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on Open MacroEconomics |
| By: | Özer Karagedikli; Haroon Mumtaz; Misa Tanaka (Reserve Bank of New Zealand) |
| Abstract: | Recent research has found evidence of increasing co-movement in CPI inflation rates across industrialised countries. This paper considers whether this increased international co-movement in inflation rates can be attributed to greater global integration of product markets. To examine this question, we use a data set of 28 matched product category price indices for 14 advanced economies for 1998Q1 - 2008Q2, and decompose the inflation rates into a world factor, country-specific factors, and category-specific factors using a Bayesian dynamic factor model with Gibbs sampling. We find that the category-specific factors account for a large part of the co-movement in the prices of goods which are intensive in internationally traded primary commodities; but this is less evident for other traded goods. We also find that both the world factor and the category-specific factors become more significant in explaining the movement in the relative prices in the second half of our sample. |
| JEL: | E30 E52 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2010/02&r=opm |
| By: | Alexander Chudik (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.) |
| Abstract: | The curse of dimensionality, a problem associated with analyzing the interaction of a relatively large number of endogenous macroeconomic variables, is a prevailing issue in the open economy macro literature. The most common practise to mitigate this problem is to apply the so-called Small Open Economy Framework (SOEF). In this paper, we aim to review under which conditions the SOEF is a justifiable approximation and how severe the consequences of violation of key conditions might be. Thereby, we use a multicountry general equilibrium model as a laboratory. First, we derive the conditions that ensure the existence of the equilibrium and study the properties of the equilibrium using large N asymptotics. Second, we show that the SOEF is a valid approximation only for economies (i) that have a diversified foreign trade structure and if (ii) there is no globally dominant economy in the system. Third, we illustrate that macroeconomic interdependence is primarily related to the degree of trade diversification, and not to the extent of trade openness. Furthermore, we provide some evidence on the pattern of global macroeconomic interdependence by calculating probability impulse response functions in our calibrated multicountry model using data for 153 economies. JEL Classification: F41. |
| Keywords: | DSGE models, Open Economy Macroeconomics, Weak and Strong Cross Section Dependence, Factor models. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101172&r=opm |
| By: | Dudley Cooke (Trinity College Dublin ,Hong Kong Institute for Monetary Research) |
| Abstract: | I develop a two country general equilibrium model with heterogeneous price-setting firms to understand how shocks to monetary policy and aggregate labor productivity impact trade integration, which I capture through the (inverse) average productivity of exporting firms. A contractionary domestic monetary policy shock raises the average productivity of domestic exporting firms but lowers the average productivity of foreign exporting firms. The magnitude of these changes is greater when governments target domestic price inflation as opposed to consumer price inflation. A positive shock to domestic labor productivity generates positive - although quantitatively small - changes in the average productivity of all exporting firms when consumer price inflation is targeted. When domestic price inflation is targeted, the same shock causes a fall in the average productivity of domestic exporting firms, and a far larger rise in the productivity of foreign exporting firms. |
| Keywords: | Monetary Policy, Heterogeneous Firms, Trade Globalization |
| JEL: | E31 E52 F41 |
| Date: | 2010–02 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:042010&r=opm |
| By: | Martin Berka; Michael B. Devereux |
| Abstract: | We study a newly constructed panel data set of relative prices of a large number of consumer goods among 31 European countries. We find that there is a substantial and nondiminishing deviation from PPP at all levels of aggregation, even among euro zone members. However, real exchange rates are very closely tied to relative GDP per capita within Europe, both across countries and over time. This relationship is highly robust at all levels of aggregation. We construct a simple two-sector endowment economy model of real exchange rate determination. Simulating the model using the historical relative GDP per capita for each country, we find that for most (but not all) countries there is a very close fit between the actual and simulated real exchange rate. |
| Keywords: | Foreign exchange rates ; Prices ; Econometric models ; Gross domestic product ; International trade ; Purchasing power parity |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:46&r=opm |
| By: | Rabah Arezki; Kareem Ismail |
| Abstract: | We examine the behavior of expenditure policy during boom-bust in commodity price cycles, and its implication for real exchange rate movements. To do so, we introduce a Dutch disease model with downward rigidities in government spending to revenue shock. This model leads to a decoupling between real exchange rate and commodity price movement during busts. We test our model's theoretical predictions and underlying assumptions using panel data for 32 oil-producing countries over the period 1992 to 2009. Results are threefold. First, we find that change in current spending have a stronger impact on the change in real exchange rate compared to capital spending. Second, we find that current spending is downwardly sticky, but increases in boom time, and conversely for capital spending. Third, we find limited evidence that fiscal rules have helped reduce the degree of responsiveness of current spending during booms. In contrast, we find evidence that fiscal rules are associated with a significant reduction in capital expenditure during busts while responsiveness to boosts is more muted. This raises concerns about potential adverse consequences of this asymmetry on economic performance in oil-producing countries. |
| Keywords: | Business cycles , Commodity price fluctuations , Economic models , Fiscal policy , Government expenditures , International trade , Natural resources , Oil exports , Oil producing countries , Political economy , Real effective exchange rates , Revenue mobilization , |
| Date: | 2010–04–07 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/94&r=opm |
| By: | Matthias Busse (Ruhr University of Bochum and HWWI); Carsten Hefeker (University of Siegen, HWWI and CESifo); Signe Nelgen (University of Adelaide) |
| Abstract: | The paper uses a comprehensive data set with bilateral direct investment flows and establishes the influence of the de-facto exchange rate regime for FDI flows. We find a strong and significant effect from fixed rates on bilateral FDI flows in developed economies, but no significant effect for developing countries. There is thus no general and uniform impact of stable exchange rates on FDI. We provide several possible explanations for this difference. |
| Keywords: | Foreign Direct Investment, Multinational Enterprises, Exchanges Rate Regimes |
| JEL: | F21 F23 O24 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:201015&r=opm |
| By: | Juan Carlos Cuestas; Paulo José Regis |
| Abstract: | The aim of this paper is to provide additional evidence on the purchasing power parity empirical fulfillment in a pool of OECD countries. We apply the Harvey et al. (2008) linearity test and the Kruse (2010) nonlinear unit root test. The results point to the fact that the purchasing power parity theory holds in a greater number of countries than has been reported in previous studies. |
| Keywords: | Real exchange rates, purchasing power parity, nonlinearities, unit root tests |
| JEL: | C32 F15 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbs:wpaper:2010/3&r=opm |
| By: | Marco Lombardi (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.); Chiara Osbat (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.); Bernd Schnatz (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.) |
| Abstract: | In this paper we examine linkages across non-energy commodity price developments by means of a factor-augmented VAR model (FAVAR). From a set of non-energy commodity price series, we extract two factors, which we identify as common trends in metals and a food prices. These factors are included in a FAVAR model together with selected macroeconomic variables, which have been associated with developments in commodity prices. Impulse response functions confirm that exchange rates and of economic activity affect individual nonenergy commodity prices, but we fail to find strong spillovers from oil to non-oil commodity prices or an impact of the interest rate. In addition, we find that individual commodity prices are affected by common trends captured by the food and metals factors. JEL Classification: E3, F3. |
| Keywords: | Oil price, Commodity prices, Exchange rates, Globalisation, FAVAR. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101170&r=opm |
| By: | Andrei Zlate |
| Abstract: | Cross-country variation in production costs encourages the relocation of production facilities to other countries, a process known as offshoring through vertical foreign direct investment. I examine the effect of offshoring on the international transmission of business cycles. Unlike the existing macroeconomic literature, I distinguish between fluctuations in the number of offshoring firms (the extensive margin) and in the value added per offshoring firm (the intensive margin) as separate transmission mechanisms. The firms' decision to produce offshore depends on the firm-specific level of labor productivity, on fluctuations in the relative cost of effective labor, and on the fixed and trade costs of offshoring. The model replicates the procyclical pattern of offshoring and the dynamics along its two margins, which I document using data from U.S. manufacturing and Mexico's maquiladora sectors. Offshoring enhances the synchronization of business cycles, and dampens the real exchange rate appreciation generated by aggregate productivity differentials across countries. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:995&r=opm |
| By: | Eijffinger, S.C.W.; Qian, Z. (Tilburg University, Center for Economic Research) |
| Abstract: | Recent cross-country studies on the globalization and output-inflation tradeoff correlation find openness has no significant effect on OECD countries. Those studies assume parameter constancy across countries. In this paper, we argue that this assumption does not hold for major industrialized countries. Using individual time series analysis, we find the effect of openness on the output-inflation trade off differ in sign and size across countries. In contrast to previous cross-country studies, we find globalization has significantly changed some major industrialized countries’ output inflation tradeoff. This has important implications for future theoretical and empirical research. |
| Keywords: | openness;output-inflation tradeoff;Phillips curve;time inconsistency theory |
| JEL: | E31 E58 F10 F30 F41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:201027&r=opm |
| By: | Gianluigi Ferrucci (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.); Rebeca Jiménez-Rodríguez (Department of Economics, University of Salamanca, Campus Miguel de Unamuno, E-37007, Salamanca, Spain.); Luca Onorante (European Central Bank, Kaiserstrasse 29, 60311, Frankfurt am Main, Germany.) |
| Abstract: | In this paper we analyse the pass-through of a commodity price shock along the food price chain in the euro area. Unlike the existing literature, which mainly focuses on food commodity prices quoted in international markets, we use a novel database that accounts for the role of the Common Agricultural Policy in the European Union. We model several departures from the linear pass-through benchmark and compare alternative specifications with aggregate and disaggregate food data. Overall, when the appropriate dataset and methodology are used, it is possible to identify a significant and longlasting food price pass-through. The results of our regressions are applied to the strong increase in food prices in the 2007-08 period; a simple decomposition exercise shows that commodity prices are the main determinant of the increase in producer and consumer prices, thus solving the pass-through puzzle highlighted in the existing literature for the euro area. JEL Classification: C32, C53, E3, Q17. |
| Keywords: | food commodity prices, inflation, non-linearities, pass-through. |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20101168&r=opm |
| By: | Muge Adalet (Koc University); Sumru Oz (Koc University) |
| Abstract: | This paper uses a simple VAR analysis to examine 5 CEE countries (the Czech Republic, Hungary, Poland, Romania and Slovakia) in order to understand whether their business cycles are synchronized with each other and/or with the major economies that they are supposed to be linked with, namely the US, Germany and Russia. We find that there are differences across the CEE countries themselves and that there is no common CEE business cycle. Comparing the individual CEE business cycles with those of the dominant economies, we find that Hungary and Poland are related to the US business cycle, reflecting the fact that they are more integrated with the global economy, whereas Slovakia is closer to the Russian cycle. Finally, splitting the sample into the late 1990s and 2000s due to the transition nature of these economies in the former period shows that the influence of Russia on the CEE economies has declined over time. However, in contrast to the expectations that CEE countries are likely to be affected by Germany in the second half of the sample due to EU negotiations followed by full membership, among the CEE countries only the business cycle of Slovakia is synchronized with that of Germany. On the other hand the Czech Republic, Hungary and Poland are synchronized with the US business cycle, showing that globalization has decreased the importance of distance. |
| Keywords: | Business cycle synchronization, CEE countries, EMU |
| JEL: | E32 F15 F41 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1014&r=opm |