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on Open MacroEconomics |
| By: | Enrique G. Mendoza |
| Abstract: | This paper shows that the quantitative predictions of a DSGE model with an endogenous collateral constraint are consistent with key features of the emerging markets' Sudden Stops. Business cycle dynamics produce periods of expansion during which the ratio of debt to asset values raises enough to trigger the constraint. This sets in motion a deflation of Tobin’s Q driven by Irving Fisher’s debt-deflation mechanism, which causes a spiraling decline in credit access and in the price and quantity of collateral assets. Output and factor allocations decline because the collateral constraint limits access to working capital financing. This credit constraint induces significant amplification and asymmetry in the responses of macro-aggregates to shocks. Because of precautionary saving, Sudden Stops are low probability events nested within normal cycles in the long run. |
| JEL: | D52 E32 E44 F32 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14444&r=opm |
| By: | Caroline M. Betts; Timothy J. Kehoe |
| Abstract: | We study the quarterly bilateral real exchange rate and the relative price of non-traded to traded goods for 1225 country pairs over 1980-2005. We show that the two variables are positively correlated, but that movements in the relative price measure are smaller than those in the real exchange rate. The relation between the two variables is stronger when there is an intense trade relationship between two countries and when the variance of the real exchange rate between them is small. The relation does not change for rich/poor country bilateral pairs or for high inflation/low inflation country pairs. We identify an anomaly: The relation between the real exchange rate and relative price of non-traded goods for US/EU bilateral trade partners is unusually weak. |
| JEL: | F31 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14437&r=opm |
| By: | Patrick A. Imam |
| Abstract: | We describe unique aspects of microstates-they are less diversified, suffer from lumpiness of investment, they are geographically at the periphery and prone to natural disasters, and have less access to capital markets-that may make the current account more vulnerable, penalizing exports and making imports dearer. After reviewing the "old" and "new" view on current account deficits, we attempt to identify policies to help reduce the current account. Probit regressions suggest that microstates are more likely to have large current account adjustments if (i) they are already running large current account deficits; (ii) they run budget surpluses; (iii) the terms of trade improve; (iv) they are less open; and (v) GDP growth declines. Monetary policy, financial development, per capita GDP, and the de jure exchange rate classification matter less. However, changes in the real effective exchange rate do not help drive reductions in the current account deficit in microstates. We explore reasons for this and provide policy implications. |
| Keywords: | Current account , Current account deficits , Investment , Capital markets , Exports , Imports , External shocks , Monetary policy , Development , Gross domestic product , Real effective exchange rates , Economic models , |
| Date: | 2008–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/233&r=opm |
| By: | Menzie D. Chinn; Shang-Jin Wei |
| Abstract: | The assertion that a flexible exchange rate regime would facilitate current account adjustment is often repeated in policy circles. In this paper, we compile a data set encompassing data for over 170 countries are included, over the 1971-2005 period, and examine whether the rate of current account reversion depends upon the de facto degree of exchange rate fixity, as measured by two popular indices. We find that there is no strong, robust, or monotonic relationship between exchange rate regime flexibility and the rate of current account reversion, even after accounting for the degree of economic development, the degree of trade and capital account openness. We also find that the endogenous selection of exchange rate regimes does not explain the observed lack of correlation. |
| JEL: | F3 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14420&r=opm |
| By: | Ramón María-Dolores (Banco de España) |
| Abstract: | This paper studies the pass-through of exchange rate changes into the prices of imports that originated inside the euro area made by some New Member States (NMSs) of the European Union and one candidate country (Turkey). I use data on import unit values for nine different product categories and bilateral imports from the euro area for each country and I estimate industry-specific rates of pass-through across and within countries using two different methodological approaches. The first one is based on Campa and González-Mínguez (2006) which estimates the short- and long-run pass through elasticities, where long-run elasticities are defined as the sum of the pass-through coefficients for the contemporaneous exchange rate and its first four lags. The second one is employed by de Bandt, Banerjee and Kozluk (2007) which suggests a long-run Engle and Granger (1987) cointegrating relationship and the possibility of structural breaks to restore the long-run in the estimation. I did not find evidence either in favour of the hypothesis of Local Currency Pricing (zero pass-through) or the hypothesis of Producer Currency Pricing (complete pass-through) for all the countries except Slovenia and Cyprus in the latter. The exchange rate pass-through ranged from 0.090 to 2.916 in the short-run and from 0.102 to 2.242 in the long-run. With reference to the results by industry the lowest values for exchange rate pass-through are in Manufacturing sectors. However, I did observe a exchange rate pass-through decline through the pricing chain and a large dependence of their economies on imported inputs. |
| Keywords: | exchange rates, pass-through, monetary union, panel cointegration |
| JEL: | F31 F36 F42 C23 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0822&r=opm |
| By: | Hilde C. Bjørnland (Department of Economics, Norwegian School of Management (BI); Jørn I. Halvorsen (Norwegian School of Economics and Business Administration) |
| Abstract: | This paper analyzes how monetary policy responds to exchange rate movements in open economies, paying particular attention to the two-way interaction between monetary policy and exchange rate movements. We address this issue using a structural VAR model that is identified using a combination of sign and short-term (zero) restrictions. Our suggested identification scheme allows for a imultaneous reaction between the variables that are observed to respond intraday to news (the interest rate and the exchange rate), but maintains the recursive order for the traditional macroeconomic variables (GDP and inflation). Doing so, we find strong interaction between monetary policy and exchange rate variation. Our results suggest more theory consistency in the monetary policy responses than what has previously been reported in the literature. |
| Keywords: | Exchange rate, monetary policy, SVAR, Bayesian estimation, sign restrictions |
| JEL: | C32 E52 F31 F41 |
| Date: | 2008–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_15&r=opm |
| By: | Rokon Bhuiyan (Queen's University) |
| Abstract: | This paper develops an open-economy Bayesian structural VAR model for Canada in order to estimate the effects of monetary policy shocks, using the overnight target rate as the policy instrument. I allow the policy variable and the financial variables of the model to interact simultaneously with each other and with a number of other home and foreign variables. When I estimate this over-identified VAR model, I find that the policy shock transmits to real output through both the interest rate and exchange rate channels, and the shock does not induce a departure from uncovered interest rate parity. I also find that the impulse response of the monetary aggregate, M1, does not exactly follow the impulse response of the target rate. Finally, I find that Canadian variables significantly responds to the US federal funds rate shock, and external shocks are an important source of Canadian output fluctuations. |
| Keywords: | Monetary policy, structural VAR, block exogeneity, impulse response |
| JEL: | C32 E52 F37 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1183&r=opm |
| By: | M. Ayhan Kose; Eswar Prasad; Marco Terrones |
| Abstract: | 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: | Capital flows , Productivity , Production growth , Capital account , Foreign direct investment , Development , Debt , Economic models , |
| Date: | 2008–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/242&r=opm |
| By: | Herman Z. Bennett; Ziga Zarnic |
| Abstract: | The real effective exchange rate (REER) is the most commonly used measure for assessing international competitiveness. We develop a methodology to estimate the REER that incorporates two distinctive elements that are not considered in the current literature and apply it to the Mediterranean Quartet (MQ) of Greece, Italy, Portugal, and Spain, whose common pattern of real appreciation has created concern in policy and academic circles. The two elements that we add to the existing literature are (i) product heterogeneity when identifying each country's international competitors and their weights and (ii) a comprehensive treatment of services exports. Our refined measure suggests a modest reduction in the observed REER gap between the MQ countries and the other euro area countries. In particular, considering product heterogeneity and services exports implies a lower real appreciation from 1998 to 2006 on the order of 2-3 percent for all MQ countries. These are difference-in-difference estimates relative to the results obtained for the rest of the euro area countries using the same methodology. |
| Keywords: | Competition , Greece , Italy , Portugal , Spain , Real effective exchange rates , Exports , Euro Area , Services sector , |
| Date: | 2008–10–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/240&r=opm |
| By: | Etienne Farvaque (University of Lille 1); Norimichi Matsueda (Kwansei Gakuin University) |
| Abstract: | According to Bordo and James [2008, “A long term perspective on the Euro, ” NBER Working Paper, No. 13815], history shows that multinational monetary unions have dissolved mainly under the consequences of external shocks. This paper provides a theoretical model demonstrating their point. |
| Keywords: | Monetary Union, Optimum Currency Areas, External Shocks. |
| JEL: | E58 E61 F33 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:kgu:wpaper:42&r=opm |
| By: | Céline Allard; Nada Choueiri; Susan Schadler; Rachel van Elkan |
| Abstract: | Large inflows from the European Union to the New Member States are likely to significantlyimpact macroeconomic outcomes. In this paper, we use the IMF's Global Integrated Monetaryand Fiscal model (GIMF) to analyze the impact of the transfers and show the conditionsunder which they would help speed up convergence. We find that the EU funds need to bedirected predominantly to investment rather than to income support and that to bestaccompany the EU fund inflows, the policy-mix would need to combine counter-cyclicalpolicy with a strong commitment to the existing monetary regime. |
| Keywords: | European Economic and Monetary Union , Capital flows , Monetary policy , Investment policy , Capital inflows , Economic integration , Exchange rate regimes , Working Paper , |
| Date: | 2008–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/223&r=opm |
| By: | Mustapha Sadni Jallab (United Nations Economic Commission for Africa and African Trade Policy Center); Monnet Benoît Patrick Gbakou (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France); René Sandretto (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France) |
| Abstract: | This paper aims at analyzing the possible influence of foreign direct investment (FDI) on economic growth in the particular case of Middle East and North African countries (MENA). During the last years, the relation between FDI and growth in LDCs has been discussed extensively in the economic literature. However, the view that FDI stimulates economic growth does not receive an unanimous support. In order to access empirically this relation in MENA countries, we use a dynamic panel procedure with observations per country over the period 1970-2005. To improve efficiency, we use the standard “difference” and “system” GMM and 2SLS estimators. Our findings show that there is no independent impact of FDI on economic growth. The growth-effect of FDI does not also depend on degree of openness to trade and income per capita. But, the positive impact of FDI on economic growth depends on macroeconomic stability: there is a threshold effect of annual percentage change of consumer prices. |
| Keywords: | Foreign Direct Investment, Macroeconomic stability, Economic Growth, Middle East and North Africa, Two-stage Least Squares, Generalized Moments Methods |
| JEL: | C32 C33 F21 F23 F43 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0817&r=opm |
| By: | Melisso Boschi; Alessandro Girardi |
| Abstract: | This paper quantifies the relative contribution of domestic, regional and international factors to the fluctuation of domestic output in six key Latin American (LA) countries: Argentina, Bolivia, Brazil, Chile, Mexico and Peru. Using quarterly data over the period 1980:1-2003:4, a multi-variate, multicountry time series model was estimated to study the economic interdependence among LA countries and, in addition, between each of them and the three world largest industrial economies: the US, the Euro Area and Japan. Falsifying a common suspicion, it is shown that the proportion of LA countries’ domestic output variability explained by industrial countries’ factors is modest. By contrast, domestic and regional factors account for the main share of output variability at all simulation horizons. The implications for the choice of the exchange rate regime are also discussed. |
| JEL: | C32 E32 F31 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-33&r=opm |