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on Open MacroEconomics |
| By: | Philip R. Lane |
| Abstract: | This essay addresses the macroeconomics of international financial integration from a European perspective. We first analyse the role of international financial integration in promoting economic convergence among members of the European Union. Next, we analyse the implications of increasing financial linkages, both within Europe and between Europe and other regions in the world economy. Finally, we assess how increased financial integration has altered the economics of external adjustment. |
| Date: | 2008–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp265&r=opm |
| By: | Thomas Plümper and Eric Neumayer |
| Abstract: | Recent scholarship on exchange rate regime choice seeks to explain why some countries fix their exchange rate to an anchor currency, but it neglects the question to which currency countries peg. This article posits that an understanding of the choice of anchor currency also improves political economists’ understanding of the decision for an exchange rate peg itself. Drawing on the ‘fear of floating literature’, we argue that the choice of anchor currency is mainly determined by the degree of dependence of the potentially pegging country on imports from the country or currency union issuing the key currency as well as the degree of dependence on imports from the currency area, that is, from other countries which have already pegged to that key currency. This is because an exchange rate depreciation against the main trading partners’ currency increases domestic inflationary pressures due to exchange-rate pass-through. In addition, our theory claims that central bank independence and de facto fixed exchange rates are complements (rather than substitutes) since independent central banks care more than governments about imported inflation. Analyzing a pooled cross-section of 106 countries over the period 1974 to 2005, we find ample evidence in support of our theoretical predictions. |
| Date: | 2008–11–04 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp264&r=opm |
| By: | Joshua Aizenman; Yothin Jinjarak |
| Abstract: | This paper evaluates the degree to which current account patterns are explained by the variables suggested by the literature, and reflects on possible future patterns. We start with panel regressions explaining the current account of 69 countries during 1981-2006. We identify an asymmetric effect of the US as the "demander of last resort:" a 1% increase in the lagged US current account deficit is associated with 0.5% increase of current account surpluses of countries running surpluses, but with insignificant changes of current account deficits of countries running deficits. Overall, the panel regressions account for not more than 2/3 of the variation. We apply the regression results to assess China's current account over the next six years, projecting a large drop in its account/GDP surpluses. |
| JEL: | F15 F32 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14453&r=opm |
| By: | A. Prasad; Charles Frederick Kramer; Hélène Poirson |
| Abstract: | The question of how India should adapt monetary policy to ongoing financial globalization has gained prominence with the recent surge in capital inflows. This paper documents the degree to which India has become financially globalized, both in absolute terms and relative to emerging and developed countries. We find that despite a relatively low degree of openness, India's domestic monetary conditions are highly influenced by global factors. We then review the experiences of countries that have adapted to financial globalization, drawing lessons for India. While we find no strong relationship between the degree of stability in monetary conditions and the broad monetary policy regime, our findings suggest that improvements in monetary operations and communication?sometimes prompted by a shift to an IT regime?have helped stabilize broader monetary conditions. In addition, the experience of countries which used non-standard instruments suggests that room to regulate capital flows effectively through capital controls diminishes as financial integration increases. |
| Keywords: | India , Monetary policy , Globalization , Capital inflows , Economic conditions , Domestic liquidity , Liquidity management , |
| Date: | 2008–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/131&r=opm |
| By: | Helmut Herwartz; Henning Weber |
| Abstract: | Microfoundations of the euro’s effect on euro area trade hinge on the timing, the speed and the size of adjustment in trade costs. We estimate timing, speed and size of adjustment in trade costs for sectoral trade data. Our approach allows for sector specific impacts of trade costs on sectoral trade while controlling for unobserved but time-variant variables at the sector level. We find that, due to falling trade costs, trade within the euro area increases between the years 2000 and 2003 by 10 to 20 percent compared with trade between European countries that are not members of the euro area. Adjustment of individual sectors is extremely fast whereas aggregate adjustment spreads out because different sectors adjust at distinct times. |
| Keywords: | Euro trade effect, gravity model, smooth transition, Kalman filter |
| JEL: | C31 C33 F13 F15 F33 F42 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2008-065&r=opm |
| By: | Di Nino Virginia (IUHEID, The Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | This paper develops an open economy firm-heterogeneous model where the combination of market rigidities and exchange rate uncertainty acts like a barrier to trade and modifies a firm's optimal choice in terms of production and pricing. The existence of price and labour rigidities, coupled with imperfect financial development and exchange rate uncertainty, separates incumbent firms into (1) domestic producers, (2) exporters setting the price in national currency and (3) more productive exporters pricing in foreign currency. The model predicts that only where financial development is limited a reduction in exchange rate uncertainty raises a firm's profit, lowers prices, and induces new firms to export. Fully financially integrated countries are insulated from exchange rate risk. |
| Keywords: | exchange rate uncertainty; firm heterogeneity; market rigidity; financial restraints. |
| JEL: | F1 F12 F16 F15 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heiwp10-2008&r=opm |
| By: | Maria Demertzis; Andrew Hughes Hallett; Nicolien Schermer |
| Abstract: | This paper investigates the impact of increasing globalization on labor markets, in terms of wage inflation and the distribution of activity across regions. Specifically, we study the effects of aggregation in the labor markets on the distribution of employment and inflationary pressures, where there are differences in market structures and transmission mechanisms underpinned by relatively immobile labor. To demonstrate these ideas, we take the European experience as a “laboratory to show what can be expected from globalization in the labor markets in practice. Using models of wage leadership vs. locational competition, we examine the extent and strength of aggregation effects on labor market costs using a sample of data from 1983 to 2007 which covers the period of the creation of the Euro. We find that the aggregation effect has decreased significantly since the start of EMU, thereby improving the tradeoff between inflation and unemployment. At the same time, while Germany played an important role in the run-up to EMU in terms of wage leader, its role has now decreased and been replaced by globalization forces. This has led to increased locational competition in terms of wage formation. We demonstrate this with the emerging role of the US as the benchmark for wage setting in Europe. |
| Keywords: | Phillips Curves; aggregation; locational competition; wage leadership. |
| JEL: | F15 F42 J60 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:186&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:cesptp:halshs-00335025_v1&r=opm |
| By: | Carlos Carvalho; Fernanda Nechio |
| Abstract: | We study the purchasing power parity (PPP) puzzle in a multisector, two-country, sticky-price model. Firms' price stickiness differs across sectors, in accordance with recent microeconomic evidence on price setting in various countries. Combined with local currency pricing, these differences lead sectoral real exchange rates to exhibit heterogeneous dynamics. We show that in this economy, deviations of the real exchange rate from PPP are more volatile and persistent when compared with a counterfactual one-sector world economy that features the same average frequency of price changes and is otherwise identical to the multisector world economy. When simulated with a sectoral distribution of price stickiness that matches the microeconomic evidence for the U.S. economy, the model produces a half-life of deviations from PPP of forty-five months. In contrast, the half-life of such deviations in the counterfactual one-sector economy is only slightly above one year. As a by-product, our model provides a decomposition of this difference in persistence that allows a structural interpretation of the approaches found in the empirical literature on aggregation and the real exchange rate. In particular, we reconcile the apparently conflicting findings that gave rise to the "PPP strikes back" debate (Imbs et al. [2005a, b] and Chen and Engel [2005]). |
| Keywords: | Purchasing power parity ; Prices ; Foreign exchange rates |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:351&r=opm |
| By: | Kunieda, Takuma |
| Abstract: | This paper investigates how financial globalization and financial development affect income inequality within a country. We demonstrate that when a country is financially closed to the world market, the Gini coefficient is monotonically decreasing with respect to the degree of financial development, whereas when a country becomes so small due to financial globalization that financial development in the country does not affect the world interest rate, the Gini coefficient is monotonically increasing with respect to the degree of financial development. A simple quantitative analysis for the Gini coefficients shows that income inequality in the United States is negatively affected by its financial development. In the United States, income inequality has widened since the late-1970s probably due to financial globalization and financial development. |
| Keywords: | Income inequality; Financial globalization; Financial development; Gini coefficient; Heterogeneous agents. |
| JEL: | E24 O16 F43 |
| Date: | 2008–10–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11343&r=opm |
| By: | Nienke Oomes; Christopher M. Meissner |
| Abstract: | What determines the currency to which countries peg or "anchor" their exchange rate? Data for over 100 countries between 1980 and 1998 reveal that trade network externalities are a key determinant. This implies that anchor currency choice may well be suboptimal in that certain currencies, e.g., the U.S. dollar, could be oversubscribed. It also implies that changes in anchor choices by a small number of countries can have large and rapid effects on the international monetary system. Other factors found to be related to anchor choice include the symmetry of output shocks and the currency denomination of liabilities. |
| Keywords: | Currency pegs , Exchange rates , International monetary system , |
| Date: | 2008–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/132&r=opm |
| By: | Hooy, Chee Wooi; Chan, Tze-Haw |
| Abstract: | The exposure to exchange rates remains an unresolved issue in international trade literature. The issue is particularly relevant to China and Malaysia, whom relaxed their USD pegging the same day in the mid of 2005. Our paper investigates the exchange rate exposure of China-Malaysian bilateral trade balance over the last 20 years using a standard trade balance equation which is a function of local income, foreign income, and the bilateral real exchange rates of yuan/ringgit. Our modeling is somewhat different with the literature where we take into account the structural breaks of the 1997 Asian currency crisis as well as the fixed-exchange rate regime adopted by the Malaysia. With high frequency monthly sample (Jan1990-Jan2008), we documented GARCH effect in the trade model. Taking that into consideration, our result shows that real exchange rates do play a role in the bilateral trade of China-Malaysia. The long run exchange rate elasticity is consistent with the Marshall-Lerner condition. However, the short run J-curve phenomenon is somewhat inconclusive. |
| Keywords: | Exports; Imports; exchange rates exposure; J-curve; structural breaks; GARCH |
| JEL: | C32 F10 F41 F31 |
| Date: | 2008–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11306&r=opm |
| By: | Yoko Oguro; Kyoji Fukao; Yougesh Khatri |
| Abstract: | This paper theoretically and empirically investigates export sensitivity to exchange rates in the context of intra-industry trade (IIT). It is assumed that more IIT implies a smaller elasticity of substitution among differentiated products and vice versa. The model presented suggests the gap in production costs between two countries has an influence on IIT as well. Industry-level pane regressions of thirty-eight trading pairs provide strong empirical support for the idea that the exchange rate sensitivity of exports declines in concert with the extent of ITT. An obvious policy implication is that the effectiveness of exchange rates in addressing trade imbalances will diminish as the extent of IIT increases. |
| Keywords: | Working Paper , India , Globalization , Monetary policy , Capital inflows , Economic conditions , Liquidity management , |
| Date: | 2008–05–27 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/134&r=opm |
| By: | Niko Hobdari |
| Abstract: | Tanzania's real effective exchange rate (REER) has depreciated sharply since end-2000, reversing the appreciation that took place in the second half of the 1990s. Single-country and panel data estimates, and the external sustainability approach, suggest that Tanzania's REER is currently modestly undervalued relative to its estimated equilibrium level. Looking forward, a modest trend appreciation of the equilibrium REER is expected, consistent with continued high GDP growth and an expected recovery in terms of trade. In addition, capital inflows to Tanzania could be significantly higher than currently expected, to take advantage of Tanzania's natural resources and strong policy framework. If so, these inflows would contribute to an additional appreciation by as much as 20 percent of the equilibrium REER. |
| Keywords: | Working Paper , Tanzania , Exchange rate depreciation , Exchange rates , Fiscal sustainability , Terms of trade , Capital inflows , |
| Date: | 2008–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/138&r=opm |