt countries tend to become Ricardian. Estimating the same model for the 11 largest euro area countries shows that the reationship between the govnerment balance and the current account turns statistically insignificant when the debt to GDP ratio exceeds 80%. JEL Classification: F32, E62, F41. |
| Keywords: | Fiscal policy, current account, panel threshold model. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080935&r=opm |
| By: | Christian Dreger |
| Abstract: | The real interest partity (RIP) condition combines two cornerstones in international finance, uncovered interest parity (UIP) and ex ante purchasing power parity (PPP). The extent of deviation from RIP is therefore an indicator of the lack of product and financial market integration. This paper investigates whether the nominal exchange rate regime has an impact on RIP. The analysis is based on 15 annual real interest rates and covers a long time span, 1870-2006. Four subperiods are distinguished and linked to fixed and flexible exchange rate regimes: the Gold Standard, the interwar float, the Bretton Woods system and the current managed float. Panel integration techniques are used to increase the power of the tests. Cross section correlation is embedded via common factor structures. The results suggest that RIP holds as a long run condition irrespectively of the exchange rate regimes. Adjustment towards RIP is affected by the institutional framework and the historical episode. Half lives of shocks tend to be lower under fixed exchange rates and in the first part of the sample, probably due to higher price flexibility before WWII. Although barriers to foreign trade and capital controls were substantially removed after the collapse of the Bretton Woods system, they did not lead to lower half lives during the managed float. |
| Keywords: | Real interest parity, nominal exchange rate regime, panel unit roots, common factors |
| JEL: | C32 F21 F31 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp819&r=opm |
| By: | Lukasz A. Drozd; Jaromir B. Nosal |
| Abstract: | This paper develops a theory of pricing-to-market driven by marketing and bargaining frictions. Our key innovation is a capital theoretic model of marketing in which relations with customers are valuable. In our model, producers search and form long-lasting relations with their customers, and marketing helps overcome the search frictions involved in forming such matches. In the context of international business cycle patterns, the model accounts for observations that are puzzles for a large class of theories: (i) pricing-to-market, (ii) positive correlation of aggregate real export and import prices, (iii) excess volatility of the real exchange rate over the terms of trade, and (iv) low short-run and high long-run price elasticity of international trade flows. The behavior of quantities is shown to be on par with standard international business cycle theories that, in contrast to our model, assume low intrinsic elasticity of substitution between domestic and foreign goods. |
| Keywords: | Business cycles ; Prices ; International business enterprises |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:411&r=opm |
| By: | Ippei Fujiwara (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ippei.fujiwara@boj.or.jp)); Keisuke Otsu (Assistant Professor, Sophia University, Faculty of Liberal Arts and formerly, Economist, Institute for Monetary and Economic Studies (E-mail: k-otsu@sophia.ac.jp)); Masashi Saito (Economist, Research and Statistics Department, Bank of Japan (E-mail: masashi.saitou@boj.or.jp)) |
| Abstract: | Three decades have passed since China dramatically opened up to the global market and began to catch up rapidly with leading economies. In this paper we discuss the effects of Chinafs opening-up and rapid growth on the welfare of both China and the rest of the world (ROW). We find that the opening-up per se is welfare improving for China but has had little impact on the ROW given a balanced trade constraint. The opening-up of China is beneficial to the ROW if it leads to significant productivity growth in China. Also, Chinafs balanced trade policy after the opening-up has helped the ROW rather than China. |
| Keywords: | Productivity, Terms of Trade, Growth, Open Economy |
| JEL: | E13 F41 O47 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:08-e-22&r=opm |
| By: | Alessia Campolmi (Central European University, Magyar Nemzeti Bank) |
| Abstract: | From the last quarter of 2001 to the third quarter of 2005 the real price of oil increased by 103%. Such an increase is comparable to the one experienced during the oil shock of 1973. At the same time, the behaviour of real GDP growth, Consumer Price inflation (CPI inflation), GDP Deflator inflation, real wages and wage inflation in the U.S. in the 1970s was very different from the one exhibited in the 2000s. What can explain such a difference? Within a two-country framework where oil is used in production, two kinds of shocks are analyzed: (a) a reduction in oil supply, (b) a persistent increase in foreign productivity (as proxy for the experience of China in the last years). It is shown that, while the 1970s are consistent with a supply shock, the shock to foreign productivity generates dynamics close to the one observed in the 2000s. |
| Keywords: | oil price, open economy, demand and supply shocks. |
| JEL: | E12 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2008/5&r=opm |
| By: | Juan Carlos Cuestas; Paulo Jose Regis |
| Abstract: | The aim of this paper is to analyse the empirical fulfilment of the PPP in Australia (1977-2004). Previous research focuses on the presence of structural breaks and fails to find any support to the PPP (Darne and Hoarau, 2008, Henry and Olekalns, 2002). In contrast, we find that the PPP hypothesis holds once we account for a more general specification of the Nonlinear Deterministic components based on a Chebishev polynomials approximation. |
| Keywords: | PPP, Real exchange rates, Unit roots, nonlinearities |
| JEL: | C32 F15 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:nbs:wpaper:2008/3&r=opm |
| By: | Gianluca Cafiso (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper assesses the Euro’s influence upon European trade by estimating two different indicators. The first is the so-called “Rose Effect”, while the second is the “Border Effect”. The former measures how much a country within a currency union trades more with its partners than with non-member countries, the latter measures the integration of a country with its trade partners. This study of the Euro’s influence by means of the Border Effect is a novelty in the literature, it reveals that the Euro’s influence upon trade is not so clear as papers focused only on the Rose Effect claim. This casts doubts about the consequences of the Euro introduction for the European Single Market. Both indicators are estimated by means of a gravity model for bilateral trade flows using a panel of manufacture exports among twenty-four OECD countries. JEL Classification: F10, F14, F15. |
| Keywords: | Euro, European Integration, Trade, Rose Effect, Border Effect. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080941&r=opm |
| By: | Fidrmuc, Jarko; Batorova, Ivana |
| Abstract: | We analyse the business cycles in China and in selected OECD countries between 1992 and 2006. We show that, although negative correlation dominates for nearly all countries, we can also see large differences for various frequencies of cyclical developments. On the one hand, nearly all OECD countries show positive correlations of the very short-run developments that may correspond to intensive supplier linkages. On the other hand, business cycle frequencies (cycles with periods between 1.5 and 8 years) are typically negative. Nevertheless, countries facing a comparably longer history of intensive trading links tend to show also slightly higher correlations of business cycles with China. |
| Keywords: | business cycles, synchronisation, trade, FDI, dynamic correlation |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:rp2008-02&r=opm |
| By: | Juan David Prada Sarmiento |
| Abstract: | This paper analyses the role of a costly financial system in the transmission of monetary policy. The new-keynesian model for a small open economy is extended with a simple financial system based in Hamann and Oviedo (2006). The presence of the financial intermediation naturally allows the introduction of standard policy instruments: the repo interest rate and the compulsory requirement of reserves. The model is calibrated to match key steady-state ratios of Colombia and is used to evaluate the alternative policy instruments. The financial system plays an important role in the transmission mechanism of the monetary policy, and determines the final effects on aggregated demand and inflation rates of exogenous modifications of the policy instruments. The monetary policy conducted through the repo interest rate has the standard effects predicted by the new-keynesian framework. But changes in the compulsory reserve requirement rate may generate, under different scenarios, totally different reactions on economic activity, and little quantitative effects on inflation rates and aggregate demand. Therefore this last policy instrument appears to be uneffective and unreliable. |
| Date: | 2008–09–22 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:005010&r=opm |
| By: | Filippo di Mauro (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Katrin Forster (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Against the background of increasing competition and other significant structural changes implied by globalisation, maintaining and enhancing competitiveness has evolved into one of the prime concerns in most countries. Following up on previous work (see in particular ECB Occasional Papers No. 30 and No. 55), this Occasional Paper examines the latest developments and prospects for the competitiveness and trade performance of the euro area and the euro area countries. Starting from an analysis of most commonly used, traditional competitiveness indicators, the paper largely confirms the findings of previous studies that there have been substantial adjustments in euro area trade. Euro area firms have taken advantage of the new opportunities offered by globalisation, and have at the same time been increasingly challenged by emerging economies. This is primarily reflected in the loss of export market shares which have been recorded over the last decade. While these can partly be related to the losses in the euro area’s price competitiveness, further adjustment also seems warranted with regard to the export specialisation. Compared with other advanced competitors, the euro area remains relatively more specialised in labourintensive categories of goods and has shown only a few signs of a stronger specialisation in research-intensive goods. Nevertheless, the paper generally calls for a more cautious approach when assessing the prospects for euro area competitiveness, as globalisation has made it increasingly difficult to define and measure competitiveness. Stressing the need to take a broader view on competitiveness, specifically with a stronger emphasis on productivity performance, the paper also introduces a more elaborate framework that takes into account the interactions between country-specific factors and firm-level productivity. It thus makes it possible to construct more broadly defined competitiveness measures. Pointing to four key factors determining the global competitiveness of euro area countries – market accessibility, market size, technological leadership of firms and institutional set-up – the analysis provides further arguments for continuing efforts to increase market integration and strengthen the competitive environment within Europe as a mean of enhancing resource allocation and coping with the challenges globalisation creates. JEL Classification: F15, F43, O52 |
| Keywords: | Globalisation, competitiveness, productivity |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080097&r=opm |