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on Open MacroEconomics |
| By: | Michael B Devereux (University of British Columbia); James Yetman (Bank for International Settlements) |
| Abstract: | Recent macroeconomic experience has drawn attention to the importance of interdependence among countries through financial markets and institutions, independently of traditional trade linkages. This paper develops a model of the international transmission of shocks due to interdependent portfolio holdings among leverage-constrained financial institutions. In the absence of leverage constraints, international portfolio diversification has no implications for macroeconomic co-movements. When leverage constraints bind, however, the presence of diversified portfolios in combination with these constraints introduces a powerful financial transmission channel which results in a high correlation among macroeconomic aggregates during business cycle downturns, quite independent of the size of international trade linkages. |
| Keywords: | leverage; international transmission; portfolios |
| JEL: | F3 F32 F34 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2009-08&r=opm |
| By: | Aizenman, Joshua (University of California Sta. Cruz); D. Chinn, Menzie (University of Wisconsin); Ito, Hiro (Portland State University) |
| Abstract: | Using the “trilemma indexes” developed by Aizenman et al. (2008) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—this paper examines how policy configurations affect macroeconomic performances with focus on the Asian economies. We find that the three policy choices do not matter for per capita economic growth. However, they do matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a higher level than a threshold (about 20% of gross domestic product). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation level. We find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be cancelled by holding higher levels of IR. Greater financial openness helps reduce real exchange rate volatility. These results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatilities in both investment and real exchange rate. These economies’ sizeable amount of international reserves holding appears to help enhance the stabilizing effect of the trilemma policy choices, which explains the recent phenomenal buildup of international reserves in the region. |
| Keywords: | trilemma policy; Asian emerging market economies; financial globalization; output volatility |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0180&r=opm |
| By: | Roberto Frenkel (Centro de Estudios de Estado y Sociedad (CEDES)); Martin Rapetti (University of Massachusetts Amherst) |
| Abstract: | The paper analyzes exchange rate regimes implemented by the major Latin American countries since the Second World War, with special attention on the period of the second globalization process beginning in the 1970s. The analysis follows a historical narrative aiming to provide an understanding of the domestic and external circumstances in which various regimes were adopted. A simple conceptual framework is developed in order to emphasize how the exchange rate regime may affect key nominal and real variables in a small open economy. After an overview of the main trends followed by the major countries in the region over the last 60 years, the paper focuses on regimes that were implemented 1) with stabilization purposes (nominal anchors) and 2) with the aim of targeting the level of the real exchange rate. These two sections analyze in greater detail some experiences illustrating the pros and cons of both strategies. The paper closes with an assessment about exchange rate experiences in Latin America. JEL Categories: F41, N16, F31 |
| Keywords: | Latin America, exchange rate regimes, real exchange rate, inflation targeting. |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2010-01&r=opm |
| By: | Drama , Bedi Guy Herve |
| Abstract: | This paper investigates the effect of real exchange rate on the balance of trade of Cote d’Ivoire using multivariate cointegration tests and vector error correction models with time series data covering the periods of 1975-2007. Our investigation results confirm the existence of long-run relationships among Trade Balance(TB), Real Exchange Rate(RER), and foreign and domestic incomes for Cote d’Ivoire. Estimated results also demonstrate that the (RER) has a significant positive influence on Cote d’Ivoire’s trade balance in both short and long-run under fixed real exchange rate management policies for the considering period. The Granger Causality test shows that the (RER) does Granger causes the trade balance then, based on the estimations, the Marshall-Lerner condition in Cote d’Ivoire’s data is explored by utilizing the Impulse Response Function (IFR) which traces the effect of (RER) on the trade balance viewing the J-curve pattern. |
| Keywords: | Key words: Real exchange rate; Trade balance; Cointegration test; VAR model; Granger Causality; IFR. |
| JEL: | F4 |
| Date: | 2010–04–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:21810&r=opm |
| By: | Miguel A. León-Ledesma; Reginaldo P. Nogueira Júnior |
| Abstract: | Recent literature has argued that exchange rate pass-through (ERPT) into domestic inflation has been declining in many countries following a dramatic change in inflation environment during the 1990s. Available empirical results face two central challenges: (i) the evidence on declining ERPT is mostlybased on sample-splitting approaches and hence subject to a degree of arbitrariness; and (ii) the link between a lower ERPT and inflation environment is usually based on simple correlation analysis and hence silent about temporal causality. We address these issues by making use of a state-space model that allows ERPT to be time-varying and dependent on the inflation environment. We estimate the model for 12 developed and emerging economies and test whether inflation contains significant information about the future evolution of the ERPT. The results reinforce the view of a smooth decline in the impact of exchange rates on domestic inflation, but do not support the hypothesis that lower inflation precedes this declining ERPT. |
| Keywords: | Exchange Rate Pass-Through, Inflation, State-space Models, Causality Tests. |
| JEL: | E42 E52 E58 F31 F41 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1002&r=opm |
| By: | Pao-Lin Tien (Department of Economics, Wesleyan University) |
| Abstract: | This paper makes use of long-run restrictions to identify macroeconomic shocks and evaluate their relative importance for exchange rate fluctuations. Unlike previous studies that employ a similar approach, I consider a large eight variable vector autoregressive system that includes short term interest rates rather than money stocks in order to help identify monetary policy shocks. Results for the U.S. and the U.K. show that monetary policy shocks and other macroeconomic shocks behave according to theory. However, monetary shocks account for only a small fraction of the variance of the real exchange rate. Instead, “taste shocks” that can be associated with the degree of trade openness, terms of trade, and current account appear to be the key factor driving the U.S.-U.K. real exchange rate. Results for other countries under consideration (Canada, Germany, and Japan) are similar. |
| Keywords: | vector autoregression, taste shocks, monetary shocks, exchange rate movements, long-run identifying restrictions |
| JEL: | F31 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2009-004&r=opm |
| By: | M Farid; |
| Abstract: | Trade data on East Asian EMEs shows the predominant use of Dollar Currency Pricing (DCP). Using a DSGE model with six-stage vertical production chain, staggered prices, and cross-border trade in intermediate inputs, we aim to provide an alternative explanation for ‘fear of floating’ by EMEs. We examine interactions between firms’ pricing rules and the transmission of external shocks under different exchange rate regimes. We find that weak input substitution and DCP of exports eliminate expenditure-switching and the allocative role of exchange rate adjustment, resulting in ‘exchange rate disconnect’, and hence ‘fear of floating’ by EMEs. |
| Keywords: | Vertical production chain; Staggered price contracts; Input Substitution; External Currency Pricing; Monetary Policy |
| JEL: | E31 E52 F41 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:10/05&r=opm |
| By: | Park, Donghyun (Asian Development Bank); Shin, Kwanho (Asian Development Bank) |
| Abstract: | An integral part of global current account imbalances is the large and persistent current account surplus developing Asia has run since the 1997–1998 Asian crisis. A country’s current account surplus is, by definition, equal to its net saving. The central objective of this paper is to investigate the extent to which the saving and investment rate of Asian countries can be explained by the underlying fundamental determinants of saving and investment such as gross domestic product growth and demographic factors. Our empirical analysis yields two key findings. First, we find stronger evidence of oversaving than underinvestment in the region. Second, we find stronger evidence of overinvestment prior to the Asian crisis than underinvestment after the Asian crisis. This suggests that the key to rebalancing Asian growth toward domestic sources lies in promoting consumption rather than investment. |
| Keywords: | Saving; investment; current account balance; global imbalance; Asia |
| JEL: | E21 E22 F32 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0158&r=opm |
| By: | Patnaik, Ila (Asian Development Bank Institute); Shah, Ajay (Asian Development Bank Institute) |
| Abstract: | In this paper, we examine capital account openness and exchange rate flexibility in 11 Asian economies. Asia has made slow progress in de jure capital account openness, but has made much more progress in de facto capital account openness. While there has been a gradual increase in exchange rate flexibility, most Asian economies continue to have largely inflexible exchange rates. This combination of advancing de facto capital account integration without greater exchange rate flexibility has led to procyclical monetary policy, when capital flows are procyclical. This paper emphasises the need for a consistent monetary policy framework. |
| Keywords: | capital account openness; exchange rate flexibility; asian economies |
| JEL: | E40 E60 F41 |
| Date: | 2010–03–12 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0204&r=opm |
| By: | Mario Forni; Luca Gambetti |
| Abstract: | We use a dynamic factor model to provide a semi-structural representation for 101 quarterly US macroeconomic series. We find that (i) the US economy is well described by a number of structural shocks between two and six. Focusing on the four-shock specification, we identify, using sign restrictions, two non-policy shocks, demand and supply, and two policy shocks, monetary and fiscal. We obtain the following results. (ii) Both supply and demand shocks are important sources of fluctuations; supply prevails for GDP, while demand prevails for employment and inflation. (ii) Policy matters: Both monetary and fiscal policy shocks have sizeable effects on output and prices, with little evidence of crowding out; both monetary and fiscal authorities implement important systematic countercyclical policies reacting to demand shocks. (iii) Negative demand shocks have a large long-run positive effect on productivity, consistently with the Schumpeterian "cleansing" view of recessions. |
| Keywords: | structural factor model; sign restrictions; monetary policy; fiscal policy; demand; supply |
| JEL: | C32 E32 E52 F31 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:040&r=opm |
| By: | Fabrizio Venditti (Bank of Italy) |
| Abstract: | In the past decade changes in oil prices have played a significant role in shaping inflation dynamics in the US and in the euro area, largely through their direct effect on fuels prices, reviving the controversy over whether the prices of petroleum products respond more promptly to positive than to negative oil price shocks. This paper provides fresh evidence on this issue for the US, the euro area and the four largest euro area countries (Germany, France, Italy and Spain), both for petrol and diesel prices. Inference is based on the dynamic response of downstream prices to upstream shocks, rather than on tests on the regression slopes as in the majority of existing studies, taking into account the non-linearity of the impulse response function in models with asymmetric adjustment, so far ignored in this literature. The empirical analysis shows that fuels prices respond very promptly to oil price shocks, with some heterogeneity across countries, and that no systematic evidence of asymmetries emerges. This result is robust across periods of high and low oil price volatility and holds both for standard and large shocks. |
| Keywords: | energy, oil prices, asymmetry, inflation |
| JEL: | C52 Q43 E31 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_751_10&r=opm |
| By: | Maria Christidou (Department of Economics, University of Macedonia); Theodore Panagiotidis (Department of Economics, University of Macedonia) |
| Abstract: | The effect of the single currency on the Purchasing Power Parity (PPP) hypothesis is examined in this study for the 15 EU countries, vis a vis the US dollar, before and after the advent of the euro. Standard as well as nonlinear unit root tests are employed on the time series dimension. Unit root tests reject PPP and the highest half-lives are observed after the introduction of the single currency. Panel unit root (Pesaran, 2007) and stationarity tests (Hadri and Kurozumi, 2008) that take into account cross-sectional dependence are also estimated. The results remain inconclusive as panel stationarity tests fail to support PPP whereas panel unit root tests fail to reject PPP for the whole sample and for the period before the introduction of the single currency. |
| Keywords: | Purchasing Power Parity, half-life, nonlinear unit roots, panel unit roots, heterogeneity, cross-section dependence |
| JEL: | F31 F33 G15 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:mcd:mcddps:2010_03&r=opm |
| By: | Adams, Charles (National University of Singapore); Park, Donghyun (Asian Development Bank) |
| Abstract: | Global current account imbalances are one of the key macroeconomic imbalances that underlie the global financial crisis. The central objective of this paper is to analyze the causes and consequences of global imbalances from the perspective of developing Asia. More specifically, we examine the root causes of the large and persistent current account surpluses that have emerged in the region since the Asian crisis. We also explore the consequences of global imbalances for the region, in terms of welfare and economic growth. Based on our analysis, we recommend a number of concrete policy directions to help Asia rebalance its demand and growth toward domestic sources. |
| Keywords: | Global imbalances; current account; global financial crisis; rebalancing; Asia |
| JEL: | F32 F41 F43 |
| Date: | 2010–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbewp:0157&r=opm |