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on Open MacroEconomics |
| By: | Aizenman, Joshua (Asian Development Bank Institute); Chinna, Menzie (Asian Development Bank Institute); Ito, Hiro (Asian Development Bank Institute) |
| Abstract: | This paper extends our previous paper (Aizenman, Chinn, and Ito 2008) and explores some of the unexplored questions. First, we examine the channels through which the trilemma policy configurations affect output volatility. Secondly, we investigate how trilemma policy configurations affect the output performance of the economies under severe crisis situations. Thirdly, we look into how trilemma configurations have evolved in the aftermath of economic crises in the past. 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 international reserves (IR). Greater financial openness helps reduce real exchange rate volatility. These results indicate that policymakers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. We also find that the "crisis economies" could end up with smaller output losses if they entered the crisis situation with more stable exchange rates or if they continue to hold a high level of IR and maintain greater exchange rate stability during the crisis period. Lastly, we find that developing countries are often found to have decreased the level of monetary independence and financial openness, but increased the level of exchange rate stability in the aftermath of a crisis, especially for the last two decades. This finding indicates how vulnerable developing countries, especially emerging market ones, are to volatile capital flows as a result of global financial liberalization. |
| Keywords: | trilemma policy; capital outflows; investment channel; asia regional |
| JEL: | F15 F21 F31 F36 F41 O24 |
| Date: | 2010–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0213&r=opm |
| By: | Kimberly Beaton; Carlos de Resende; René Lalonde; Stephen Snudden |
| Abstract: | The authors use the Bank of Canada's version of the Global Economy Model, a multi-country, multi-sector dynamic stochastic general-equilibrium model with an active banking system (the BoC-GEM-FIN), to study the evolution of global current account balances following the recent global financial crisis. More specifically, they use several shocks from the model to generate a simulated baseline scenario that mimics: (i) the initial, pre-crisis state of disequilibrium in global current account balances, and (ii) the effects of the crisis, including those of the policy responses undertaken worldwide. The authors find that a sufficient set of conditions and policies for a sustainable resolution of the global current account imbalances relies on three key elements: (i) a continuous upward adjustment of U.S. private savings, (ii) fiscal consolidation in advanced countries, and (iii) an orderly adjustment of exchange rates. These three criteria facilitate a gradual decline in the U.S. current account deficit going forward. A fourth key element, the implementation of policies aimed at stimulating domestic demand in emerging Asia, is needed to ensure that the counterpart of the decrease in the U.S. current account deficit is mainly a reduction in the surpluses of emerging Asia. Sensitivity analysis based on deviations from these conditions illustrates the factors behind the main results and the costs associated with the alternative scenarios considered. |
| Keywords: | Balance of payments and components; Business fluctuations and cycles; International topics; Recent economic and financial developments |
| JEL: | E21 F01 F32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:10-4&r=opm |
| By: | Baldwin, John R.; Yan, Beiling |
| Abstract: | We examine the simultaneous effects of real-exchange-rate movements and of tariff reductions on plant death in Canadian manufacturing industries between 1979 and 1996. We find that both currency appreciation and tariff cuts increase the probability of plant death, but that tariff reductions have a much greater effect. Consistent with the implications of recent international-trade models involving heterogeneous firms, we further find that the effect of exchange-rate movements and tariff cuts on exit are heterogeneous across plants - particularly pronounced among least efficient plants. Our results reveal multi-dimensional heterogeneity that current models featuring one-dimensional heterogeneity (efficiency differences among plants) cannot fully explain. There are significant and substantial differences between exporters and non-exporters, and between domestic- and foreign- controlled plants. Exporters and foreign-owned plants have much lower failure rates; however, their survival is more sensitive to changes in tariffs and real exchange rates, whether differences in their efficiency levels are controlled or not. |
| Keywords: | Manufacturing, Business performance and ownership, Business adaptation and adjustment, Entry, exit, mergers and growth |
| Date: | 2010–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:stc:stcp5e:2010061e&r=opm |
| By: | James R. Markusen |
| Abstract: | A major role for per-capita income in international trade, as opposed to simply country size, was persuasively advanced by Linder (1961). Yet this crucial element of Linder’s story was abandon by most later trade economists in favor of the analytically-tractable but counter-empirical assumption that all countries share identical and homothetic preferences. This paper collects and unifies a number of disjoint points in the existing literature and builds further on them using simple and tractable alternative preferences. Adding non-homothetic preferences to a traditional models helps explain such diverse phenomenon as growing wage gaps, the mystery of the missing trade, home bias in consumption, and the role of intra-country income distribution, solely from the demand side of general equilibrium. With imperfect competition, we can explain higher markups and higher price levels in higher per-capita income countries, and the puzzle that gravity equations show a positive dependence of trade on per-capita incomes, aggregate income held constant. In all cases, the effects of growth are quite different depending on whether it is growth in productivity or through factor accumulation. The paper concludes with some suggestions for calibration, estimation, and gravity equations. |
| JEL: | F1 F10 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15903&r=opm |
| By: | Robert J. Barro; Jong-Wha Lee |
| Abstract: | Our panel data set on educational attainment has been updated for 146 countries from 1950 to 2010. The data are disaggregated by sex and by 5-year age intervals. We have improved the accuracy of estimation by using information from consistent census data, disaggregated by age group, along with new estimates of mortality rates and completion rates by age and education level. We use these new data to investigate how output relates to the stock of human capital, measured by overall years of schooling as well as by the composition of educational attainment of workers at various levels of education. We find schooling has a significantly positive effect on output. After controlling for the simultaneous determination of human capital and output, by using the 10-year lag of parents‘ education as an instrument variable (IV) for the current level of education, the estimated rate-of-return to an additional year of schooling ranges from 5% to 12%, close to typical Mincerian return estimates found in the labor literature. |
| JEL: | F43 I21 O11 O4 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15902&r=opm |
| By: | Quaas, Georg |
| Abstract: | Schnabl and Freitag (2009) sketch the causal chain that produced the current account surplus in China and the current account deficit of the U.S. (as a part of global imbalances) as follows: declining interest rates in the U.S. cause a redirection of capital flows into the periphery, rising capital inflows into China and other Asian countries trigger currency purchases by periphery central banks, and increasing stocks of foreign reserves on the asset side in the central bank balance sheet are matched by a proportional increase of reserve money on the liability side. To keep the exchange rate stable, foreign reserves are accumulated and reserve money expands. The Peoples Bank of China is trying to fight the inflation pressure with several measures, among them higher interest rates. This attracts even more foreign capital to China. Moreover, it cannot solve a problem that originates in the macroeconomic policy of the global economy’s leader. - A crucial point in this argument is the redirection thesis. The empirical evidence does not support this thesis in several respects—there is no evidence for a redirected capital flow away from the U.S. toward China, and there is no evidence that interest rates controlled by the Federal Reserve are the cause of the capital flow to China. |
| Keywords: | global imbalances; current account surplus; current account deficit |
| JEL: | F32 |
| Date: | 2010–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:22133&r=opm |
| By: | Benedetti Fasil, Cristiana (European University Institute); Borota, Teodora (Department of Economics) |
| Abstract: | This paper analyzes the role of product quality and labor efficiency in shaping the trade patterns and trade intensities within and across two groups of countries, the developed and richer North and the developing South. Taking prices as a proxy for quality, recent empirical literature identifies a positive relation between income per capita and both export and import prices, suggesting that rich countries trade goods of relatively higher quality. Instead of relying on specific demand side mechanisms such as non-homothetic preferences, we focus on the North-South differences in technology. We employ a four country North-South trade model with two dimensions of firm heterogeneity. Differences in firms’ product qualities and cost efficiencies result in a price distribution generating different consumption bundles and the observed export and import prices across rich and poor countries. Furthermore, the resulting total expenditure allocation across quality shows that the North (South) spends a larger share of its income on high (low) quality even with the same homothetic preferences across regions. |
| Keywords: | International trade patterns; North-South trade; import and export prices; heterogeneous firms; product quality |
| JEL: | F10 F12 F14 L11 L15 |
| Date: | 2010–04–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:uunewp:2010_007&r=opm |