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on Open MacroEconomics |
| By: | Hilde C. Bjørnland (Norwegian School of Management (BI), Norges Bank (Central Bank of Norway) and UC Berkeley) |
| Abstract: | Dornbusch's exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has been viewed by some researchers as a "stylized fact" to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restrictions on them. In contrast, we achieve identification by imposing a long-run neutrality restriction on the real exchange rate, thereby allowing for contemporaneous interaction between the interest rate and the exchange rate. In a study of four open economies, we find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate, which appreciates on impact. The maximum effect occurs within 1-2 quarters, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP. |
| Keywords: | Exchange rate, uncovered interest parity (UIP), Dornbusch overshooting, monetary policy, Structural VAR. |
| JEL: | E32 E52 F31 F41 |
| Date: | 2009–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2009_09&r=opm |
| By: | Fabio Canova; Matteo Ciccarelli; Eva Ortega |
| Abstract: | We study the effects that the Maastricht treaty, the creation of the ECB, and the Euro changeover had on the dynamics of European business cycles using a panel VAR and data from ten European countries - seven from the Euro area and three outside of it. There are slow changes in the features of business cycles and in the transmission of shocks. Time variations appear to be unrelated to the three events of interest and instead linked to a process of European convergence and synchronization. |
| Keywords: | Business cycles, EuropeanMonetary Union, Panel VAR, Structural changes |
| JEL: | C15 C33 E32 E42 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1158&r=opm |
| By: | Fabio Milani (Department of Economics, University of California-Irvine) |
| Abstract: | This paper estimates a structural general equilibrium model to investigate the changing relationship between the oil price and macroeconomic variables. The oil price, through the role of oil in production and consumption, affects aggregate demand and supply in the model. The assumption of rational expectations is relaxed in favor of learning. Oil prices, therefore, affect the economy through an additional channel, i.e. through their effect on the formation of agents' beliefs. The estimated learning dynamics indicates that economic agents' perceptions about the effects of oil prices on the economy have changed over time: oil prices were perceived to have large effects on output and inflation in the 1970s, but only milder effects after the mid-1980s. Since expectations play a large role in the determination of output and inflation, the effects of oil price increases on expectations can magnify the response of macroeconomic variables to oil price shocks. In the estimated model, in fact, the implied responses of output and inflation to oil price shocks were much more pronounced in the 1970s than in 2008. Therefore, through the time variation in the impact of oil prices on beliefs, the paper can successfully explain the observed weakening of the effects of oil price shocks on real activity and inflation. |
| Keywords: | Oil price; Inflation expectations; Learning; Monetary policy, Effect of energy shocks; Bayesian estimation |
| JEL: | E31 E52 E58 F43 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:irv:wpaper:080923&r=opm |
| By: | Tobias J. Cwik (Goethe Uniyversity Frankfurt); Gernot J. Müller (Goethe University Frankfurt); Maik Wolters (Goethe University Frankfurt) |
| Abstract: | This paper explores the role of trade integration—or openness—for monetary policy transmission in a medium-scale New Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation. Although the strength of this effect increases with economic openness, it also requires that import prices respond to exchange rate changes. In this case domestic producers find it optimal to adjust their prices to exchange rate changes which alter the domestic currency price of their foreign competitors. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on U.S. time series relative to an aggregate of industrialized countries. While we find evidence for strong complementarities, exchange rate pass-through is limited. Openness has therefore little bearing on monetary transmission in the estimated model. |
| Keywords: | Monetary Policy Transmission, Open Economy, Trade Integration, Exchange Rate Channel, Strategic Complementarity, Exchange Rate Pass-Through |
| JEL: | F41 F42 E32 |
| Date: | 2008–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200829&r=opm |
| By: | Alexandre, Fernando (University of Minho); Bação, Pedro (University of Coimbra); Cerejeira, João (University of Minho); Portela, Miguel (University of Minho) |
| Abstract: | Real exchange rate movements are important drivers of the reallocation of resources between sectors of the economy. Economic theory suggests that the impact of exchange rates should vary with the degree of exposure to international competition and with the technology level. This paper contributes by bringing together these two views, both theoretically and empirically. We show that both the degree of openness and the technology level mediate the impact of exchange rate movements on labour market developments. According to our estimations, whereas employment in high-technology sectors seems to be relatively immune to changes in real exchange rates, these appear to have sizable and significant effects on highly open low-technology sectors. The analysis of job flows suggests that the impact of exchange rates on these sectors occurs through employment destruction. |
| Keywords: | exchange rates, international trade, job flows |
| JEL: | J23 F16 F41 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4191&r=opm |
| By: | Joze Mencinger |
| Abstract: | The EU new member states (NMS) have been recipients of substantial net capital inflows in the form of FDI. Economic policy makers and development strategists often regard them as the pillar of the development and neglect their potential long run consequences: inevitable deficit in the investment balance. FDI however affects current account balance also indirectly by improving or deteriorating trade balance which might overweigh negative direct effects, moderate them, or add to the deterioration of the current account balance. Capital outflows through the investment account in NMS have been increasing rapidly . Namely, the rates of return on FDI are twice the rates of return on portfolio investments and three times the rates of return on loans. Indirect effects have moderated strong direct effects but could not overweigh structural current account deficit caused by transition. A major problem might arise as a consequence of the “addiction” with FDI. First, the outflows of capital speeded up by the opportunities of multinationals to reallocate production to the countries with even cheaper labor might become larger than new inflows. Second, sudden interruption of FDI inflows could result in an exchange rate crisis. |
| Keywords: | current account, factors services, foreign direct investments |
| JEL: | F32 F21 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:icr:wpicer:16-2008&r=opm |
| By: | Iancu, Aurel |
| Abstract: | After presenting the institutional construction during the pre-accession and post-accession to the Economic and Monetary Union (EMU), the exchange rate mechanisms (ERM) in several countries and the convergence criteria, we go on with a brief analysis of the way the CEE countries cope with the convergence criteria in accordance with the Maastricht Treaty. Then, the study deals with a topic often discussed in the scientific literature and included on the agenda of decision-makers at various levels, in order to clarify the following major issues: a shorter transition to the euro, the exchange rate equilibrium versus the inflation rate diminution and the Balassa-Samuelson effect, the exchange rates and the exchange rate deviation index, evidences concerning the real exchange rate equilibrium and the appreciation of the exchange rate in the CEE countries. |
| Keywords: | Convergence criteria, exchange rate, exchange rate mechanisms, Euro Area, Balassa-Samuelson effect, tradable goods, non-tradable goods, exchange rate deviation index, purchasing power parity |
| JEL: | F31 F33 O43 O47 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:ror:wpince:090602&r=opm |
| By: | Holger Zemanek; Ansgar Belke; Gunther Schnabl |
| Abstract: | Low international competitiveness of a set of euro area countries, which have become evident by large current account deficits and rising risk premiums on government bonds, is one of the most challenging economic policy issues for Europe. We analyse the role of private restructuring and public structural reforms for the urgently needed readjustment of intra-euro area imbalances. A panel regression reveals a significant impact of private restructuring and public structural reforms on intra-euro area competitiveness. This implies that private restructuring and public reforms are rather than public transfers the best way to preserve long-term economic stability in Europe. |
| Keywords: | Structural reforms, competitiveness, current account imbalances, euro area, European Monetary Union, dynamic panel estimation, interaction term |
| JEL: | E24 F15 F16 F32 F33 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp895&r=opm |
| By: | Felbermayr, Gabriel (University of Hohenheim); Prat, Julien (University of Vienna); Schmerer, Hans-Jörg (University of Tuebingen) |
| Abstract: | This paper documents a robust empirical regularity: in the long-run, higher trade openness is causally associated to a lower structural rate of unemployment. We establish this fact using: (i) panel data from 20 OECD countries, (ii) cross-sectional data on a larger set of countries. The time structure of the panel data allows us to deal with endogeneity concerns, whereas cross-sectional data make it possible to instrument openness by its geographical component. In both setups, we carefully purge the data from business cycle effects, include a host of institutional and geographical variables, and control for within-country trade. Our main finding is robust to various definitions of unemployment rates and openness measures. The preferred specification suggests that a 10 percent increase in total trade openness reduces unemployment by about one percentage point. Moreover, we show that openness affects unemployment mainly through its effect on TFP and that labor market institutions do not appear to condition the effect of openness. |
| Keywords: | international trade, real openness, unemployment, GMM models, IV estimation |
| JEL: | F16 E24 J6 |
| Date: | 2009–05 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4184&r=opm |