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on Open MacroEconomics |
| By: | Fabio Ghironi (Boston College); Jaewoo Lee (International Monetary Fund); Alessandro Rebucci (Inter-American Development Bank) |
| Abstract: | International financial integration has greatly increased the scope for changes in a country's net foreign asset position through the "valuation channel" of external adjustment, namely capital gains and losses on the country's external assets and liabilities. We examine this valuation channel theoretically in a dynamic equilibrium portfolio model with international trade in equity that encompasses complete and incomplete asset market scenarios. By separating asset prices and quantities in the definition of net foreign assets, we can characterize the first-order dynamics of both valuation effects and net foreign equity holdings. First-order excess returns are unanticipated and i.i.d. in our model, but capital gains and losses on equity positions feature persistent, anticipated dynamics in response to productivity shocks. The separation of prices and quantities in net foreign assets also enables us to characterize fully the role of capital gains and losses versus the current account in the dynamics of macroeconomic aggregates. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete, showing how these different channels contribute to dampening (or amplifying) the impact response of the cross-country consumption differential to shocks and to keeping it constant in subsequent periods. |
| Keywords: | Current account; Equity; Net foreign assets; Risk sharing; Valuation |
| JEL: | F32 F41 G11 G15 |
| Date: | 2009–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:boc:bocoec:722&r=opm |
| By: | Arghyrou, Michael G (Cardiff Business School); Gregoriou, Andros; Pourpourides, Panayiotis M. (Cardiff Business School) |
| Abstract: | Arghyrou, Gregoriou and Pourpourides (2009) argue that exchange rate uncertainty causes deviations from the law of one price. We test this hypothesis on aggregate data from the G7-area. We find that exchange rate uncertainty explains to a significant degree deviations from Purchasing Power Parity. |
| Keywords: | Purchasing power parity; exchange rate uncertainty |
| JEL: | F31 F41 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2009/23&r=opm |
| By: | Fuentes, Miguel (Central Bank of Chile); Ibarrarán, Pablo (Inter-American Development Bank) |
| Abstract: | In this paper we study the effect of NAFTA on the responsiveness of Mexican economy to real exchange rate shocks. We argue that, by opening the U.S. and Canadian markets to Mexican goods, NAFTA made it easier for domestic producers to take advantage of the opportunities brought by the depreciation of the real exchange rate. To identify this mechanism, we use plant-level data and compare the behavior of employment, production and investment after two big real exchange rate shocks: the first observed in the mid 1980s, the second the Tequila Crisis of 1994-5. The evidence indicates that after passage of NAFTA exporting firms exhibited higher growth rates of employment, sales, and investment vis-á-vis non-exporters. We confirm our results by analyzing the behavior of a control group of firms, that had complete access to the U.S. market during both devaluations, and we show that they responded in a similar way in both events. Finally, we also provide direct evidence on the relationship between exports and tariff reductions brought by NAFTA. Our results support the view that NAFTA has allowed Mexican producers to respond more quickly to real exchange shocks. |
| Keywords: | NAFTA, RER Shocks, Tequila Crisis, external adjustment, firm-level evidence of effects of RER Shocks |
| JEL: | F36 F41 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp4494&r=opm |
| By: | Przystupa, Jan; Wróbel, Ewa |
| Abstract: | We propose a complex analysis of the exchange rate pass-through in an open economy. We assess the level, linearity and symmetry of exchange rate pass-through to import and consumer prices in Poland and discuss its implications for the monetary policy. We show that the pass-through is incomplete even in the long run. There is pricing to market behavior both in the long and short run. We do not find a strong evidence of non-linearity in import prices reaction to the exchange rate and reject the hypothesis of an asymmetric response to appreciations and depreciations. On the other hand, we find an asymmetry of CPI responses to the output gap, direction and size of the exchange rate changes and to the magnitude of the exchange rate volatility. The asymmetry is mostly visible after exogenous shocks. We reject the hypothesis of an asymmetric reaction of prices in a high and low inflation environment. |
| Keywords: | Exchange Rate Pass-through; Non-linear Model. |
| JEL: | E52 C22 F31 |
| Date: | 2009–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17660&r=opm |
| By: | Robinson Kruse (Aarhus University and CREATES); Michael Frömmel (Ghent University); Lukas Menkhoff (Leibniz University Hannover); Philipp Sibbertsen (Leibniz University Hannover) |
| Abstract: | This research points to the serious problem of potentially misspecified alternative hypotheses when testing for unit roots in real exchange rates. We apply a popular unit root test against nonlinear ESTAR and develop a Markov Switching unit root test. The empirical power of these tests against correctly and misspecified non-linear alternatives is analyzed by means of a Monte Carlo study. The chosen parametrization is obtained by real-life exchange rates. The test against ESTAR has low power against all alternatives whereas the proposed unit root test against a Markov Switching autoregressive model performs clearly better. An empirical application of these tests suggests that real exchange rates may indeed be explained by Markov-Switching dynamics. |
| Keywords: | real exchange rates, unit root test, ESTAR, Markov Switching, PPP |
| JEL: | C12 C22 F31 |
| Date: | 2009–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-50&r=opm |
| By: | Escaith, Hubert |
| Abstract: | Global supply chains reshaped international trade since the end 1980s. Their role in explaining the trade collapse that followed the financial crisis of September 2008 was determinant. Because production is internationally diversified, adverse external shocks affect firms not only through final demand, but also through a rupture in the flow of inputs received from their suppliers. The future of supply chain will also determine the alternative exit scenarios from the Great Recession; as a result of global rebalancing, they will probably be smaller and more regional. Left unchecked, these centripetal forces may lead to a deterioration of global governance and to deglobalization. The reshaping of global effective demand is of particular importance for the labour abundant lesser advanced developing countries that where relying on the strength of the global supply chains to attract productive investments. On the other hand, because trade in goods for processing inflated artificially some bilateral trade deficit, rebalancing them will prove easier in the short term, while the technical factors that made possible the internationalization of production will still promote further "flattening of the Earth" in the longer term |
| Keywords: | international trade; crisis; global supply chains; transmission channels; global rebalancing; trade and development |
| JEL: | F42 F23 O24 O19 |
| Date: | 2009–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:18274&r=opm |