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on Open MacroEconomics |
| By: | Charles Engel; John H. Rogers |
| Abstract: | Survey data show that the expected growth rates of consumption across countries vary widely and are not highly correlated. This data contradicts the simplest of open-economy models in which there is a freely traded non- state-contingent bond and purchasing power parity holds. We explore two alternative explanations for the finding: that households in each country in effect face different ex ante real interest rates or that there are significant credit constraints, so that expected consumption growth rates are driven largely by expected income growth. The empirical evidence strongly supports the latter hypothesis. These findings challenge the modeling of consumption that is at the heart of many, if not most, macroeconomic models. |
| Keywords: | Capital market ; Econometric models ; International finance |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:949&r=opm |
| By: | James M. Nason; John H. Rogers |
| Abstract: | Exchange rates have raised the ire of economists for more than 20 years. The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out of sample forecasts. Engel and West (2005) show that these failures can be explained by the standard-present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root. This paper generalizes the Engel and West (EW) hypothesis to the larger class of open economy dynamic stochastic general equilibrium (DSGE) models. The EW hypothesis is shown to hold for a canonical open economy DSGE model. We show that all the predictions of the standard-PVM carry over to the DSGE-PVM. The DSGE-PVM also yields an unobserved components (UC) models that we estimate using Bayesian methods and a quarterly Canadian-U.S. sample. Bayesian model evaluation reveals that the data support a UC model that calibrates the discount factor to one implying the Canadian dollar-U.S. dollar exchange rate is a random walk dominated by permanent cross-country monetary and productivity shocks. |
| Keywords: | Foreign exchange rates |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:948&r=opm |
| By: | Alexander Mihailov; Fabio Rumler; Johann Scharler |
| Abstract: | This paper applies GMMestimation to assess empirically the small open-economy New Keynesian Phillips Curve derived in Galí and Monacelli (2005). We obtain a testable specification where fluctuations in the terms of trade enter explicitly, thus allowing a comparison of the relevance of domestic versus external determinants of CPI inflation dynamics. For most countries in our sample the expected relative change in the terms of trade emerges as a more relevant inflation driver than the contemporaneous domestic output gap. Overall, our results indicate some, albeit moderate, support for the tested relationship based on data from ten OECD countries typically classified as open economies. |
| Keywords: | New Keynesian Phillips Curve, small open economies, terms of trade fluctuations, inflation dynamics, GMM estimation |
| JEL: | C32 C52 E31 F41 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:jku:econwp:2008_17&r=opm |
| By: | Gabriel Fagan (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Vitor Gaspar (Bureau of European Policy Advisers, European Commission, Rue de la Loi 100, B-1049 Brussels, Belgium.) |
| Abstract: | The move to monetary union in Europe led to convergence of interest rates among the participating countries. This was associated with notable cross-country differences in the behaviour of key macroeconomic aggregates. Compared to the low interest rate countries, former high interest rate countries experienced a boom in domestic demand, a deterioration of the current account and appreciation of the real exchange rate. This paper documents the key stylised facts of this experience and provides a compact two-country model, based on the Blanchard-Yaari setup, to analyze this phenomenon. This model, though simple, is able to broadly capture the main qualitative features of the adjustment. Using this model, we show that the creation of the monetary union leads to an increase in welfare for all generations in both country groups. JEL Classification: F36, E21, F32. |
| Keywords: | euro area, interest rate convergence, overlapping generations model. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080946&r=opm |
| By: | Ceyhun Bora Durdu; Serdar Sayan |
| Abstract: | This paper analyzes the implications of remittance fluctuations for various macroeconomic variables and Sudden Stops. The paper employs a quantitative two-sector model of a small open economy with financial frictions calibrated to Mexican and Turkish economies, two major recipients, whose remittance receipts feature opposite cyclical characteristics. We find that remittances dampen the business cycles in Mexico, whereas they amplify the cycles in Turkey. Their quantitative effects in the long run, approximated by the stochastic steady state are mild. In the short run, however, remittances have quantitatively large impacts on the economy, when the economy is borrowing constrained. This is because agents in the economy cannot adjust their precautionary wealth to sudden tightening in credit, hence, fluctuations in remittances get magnified through an endogenous debt-deflation mechanism. Our findings suggest that procyclical (or countercyclical) remittances can play a significant deepening (or mitigating) role for Sudden Stops. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:946&r=opm |
| By: | Li, Wu |
| Abstract: | This paper presents a discrete-time growth model to describe the dynamics of a multi-agent economy, and the model consists of production process, exchange process, price and technology adjustment processes etc. Technologies of agents in each period are represented by a technology matrix pair, and some properties of Perron-Frobenius eigenvalues and eigenvectors of technology matrix pairs are discussed. An exchange model is also developed to serve as the exchange part of the growth model. And equilibrium paths of the growth model are proved to be balanced growth paths sharing a unique normalized price vector. Though this paper focuses mainly on the case of n agents and n goods, the growth model can also deal with the case of m agents and n goods. A numerical example with 6 agents and 4 goods is given, which describes the dynamics of a two-country economy and has endogenous price fluctuations and business cycles. |
| Keywords: | von Neumann’s expanding economic model; input-output model; dynamic general equilibrium; disequilibrium; multi-country economic model |
| JEL: | B51 C68 O41 D58 F43 D51 C67 D5 E32 C02 F1 |
| Date: | 2008–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11302&r=opm |
| By: | Sek, Siok Kun; Kapsalyamova, Zhanna |
| Abstract: | The paper undertakes a comparative empirical analysis on the effects of shocks on domestic prices in four Asian countries before and after the financial crisis of 1997. We apply two different estimation methodologies, namely a structural VAR and a single equation approach. The results of the two methods are consistent, although the magnitude of the elasticities of the exchange rate pass-through are different due to the inclusion of different variables, lag terms and different assumptions made in both methods. The results show that the degrees of the exchange rate pass-through are different across countries and over time. In most cases, the pass-through rates are incomplete. The degree of the exchange rate pass-through is the highest on import prices, moderate on PPI and is the lowest on CPI. In some cases, the pass-through rates on CPI are even negative. The effect of the import price shock is stronger as compared to that of the exchange rate shock in determining the movement of the domestic prices in these countries. Trade openness has a weak correlation with the degree of the exchange rate pass-through. |
| Keywords: | domestic prices; exchange rate pass-through; SVAR; single equation approach |
| JEL: | C32 F41 C22 |
| Date: | 2008–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11130&r=opm |
| By: | Matthieu Bussière (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tuomas Peltonen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper estimates export and import price equations for 41 countries –including 28 emerging market economies. Further, it relates the estimated elasticities to structural factors and tests for statistical breaks in the relation between trade prices and exchange rates. Results indicate that (i) the elasticity of trade prices in emerging markets is sizeable, but not significantly higher than in advanced economies; (ii) such elasticity is primarily influenced by macroeconomic factors such as the exchange rate regime and the inflationary environment, although microeconomic factors such as product differentiation also play a role; (iii) export and import price elasticities tend to be strongly correlated across countries; (iv) pass-through to import prices has declined in some advanced economies, noticeably the United States; this is consistent with a rise in pricing-to-market in several EMEs and especially with a change in the geographical composition of U.S. imports. JEL Classification: F10, F30, F41. |
| Keywords: | emerging market economies, exchange rate pass-through, pricing-to-market, local and producer currency pricing, exchange rate regime. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080951&r=opm |
| By: | Thierry Bracke (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Martin Schmitz (Trinity College Dublin, Department of Economics and Institute for International Integration Studies, College Green, Dublin 2, Ireland.) |
| Abstract: | Global financial integration unlocks a huge potential for international risk sharing. We examine the degree to which international equity holdings act as a risk sharing device in industrial and emerging economies. We split equity returns into investment income (dividend distribution) and capital gains to investigate which of the two channels delivers the largest potential for risk sharing. Our evidence suggests that net capital gains are a more potent channel of risk sharing. They behave in a countercyclical way, that is they tend to be positive (negative)when the domestic economy is growing more slowly (rapidly) than the rest of the world. Countries with more countercyclical net capital gains experience improved consumption risk sharing. The empirical analysis furthermore suggests that these risk sharing properties of net capital gains have increased through time, in particular in the 1990s and early-2000s, on the back of a declining equity home bias and financial market deepening. JEL Classification: F21, F30, F36. |
| Keywords: | International risk sharing, International portfolio diversification, Consumption smoothing, Cross-border investment, Valuation effects. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080938&r=opm |
| By: | Robert A. Blecker |
| Abstract: | This paper finds that shocks to net financial inflows, world oil prices, the U.S. growth rate, and the lagged real exchange rate explain most of the fluctuations in Mexico’s annual growth since 1979. The paper also estimates how the effects of these external constraints have changed since Mexico’s liberalization policies of the late 1980s and the formation of NAFTA in 1994. Estimates of an investment function and other tests show that growth drives investment but not conversely, in the short run. Inflows of foreign direct investment have positive effects on investment, but the coefficients are small and not always significant. |
| Keywords: | Latin America, Mexico, external shocks, economic growth, investment, financial inflows |
| JEL: | O54 O11 E22 F43 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:amu:wpaper:0408&r=opm |
| By: | Stephanie E. Curcuru; Charles P. Thomas; Francis E. Warnock |
| Abstract: | The sustainability of the large and persistent U.S. current account deficits is one of the biggest issues currently being confronted by international macroeconomists. Some very plausible theories suggest that the substantial global imbalances can continue in a benign manner, other equally plausible theories predict a disorderly resolution, and in general it is very difficult to discern between competing theories. To inform the debates, we view competing theories through the perspective of the relative reliability of the data the theories rely on. Our analysis of the dark matter theory is cursory; from a relative reliability perspective, it fails as it is built on the assumption that an item that is largely unmeasured is the most accurate component of the entire set of international accounts. Similarly, the best data currently available suggest that U.S. returns differentials are much smaller than implied by the exorbitant privilege theory. Our analysis opens up questions about potential inconsistencies in the international accounts, which we address by providing rough estimates of various holes in the accounts. |
| Keywords: | International finance ; International trade |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:947&r=opm |
| By: | Claudia M. Buch; Paola Monti |
| Abstract: | Many theoretical models show that trade openness has positive welfare implications. Yet, openness might affect different social groups and regions asymmetrically, even within a given country. We use Italian regional data to answer the question whether trade openness affects within-country income differentials. In Italy, the more affluent regions are internationally more open than poorer ones not only with respect to trade in goods, but also with respect to FDI and international migration. Prima facie, there is a positive correlation between openness and per capita income. Studying this relationship empirically requires taking into account the endogenous component of openness. We apply panel cointegration and instrumental variables techniques to account for the endogeneity of trade. Our results show a positive link between trade openness and the level of income per capita. |
| Keywords: | Openness, growth, regional income disparities, Italian regions |
| JEL: | F2 F43 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:iaw:iawdip:41&r=opm |
| By: | Boriss Siliverstovs (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Dieter Schumacher (DIW Berlin) |
| Abstract: | This study analyzes the stability of the distance coefficient values over time in the generalized gravity equation of Bergstrand (1989) using both aggregate and disaggregated trade flows among 22 OECD countries recorded for the sample period covering 1970 until 2000. We estimate the gravity equation both in its traditional form as well as by taking into account multilateral resistance as suggested in Baier and Bergstrand (2007). First of all, we find that the missing globalization puzzle, typically observed in empirical gravity models for aggregate trade flows, largely disappears when one estimates a gravity model using disaggregated trade data at the level of individual industries. Secondly, we document that accounting for multilateral price resistance alone can provide some evidence against the missing globalization puzzle. At the same time, the results obtained for a traditional specification of the gravity equation emphasizing the importance of disaggregated trade flows in explaining the distance puzzle remain largely intact. We also illustrate how the aggregation bias could have contributed to a typical finding of a non-declining trade-deterring role of distance in the existing literature. |
| Keywords: | Gravity model, missing globalization puzzle, distance coefficient, multilateral resistance |
| JEL: | F12 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:08-209&r=opm |
| By: | Chan, Tze-Haw; Khong, Wye Leong Roy |
| Abstract: | Currency crises and financial instability in the 1990s have increased the needs of regional cooperation, hence leading to the proposition of optimal currency area (OCA). But only if shocks are symmetric, the cost of relinquish the flexible monetary policy is to be outweighed by the benefits of forming OCA. To tackle the issue, this paper studies the extent of business cycle correlation and output linkages among fifteen Asia Pacific economies during 1961-2004. The real outputs series which sourced from the Penn World Data were estimated in standardized international dollars to construct business cycles based on the Christiano-Fitzgerald (2003)’s asymmetric band-pass filtering method. On the whole, the selected APEC members (especially ASEANs and NIEs) have achieved some important degree of business cycle co-fluctuations since the 1990s and further enhanced after 1997, most possibly attributed to the improved intra-trading and cross-boarder investments. For the US-Japan-ASEAN5 series, a dynamic analysis was conducted using the Autoregressive Distributed Log bounds test and the Unrestricted Error Correction Model (UECM) representation advanced in Pesaran et al. (2002). Nonetheless, the idiosyncratic and common shocks in ASEAN economies are more identical to the Japanese experience rather than the US’s. The overall finding has signified the brighter likelihood of economic cooperation and regional currency arrangements among APEC members. |
| Keywords: | Business Cycle Correlation; Output linkages; OCA; Asia Pacific; Band-pass Filtering; UECM |
| JEL: | C51 E32 O47 C22 |
| Date: | 2007–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11305&r=opm |
| By: | Olga Bohachova |
| Abstract: | This paper explores the links between macroeconomic conditions and individual bank risk. Using capital adequacy ratios as a broad measure of risk sustainability, a linear mixed effects model for a large international panel of banks for the years 2001-2005 is estimated. In OECD countries, banks tend to hold higher capital ratios during business cycle highs, this effect being even stronger for a subsample of EU banks. In non-OECD countries, periods of higher economic growth are associated with lower capital ratios. This indicates procyclical behavior. Banks accumulate risks more rapidly in economically good times and some of these risks materialize as asset quality deteriorates during subsequent recessions. Furthermore, higher inflation rates are associated with higher capital ratios of banks, implying that inflation-induced economic uncertainty stimulates banks to restrict credit. As far as regulatory and institutional environment is concerned, econometric estimates show that banks in non-OECD countries with deposit insurance tend to be more risky, whereas evidence of a negative relationship between concentration of the banking sector and banks’ risk taking is statistically less robust. |
| Keywords: | international banking, macroeconomic conditions, banking risk |
| JEL: | F37 F41 G21 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:iaw:iawdip:44&r=opm |
| By: | Iuliana Matei (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | This article studies the features of co-movements of prices and production between six CEECs recently joined the EU and the euro zone. More precisely, based partially on the methodology suggested by Alesina, Barro and Tenreyro [2002], we evaluate the size and the persistence of prices and outputs shocks between each CEECs and euro zone. Results will contribute to the debate around the participation of the new members to the EMU. |
| Keywords: | European monetary integration, co-movements, AR models, CEECs. |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:paris1:halshs-00335025_v1&r=opm |
| By: | Peter Kriesler (School of Economics, The University of New South Wales); Moritz Cruz (Universidad Nacional Autónoma de México) |
| Abstract: | During the last decade, developing (and some developed) economies have accumulated large amounts of international reserves, mainly for precautionary reasons. This phenomenon has been coupled with moderate economic growth. The resources being amassed largely overwhelm protective needs, there is an excess of resources that is being wasted, and which could be utilised for alternative productive projects, namely to promote growth. If insufficient aggregate demand can largely explain low growth, it is clear that this excess of international reserves can be used to stimulate aggregate demand. This paper argues that the excess of international reserves represents a potential source to boost growth. |
| Keywords: | international reserves; aggregate demand; economic growth |
| JEL: | F30 F40 O11 O19 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2008-16&r=opm |