|
on Open MacroEconomics |
| By: | Ester Faia; Eleni Iliopulos |
| Abstract: | How should monetary policy be optimally designed in an environment with high degrees of financial globalization? To answer this question we lay down an open economy model where net lending toward the rest of the world is constrained by a collateral constraint motivated by limited enforcement. Borrowing is secured by collateral in the form of durable goods whose accumulation is subject to adjustment costs. We demonstrate that, although this economy can generate persistent current account deficits, it can also deliver a stationary equilibrium. The comparison between different monetary policy regimes (floating versus pegged) shows that the impossible trinity is reversed: a higher degree of financial globalization, by inducing more persistent and volatile current account deficits, calls for exchange rate stabilization. Finally, we study the design of optimal (Ramsey) monetary policy. In this environment the policy maker faces the additional goal of stabilizing exchange rate movements, which exacerbate fluctuations in the wedges induced by the collateral constraint. In this context optimality requires deviations from price stability and calls for exchange rate stabilization. |
| Keywords: | Monetary policy ; Globalization ; International finance ; Foreign exchange rates ; Financial stability ; International trade |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:52&r=opm |
| By: | Matthew T Cole (University College Dublin); Ronald B Davies (University College Dublin) |
| Abstract: | The key result of the so-called “New Trade Theory” is that countries gain from falling trade costs by an increase in the number of varieties available to consumers. Though the number of varieties in a given country rises, it is also true that global variety decreases from increased competition wherein imported varieties drive out some local varieties. This second result is a major issue for anti-trade activists who criticize the move towards free trade as promoting “homogenization” or “Americanization” of varieties across countries. We present a model of endogenous entry with heterogeneous firms which models this concern in two ways: a portion of a consumer’s income is spent overseas (i.e. tourism) and an existence value (a common tool in environmental economics where simply knowing that a species exists provides utility). Since lowering trade costs induces additional varieties to export and drives out some non-exported varieties, these modifications result in welfare losses not accounted for in the existing literature. Nevertheless, it is only through the existence value that welfare can fall as a result of declining trade barriers. Thus, for these criticisms of globalization to dominate, it must be that this loss in the existence value outweighs the direct benefits from consumption. |
| Keywords: | Trade Theory, Globalization, Variety, Tourism |
| Date: | 2010–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201024&r=opm |
| By: | Berg, Tim Oliver |
| Abstract: | This paper explores the relation between stock prices and the current account for 17 OECD countries in 1980-2007. I use a panel vector autoregression (VAR) to compare the effects of stock price shocks to those originating from monetary policy and exchange rates. While monetary policy shocks have little effects, shocks to stock prices and exchange rates have sizeable effects. A 10% contraction in stock prices improves the current account by 0.3% after two years. Hence I find a channel, in addition to the traditional exchange rate channel, through which external balance for an OECD country with a current account imbalance can be restored. |
| Keywords: | current account fluctuations; stock prices; panel VAR |
| JEL: | F32 E44 C33 |
| Date: | 2010–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:23976&r=opm |
| By: | James D. Hamilton |
| Abstract: | This paper reviews some of the literature on the macroeconomic effects of oil price shocks with a particular focus on possible nonlinearities in the relation and recent new results obtained by Kilian and Vigfusson (2009). |
| JEL: | E32 Q43 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16186&r=opm |
| By: | Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Wildo Gonzalez (Banco Central de Chile) |
| Abstract: | We estimate how monetary policy works in small open economies. To do so, we build a dynamic stochastic general equilibrium model that incorporates the basic features of these economies. We conclude that the monetary policy in a group of small open economies (including Australia, Chile, Colombia, Peru and New Zealand) is rather similar to that observed in developed countries. Nevertheless, our results also indicate that there are strong differences due to shocks from the international financial markets (risk premium shocks, mainly) that explain mostly the variability of the real exchange rate, which has important reallocation effects in the short run. In addition, we find that in practice central banks do not face any trade-off responding to these shocks through changes in the interest rate. This result is consistent with the fact that in each country under study, the exchange rate must be included in the policy reaction function. |
| Keywords: | small open economy models; monetary policy rules; exchange rates; Bayesian econometrics |
| JEL: | C32 E52 F41 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv228&r=opm |
| By: | Gilbert Koenig; Irem Zeyneloglu |
| Abstract: | The paper offers a survey of recent research on fiscal policy in both deterministic and stochastic models of the New Open Economy Macroeconomics (NOEM) initiated by Obstfeld and Rogoff (1995, 2002b). The survey includes a comparison of the implications of the deterministic benchmark model to the empirical evidence obtained in recent studies. It provides a detailed discussion of the recent extensions induced by the gap between theoretical and empirical implications. These extensions revise the traditionally studied aspects of fiscal issues such as the transmission channels of fiscal policy by introducing production specialization at the international level or by diversifying the pricing decisions of firms. They also cover current economic issues such as the effect of financial globalization on fiscal policy efficiency and the implication of a reduction in public employment in order to cut taxes. After presenting the basic features of a benchmark stochastic NOEM model for fiscal policy, the paper discusses the recent developments the gains from international fiscal policy cooperation with respect to gains from fiscal stabilization. |
| Keywords: | New Open Economy Macroeconomics, fiscal policy, stochastic and deterministic general equilibrium models. |
| JEL: | E62 E63 F41 F42 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2010-18&r=opm |
| By: | Thomas J. Holmes; John J. Stevens |
| Abstract: | The fact that large manufacturing plants export relatively more than small plants has been at the foundation of much work in the international trade literature. We examine this fact using Census micro data on plant shipments from the Commodity Flow Survey. We show the fact is not entirely an international trade phenomenon; part of it can be accounted for by the effect of distance, distinct from any border effect. Export destinations tend to be further than domestic destinations, and large plants tend to ship further distances even to domestic locations, as compared with small plants. We develop an extension of the Melitz (2003) model and use it to set up an analysis with model interpretations of ratios between large plant and small plant shipments that can be calculated with the data. We obtain a decomposition of the overall ratio into a term that varies with distance, holding fixed the border, and a term that varies with the border, holding fixed the distance. The distance term accounts for more than half of the overall difference. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2010-38&r=opm |
| By: | Mario J. Crucini; Mototsugu Shintani |
| Abstract: | We propose a simple saving-based measure of the cyclical component in GDP. The measure is motivated by the prediction that the representative consumer changes savings in response to temporary deviations of income from its stochastic trend, while satisfying a present-value budget constraint. To evaluate our procedure, we employ the bivariate error correction model of Cochrane (1994) to the member countries of the G-7 and Australia. Our estimates reveal, that to a close approximation, the stochastic trend component of GDP is consumption and the transitory component is the error correction term, which justifies the use of our saving-based measure. |
| Keywords: | Business cycles ; Saving and investment ; Gross domestic product ; Consumer behavior |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:50&r=opm |
| By: | Carlos Garcia (ILADES-Georgetown University, Universidad Alberto Hurtado); Wildo Gonzalez (Banco Central de Chile) |
| Abstract: | We estimate how the monetary policy works in small open economies with inflation target. To do so, we build a dynamic stochastic general equilibrium model that incorporates the basic features of these economies. We conclude that the monetary policy in a group of representative small open economies (including Australia, Chile, Colombia, Peru and New Zealand) presents strong differences due to shocks from the international financial markets (risk premium shocks, mainly) that explain mostly the variability of the real exchange rate, which has important reallocation effects in the short run. By using the allocations of the Ramsey problem as benchmark, this article shows that if the central banks in small open economies want to reduce the observed volatility of the inflation rate and the output gap, more exchange rate intervention is necessary in order to reduce the volatility produced by risk premium shocks. |
| Keywords: | Small open economies economy models; monetary policy rules; exchange rates; Bayesian econometrics, Risk premium shocks, Ramsey problem. |
| JEL: | C32 E52 F41 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:ila:ilades:inv248&r=opm |
| By: | Koichi Futagami (Graduate School of Economics, Osaka University); Yasuhiro Nakamoto (Faculty of Economics, Kyushu Sangyo University) |
| Abstract: | We construct a small open economy model with a renewable resource. Households have an endogenous time preference rate that depends on the level of the renewable resource in the domestic economy. Although households know that the degree of own patience depends on its resource, we assume that households believe that they cannot control the motion of the aggregate renewable resource. This is because they think that their impact is negligible so that there exists an externality in the form of the patience of the households. Based on this framework, we analyze the dynamic character of the steady state and show that the equilibrium path may be indeterminate. We next examine the welfare effects of tax policies. Finally, we investigate socially optimal tax policies. |
| Keywords: | Endogenous time preference rate; Indeterminacy; Renewable resources; Optimal tax policy |
| JEL: | F41 H21 Q28 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1022&r=opm |
| By: | Koichi Futagami (Graduate School of Economics, Osaka University); Yasuhiro Nakamoto (Faculty of Economics, Kyushu Sangyo University) |
| Abstract: | We examine the effects of environmental policies such as a subsidy for reforestation and an export-income tax in a small open economy with a renewable resource. In the small economy, the harvested renewable resources are exported to acquire foreign assets and consumers can invest in the natural resource to preserve it. In the setup, using a phase diagram, we show how the environmental policies affect the natural resource and the domestic economy. |
| Keywords: | Renewable resources; The effects of environmental policies. |
| JEL: | F41 H21 Q28 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1021&r=opm |