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on Open MacroEconomics |
| By: | Michael B Devereux; Gregor W Smith; James Yetman |
| Abstract: | Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciations across countries. The striking lack of evidence for this link - the consumption/real-exchange-rate anomaly or Backus-Smith puzzle - has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of 'hand-to-mouth' consumers may help to explain the evidence. |
| Keywords: | international risk sharing, Backus-Smith puzzle |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:295&r=opm |
| By: | Yongsung Chang; Sun-Bin Kim; Jaewoo Lee |
| Abstract: | We undertake a quantitative analysis of the dispersion of current accounts in an open economy version of incomplete insurance model, incorporating important market frictions in trade and financial flows. Calibrated with conventional parameter values, the stochastic stationary equilibrium of the model with limited borrowing can account for about two-thirds of the global dispersion of current accounts. The easing of financial frictions can explain nearly all changes in the current account dispersion in the past four decades whereas the easing of trade frictions has almost no impact on the current account dispersion. |
| Date: | 2009–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/276&r=opm |
| By: | Fabio Ghironi; Jaewoo Lee; Alessandro Rebucci |
| Abstract: | International financial integration has greatly increased the scope for changes in a country's net foreign asset position through the valuation channel, namely capital gains and losses on external assets and liabilities. We examine this valuation channel in a dynamic equilibrium portfolio model with international trade in equity. By separating asset prices and quantities, we can characterize the first-order dynamics of valuation effects and the current account in macroeconomic dynamics. Specifically, we disentangle the roles of excess returns, capital gains, and portfolio adjustment for consumption risk sharing when financial markets are incomplete. |
| Date: | 2009–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/275&r=opm |
| By: | Yunfang Hu (Graduate School of International Cultural Studies, Tohoku University); Kazuo Mino (Institute of Economic Research, Kyoto University) |
| Abstract: | This paper explores a dynamic two-country model with production externalities in which capital goods are not traded and international lending and borrowing are allowed. Unlike the integrated world economy model based on the Heckscher-Ohlin setting, our model yields indeterminacy of equilibrium under a wider set of parameter values than in the corresponding closed economy model. Our finding demonstrates that the assumption on trade structure would be a relevant determinant in considering the relation between globalization and economic volatility. |
| Keywords: | two-country model, non-traded goods, equilibrium indeterminacy, social constant returns |
| JEL: | F43 O41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:kyo:wpaper:690&r=opm |
| By: | Michael D. Bordo; David Hargreaves; Mizuho Kida (Reserve Bank of New Zealand) |
| Abstract: | We identify the timing of currency, banking crises and sudden stops in New Zealand from 1880 to 2008 using methodologies from the international literature and consider the extent to which the empirical models in that literature can explain New Zealand’s crisis history. We find that the cross country evidence on the determinants of crises fits New Zealand experience reasonably well. A number of the risk factors that correlate with crises internationally – such as domestic imbalances, external debt, and currency mismatches – were elevated for New Zealand when the country had more frequent crises and have improved in the recent more stable) period. However, a time-series analysis of New Zealand growth over 120 years shows that global factors – such as the US growth rate and terms of trade – explain New Zealand growth fairly well, and that crisis dummy variables do not have significant additional explanatory power. This suggests that having sound institutions and policies may help avoid severe domestic crises, but will not be sufficient to avoid the domestic economic impact of the global business cycle. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2009/17&r=opm |
| By: | Levent, Korap |
| Abstract: | In our article we employ some contemporaneous panel unit root tests (Maddala and Wu, 1999; Im et al., 2003) to examine whether the real exchange rates are mean reverting. Considering a panel of 26 OECD countries from 1987 to 2006 both using monthly and quarterly observations, we find that assuming a panel framework significantly increases the power of unit root tests. As a result, we find that the nonstationarity of the real exchange rate has strongly been rejected in favour of giving support to the purchasing power parity. |
| Keywords: | Real Exchange Rates ; Panel Unit Root Tests ; OECD Economies ; |
| JEL: | C22 F41 F31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19527&r=opm |
| By: | Liefert, William; Persuad, Suresh |
| Abstract: | Movements in countriesâ exchange rates can substantially change the prices of goods faced by producers and consumers and thereby affect incentives to produce, consume, and trade goods. Exchange rate changes, however, might not be completely transmitted (passed through) to domestic prices. Empirical evidence shows that price and exchange rate transmission for agricultural products is low in most developing economies, partly because of trade policies but also because of inadequate infrastructure and other market deficiencies. During the last 20 years, developed and developing countries generally have moved away from support policies that impede price and exchange rate transmission toward trade policies that allow transmission, such as tariffs. The Uruguay Round Agreement on Agriculture of 1994 strongly encouraged this development. Despite these policy changes, market deficiencies remain as a cause of incomplete transmission. Incomplete transmission weakens countriesâ integration into world agricultural markets and thereby reduces agricultural trade potential. Low transmission in developing countries also decreases their own benefits from trade, including the gains they could realize if there is further global agricultural liberalization. |
| Keywords: | Agricultural infrastructure, agricultural policy, agricultural trade, exchange rates, exchange rate transmission, imperfect markets, institutions, price transmission., Agribusiness, Agricultural and Food Policy, Agricultural Finance, Financial Economics, |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:uersrr:55942&r=opm |
| By: | Md Shoaib Ahmed, Shoaib |
| Abstract: | This is a study to investigate the exchange rate volatility and it impacts on international trade growth: evidence from Bangladesh. To establish the empirical relationship between exchange rate volatility and impact on international trade growth in Bangladesh, different quantitative techniques are used by considering the data from May 2003 to December 2008. In the analysis co-integration and error correction methods have been used to do the analysis the relationship between exchange rate volatility and international trade growth in Bangladesh. From the investigation, the result shows that the exchange rate volatility has a negative and major effect both in short run and long run with Western European and North American countries. There is a negative and significant relationship has been observed between exchange rate volatility and the international trade growth. |
| Keywords: | Key words: Co-integration; Error Correction; Exchange Rate; Volatility; Export growth; Trade growth. |
| JEL: | C0 C22 C01 |
| Date: | 2009–01–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19466&r=opm |
| By: | Parantap Basu; Robert Kollmann |
| Abstract: | Empirical research documents that an exogenous rise in government purchases in a given country triggers a depreciation of its real exchange rate. This raises an important puzzle, as standard macro theories predict an appreciation of the real exchange rate. We argue that this prediction reflects the assumption that government purchases are unproductive. Using a simple model, we show that the real exchange rate may depreciate in response to a rise in government purchases, if those purchases increase domestic private sector productivity. A very small dose of public sector externality is sufficient to generate this result. |
| Keywords: | Productive government purchases, real exchange rate |
| JEL: | F41 F42 E62 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eca:wpaper:2010_001&r=opm |
| By: | Przystupa, Jan |
| Abstract: | Taking into account a large number of types of nominal and real exchange rates, while estimating the real equilibrium exchange rate, one should always remember that there is no a single, universal equilibrium exchange rate. A point value or a path of that exchange rate depends on the adopted definitions and assumptions as well as on the method and purpose of the analysis. However, a value added of each estimation of the equilibrium exchange rate is an answer, whether the economic policy causes upset or stabilisation of the economy. Moreover, in the period of discussion on the exchange rate of accession to ERM-2, showing an interval of the exchange rate where all values of the exchange rate ensure at least suboptimal behaviour of the economy may help to make a decision on the date of accession to ERM-2 that will minimise costs of retention of the exchange rate within a definite currency band. For Poland, estimated by the NATREX method the long-run real equilibrium exchange rate ensures the internal equilibrium with annual growth rates of GDP amounting to 4.1%, comprised of growth of consumption by 4% p.a., investment by 8.7%, volume of exports by 8.5% and volume of imports by 8.1% p.a. Estimating on the ground of real exchange rates an approximate value of nominal exchange rates, one can state that the long-term equilibrium in the economy is ensured with the exchange rate of 3.80-3.90 zlotys for 1 euro. The current exchange rate will probably approach the equilibrium exchange rate at the turn of 2010 and 2011, and it will remain near that level over 5-6 quarters. This means that in that period cost of retention of the PLN exchange rate within a narrow band of fluctuations is relatively the least. The next period where the current exchange rate should approach the optimal exchange rate is 2014. Then, also in the medium term, the exchange rate of zloty should be comprised within the interval of 3.80-3.90 (assuming the stable exchange rate of USD/EUR=1.40) |
| Keywords: | equilibrium exchange rate; NATREX |
| JEL: | E52 F31 |
| Date: | 2009–10–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:19549&r=opm |
| By: | Yushi Yoshida (Faculty of Economics, Kyushu Sangyo University) |
| Abstract: | After the financial crisis originating from the collapse of the US housing market in 2007, financial markets, including stock markets and foreign exchange markets, experienced drastic fluctuations during an adjustment stage. We examine how the financial crisis affected the linkage between foreign exchange markets and stock markets. First, by examining the daily stock market returns of both Japan and the United States for the sample covering the 2007-2008 financial crisis, we test whether there is a shift in correlation in a smooth-transition correlation GARCH model. We find strong evidence that there was an abrupt upward shift in correlation in June of 2001. There may have been another upward shift of correlation in June of 2008, although the evidence is statistically weak. Second, after adding the JPY/USD exchange rate into a model, we find little correlation between returns of exchange rate and the Japanese stock market, although evidence indicates that there is two-way causality effect between the exchange rate and the Japanese stock market in a VAR framework. This paper provides evidence that a large financial shock may bring financial markets around the world closer to one another. |
| Keywords: | Exchange rate, Financial crisis, Japan and US, Smooth transition, Stock market integration |
| JEL: | F31 F36 G15 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:kyu:dpaper:38&r=opm |