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on Open MacroEconomics |
| By: | Devereux, Michael B.; Sutherland, Alan |
| Abstract: | Recent data show substantial increases in the size of gross external asset and liability positions. The implications of these developments for optimal conduct of monetary policy are analyzed in a standard open economy model which is augmented to allow for endogenous portfolio choice. The model shows that monetary policy takes on new importance due to its impact on nominal asset returns. Nevertheless, the case for price stability as an optimal monetary rule remains. In fact, it is reinforced. Even without nominal price rigidities, price stability is optimal because it enhances the risk sharing properties of nominal bonds. |
| Keywords: | Portfolio Choice, International Risk Sharing, Exchange Rate |
| JEL: | E52 E58 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7445&r=opm |
| By: | Coeurdacier, Nicolas; Kollmann, Robert Miguel W. K.; Martin, Philippe J. |
| Abstract: | Despite the liberalisation of capital flows among OECD countries, equity home bias remains sizable. We depart from the two familiar explanation of equity home bias: transaction costs that impede international diversification, and terms of trade responses to supply shocks that provide risk sharing, so that there is little incentive to hold diversified portfolios. We show that the interaction of the following ingredients generates a realistic equity home bias: capital accumulation, shocks to the efficiency of physical investment, as well as international trade in stocks and bonds. In our model, domestic stocks are used to hedge fluctuation in local wage income. Terms of trade risk is hedged using bonds denominated in local goods and in foreign goods. In contrast to related models, the low level of international diversification does not depend on strongly countercyclical terms of trade. The model also reproduces the cyclical dynamics of foreign asset positions and of international capital flows. |
| Keywords: | capital accumulation, international equity and bond portfolios, capital flows, current account, valuation effects, terms of trade |
| JEL: | F2 F3 G1 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:7444&r=opm |
| By: | Gian Maria Milesi-Ferretti |
| Abstract: | The real effective exchange rate of the dollar is close to its minimum level for the past 4decades (as of September 2008). At the same time, however, the U.S. trade and currentaccount deficits remain large and, absent a significant correction in coming years, wouldcontribute to a further accumulation of U.S. external liabilities. The paper discusses thetension between these two aspects of the dollar assessment, and what factors can helpreconcile them. It focuses in particular on the terms of trade, adjustment lags, andmeasurement issues related to both the real effective exchange rate and the current accountbalance. |
| Keywords: | Current account deficits , United States , Real effective exchange rates , Terms of trade , Current account balances , Adjustment process , |
| Date: | 2008–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/260&r=opm |
| By: | Francesco Pappadà (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I) |
| Abstract: | This paper investigates the impact of a real current account adjustment on terms of trade, aggregate productivity and welfare-based exchange rate in a two-country general equilibrium model. As in Melitz (2003), firms are heterogeneous in productivity and endogenously enter and exit their domestic and export markets. The real adjustment of the current account leads to the increase of Home exports through the intensive and the extensive margins of trade : incumbent firms export more and new exporters endogenously enter the market. In the benchmark case, the extensive margin of trade accounts for about 19% of the overall adjustment and the depreciation of the national currency is lower with respect to models where this margin is not considered. In the literature, the change in the terms of trade is lower when goods are more substituable. This common finding is overturned by the endogenous entry of new exporters. For a given dispersion of productivity across firms, a higher elasticity of substitution reduces the role played by the extensive margin on the adjustment and yields a higher depreciation of the exchange rate. |
| Keywords: | Global imbalances, real adjustment, depreciation, extensive margin, firms' heterogeneity. |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00348888_v1&r=opm |
| By: | Sophie Bereau; Antonia Lopez Villavicencio; Valerie Mignon |
| Abstract: | We study the nonlinear dynamics of the real exchange rate towards its behavioral equilibrium value (BEER) using a Panel Smooth Transition Regression model framework.We show that the real exchange rate convergence process in the long run is characterized by nonlinearities for emerging economies, whereas industrialized countries exhibit a linear pattern. Moreover, there exists an asymmetric behavior of the real exchange rate when facing an over- or an undervaluation of the domestic currency. Finally, our results suggest that the real exchange rate is unable to unwind alone global imbalances. |
| Keywords: | Equilibrium exchange rate; BEER model; panel smooth transition regression; panel vector error correction model |
| JEL: | F31 C23 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2008-23&r=opm |
| By: | Akito Matsumoto; Pietro Cova; Massimiliano Pisani; Alessandro Rebucci |
| Abstract: | We study exchange rate and equity price dynamics, in general equilibrium, in the presence of news shocks about future productivity and monetary policy. We identify a condition under which these asset prices become more volatile without affecting the volatility of the underlying processes-a positive correlation between news and current shocks. This condition also explains why persistent underlying processes generate volatile asset prices. In addition, we show that the correlation between exchange rate and equity returns depends critically on the currency denomination of the equity return and the monetary policy reaction to productivity shocks. The model we set up does well at matching second moments of exchange rate and equity returns for major floating currencies. |
| Keywords: | External shocks , Exchange rates , Stock prices , Productivity , Monetary policy , Asset prices , Floating exchange rates , Economic models , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/284&r=opm |
| By: | Peacock, Chris (Bank of England); Baumann, Ursel (European Central Bank) |
| Abstract: | In this paper we model the role of open-economy effects within a New Keynesian Phillips Curve (NKPC) via the inclusion of intermediate imports in firms' production technology. Using this framework we provide evidence on two questions: first, does the inclusion of import prices help explain post-war inflation dynamics in the United Kingdom , United States and Japan; and second, has the influence of import prices in firms' costs become greater over the more recent period since the mid-1980s. Overall, our results suggest that import prices do help explain movements in inflation; in particular, NKPC models that allow for import prices to enter into firms' costs outperform closed-economy models in sample. However, our results suggest that the influence of import prices has generally remained constant across our sample period, with perhaps only the United Kingdom providing some evidence that import prices have become more important in firms' marginal costs. |
| Keywords: | Globalisation; inflation dynamics; import prices; New Keynesian Phillips Curves |
| Date: | 2008–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0359&r=opm |
| By: | Mario Cerrato; Hyunsok Kim; Ronald MacDonald |
| Abstract: | The breakdown of the Bretton Woods system and the adoption of generalised floating exchange rates ushered in a new era of exchange rate volatility and uncertainty. This increased volatility lead economists to search or economic models able to describe observed exchange rate behavior. In the present paper we propose more general STAR transition functions which encompass both threshold nonlinearity and asymmetric effects. Our framework allows for a gradual adjustment from one regime to another, and considers threshold effects by encompassing other existing models, such as TAR models. We apply our methodology to two different exchange rate data-sets, one for developing countries, and official nominal exchange rates, and the second for emerging market economies using black market exchange rates. |
| Keywords: | unit root tests, threshold autoregressive models, purchasing power parity. |
| JEL: | C22 F31 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2008_33&r=opm |
| By: | Maria Bas |
| Abstract: | This paper develops a model of trade that features heterogeneous firms, technology choice anddifferent types of skilled labor in a general equilibrium framework. Its main contribution is to explainthe impact of trade integration on technology adoption and wage inequalities. It also providesempirical evidence to support the model's predictions using plant-level panel data from Chile'smanufacturing sector (1990-1999). The theoretical framework offers a possible explanation of thepuzzling increase in skill premium in the developing countries. The key mechanism is found in theeffects of trade policy on the number of new firms upgrading technology and on the skill-intensity oflabor. Trade liberalization pushes up export revenues, raising the probability that the most productiveexporters will upgrade their technology. These firms then increase their relative demand for skilledlabor, thereby raising inequalities. |
| Keywords: | Firm heterogeneity, trade reforms, technology adoption, skill premium, plant panel data |
| JEL: | F10 F12 F41 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0902&r=opm |
| By: | Herwartz, Helmut; Weber, Henning |
| 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. |
| JEL: | C31 C33 F13 F15 F33 F42 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:7412&r=opm |
| By: | Elif C. Arbatli |
| Abstract: | The intertemporal approach to the current account suggests modeling movements in the current account in a forward-looking, dynamic framework. In this framework, the current account reflects consumption smoothing of agents that lend and borrow from the rest of the world in the face of transitory shocks to income. As in permanent income models of consumption, the marginal propensity to consume out of transitory shocks is predicted to be significantly smaller which implies that a permanent income shock has a smaller effect on the current account than a transitory income shock. I use the term structure of petroleum futures to identify permanent and transitory innovations to petroleum prices. Then, I formulate a test of the intertemporal approach to the current account based on how a group of nineteen small petroleum exporters respond to each type of income shock. This market-based identification of income shocks and their perceived persistence offers a transparent framework for investigating the empirical evidence for the intertemporal approach. As the theory predicts, petroleum exporters have a significantly higher marginal propensity to consume out of permanent oil price shocks than out of transitory oil price shocks. |
| Keywords: | Balance of payments and components |
| JEL: | C22 F21 F32 G13 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-48&r=opm |
| By: | Messina, Julián (University of Girona); Strozzi, Chiara (University of Modena and Reggio Emilia); Turunen, Jarkko (European Central Bank) |
| Abstract: | We study differences in the adjustment of aggregate real wages in the manufacturing sector over the business cycle across OECD countries, combining results from different data and dynamic methods. Summary measures of cyclicality show genuine cross-country heterogeneity even after controlling for the impact of data and methods. We find that more open economies and countries with stronger unions tend to have less pro-cyclical (or more counter-cyclical) wages. We also find a positive correlation between the cyclicality of real wages and employment, suggesting that policy complementarities may influence the adjustment of both quantities and prices in the labour market. |
| Keywords: | dynamic correlation, business cycle, real wages, labour market institutions |
| JEL: | E32 J30 C10 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp3884&r=opm |
| By: | Maria Grydaki (Department of Economics, University of Macedonia); Stilianos Fountas (Department of Economics, University of Macedonia) |
| Abstract: | This paper makes an attempt to determine the factors influencing exchange rate and exchange rate uncertainty, as well as, output and output variability. In the context of a small open economy under flexible exchange rates regime it is found that the level both of exchange rate and output is affected by monetary and inflationary shocks, as well as shocks in government spending, output and trade balance. Further, the uncertainty of exchange rate and output is associated positively with the uncertainty of all shocks while the contemporaneous occurrence of selected shocks imposes either a positive or negative impact on exchange rate and output volatility. Finally, it is shown that the effect of the determinants either of exchange rate volatility or output volatility is very sensitive to the parameter values. |
| Keywords: | Vexchange rate volatility, output volatility, open-economy models. |
| JEL: | E32 F31 F41 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2008_16&r=opm |
| By: | Olimov, Ulugbek; Sirajiddinov, Nishanbay |
| Abstract: | This study documents a quantitative analysis of exchange rate volatilities and misalignment in Uzbekistan for the period of 1994q3–2005q2. The results suggest that the real exchange rate volatility and misalignment have depressing effects on the volume of trade, mainly exports in Uzbekistan. The Government’s currency rationing policy was lessening the volatility proving that the policy-induced changes in exchange rate has a stabilizing effect on trade flows. The implied elasticity for the most significant real exchange rate volatility coefficient is –0.20. Using a two-step Engle-Granger technique import demand and export supply price elasticities are computed. The results are consistent with the predictions from a number of previous studies, and in particular, the estimated exports price elasticity for Uzbek economy ranges from 1.65 to 1.84, while import demand price elasticity is between –0.78 and –0.83. At the same time, relatively lower elasticity during “the currency rationing” period indicate that large devaluations, most likely, did not generate the expected improvements in the overall export performance. |
| Keywords: | Real exchange rate, volatility, misalignment, trade flows, Uzbekistan |
| JEL: | C32 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:7405&r=opm |
| By: | Philip Liu (Reserve Bank of Australia) |
| Abstract: | This paper examines the sources of Australia’s business cycle fluctuations. The cyclical component of GDP is extracted using the Beveridge-Nelson decomposition and a structural VAR model is identified using robust sign restrictions derived from a small open economy model. In contrast to previous VAR studies, international factors are found to contribute to over half of the output forecast errors, whereas demand shocks have relatively modest effects. |
| Keywords: | Australian business cycle; sign restriction VAR; stabilisation policy; international shocks |
| JEL: | E32 E52 E63 F41 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2008-08&r=opm |
| By: | Nathaniel John Porter; Francis Vitek |
| Abstract: | We study the impact of a minimum wage on business cycle volatility, depending upon its coverage and adjustment mechanism. As with other small open economies, Hong Kong SAR is vulnerable to external shocks, with its exchange rate regime precluding active monetary policy. Adjustment to past shocks has relied on flexible domestic prices. We find that a minimum wage affecting 20 percent of employees would amplify output volatility by 0.2 percent to 9.2 percent, and employment volatility by ?1.2 percent to 7.8 percent. A fixed wage or indexation to consumption price inflation increases volatility most. Indexation to wage inflation or unit labor cost growth is preferable, largely preserving labor market flexibility. |
| Keywords: | Minimum wage , Hong Kong Special Administrative Region of China , Business cycles , External shocks , Exchange rate regimes , Monetary policy , Inflation , Wage indexation , Labor market policy , Economic models , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/285&r=opm |
| By: | Ondra Kamenik; Ioan Carabenciov; Igor Ermolaev; Charles Freedman; Dmitry Korshunov; Jared Laxton; Douglas Laxton; Michel Juillard |
| Abstract: | This is the third of a series of papers that are being written as part of a larger project to estimate a small quarterly Global Projection Model (GPM). The GPM project is designed to improve the toolkit for studying both own-country and cross-country linkages. In this paper, we estimate a small quarterly projection model of the US, Euro Area, and Japanese economies that incorporates oil prices and allows us to trace out the effects of shocks to oil prices. The model is estimated with Bayesian techniques. We show how the model can be used to construct efficient baseline forecasts that incorporate judgment imposed on the near-term outlook. |
| Keywords: | Economic forecasting , United States , Euro Area , Japan , Oil prices , Monetary policy , External shocks , Forecasting models , |
| Date: | 2008–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/280&r=opm |
| By: | Daria Zakharova |
| Abstract: | This paper surveys policy responses in recent years to capital inflows in a diverse group of countries that are represented by the Netherlands at the IMF Executive Board. Based on the findings from cross-country empirical literature, the paper distills some guiding principles for policy responses to excessive capital inflows, depending on country-specific circumstances and with a particular focus on fiscal policy. In addition to considering the conventional macroeconomic and structural policy tools, the paper also discusses the role of microfiscal policies in affecting the size and the composition of capital inflows. While conditions in these countries have changed very recently, the policy principles remain salient. |
| Keywords: | Fiscal policy , Capital flows , Capital inflows , Capital account , Capital account , Current account deficits , |
| Date: | 2008–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/269&r=opm |
| By: | Robert W. Staiger; Alan O. Sykes |
| Abstract: | Central bank intervention in foreign exchange markets may, under some conditions, stimulate exports and retard imports. In the past few years, this issue has moved to center stage because of the foreign exchange policies of China. China has regularly intervened to prevent the RMB from appreciating relative to other currencies, and over the same period has developed large global and bilateral trade surpluses. Numerous public officials and commentators argue that China has engaged in impermissible "currency manipulation," and various proposals for stiff action against China have been advanced. This paper clarifies the theoretical relationship between exchange rate policy and international trade, and addresses the question of what content can be given to the concept of "currency manipulation" as a measure that may impair the commitments made in trade agreements. Our conclusions are at odds with much of what is currently being said by proponents of counter-measures against China. For example, it is often asserted that China's currency policies have real effects that are equivalent to an export subsidy. In fact, however, if prices are flexible the effect of exchange rate intervention parallels that of a uniform import tariff and export subsidy, which will have no real effect on trade, an implication of Lerner's symmetry theorem. With sticky prices, the real effects of exchange rate intervention and the translation of that intervention into trade-policy equivalents depend critically on how traded goods and services are priced. The real effects of China's policies are potentially quite complex, are not readily translated into trade-policy equivalents, and are dependent on the time frame over which they are evaluated (because prices are less "sticky" over a longer time frame). |
| JEL: | F02 F13 F31 K33 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14600&r=opm |