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on Open MacroEconomics |
| By: | Gita Gopinath; Pierre-Olivier Gourinchas; Chang-Tai Hsieh; Nicholas Li |
| Abstract: | To what extent do national borders and national currencies impose costs that segment markets across countries? To answer this question the authors use a dataset with product-level retail prices and wholesale costs for a large grocery chain with stores in the United States and Canada. They develop a model of pricing by location and employ a regression discontinuity approach to estimate and interpret the border effect. They report three main facts: One, the median absolute retail price and wholesale cost discontinuities between adjacent stores on either side of the U.S.-Canadian border are as high as 21 percent. In contrast, within-country border discontinuity is close to 0 percent. Two, the variation in the retail price gap at the border is almost entirely driven by variation in wholesale costs, not by variation in markups. Three, the border gaps in prices and costs co-move almost one-to-one with changes in the U.S.-Canadian nominal exchange rate. They show these facts suggest that the price gaps they estimate provide only a lower bound on border costs. |
| Keywords: | Prices ; Price indexes ; Wholesale price indexes ; Retail trade |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:09-10&r=opm |
| By: | Charles Engel; Jian Wang; Jason Wu |
| Abstract: | Engel and West (EW, 2005) argue that as the discount factor gets closer to one, present-value asset pricing models place greater weight on future fundamentals. Consequently, current fundamentals have very weak forecasting power and exchange rates appear to follow approximately a random walk. We connect the Engel-West explanation to the studies of exchange rates with long-horizon regressions. We find that under EW's assumption that fundamentals are I(1) and observable to the econometrician, long-horizon regressions generally do not have significant forecasting power. However, when EW's assumptions are violated in a particular way, our analytical results show that there can be substantial power improvements for long-horizon regressions, even if the power of the corresponding shorthorizon regression is low. We simulate population Rsquared for long-horizon regressions in the latter setting, using Monetary and Taylor Rule models of exchange rates calibrated to the data. Simulations show that long-horizon regression can have substantial forecasting power for exchange rates. |
| Keywords: | Foreign exchange rates ; Financial markets ; Asset pricing ; Forecasting ; Random walks (Mathematics) ; Regression analysis |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:36&r=opm |
| By: | Warwick J McKibbin; Andy Stoeckel |
| Abstract: | This paper models the global financial crisis as a combination of shocks to global housing markets and sharp increases in risk premia of firms, households and international investors in an intertemporal (or DSGE) global model. The model has six sectors of production and trade in 15 major economies and regions. The paper shows that a ‘switching’ of expectations about risk premia shocks in financial markets can easily generate the severe economic contraction in global trade and production currently being experienced in 2009 and subsequent events. The results show that the future of the global economy depends critically on whether the shocks to risk are expected to be permanent or temporary. The best representation of the crisis may be one where initial long lasting pessimism about risk is unexpectedly revised to a more moderate scenario. This suggests a rapid recovery in countries not experiencing a balance sheet adjustment problem. |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2009-25&r=opm |
| By: | Engler, Philipp |
| Abstract: | This paper extends the model of Engler et al. (2007) on the adjustment of the US current account to a three-country world economy. This allows an analysis of the differential impact of a reversal of the US current account on Europe and Asia. In particular, the outcomes under different exchange rate policies are analysed. The main finding is that large factor re-allocations from non-tradables to tradables will be necessary in the US. The direction of factor re-allocation in Asia depends on whether the Bretton-Woods-II regime of unilaterally fixed or manipulated exchange rates in Asia is continued. If this is the case, the tradables sector and the current account surplus will continue to grow even when the US deficit closes. The flip side of this result is that Europe will face a huge real appreciation and an enormous current account deficit. With floating exchange rates worldwide, the impact on Europe will be limited while Asia´s tradables sector will shrink. |
| Keywords: | Global imbalances,US current account deficit,dollar adjustment,sectoral adjustment |
| JEL: | E2 F32 F41 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:20091&r=opm |
| By: | Fabio Canova (ICREA-UPF); Matteo Ciccarelli (European Central Bank); Eva Ortega (Banco de España) |
| 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, European Monetary Union, Panel VAR, Structural changes |
| JEL: | C15 C33 E32 E42 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0921&r=opm |
| By: | Mohler, Lukas |
| Abstract: | With the seminal work of Feenstra (1994) and its application to the United States by Broda and Weinstein (2006) the gains from variety through trade as suggested by Krugman (1979) have become quantifiable. My paper adds to this literature in different respects: On the theoretical side, the Feenstra ratios are reinterpreted to allow for unobserved growth at the extensive margin. Also, the gains from variety are decomposed regarding countries of origin and industries. On the empirical side, the gains from variety are calculated for the United States and Switzerland, a small open economy. Analyzing the empirical results for these countries as well as data from other OECD economies, it is then argued that size and openness of countries as well as the (unobserved) true growth at the extensive margin are important factors in determining the welfare gains from variety. |
| Keywords: | Welfare Gains from Trade; Trade in Variety; Small Open Economy |
| JEL: | F12 F14 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17592&r=opm |
| By: | Weber, Sebastian; Wyplosz, Charles |
| Abstract: | Nearly two years after the onset of the financial crises, many central banks have brought their policy interest rates down to, or close to zero. Various governments have seen their budget deficits soar. Both policies have affected exchange rates, partly through market expectations. With a majority of exchange rates officially floating, exchange rate movements do not necessarily reflect official decisions as was the case in the 1930s. Yet, also in the 2008 crisis, authorities have directly intervened in the foreign exchange market, sometimes in order to defend a falling currency but in other instances with the aim to limit appreciation pressure, akin of competitive devaluations. This paper documents the exchange rate interventions during the height of the 2008/09 financial crisis and identifies the countries which have particular high incentives to intervene in the foreign exchange market to competitively devalue their currency. While various countries had increased incentives to devalue, we find that direct exchange rate interventions have been rather limited and contagion of devaluation has been restricted to one regionally contained case. However, sharp market-driven exchange rate movements have reshaped competitive positions. It appears that these movements have so far not seriously disrupted global trade. After all, a world crisis is likely to require widespread exchange rate adjustments as different countries are affected in different ways and have different capacities to weather the shocks. |
| Keywords: | Currencies and Exchange Rates,Debt Markets,Emerging Markets,Economic Stabilization,Economic Theory&Research |
| Date: | 2009–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5059&r=opm |