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on Open MacroEconomics |
| By: | Michael B. Devereux; Alan Sutherland |
| Abstract: | This paper develops a simple approximation method for computing equilibrium portfolios in dynamic general equilibrium open economy macro models. The method is widely applicable, simple to implement, and gives analytical solutions for equilibrium portfolio positions in any combination or types of asset. It can be used in models with any number of assets, whether markets are complete or incomplete, and can be applied to stochastic dynamic general equilibrium models of any dimension, so long as the model is amenable to a solution using standard approximation methods. We first illustrate the approach using a simple two-asset endowment economy model, and then show how the results extend to the case of any number of assets and general economic structure. |
| JEL: | F3 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14372&r=opm |
| By: | Cédric Tille; Eric van Wincoop |
| Abstract: | We develop a new theory of international capital flows based on dispersed information across individual investors. There is extensive evidence of information heterogeneity within and across countries, which has proven critical to understanding asset price behavior. We introduce information dispersion into an open economy dynamic general equilibrium portfolio choice model, and emphasize two implications for capital flows that are specific to the presence of dispersed information. First, gross and net capital flows become partially disconnected from publicly observed fundamentals. Second, capital flows (particularly gross flows) contain information about future fundamentals, even after controlling for current fundamentals. We find that these implications are quantitatively significant and consistent with data for industrialized countries. |
| JEL: | F32 F36 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14390&r=opm |
| By: | Serpil Tekin; Stephen J. Turnovsky; Valerie Cerra |
| Abstract: | A dynamic dependent-economy model is developed to investigate the role of the real exchange rate in determining the effects of foreign aid. If capital is perfectly mobile between sectors, untied aid has no longrun impact on the real exchange rate. A decline in the traded sector occurs because aid, being denominated in traded output, substitutes for exports in financing imports. While untied aid causes short-run real exchange appreciation, this response is very temporary and negligibly small. Tied aid, by influencing sectoral productivity, does generate permanent relative price effects. The analysis, which employs extensive numerical simulations, emphasizes the tradeoffs between real exchange adjustments, long-run capital accumulation, and economic welfare, associated with alternative forms of foreign aid. |
| Keywords: | Working Paper , Aid flows , Real effective exchange rates , Imports , Fiscal policy , External debt , Capital accumulation , Trade , Economic models , |
| Date: | 2008–08–28 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/204&r=opm |
| By: | Mario J. Crucini; M. Ayhan Kose; Christopher Otrok |
| Abstract: | We examine the driving forces of G-7 business cycles. We decompose national business cycles into common and nation-specific components using a dynamic factor model. We also do this for driving variables found in business cycle models: productivity; measures of fiscal and monetary policy; the terms of trade and oil prices. We find a large common factor in oil prices, productivity, and the terms of trade. Productivity is the main driving force, with other drivers isolated to particular nations or sub-periods. Along these lines, we document shifts in the correlation of the G-7 component of each driver with the overall G-7 cycle. |
| JEL: | E3 E32 F4 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14380&r=opm |
| By: | Olga Arratibel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Reiner Martin (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Davide Furceri (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper analyzes the relation between exchange rate volatility and several macroeconomic variables, namely real per capita output growth, the credit cycle, the stock of inward foreign direct investment (FDI) and the current account balance, in the Central and Eastern European EU Member States. Using panel estimations for the period between 1995 and 2006, we find that lower exchange rate volatility is associated with higher growth (for relatively less financially developed economies), higher stocks of FDI (for relatively more open economies), higher current account deficits, and a more volatile development of the credit to GDP ratio. JEL Classification: F3, F4, F5. |
| Keywords: | EU, Exchange Rate Volatility, Growth, FDI, Credit, Current Account, Catching-up, Convergence. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080929&r=opm |
| By: | Nathan S. Balke; Stephen P. A. Brown; Mine K. Yücel |
| Abstract: | The effect of oil price shocks on U.S. economic activity seems to have changed since the mid-1990s. A variety of explanations have been offered for the seeming change?including better luck, the reduced energy intensity of the U.S. economy, a more flexible economy, more experience with oil price shocks and better monetary policy. These explanations point to a weakening of the relationship between oil prices shocks and economic activity rather than the fundamentally different response that may be evident since the mid-1990s. Using a dynamic stochastic general equilibrium model of world economic activity, we employ Bayesian methods to assess how economic activity responds to oil price shocks arising from supply shocks and demand shocks originating in the United States or elsewhere in the world. We find that both oil supply and oil demand shocks have contributed significantly to oil price fluctuations and that U.S. output fluctuations are derived largely from domestic shocks. |
| Keywords: | Petroleum industry and trade ; Petroleum products - Prices ; International trade ; Economic conditions - United States |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:20&r=opm |
| By: | Denise Côté; Carlos de Resende |
| Abstract: | In this paper, we develop a theoretical model which identifies four channels-import prices, competition with domestic suppliers and workers, and commodity prices-through which priceand wage-setting conditions in country j may affect inflation in country i. We estimate a dynamic inflation equation derived from the theoretical model using a quarterly dataset of eighteen OECD countries over the 1984-2006 period. Although our methodology can be applied to any pair of countries, we focus on the effect of China on the inflation rate of other countries. Our results suggest that while China's negative effect on global inflation has been quantitatively modest, it has increased in absolute terms since the early 2000s. We also find evidence that, for most countries examined, competition with domestic suppliers has been the most important channel. |
| Keywords: | International topics |
| JEL: | E22 E32 E44 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-35&r=opm |
| By: | Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga |
| Abstract: | Volatile and persistent real exchange rates are observed not only in aggregate series but also in the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot replicate the time-series properties of the law-of-one-price deviations. We extend their sticky price model by combining good specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). Under a reasonable assumption on the money growth process, we show that the model fully explains both persistence and volatility of the good-level real exchange rates. Furthermore, our framework allows for multiple cities within a country. Using a panel of U.S.-Canadian city pairs, we estimate a dynamic price adjustment process for each 165 individual goods. The empirical result suggests that the dispersion of average time of information update across goods is comparable to that of average time of price adjustment. |
| JEL: | D40 E31 F31 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14381&r=opm |
| By: | Brahima Coulibaly; Jonathan Millar |
| Abstract: | This study assesses the role of the Asian financial crisis of the late 1990s in the emergence and persistence of the large current account surpluses across non-China emerging Asia, which have been a significant counterpart to the U.S. current account deficit. Using panel data encompassing nearly 3,750 firms, we trace the current account surpluses to a marked and broad-based decline in corporate expenditures on fixed investment in the aftermath of the crisis that cuts across a wide spectrum of countries, industries, and firms. The lower corporate spending in turn depressed aggregate investment rates, widened the saving-investment gap, and allowed the region to turn into a net exporter of capital. We then consider the factors behind this reduction in postcrisis corporate investment. While weaker firm-level fundamentals in the postcrisis period seem to explain part of the drop in investment rates, ongoing re-structuring owing to large debts accumulated and excess investment undertaken in the run-up to the crisis has been the main source of restraint postcrisis corporate investment. The results suggest that even after a decade, the effect of the financial crisis is still affecting corporate investment decisions in emerging Asia, and that as the restructuring completes its course, investment rates will likely rise to contribute to a gradual reduction in the region's current account surpluses. |
| Keywords: | Financial crises - Asia |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:942&r=opm |
| By: | Louis Be Duc (Banque de France, 39, rue Croix-des-Petits-Champs, 75049 Paris Cedex 01, France.); Frank Mayerlen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Pierre Sola (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This occasional paper describes the monetary presentation of the euro area balance of payments and its use. The monetary presentation is a tool for assessing the impact of balance of payments transactions involving non-bank residents on monetary developments. The paper explains in detail the principle underlying this approach, i.e. the link between the external counterpart of money, as reflected in the balance sheet of the banking sector, and the balance of payments. From a statistical perspective, it is shown that the monetary presentation of the balance of payments, which is based on international statistical standards, may be applied in any country or currency union. With regard to euro area statistics, the paper elaborates on the practical implementation of the monetary presentation, while also describing a few approximations and remaining statistical challenges. Finally, the paper assesses how the monetary presentation of the balance of payments has been used for analysing monetary developments in the euro area, and highlights the significant impact of balance of payments transactions on monetary dynamics in certain periods. JEL Classification: E51, F40 |
| Keywords: | Monetary analysis, capital flows, balance of payments |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080096&r=opm |
| By: | Romain Restout (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | This paper explores the consequences of introducing a monopolistic competition in an intertemporal two-sector small open economy model which produces traded and non traded goods. It is assumed that the non traded sector is the locus of the imperfectly competition. Our analysis shows that markup depends on the composition of aggregate non traded demand and is therefore endogenously determined in the model. Calibrating the model with OECD parameters, the effects of fiscal and technological shocks are simulated. Our findings are as follows. First, the model is consistent with the observed saving-investment correlations found in the data. Second, unlike the perfectly framework and in accordance with empirical studies, fiscal shocks cause real appreciation of the relative price of non traded goods, which in turn enlarges the responses of current account and investment. Third, the model is consistent with the empirical report that technological shocks result in current account deficits and investment rises. Fourth, the strength of the relative price appreciation following sector productivity differentials, i.e. the Balassa-Samuelson effect, is affected by the monopolistic competition hypothesis. Assume perfect competition when it is not, biases upward estimates of the Balassa-Samuelson effect. |
| Keywords: | fiscal policy ; monopolistic competition ; productivity |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00260868_v2&r=opm |
| By: | David Cook; Woon Gyu Choi |
| Abstract: | Using the theory of optimal local currency pricing, this paper constructs a structural equation to estimate the rate at which foreign producer prices pass through the local currency prices of imported goods in the U.S. This can be viewed as measuring exchange rate pass-through, in line with price stickiness in the New Keynesian Phillips curve literature. We estimate the structural equation using the generalized methods of moments for consistent estimates of exchange rate pass-through. We find that a model with a mix of local currency pricing and producer currency pricing fits the data best. The estimate of price stickiness in import prices is comparable to existing estimates of domestic price stickiness. |
| Date: | 2008–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/213&r=opm |
| By: | Maher Hasan; Jemma Dridi |
| Abstract: | This paper examines the impact of oil-related income, among other fundamentals, on the equilibrium real effective exchange rate (ERER) in Syria. After reviewing the evolution of the Syrian multiple exchange rate regime since 1960 and assessing alternative measures for the exchange rate, the paper analyzes the impact of oil-related income on the ERER in the context of a behavioral equilibrium exchange rate model. The analysis concludes that ERER appreciates with higher oil-related income, productivity and net foreign assets, but, at odds with the conventional wisdom, depreciates with higher government expenditures given that an increase in expenditures usually translates into higher imports and weaker current account position. In light of the projected real shocks associated with the depletion of oil and the change in other fundamentals in the context of the ongoing transition to a market economy, a more flexible regime would serve Syria better in the future. |
| Keywords: | Syrian Arab Republic , Real effective exchange rates , Oil production , Oil revenues , Productivity , Government expenditures , Imports , Current account balances , External shocks , Exchange systems , Working Paper , |
| Date: | 2008–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/196&r=opm |
| By: | Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank); Marek Rusnák (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | In this paper, we provide evidence on the nature and the relative importance of domestic and foreign shocks in Slovak economy based on block-restriction vector autoregression model in 1999-2007. We document well-functioning monetary transmission mechanism in Slovakia. Subject to various sensitivity checks, we find that contractionary monetary policy shock has a temporary negative effect on the degree of economic activity and price level. We find that using output gap instead of GDP alleviates the price puzzle. In general, prices are driven mainly by foreign factors and the European Central Bank monetary policy shock on Slovak prices is more powerful than that of the National Bank of Slovakia. Slovak central bank interest rate policy seems to follow the ECB’s interest rates. On the other hand, spectacular Slovak economic growth is primarily driven by domestic factors suggesting the positive role of recently undertaken Slovak economic reforms. |
| Keywords: | small open economy, foreign shocks, monetary policy, Slovakia, euro area |
| JEL: | E58 F41 F42 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2008_21&r=opm |
| By: | Jun Il Kim; Aqib Aslam; Alun H. Thomas |
| Abstract: | This paper introduces a methodology for assessing external balance in countries with large stocks of non-renewable resources based on oil stock data, and applies it to selected oil producing countries. The methodology uses a stock approach (instead of the more traditional flow approach) to estimate the equilibrium non-oil current account consistent with optimal consumption smoothing. One of the benefits of the stock approach is that geological data for oil reserves can be used to estimate oil wealth; however, the methodology makes the estimated non-oil current account norm very sensitive to oil price projections. Based on an oil price about US$70 per barrel prevailing in the summer of 2007, the baseline estimates indicate that the non-oil current accounts for most of the countries in the sample are broadly in equilibrium. By the same token, using oil price projections as of the summer of 2008 implies large disparities between the equilibrium non-oil current account position and the medium term forecast for all countries in the sample except for Malaysia. |
| Keywords: | Nonoil sector , Oil producing countries , Current account balances , Oil prices , Exchange rate assessments , Economic models , Working Paper , |
| Date: | 2008–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/198&r=opm |
| By: | Barbara Pfeffer (Universität Siegen, Department of Economics) |
| Abstract: | The goal of the present paper is two-fold. First, I explore the impact of different trade patterns on industrial specialisation and consequently on business cycle co-movements between and within different regions. Especially, I emphasize industrial specialisation as a result of intra- or inter-industry trade. Furthermore, I justify the predictions of different theoretical trade models on the basis of my results. Second, I analyse the degree of risk-sharing between and within the regions in dependence of the previous step. In particular, the purpose is to clarify direct and indirect channels between trade, specialisation, business cycle co-movements and risk sharing. The expectations are that countries within a region with homogeneous specialisations show intra-industry trade. Hence regional business-cycles converge. Consequently, risk-sharing within these regions is not possible. These countries tend to be more internationally financially integrated than regionally. Inter-industry trade arises in countries within regions with heterogeneous specialisation. As a result regional business-cycles diverge. Now, countries can share risk within the region. Regional financial integration is stronger for these countries than international financial integration. One further question is: do the same patterns create risk sharing also in the means of consumption co-movements between or within a region? |
| Keywords: | Trade, Specialization, Risk Sharing |
| JEL: | F15 F36 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:200813&r=opm |
| By: | Roman Horváth (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank); Kamila Koprnická (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank) |
| Abstract: | In this paper, we examine the determinants of inflation differentials in a panel of the new European Union member states vis-à-vis the euro area in 1997-2007. Our main results are as follows. Exchange rate appreciation and higher price level in the new EU members is associated with narrower inflation differential vis-à-vis the euro area, while fiscal deficit and positive output gap seem to contribute to higher inflation differential. Nevertheless, the effect of price convergence on inflation differentials is found to be dominating in these countries suggesting that a country with price level 20% below the euro area average is likely to exhibit inflation nearly one percentage point above the euro area. Overall, our results indicate that real convergence factors rather than cyclical variation are more important for inflation developments in the new EU members, as compared to the euro area. |
| Keywords: | inflation differentials, price convergence, exchange rate, New EU members, panel data |
| JEL: | E31 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2008_24&r=opm |
| By: | Ayla Ogus (Department of Economics, Izmir University of Economics); Niloufer Sohrabji (Department of Economics, Simmons College) |
| Abstract: | We test for sustainability of Turkey’s current account position between 1992 and 2007 using the intertemporal solvency model of Hakkio and Rush (1991) and Husted (1992). This approach examines the relationship between exports and imports+ (which include imports, net interest and unilateral transfer payments). Cointegration between inflows and outflows implies that the intertemporal budget constraint is satisfied. We use the Johansen and the Gregory and Hansen (1996) cointegration tests to determine linkages between exports and imports+ in Turkey. Using the Johansen test we find no cointegration and thus reject intertemporal solvency of the current account for this period. If we allow for a structural break in the cointegrating relation using the Gregory Hansen procedure we do find evidence of cointegration between the two series. This result can be used to estimate the long-run relationship between exports and imports+ using dynamic OLS and test for weak and strong sustainability of the current account position. We find evidence for weak sustainability but reject strong sustainability of the Turkish current account position in recent years. |
| Keywords: | Current account sustainability, intertemporal budget constraint, Turkey, cointegration |
| JEL: | F32 F41 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:izm:wpaper:0805&r=opm |
| By: | Fathi Ali; Norbert Fiess; Ronald MacDonald |
| Abstract: | In this paper the role of institutions in determining foreign direct investment (FDI) is investigated using a large panel of 107 countries during 1981 and 2005. We find that institutions are a robust predictor of FDI and that the most significant institutional aspects are linked to propriety rights, the rule of law and expropriation risk. Using a novel data set, we also study the impact of institutions on FDI at the sectoral level. We find that institutions do not have a significant impact on FDI in the primary sector but that institutional quality matters for FDI in manufacturing and particularly in services. We also provide policy implications for institutional reform. |
| Keywords: | Foreign direct investment, institutions, sectoral FDI |
| JEL: | F3 F4 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2008_26&r=opm |