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on Open MacroEconomics |
| By: | Obstfeld, Maurice; Rogoff, Kenneth |
| Abstract: | This paper makes a case that the global imbalances of the 2000s and the recent global financial crisis are intimately connected. Both have their origins in economic policies followed in a number of countries in the 2000s and in distortions that influenced the transmission of these policies through U.S. and ultimately through global financial markets. In the U.S., the interaction among the Fed’s monetary stance, global real interest rates, credit market distortions, and financial innovation created the toxic mix of conditions making the U.S. the epicenter of the global financial crisis. Outside the U.S., exchange rate and other economic policies followed by emerging markets such as China contributed to the United States’ ability to borrow cheaply abroad and thereby finance its unsustainable housing bubble. |
| Keywords: | current account deficit; financial crisis; financial reform; global imbalances; housing bubble |
| JEL: | E44 E58 F32 F33 F42 G15 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7606&r=opm |
| By: | Ansgar Belke; Gunther Schnabl; Holger Zemanek |
| Abstract: | The paper scrutinizes the role of wages and capital flows for competitiveness in the new EU member states in the context of real convergence. For this purpose it extends the seminal Balassa-Samuelson model by international capital markets. The augmented Balassa-Samuelson model is linked to the monetary overinvestment theories of Wicksell and Hayek in order to trace cyclical deviations of real exchange rates from the productivity-driven equilibrium path. Panel estimations for the period from 1993 to 2008 reveal mixed evidence for the role of capital markets for both the economic catch-up process and international competitiveness of the Central and Eastern European countries. |
| Keywords: | Exchange rate regime, wages, Central and Eastern Europe, EMU accession, panel model |
| JEL: | E24 F16 F31 F32 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0147&r=opm |
| By: | Harashima, Taiji |
| Abstract: | The paper examines the impacts of heterogeneity in the degree of relative risk aversion on the balance on current account in the framework of endogenous growth, and concludes that, like heterogeneity in demographic changes, heterogeneity in the degree of relative risk aversion generates persisting current account imbalances. The imbalance continues permanently, but its ratio to outputs stabilizes. With evidence in many empirical studies that the degree of relative risk aversion in Japan is relatively higher than that in the U.S., the paper argues that the persisting bilateral trade deficit of the U.S. with Japan is partially generated by this mechanism. |
| Keywords: | Current account; Trade deficits; Capital flows; Endogenous growth; Risk aversion |
| JEL: | F21 F41 F43 E10 O40 |
| Date: | 2009–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19385&r=opm |
| By: | Martin Berka; Mario J. Crucini |
| Abstract: | The national terms of trade, defined as the ratio of an export price index to an import price index has been extensively studied empirically. In this paper we construct an alternative measure, which we call the consumption terms of trade. This measure recognizes the fact that consumers and firms face different prices for the same items and consume different items. Using micro-data from the Economist Intelligence Unit at the retail level, we conduct a forensic analysis of the variation of the terms of trade of 38 countries. Using a novel variance decomposition method, we find that the bulk of terms of trade variation is accounted for by oil, automobiles and medicine. The other goods in our construct tend to exhibit balanced trade, providing a natural hedge against world price fluctuations. We find the consumption terms of trade at local prices is more volatile than at world prices, but the two are strongly positively correlated. The same commodities dominate the variance decomposition in both constructs, but variance shifts from oil to medicine, when local prices are used, presumably due to larger LOP deviations in the latter than the former. The significant differences in time paths of producer (conventional) and consumer terms of trade suggests the need to adapt the elasticities approach to trade balance adjustment to recognize different prices and baskets at the consumer and producer level. |
| JEL: | F0 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15580&r=opm |
| By: | Robert C. Feenstra; Benjamin R. Mandel; Marshall B. Reinsdorf; Matthew J. Slaughter |
| Abstract: | Since 1995, growth in productivity in the United States appears to have accelerated dramatically. In this paper, we argue that part of this apparent speed-up actually represents gains in the terms of trade and tariff reductions, especially for information-technology products. We demonstrate how unmeasured gains in the terms of trade and declines in tariffs can cause conventionally measured growth in real output and productivity to be overstated. Building on the GDP function approach of Diewert and Morrison, we develop methods for measuring these effects. From 1995 through 2006, the average growth rates of our alternative price indexes for U.S. imports are 1.5% per year lower than the growth rate of price indexes calculated using official methods. Thus properly measured terms-of-trade gain can account for close to 0.2 percentage points per year, or about 20%, of the 1995-2006 apparent increase in productivity growth for the U.S. economy. Bias in the price indexes used to deflate domestic output is a question beyond the scope of this paper, but if upward bias were also present in those indexes, this could offset some of the effects of mismeasurement of gains in terms of trade. |
| JEL: | F43 O47 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15592&r=opm |
| By: | Mototsugu Shintani (Department of Economics, Vanderbilt University); Akiko Terada-Hagiwara (Economics and Reasearch Department, Asian Development Bank); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University) |
| Abstract: | This paper investigates the relationship between the exchange rate pass-through (ERPT) and inflation by estimating a nonlinear time series model. Using a simple theoretical model of ERPT determination, we show that the dynamics of ERPT can be well-approximated by a class of smooth transition autoregressive (STAR) models with inflation as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to U.S. domestic prices. The estimation result suggests that declines in the ERPT during the 1980s and 1990s are associated with lowered inflation. |
| Keywords: | Import prices, inflation indexation, pricing-to-market, smooth transition autoregressive models, sticky prices |
| JEL: | C22 E31 F31 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0920&r=opm |
| By: | Ruscher, Eric; Wolff, Guntram B. |
| Abstract: | Global and European trade balances have seen strong divergences combined with strong movements in the exchange rate. Trade balances and real effective exchange rates are related. Using different measures of the real effective exchange rate, we show that this long-run link hinges on the relative price of non-tradable to tradable goods and services in relation to their trading partners. An improvement in the trade balance is associated with a fall in the relative price of non-tradable goods and services. The elimination of nominal exchange rates with the euro does not change these relationships. Government consumption increases the relative price of nontradable goods. The results highlight the importance of internal price adjustments for external balances, a point frequently overlooked in policy debates. |
| Keywords: | real exchange rate; non-tradable sector; euro |
| JEL: | F32 F41 F31 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19151&r=opm |
| By: | Mirdala, Rajmund |
| Abstract: | Exchange rate plays an important role in transmitting pressures from the external shocks to the domestic economy. Development of inflation in the domestic economy is significantly determined by the ability of exchange rate to transmit external price related pressures to the domestic market. Considering the new EU member countries obligation to adopt euro the loss of the monetary sovereignty should be analyzed not only in the view of the direct positive and negative effects of this decision but also in the view of many indirect effects. While the exchange rates of majority of the EMU candidate countries are strongly affected by the euro exchange rate on the international markets there is still room for them to float partially reflecting changes in the national economic development. Ability of the exchange rate to transfer external shocks to the national economy remains one of the most discussed areas relating to the current stage of the monetary integration process in the European single market. In the paper we analyze the ability of the exchange rate to weaken or eventually to strengthen the transmission of the external inflation pressures to the national economy in the Czech republic, Hungary, Poland and the Slovak republic. In order to meet this objective we estimate a vector autoregression (VAR) model correctly identified by the Cholesky decomposition of innovations that allows us to identify structural shocks hitting the model. Variance decomposition and impulse-response functions are computed in order to estimate the exchange rate pass-through from the foreign prices of import to the domestic consumer price indexes in the Visegrad countries. Ordering of the endogenous variables in the model is also considered allowing us to check the robustness of the empirical results. |
| Keywords: | exchange rate; inflation; VAR; Cholesky decomposition; variance decomposition; impulse-response function |
| JEL: | C32 E52 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19282&r=opm |
| By: | Claudio Bravo-Ortega |
| Abstract: | This paper investigates the impact of multilateral trade linkages on bilateral real exchange rate volatility by examining a particular channel —the extent of the e?ects of di?erences on import intensities (GDP’s share of imports of a given product and origin) between trade part- ners—of long-run real exchange rate volatility. I exploit a large panel of cross-country data over the years 1970–97 and construct a micro-founded index to capture this e?ect. In the estima- tions I address carefully endogeneity issues by testing not just exogeneity but also the presence of weak instruments. As robustness check and under the latter I estimate LIML and Fuller(1) regressions to ensure unbiased coe?cients. Results strongly support the hypothesis that a pair of countries with a larger di?erence in the import intensities from the rest of the world faces a larger bilateral real exchange rate volatility. This result turns to be robust to the inclusion of bilateral trade a commonly argued moderator of volatility and other controls. These empirical ?ndings are consistent with recent international trade models that highlight multi-country trade linkages. |
| JEL: | F30 F40 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:udc:wpaper:wp304&r=opm |
| By: | Masood, Tariq; Ahmad, Mohd. Izhar |
| Abstract: | The study attempts to analyse the behaviour of some macroeconomic variables in response to total capital inflows in India using quarterly data for the period 1994Q1-2007Q4. Time trend of all variables except nominal effective exchange rate-both export and trade based and current account balance shows instability over the period of study. Current account balance is the only variable which is stationary in level form all other variables are stationary in first difference form. Cointegration test confirms the long run equilibrium relation between total capital inflows (TCI) and real effective exchange rate-both trade based and export based and between TCI and nominal effective exchange rate-export based. Granger causality test confirms the bidirectional causality between real effective exchange rate-export based and TCI and between foreign exchange reserve & TCI and unidirectional causality from TCI to real effective exchange rate-trade based. |
| Keywords: | International Capital Inflows; Time Series Econometrics |
| JEL: | F30 C22 |
| Date: | 2009–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19299&r=opm |
| By: | Campanella, Edoardo |
| Abstract: | Tiny changes in the American monetary policy can have dramatic effects on the rest of the world because of its double role of national and international currency. This is what I call the Triffin dilemma, an ever green concept in international finance. In the paper I show how it works through three examples: price of commodities, dollarization, and the international financial position of the US. I argue that to solve this situation, it would be important to create a more democratic monetary system, in which all the countries have a decision weight. In particular, I think that globalization and regionalization should be the two forces leading towards the new monetary system. The main economies should adopt the same currency through a system of fixed exchange rates (global money); developing countries should create regional monetary unions (regional money), preserving the real exchange rate as real shock absorber, but gaining in terms of time consistency and credibility. -- |
| Keywords: | Triffin dilemma,global currency,regional monetary union,dollarization |
| JEL: | F33 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwedp:200946&r=opm |
| By: | Brian DePratto; Carlos de Resende; Philipp Maier |
| Abstract: | We estimate a New Keynesian general-equilibrium open economy model to examine how changes in oil prices affect the macroeconomy. Our model allows oil price changes to be transmitted through temporary demand and supply channels (affecting the output gap), as well as through persistent supply side effects (affecting trend growth). We estimate this model for Canada, the United Kingdom, and the United States over the period 1971-2008, and find that it matches the data very well in terms of first and second moments. We conclude that (i) energy prices affect the economy primarily through the supply side, whereas we do not find substantial demand-side effects; (ii) higher oil prices have temporary negative effects on both the output gap and on trend growth, which translates into a permanent reduction in the level of potential and actual output. Also, results for the United States indicate that oil supply shocks have more persistent negative effects on trend growth than oil demand shocks. These effects are statistically significant; however, our simulations also indicate that the effects are economically small. |
| Keywords: | Economic models; Interest rates; Transmission of monetary policy; Productivity; Potential output |
| JEL: | F41 Q43 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:09-33&r=opm |
| By: | Jotikasthira, Chotibhak; Lundblad, Christian T.; Ramadorai, Tarun |
| Abstract: | We provide new evidence on the channels through which financial shocks are transmitted across international borders. Employing monthly data from 1996 to 2008 on over 1,000 developed country-domiciled mutual and hedge funds, we show that inflows and outflows experienced by these funds translate into significant changes in their portfolio allocations in 25 emerging markets. Despite funds' efforts to ameliorate the price impact of these portfolio allocation shifts, they substantially impact emerging market equity returns, and are associated with increases in co-movement between emerging and developed markets. |
| Keywords: | co-movement; contagion; hedge funds; international finance; mutual funds |
| JEL: | F32 G12 G15 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7595&r=opm |
| By: | Harashima, Taiji |
| Abstract: | Strategies for trade liberalization when the rates of time preference are heterogeneous across countries are examined in the framework of endogenous growth. The paper argues that the best strategy for a country with the relatively higher rate of time preference is the strategy of free trade with wielding market power if the country is large enough to wield market power because all the optimality conditions are satisfied in this case. By this strategy, the current account of the country shows persisting surpluses, which implies a possibility that China has taken this strategy. |
| Keywords: | Trade Liberalization; Time preference; Heterogeneity; Trade deficits; China |
| JEL: | F10 O24 F21 F43 |
| Date: | 2009–12–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19386&r=opm |