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on Open MacroEconomics |
| By: | Horag Choi; Nelson C. Mark |
| Abstract: | Trending current accounts pose a challenge for intertemporal open-economy macro models. This paper shows that a two-country representative-agent business cycle model is able to explain the historical time-paths of the US and Japanese current accounts, both of which display trends but in opposite directions. Households have a state-dependent subjective discount factor such that they become relatively impatient (patient) when societal consumption is abnormally high (low). We present agents in the model with historical observations on the exogenous state variables, run the economy, and compare the current account implied by the model with the data. We find that the model generates national saving behavior that matches the current account's trend. Investment dynamics are important for explaining current account fluctuations around the trend, but not for the trend itself. The model also accounts for the timing of cyclical current account fluctuations around the trend. |
| JEL: | F3 F41 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15244&r=opm |
| By: | Emi Nakamura; Dawit Zerom |
| Abstract: | Recent theoretical work has suggested a number of potentially important factors in causing incomplete pass-through of exchange rates to prices, including markup adjustment, local costs and barriers to price adjustment. We empirically analyze the determinants of incomplete pass-through in the coffee industry. The observed pass-through in this industry replicates key features of pass-through documented in aggregate data: prices respond sluggishly and incompletely to changes in costs. We use microdata on sales and prices to uncover the role of markup adjustment, local costs, and barriers to price adjustment in determining incomplete pass-through using a structural oligopoly model that nests all three potential factors. The implied pricing model explains the main dynamic features of short and long-run pass-through. Local costs reduce long-run pass-through (after 6 quarters) by a factor of 59% relative to a CES benchmark. Markup adjustment reduces pass-through by an additional factor of 33%, where the extent of markup adjustment depends on the estimated "super-elasticity'' of demand. The estimated menu costs are small 0.23% of revenue) and have a negligible effect on long-run pass-through, but are quantitatively successful in explaining the delayed response of prices to costs. The estimated strategic complementarities in pricing do not, therefore, substantially delay the response of prices to costs. We find that delayed pass-through in the coffee industry occurs almost entirely at the wholesale rather than the retail level. |
| JEL: | E30 F10 L11 L16 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15255&r=opm |
| By: | Hernandez-Verme, Paula; Wang, Wen-Yao |
| Abstract: | We model a typical Asian-crisis-economy using dynamic general equilibrium tech-niques. Exchange rates obtain from nontrivial fiat-currencies demands. Sudden stops/bank-panics are possible, and key for evaluating the merits of alternative ex-change rate regimes. Strategic complementarities contribute to the severe indetermi-nacy of the continuum of equilibria. The scope for existence and indeterminacy of equilibria and dynamic properties are associated with the underlying policy regime. Binding multiple reserve requirements promote stability under floating but increase the scope for panic equilibria under both regimes. Backing the money supply acts as a stabilizer only in fixed regimes, but reduces financial fragility under both regimes. |
| Keywords: | Sudden stops; Bank runs; Exchange rate regimes; Multiple reserve requirements; Dynamic Stochastic General Equilibrium; Open Economy Macroeconomics; International Financial crises. |
| JEL: | G14 E43 F34 E31 O53 E44 G33 F33 O11 F32 E58 E42 O16 E52 E65 F41 F31 G21 |
| Date: | 2009–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16748&r=opm |
| By: | Rajas Parchure |
| Abstract: | This paper formulates a model of exchange rate determination that describes the market processes by which the foreign exchange markets are cleared and international receipts of countries are brought into equality with their international payments. The model is capable of being explicitly solved for the actual world economy provided the balance of payments data which are routinely collected by central banks and reported to the IMF are arranged by their countrywise origins and destinations. |
| Keywords: | foreign exchange markets, data, national currency, currency, exchange rates, homogenous equations, Forward Exchange Rates, markets, foreign exchange rate, world economy, international receipts, payments, balance of payments, central banks, IMF, |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2153&r=opm |
| By: | Erasmus K. Kersting |
| Abstract: | This paper examines the role of fiscal stabilization policy in a two-country framework that allows for a general degree of exchange rate pass-through. I derive analytical solutions for optimal monetary and fiscal policy which are shown to depend on the degree of pass-through. In the case of partial pass-through, an optimizing policy maker uses countercyclical fiscal stabilization in addition to monetary stabilization. However, in the extreme cases of complete or zero pass-through, the fiscal stabilization instrument is not employed. There is also no additional gain from the fiscal instrument in the case of coordination between the two countries. These results are due to the specific way the optimal fiscal policy rule affects marginal costs: Rather than being a substitute for monetary policy, fiscal policy complements it by increasing the correlation of the marginal cost terms within and across countries. This in turn makes monetary policy more effective at stabilizing them. |
| Keywords: | Economic stabilization ; Monetary policy ; Fiscal policy |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:31&r=opm |
| By: | Schubert, Stefan Franz |
| Abstract: | Our objective is to study the dynamic effects of an oil price shock on economic key variables and on the current account of a small open economy. To do this, we introduce time non-separable preferences in a standard model of a small open economy, where labor supply is endogenous and imported oil is used both as an intermediate input in production and as a consumption good. Using a plausible calibration of the model, we show that the changes in output and employment are quite small, and that the current account exhibits the J-curve property, both being in line with recent empirical evidence. After an oil price increase, the current account first deteriorates, and after some time it turns into surplus. We explain this non-monotonic behavior with agents' reluctance to change their consumption expenditures, resulting in an initial trade balance deficit which causes the current account to deteriorate. Over time, with gradually falling expenditures, the trade balance improves sufficiently to turn the current account into surplus. The model thus provides a plausible explanation of recent empirical findings. |
| Keywords: | oil price shocks; time non-separable preferences; current account dynamics |
| JEL: | F32 F41 Q43 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16738&r=opm |
| By: | Fabio Milani |
| Abstract: | Recent papers have argued that one implication of globalization is that domestic inflation rates may have now become more a function of "global," rather than domestic, economic conditions, as postulated by closed-economy Phillips curves. This paper aims to assess the empirical importance of global output in determining domestic inflation rates by estimating a structural model for a sample of G-7 economies. The model can capture the potential effects of global output fluctuations on both the aggregate supply and the aggregate demand relations in the economy and it is estimated using full-information Bayesian methods. The empirical results reveal a significant effect of global output on aggregate demand in most countries. Through this channel, global economic conditions can indirectly affect inflation. The results, instead, do not seem to provide evidence in favor of altering domestic Phillips curves to include global slack as an additional driving variable for inflation. |
| Keywords: | Globalization ; Inflation (Finance) ; Group of Seven countries ; Monetary policy ; Banks and banking, Central ; Phillips curve |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:33&r=opm |
| By: | Fabio Milani |
| Abstract: | This paper estimates a structural New Keynesian model to test whether globalization has changed the behavior of U.S. macroeconomic variables. Several key coefficients in the model--such as the slopes of the Phillips and IS curves, the sensitivities of domestic inflation and output to "global" output, and so forth--are allowed in the estimation to depend on the extent of globalization (modeled as the changing degree of openness to trade of the economy), and, therefore, they become time-varying. The empirical results indicate that globalization can explain only a small part of the reduction in the slope of the Phillips curve. The sensitivity of U.S. inflation to global measures of output may have increased over the sample, but it remains very small. The changes in the IS curve caused by globalization are similarly modest. Globalization does not seem to have led to an attenuation in the effects of monetary policy shocks. The nested closed economy specification still appears to provide a substantially better fit of U.S. data than various open economy specifications with timevarying degrees of openness. Some time variation in the model coefficients over the postwar sample exists, particularly in the volatilities of the shocks, but it is unlikely to be related to globalization. |
| Keywords: | Globalization ; Macroeconomics - Econometric models ; Inflation (Finance) ; Monetary policy ; Banks and banking, Central ; Phillips curve |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:32&r=opm |
| By: | John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA) |
| Abstract: | This paper is a revision of Rensselaer Polytechnic Institute’s Working Papers in Economics Series, No. 803, entitled “How Falling Exchange Rates 2000 – 2007 Have Affected the U.S. Economy and Trade Deficit (Evaluated Using the Federal Reserve’s Real Broad Exchange Rate)”. It expands the analysis to measure exchange rate effects on the U.S. economy through 2008. It also utilizes a significantly improved method for assessing the meaning of the regression coefficient on the exchange rate variable in consumption and investment functions, removing ambiguity as to whether they should be interpreted as income or substitution effects. The paper attempts econometrically, using a seven behavioral equation model, to determine the total impact during 2000-2008 of the U.S. real exchange rate’s 13.8% decline. Using projections based on an econometric model of the U.S. economy 1960 – 2000, the paper suggests that the effect on demand for domestically produced consumer goods (and exports) is positive, but strongly negative for investment goods. The estimated overall negative effect of declining real exchange rates on the GDP is 1.9% over the eight years, or about a quarter percent decline a year. This revised estimate is less than half the estimated impact reported Working Paper 803. It is estimated the decline reduced the trade deficit $189 billion from what it otherwise would have been, down from $244 billion reported Working Paper 803. |
| JEL: | C20 C22 E00 E01 E20 E21 E22 E27 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:rpi:rpiwpe:0905&r=opm |