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on Open MacroEconomics |
| By: | Maurice Obstfeld |
| Abstract: | Despite an abundance of cross-section, panel, and event studies, there is strikingly little convincing documentation of direct positive impacts of financial opening on the economic welfare levels or growth rates of developing countries. The econometric difficulties are similar to those that bedevil the literature on trade openness and growth, though if anything, they are more severe in the context of finance. There is also little systematic evidence that financial opening raises welfare indirectly by promoting collateral reforms of economic institutions or policies. At the same time, opening the financial account does appear to raise the frequency and severity of economic crises. Nonetheless, developing countries have moved over time in the direction of further financial openness. A plausible explanation is that financial development is a concomitant of economic growth, and a growing financial sector in an economy open to trade cannot long be insulated from cross-border financial flows. This survey discusses the policy framework in which financial globalization is most likely to prove beneficial. The reforms developing countries need to institute to make their economies safe for international asset trade are the same ones they need so as to curtail the power of entrenched economic interests and liberate the economy’s productive potential. |
| JEL: | F36 F43 G15 O24 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14691&r=opm |
| By: | Giancarlo Corsetti (Department of Economics, European University Institute); Panagiotis Th. Konstantinou (Department of Economics, University of Macedonia) |
| Abstract: | The joint dynamics of US net output, consumption, and (valuation-adjusted) foreign assets and liabilities, characterized empirically following Lettau and Ludvigson [2004], is shown to be strikingly consistent with current account theory. While US consumption is virtually insulated from transitory shocks, these contribute considerably to the variation in net output and, even more so, in gross foreign positions, arguably smoothing temporary variations in returns. A single permanent shock – naturally interpreted as a productivity shock – raises consumption swiftly while causing net output to adjust only gradually. This leads to persistent, procyclical external deficits but, interestingly, moves gross assets and liabilities in the same direction. |
| Keywords: | Current Account; Net ForeignWealth; Consumption Smoothing; Intertemporal Approach to the Current Account; International Adjustment Mechanism; Permanent-Transitory Decomposition. |
| JEL: | C32 E21 F32 F41 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2009_03&r=opm |
| By: | Andrew B. Bernard; J. Bradford Jensen; Stephen J. Redding; Peter K. Schott |
| Abstract: | Recent research in international trade emphasizes the importance of firms' extensive margins for understanding overall patterns of trade as well as how firms respond to specific events such as trade liberalization. In this paper, we use detailed U.S. trade statistics to provide a broad overview of how the margins of trade contribute to variation in U.S. imports and exports across trading partners, types of trade (i.e., arm's-length versus related-party) and both short and long time horizons. Among other results, we highlight the differential behavior of related-party and arm's-length trade in response to the 1997 Asian financial crisis. |
| JEL: | F1 F23 F43 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14662&r=opm |
| By: | Martin S. Feldstein |
| Abstract: | This paper was prepared for a session of the 2009 American Economic Association meeting devoted to examining the views of American economists about the euro and the European Economic and Monetary Union on the tenth anniversary of the euro. I had written an article in 1992 in the Economist and subsequent articles in the Journal of Economic Perspecties and in Foreign Affairs. I begin by reviewing the arguments that I offered at that time about the claimed advantages of a single currency and about what I regarded as the disadvantages. I then discuss my claims that the primary motivation for the creation of the euro was political, not economic and that the creation of the euro could lead to increased conflict within Europe and with the United States. I conclude with a discussion of the implications for the EMU of the current recession and the likely future economic conditions in Europe. |
| JEL: | F02 F4 F5 F51 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14696&r=opm |
| By: | Menzie Chinn (University of Wisconsin); Jeffrey Frankel (Harvard University) |
| Abstract: | The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2015. |
| Keywords: | Foreign exchange market, Euro, Dollar, Reserve currency |
| JEL: | E42 F0 F02 F31 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200831&r=opm |
| By: | Michael B. Devereux (University of British Columbia, CEPR, and NBER); Gregor W. Smith (Queen's University); James Yetman (Bank for International Settlements) |
| Abstract: | Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciations across countries. The striking lack of evidence for this link — the consumption/real exchange-rate anomaly or Backus-Smith puzzle — has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of ‘hand-to-mouth’ consumers may help to explain the evidence. |
| Keywords: | international risk-sharing, Backus-Smith puzzle |
| JEL: | F41 F47 F37 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1195&r=opm |
| By: | Yin-Wong Cheung; Menzie D. Chinn; Eiji Fujii |
| Abstract: | We examine whether the Chinese exchange rate is misaligned and how Chinese trade flows respond to the exchange rate and to economic activity. We find, first, that the Chinese currency, the renminbi (RMB), is substantially below the value predicted by estimates based upon a cross-country sample, when using the 2006 vintage of the World Development Indicators. The economic magnitude of the mis-alignment is substantial -- on the order of 50 percent in log terms. However, the misalignment is typically not statistically significant, in the sense of being more than two standard errors away from the conditional mean. However, this finding disappears completely when using the most recent 2008 vintage of data; then the estimated undervaluation is on the order of 10 percent. Second, we find that Chinese multilateral trade flows respond to relative prices -- as represented by a trade weighted exchange rate -- but the relationship is not always precisely estimated. In addition, the direction of the effects is sometimes different from what is expected a priori. For instance, Chinese ordinary imports actually rise in response to a RMB depreciation; however, Chinese exports appear to respond to RMB depreciation in the expected manner, as long as a supply variable is included. In that sense, Chinese trade is not exceptional. Furthermore, Chinese trade with the United States appears to behave in a standard manner -- especially after the expansion in the Chinese manufacturing capital stock is accounted for. Thus, the China-US trade balance should respond to real exchange rate and relative income movements in the anticipated manner. However, in neither the case of multilateral nor bilateral trade flows should one expect quantitatively large effects arising from exchange rate changes. And, of course, these results are not informative with regard to the question of how a change in the RMB/USD exchange rate would affect the overall US trade deficit. Finally, we stress the fact that considerable uncertainty surrounds both our estimates of RMB misalignment and the responsiveness of trade flows to movements in exchange rates and output levels. In particular, the results for trade elasticities are sensitive to econometric specification, accounting for supply effects, and for the inclusion of time trends. |
| JEL: | F3 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14673&r=opm |
| By: | Eswar S. Prasad |
| Abstract: | In this paper, I analyze India's approach to capital account liberalization through the lens of the new literature on financial globalization. India's authorities have taken a cautious and calibrated path to capital account opening, which has served the economy well in terms of reducing its vulnerability to crises. By now, the capital account has become quite open and reversing this is not a viable option. Moreover, the remaining capital controls are rapidly becoming ineffective, making the debate about capital controls rather moot. Managing de facto financial integration into international capital markets and aligning domestic macroeconomic policies in a manner that maximizes the indirect benefits and reduces the risks is the key challenge now facing India's policymakers on this front. |
| JEL: | F3 F4 O2 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14658&r=opm |
| By: | Sambit Bhattacharyya; Jeffrey G. Williamson |
| Abstract: | Even though Australia has experienced frequent and large commodity export price shocks like the Third World, it seems to have dealt with the volatility better. Why? This paper explores Australian terms of trade volatility since 1901. It identifies two major price shock episodes before the recent mining-led boom and bust. It assesses their relative magnitude, their de-industrialization and distributional impact, and policy responses. In what way has Australia been different from other commodity exporters experiencing volatile prices? |
| JEL: | F14 F43 N17 O56 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14694&r=opm |
| By: | Söderström, Ulf (Research Department, Central Bank of Sweden) |
| Abstract: | I revisit the potential costs and benefits for Sweden of joining the Economic and Monetary Union (EMU) of the European Union. I first show that the Swedish business cycle since the mid-1990s has been closely correlated with the Euro area economies, suggesting that common shocks have been an important driving force of business cycles in Europe. However, evidence from an estimated model of the Swedish economy instead suggests that country specific shocks have been important for fluctuations in the Swedish economy since 1993, implying that EMU membership could be costly. The model also indicates that the exchange rate has to a large extent acted to destabilize, rather than stabilize, the Swedish economy, pointing to the costs of independent monetary policy with a flexible exchange rate. Finally, counterfactual simulations of the model suggest that Swedish in inflation and GDP growth might have been slightly higher if Sweden had been a member of EMU since the launch in 1999, but also that GDP growth might have been more volatile. The evidence is therefore not conclusive about whether or not participation in the monetary union would be advantageous for Sweden. |
| Keywords: | Monetary union; Open economy; Optimum Currency Area; DSGE model. |
| JEL: | E42 E58 F41 |
| Date: | 2008–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0227&r=opm |
| By: | Jean-Pierre Allegret (University of Lyon, France); Alain Sand-Zantman (University of Lyon, France) |
| Abstract: | This paper assesses the monetary consequences of the Latin-American integration process. Over the period 1991-2007, we analyze a sample of five Latin-American countries focusing on the feasibility of a monetary union between L.A. economies. To this end, we study the issue of business cycle synchronization with the occurrence of common shocks. First, we assess the international disturbances influence on the domestic business cycles. Second, we analyze the impact of the adoption of different exchange rate regimes on the countries responses to shocks. |
| Keywords: | Business cycles, OCA, Bayesian VAR, Latin American countries |
| JEL: | C32 E32 F42 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200832&r=opm |
| By: | Haider, Adnan; Khan, Safdar Ullah |
| Abstract: | This paper estimates a small open economy Dynamic Stochastic General Equilibrium (DSGE) model for Pakistan using Bayesian simulation approach. Model setup is based on new Keynesian framework, characterized by nominal rigidity in prices with habit formation in household’s consumption. The core objective is to study whether an estimated small open economy DSGE model provides a realistic behavior about the structure Pakistan economy with fully articulated description of the monetary policy transmission mechanism vis-à-vis domestic firm’s price setting behavior. To do so, we analyze the impulse responses of key macro variables; domestic inflation, imported inflation, output, consumption, interest rate, exchange rate, term of trade to different structural/exogenous shocks. From several interesting results, few are; (a) high inflation in Pakistan do not hit domestic consumption significantly; (b) Central bank of Pakistan responds to high inflation by increasing the policy rate by 100 to 200 bps; (c) exchange rate appreciates in both the cases of high domestic and imported inflation; (d) tight monetary policy stance helps to curb domestic inflation as well as imported inflation but appreciates exchange rate significantly (f) pass through of exchange rate to domestic inflation is very low; finally parameter value of domestic price stickiness shows that around 24 percent domestic firms do not re-optimize their prices which implies averaged price contract is about two quarters. |
| Keywords: | New-Keynesian economics; open economy DSGE models; nominal rigidities; monetary policy transmission mechanism; Bayesian Approach |
| JEL: | F37 E32 E52 F47 E47 |
| Date: | 2008–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:12977&r=opm |
| By: | Altar, Moisa; Albu, Lucian Liviu (Institute of Economic Forecasting); Dumitru, Ionut; Necula, Ciprian |
| Abstract: | Equilibrium real exchange rate provides useful information on the harmonisation of convergence criteria with exchange rate stability criteria; a requirement for accession to the European Monetary Union. This study applies econometric procedures for identifying the equilibrium real exchange rate in Romania and its tendency. * Study within the CEEX Programme – Project No. 220/2006 “Economic Convergence and Role of Knowledge in Relation to the EU Integration”; Instiutul European din Romania – PAIS III; Studiul nr. 2/2005. |
| Keywords: | Capital account, exchange rate, European integration |
| JEL: | F33 F43 O23 O57 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ror:wpince:090105&r=opm |
| By: | Fatma Marrakchi Charfi (Facult 0064es Sciences Economiques et de Gestion de Tunis. Universit 0064e Tunis El Manar) |
| Abstract: | Tunisia has experienced a performance when pursuing a constant real exchange rate rule. The limitations of this rule are beginning to emerge in the context of a more open economy, which desire to relax capital controls. This paper estimates the equilibrium real exchange rate of the dinar vis 0076is the euro and the $US from 1983 to 2000, using quarterly data, based on the following fundamental variables: terms of trade, net capital inflows and the differential of productivity. Results show that Tunisian dinar was overvalued before the 1986 devaluation, becomes close to its equilibrium value over the 90s. In the beginning of this century (2000), authorities permit a larger fluctuation of the real effective exchange rate. |
| Keywords: | Equilibrium real exchange rate, Misalignment, Cointegration |
| JEL: | C22 F31 F37 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200842&r=opm |
| By: | Luis Ignacio Jácome; Inci Ötker; Turgut Kisinbay; Francisco F. Vázquez; Alessandro Giustiniani; David Vávra; Kotaro Ishi; Karl Friedrich Habermeier |
| Abstract: | This paper analyzes the monetary policy response to rising inflation in emerging and developing countries associated with the food and oil price shocks in 2007 and the first half of 2008. It reviews inflation developments in a sample of countries covering all regions and a broad range of monetary and exchange rate policy regimes; discusses the underlying causes of inflation; provides a synthesis of policy responses taken against the background of the conflicting objectives and trade-offs, the uncertainties regarding the nature of the shocks, and the additional challenges brought on by the global financial turmoil; and presents considerations for policy. |
| Keywords: | Monetary policy , Inflation , Emerging markets , Developing countries , Exchange rate regimes , External shocks , Oil prices , Inflation targeting , Central banks , |
| Date: | 2009–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/1&r=opm |
| By: | Bianca Clausen |
| JEL: | B00 B30 B40 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:kln:iwpdip:dp02/08&r=opm |
| By: | Kazuko Shirono |
| Abstract: | This paper examines the role of Japan against that of China in the exchange rate regime in East Asia in light of growing interest in forming a currency union in the region. The analysis suggests that currency unions with China tend to generate higher average welfare gains for East Asian countries than currency unions with Japan or the United States. Overall, Japan does not appear to be a dominant player in forming a currency union in East Asia, and this trend is likely to continue if China's relative presence continues to rise in the regional trade. |
| Keywords: | Exchange rate regimes , East Asia , Japan , China, People's Republic of , Currencies , Monetary unions , Trade , Economic cooperation , Economic models , Trade models , Data analysis , |
| Date: | 2009–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/3&r=opm |
| By: | Prüfer, P.; Tondl, G. (Tilburg University, Center for Economic Research) |
| Abstract: | Foreign Direct Investment (FDI) has surged in Latin America (LA) since the mid 1990s. European and North American FDI is of capital importance. We investigate the FDI-growth nexus in LA allowing for different source countries, regional hetero- geneity, interaction terms with FDI, and more than 20 growth determinants. We use Bayesian Model Averaging to address model uncertainty and to select the best mod- els and most robust parameters. The principal finding is that a positive FDI-growth nexus in LA requires a functioning legal framework and macroeconomic stability. We also find that European FDI is only indirectly correlated with productivity growth, whereas North American FDI is more robust and thus directly correlated with pro- ductivity growth. |
| Keywords: | FDI-growth nexus;model uncertainty;Bayesian Model Averaging;Latin America |
| JEL: | C52 F21 F43 O54 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:200861&r=opm |
| By: | Dubravko Mihaljek; Marc Klau |
| Abstract: | This paper estimates the Balassa-Samuelson effects for 11 countries in central and eastern Europe on a disaggregated set of quarterly data covering the period from the mid-1990s to the first quarter of 2008. The Balassa-Samuelson effects are clearly present and explain around 24% of inflation differentials vis-à-vis the euro area (about 1.2 percentage points on average); and around 84% of domestic relative price differentials between non-tradables and tradables; or about 16% of total domestic inflation (about 1.1 percentage points on average). The paper presents mixed evidence on whether the Balassa-Samuelson effects have declined since 2001 compared with the second half of the 1990s. |
| Keywords: | Balassa-Samuelson effect, productivity, inflation, transition, convergence, European monetary union, Maastricht criteria |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:270&r=opm |
| By: | Julian Emami Namini (Erasmus University Rotterdam); Enrico Pennings (Erasmus University Rotterdam) |
| Abstract: | We build a dynamic general equilibrium model with 2 countries, horizontal and vertical multinational activity and endogenous domestic and foreign investment. It is found that horizontal multinational activity always leads to a complementary relationship between domestic and foreign investment. Vertical multinational activity, in contrast, leads to either a substitutional or complementary relationship between domestic and foreign investment, depending on the firms' technologies. We test the theoretical implications with a panel of U.S. multinationals and find empirical support. |
| Keywords: | Horizontal multinational firms; vertical multinational firms; domestic investments; neoclassical growth model |
| JEL: | E22 F21 F23 |
| Date: | 2009–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:uvatin:20090004&r=opm |
| By: | Horgos, Daniel (Helmut Schmidt University, Hamburg) |
| Abstract: | Considering the sector bias of International Outsourcing within a 2x2 framework, four different scenarios appear. Each industry can either relocate its high or its low skill intensive production fragment. Traditionally, depending on the superiority of a wage vs. an outsourcing-effect, general equilibrium effects of two scenarios are assumed to be ambiguous. Applying a formal duality approach and a calibration exercise for the German economy, this contribution shows that a focus on the elasticity of substitution can solve the puzzle. With the elasticity exceeding a critical value, unambiguous results in all four scenarios appear, supporting the sector bias of International Outsourcing.Finally, the introduction of distributional constraints into the allocative decisions leads to a decisive worsening in the supply of the public good. |
| Keywords: | International Outsourcing; Sector Bias; Elasticity of Substitution |
| JEL: | E25 F16 F41 |
| Date: | 2009–01–29 |
| URL: | http://d.repec.org/n?u=RePEc:ris:vhsuwp:2009_088&r=opm |
| By: | Craig S. Hakkio |
| Abstract: | This paper examines the dynamics of various measures of national, regional, and global inflation. The paper calculates the first two common factors for four measures of industrial country inflation rates: total CPI, core CPI, cyclical total CPI, and cyclical core CPI. The paper then demonstrates that the first common factor is sometimes helpful in forecasting national inflation rates. It also shows that the second common factor and the first common factor for cyclical inflation is sometimes helpful in forecasting national CPI inflation rates. Finally, the paper suggests that the commonality of industrial inflation rates reflects the commonality of the determinants of inflation. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:rwp09-01&r=opm |