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on Open MacroEconomics |
| By: | Paul R. Bergin; Reuven Glick; Jyh-Lin Wu |
| Abstract: | The persistence of aggregate real exchange rates is a prominent puzzle, particularly since adjustment of international relative prices in microeconomic data is much faster. This paper finds that adjustment to the law of one price in disaggregated data is not just a faster version of the adjustment to purchasing power parity in the aggregate data; while aggregate real exchange rate adjustment works primarily through the foreign exchange market, adjustment in disaggregated data is a qualitatively distinct process, working through adjustment in local-currency goods prices. These distinct adjustment dynamics appear to arise from distinct classes of shocks generating macro and micro price deviations. A vector error correction model nesting aggregate and disaggregated relative prices permits identification of distinct macroeconomic and good-specific shocks. When half-lives are estimated conditional on shocks, the macro-micro disconnect puzzle disappears: microeconomic relative prices adjust to macro shocks just as slowly as do aggregate real exchange rates. These results provide evidence against theories of real exchange rate behavior based on sticky prices and on heterogeneity across goods. |
| Keywords: | Foreign exchange rates ; Purchasing power parity ; Prices |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2010-14&r=opm |
| By: | Ehsan U. Choudhri (Department of Economics, Carleton University); Lawrence L. Schembri (International Department, Bank of Canada) |
| Abstract: | The paper examines how the Balassa-Samuelson hypothesis is affected by a modern variation of the standard model that allows product differentiation (within the traded and nontraded goods sectors) with the number of firms determined exogenously or endogenously. The hypothesis is found to be fragile in the modified framework. Small variations in the elasticity of substitution between home and foreign traded goods (within the range of estimates suggested in the literature), for example, can make the effect of a traded-goods productivity improvement on the real exchange rate negative or positive, as well as small or large. This result provides a potential explanation of the mixed empirical results that have been obtained on the relationship between productivity and the real exchange rate. |
| Keywords: | Real exchange rate; Balassa-Samuelson model; Productivity; Terms of trade |
| JEL: | F41 F31 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:10-06&r=opm |
| By: | Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga |
| Abstract: | We introduce the real exchange rate volatility curve as a useful device to understand the role of price stickiness in accounting for deviations from the Law of One Price at the sector level. In the presence of both nominal and real shocks, the theory predicts that the real exchange rate volatility curve is a U-shaped function of the degree of price stickiness. Using sector-level European real exchange rate data and frequency of price changes, we estimate the volatility curve. The results are consistent with the predominance of real effects over nominal effects. Nonparametric analysis suggests the curve is convex and negatively sloped over the majority of its range. Good-by-good variance decompositions show that the relative contribution of nominal shocks is smaller at the sector level than what previous studies have found at the aggregate level. We conjecture that this is due to significant averaging out of good-specific real microeconomic shocks in the process of aggregation. |
| JEL: | F0 F33 F4 F41 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16081&r=opm |
| By: | Giancarlo Corsetti; Luca Dedola; Sylvain Leduc |
| Abstract: | Research in the international dimensions of optimal monetary policy has long been inspired by a set of fascinating questions, shaping the policy debate in at least two eras of progressive cross-border integration of goods, factors, and assets markets in the years after World War I and from Bretton Woods to today. Namely, should monetary policy respond to international variables such as exchange rates, global business cycle conditions, or global imbalances beyond their in uence on the domestic output gap and inflation? Do exchange rate movements have desirable stabilization and allocative properties? Or, on the contrary, should policymakers curb exchange rate fltuations and be concerned with, and attempt to correct, currency isalignments? Are there large gains the international community could reap by strengthening cross-border monetary cooperation? ; We revisit these classical questions by building on the choice-theoretic monetary literature encompassing the research agenda of he New Keynesian models (see, e.g., Rotemberg and Woodford 1997), the New Classical Synthesis (see, e.g., Goodfriend and King 1997), and especially the New Open Economy Macroeconomics, henceforth NOEM (see, e.g., Svensson and van Wijnbergen 1989, Obstfeld and Rogo¤ 1995). In doing so, we will naturally draw on a well-established set of general principles in stabilization theory, which go beyond open-economy issues. Yet, the main goal of our analysis is to shed light on monetary policy trade-o¤s that are inherently linked to open economies which engage in cross-border trade in goods and assets. |
| Keywords: | Monetary policy |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2010-13&r=opm |
| By: | Michael D. Bordo; Thomas F. Helbling |
| Abstract: | In this paper, we review and attempt to explain the changes in business cycle synchronization among 16 industrial countries and the over the past century and a quarter, demarcated into four exchange rate regimes. We find that there is a secular trend towards increased synchronization for much of the twentieth century and that it occurs across diverse exchange rate regimes. This finding is in marked contrast to much of the recent literature, which has focused primarily on the evidence for the past 20 or 30 years and which has produced mixed results. We then examine the role of global shocks and shock transmission in the trend toward synchronization. Our key finding here is that global (common) shocks generally are the dominant influence. |
| JEL: | F0 N0 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16103&r=opm |
| By: | Reuven Glick; Michael Hutchison |
| Abstract: | We investigate the effectiveness of capital controls in insulating economies from currency crises, focusing in particular on both direct and indirect effects of capital controls and how these relationships may have changed over time in response to global financial liberalization and the greater mobility of international capital. We predict the likelihood of currency crises using standard macroeconomic variables and a probit equation estimation methodology with random effects. We employ a comprehensive panel data set comprised of 69 emerging market and developing economies over 1975–2004. Both standard and duration-adjusted measures of capital control intensity (allowing controls to "depreciate" over time) suggest that capital controls have not effectively insulated economies from currency crises at any time during our sample period. Maintaining real GDP growth and limiting real overvaluation are critical factors preventing currency crises, not capital controls. However, the presence of capital controls greatly increases the sensitivity of currency crises to changes in real GDP growth and real exchange rate overvaluation, making countries more vulnerable to changes in fundamentals. Our model suggests that emerging markets weathered the 2007-08 crisis relatively well because of strong output growth and exchange rate flexibility that limited overvaluation of their currencies. |
| Keywords: | Financial crises ; Capital market ; Emerging markets ; Econometric models ; Panel analysis |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2010-15&r=opm |
| By: | Marius Tippkötter |
| Abstract: | This paper investigates the impact of the exchange rate regime on the current account adjustment process. In a first step, the present analysis assesses previous empirical work supporting the predominant view that more flexible exchange rate regimes facilitate current account adjustments. Using a FGLS estimator with fixed effects and panel corrected standard errors, the author draws upon the methodological approaches of two pertinent papers. The data set encompasses data for 171 countries for the 1970 to 2008 period. According to the fixed effects estimations, evidence in favor of the "conventional wisdom" does not prove to be robust. After pointing out fundamental weaknesses of the fixed effects estimator within this context, the author performs a dynamic panel estimation using a System GMM estimator fully developed in Blundell and Bond (1998). The results of this approach stand in contrast to the previous estimations, providing solid empirical evidence in favor of the predominant view. A monotonic relationship between exchange rate regime flexibility and the rate of current account reversion can be observed, indicating faster current account convergence for more flexible regimes. By employing an estimator that is more germane to the issue under investigation, the paper fills an important gap between economic common sense and its underlying empirics. |
| Keywords: | Current account adjustment process, current account imbalances, exchange rate regime flexibility |
| JEL: | F31 F32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1011&r=opm |
| By: | Hanan Morsy (International Monetary Fund (IMF)) |
| Abstract: | The paper aims at characterizing the main determinants of the medium-term current account balance for oil-exporting countries using dynamic panel estimation techniques. Previous studies included a very limited number of oil-exporting countries in their samples, raising concerns about the applicability of the estimated coefficients for oil countries. Furthermore, current approaches are not specifically tailored to oil-producing countries because they fail to capture the effects of oil wealth and the degree of maturity in oil production. This paper explores the underlying determinants of the current account balance for a large sample of oil exporting countries, and extends the specifications commonly used in the literature to include an oil wealth variable, as well as a proxy for the degree of maturity in oil production. The paper therefore contributes to the existing literature both in terms of the sample studied as well as the variables considered. The results reveal that factors that matter in determining the equilibrium current account balance of oil-exporting counties are the fiscal balance, the oil balance, oil wealth, age dependency, and the degree of maturity in oil production. |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:erg:wpaper:511&r=opm |
| By: | Anthony J Makin |
| Keywords: | global financial crisis, national income, exchange rate, monetary policy, fiscal stimulus |
| JEL: | F31 F33 F41 |
| URL: | http://d.repec.org/n?u=RePEc:gri:epaper:economics:201006&r=opm |
| By: | Jarko Fidrmuc (Austrian Central Bank, CESifo Munich, and Comenius University Bratislava); Taro Ikeda (Graduate School of Economics, Kobe University); Kentaro Iwatsubo (Graduate School of Economics, Kobe University) |
| Abstract: | We exploit dynamic correlations defined in the frequency domain to estimate determinants of output comovement of OECD countries between 1990 and 2008. We show that trade intensity, degree of financial integration and specialization pattern have significantly different effects on comovements at different frequencies. This can bias the results using aggregate data or statistical filters. For example, financial integration is shown to have the highest positive effect for the business cycle frequencies, while it is insignificant for the short-term frequencies. |
| Keywords: | Business cycle, Transmission, Financial Integration, Dynamic Correlation |
| JEL: | E32 F15 F41 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:1007&r=opm |