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on Open MacroEconomics |
| By: | Michael B. Devereux (University of British Columbia and National Bureau of Economic Research and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research); James Yetman (Bank for International Settlements and Hong Kong Institute for Monetary Research) |
| 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 investors. In our model, without leverage constraints on investment, financial integration itself has no implication for international macro co-movements. When leverage constraints bind however, the presence of these constraints in combination with diversified portfolios introduces a powerful financial transmission channel which results in a positive co-movement of production, independently of the size of international trade linkages. In addition, the paper shows that, with binding leverage constraints, the type of financial integration is critical for international co-movement. If international financial markets allow for trade only in non-contingent bonds, but not equities, then the international co-movement of shocks is negative. Thus, with leverage constraints, moving from bond trade to equity trade reverses the sign of the international transmission of shocks. |
| Keywords: | Leverage, International Transmission, Portfolios |
| JEL: | F3 F32 F34 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:132010&r=opm |
| By: | Andrei A. Levchenko (University of Michigan); Jing Zhang (University of Michigan) |
| Abstract: | Using an industry-level dataset of production and trade spanning 75 countries and 5 decades, and a fully speciÞed multi-sector Ricardian model, we estimate productivities at sector level and examine how they evolve over time in both developed and developing countries. We find that in both country groups, comparative advantage has become weaker: productivity grew systematically faster in sectors that were initially at the greater comparative disadvantage. The global welfare implications of this phenomenon are significant. Relative to the counterfactual scenario in which an individual countryÕs comparative advantage remained the same as in the 1960s, and technology in all sectors grew at the same country-specific average rate, welfare today is 1.9% lower at the median. The welfare impact varies greatly across countries, ranging from -0.5% to 6% among OECD countries, and from -9% to 27% among non-OECD countries. Remarkably, for the OECD countries, nearly all of the welfare impact is driven by changes in technology in OECD countries, and for the non-OECD countries, nearly all of the welfare impact is driven by changes in technology in non-OECD countries. |
| Keywords: | evolution of comparative advantage, welfare, Ricardian models of trade |
| JEL: | F15 F43 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:mie:wpaper:610&r=opm |
| By: | Färnstrand Damsgaard, Erika (Research Institute of Industrial Economics (IFN)); Krusell, Per (IIES) |
| Abstract: | This paper builds a theory of the shape of the distribution of total-factor productivity (TFP) across countries. The data on productivity suggests vast differences across countries, and arguably even has “twin peaks”. The theory proposed here is consistent with vast differences in long-run productivity, and potentially also with a twin-peaks outcome, even under the assumption that all countries are ex-ante identical. It is based on the hypothesis that TFP improvements in a given country follow a Nelson-Phelps specification. Thus, they derive from past investments in the country itself and, through a spillover (or catch-up) term, from past investments in other countries. We then construct a stochastic dynamic general equilibrium model of the world which has externalities: each country invests in TFP and internalizes the dynamic effects of its own investment, while treating other countries' investments as given. Average world growth is endogenous, as is the distribution of TFP across countries. We find that small idiosyncratic TFP shocks can lead to large long-run differences in TFP levels and that, in the long run, the world distribution of TFP across countries may be asymmetric, i.e., twin-peaked, or bimodal. More specifically, twin-peaked world distributions of TFP arise if the catch-up term in the Nelson-Phelps equation has a sufficiently low weight. If, on the other hand, technological catch-up is important, the world distribution of TFP is unimodal, though it may still have large dispersion. |
| Keywords: | Growth; Inequality |
| JEL: | F43 O10 |
| Date: | 2010–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0850&r=opm |
| By: | Kai Andree |
| Abstract: | In this paper we develop a spatial Cournot trade model with two unequally sized countries, using the geographical interpretation of the Hotelling line. We analyze the trade and welfare effects of international trade between these two countries. The welfare analysis indicates that in this framework the large country benefits from free trade and the small country may be hurt by opening to trade. This finding is contrary to the results of Shachmurove and Spiegel (1995) as well as Tharakan and Thisse (2002), who use related models to analyze size effects in international trade, where the small country usually gains from trade and the large country may lose. |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:pot:vwldis:101&r=opm |
| By: | Jiandong Ju (Tsinghua University and Center for International Economic Research and University of Oklahoma); Shang-Jin Wei (Columbia University and Center for International Economic Research and National Bureau of Economic Research and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research) |
| Abstract: | This paper proposes a simple model to study how domestic institutions affect patterns of international capital flows. Inefficient financial system and poor corporate governance may be bypassed by two-way capital flows in which domestic savings leave the country in the form of financial capital outflows but domestic investment takes place via inward FDI. While financial globalization always improves the welfare of a developed country with a good financial system, its effect is ambiguous for a developing country with an inefficient financial sector or poor corporate governance. Interestingly, financial and property rights institutions can have opposite effects on capital flows. |
| Keywords: | Two-Way Capital Flows, Property Rights Protection, Financial Development, Corporate Governance |
| JEL: | F21 F33 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:222010&r=opm |
| By: | Mathias Hoffmann (University of Zurich and Hong Kong Institute for Monetary Research) |
| Abstract: | The paper offers an empirical taxonomy of the factors driving China's current account. A simple present-value model with non-tradeable goods explains more than 70 percent of current account variability over the period 1982-2007, including the persistent surpluses since 2001. Expected increases in the prices of non-tradeables-housing and medical care-are the single most important channel of external adjustment, followed by consumption smoothing. Much of this pattern is driven by a permanent global shock that persistently depresses the world real interest rate and increases the current account, suggesting that shocks to precautionary saving are key in understanding China's surplus. These findings are robust to controlling for revaluation expectations in the fixed exchange rate regime and for measurement error in the current account balance. |
| Keywords: | China, Current Account, Present-Value Models, External Adjustment, Global Imbalances,Savings Glut, Precautionary Saving |
| JEL: | F32 F30 F40 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:112010&r=opm |
| By: | Shakill Hassan; Félix Simione |
| Abstract: | Microstructure aspects of nominal exchange rate determination are less relevant in countries with embryonic financial markets. In less-developed economies, trade in goods and services is a more significant driver of currency demand than financial market speculation or hedging; and central banks actively set monetary variables. We develop a simple variation of the standard monetary model of exchange rate determination, incorporating interest rate rules but not relying on interest rate parity; and study the effect of monetary fundamentals on the Mozambican exchange rate. We find a long-run relationship between fundamentals and exchange rates, with coefficient signs in regression equations consistent with theoretic predictions. Moreover, the monetary model outperforms a random walk in predicting metical exchange rates out-of-sample at the four-quarter horizon. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:192&r=opm |
| By: | Cwik, Tobias; Müller, Gernot; Wolters, Maik H |
| Abstract: | This paper explores the role of trade integration - or openness - for monetary policy transmission in a medium-scale new Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation: a monetary contraction which appreciates the exchange rate lowers the local currency price of imported goods; this, in turn, induces domestic producers to lower their prices too. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on time series for the US relative to the euro area. Our estimation procedure yields plausible parameter values and suggests a strong role for strategic complementarities. Counterfactual simulations show that openness alters monetary transmission significantly. While the contractionary effect of a monetary policy shock on inflation and output tends to increase in openness, we find that monetary policy's control over inflation increases, as the output decline which is necessary to bring about a given reduction of inflation is smaller in more open economies. |
| Keywords: | exchange rate channel; monetary policy transmission; open economy; strategic complementarity; trade integration |
| JEL: | E52 F41 F42 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8026&r=opm |
| By: | Masunda, Stein |
| Abstract: | Real exchange rate has been misaligned for the longest part under-review and this had negative consequences on the performance of the majority of the sector and the economy at large. Using panel data techniques on the agriculture, manufacturing and mining sectors, results indicates that real exchange rate overvaluation has a significant negative impact on sectoral output. The paper exposed the non linear effects of misalignment on sectoral growth and results reveals that both overvaluation and undervaluation are deleterious to sectoral output. |
| Keywords: | Real Exchange Rate; Sectoral output; Misalignment; Overvaluation; Undervaluation |
| JEL: | C50 F41 C21 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25503&r=opm |
| By: | Karolina Konopczak (Warsaw School of Economics and Ministry of Finance, Financial Policy, Analysis and Statistics Department); Andrzej Torój (Warsaw School of Economics and Ministry of Finance, Financial Policy, Analysis and Statistics Department) |
| Abstract: | This paper estimates the magnitude of the Baumol-Bowen and Balassa-Samuleson effects in the Polish economy. The purpose of the analysis is to establish to what extent the differential price dynamics in Poland and in the euro area and the real appreciation of PLN against EUR are explained by the differential in respective productivity dynamics. The historical contribution of the Baumol-Bowen effect to Polish inflation rate is estimated at 0.7-1.0 percentage points in the short run. According to estimation results, the Balassa-Samuelson effect contributed around 0.9 to 1.3 percentage point per annum to the rate of relative price growth between Poland and the euro area and 0.9 to 1.6 p.p. to real exchange rate appreciation. Sub-sample calculations and productivity trends over the last decade suggest that this impact should be declining. However, its size is still non-negligible for policymakers in the context of euro adoption in Poland. |
| Keywords: | Balassa-Samuelson hypothesis, monetary integration, real appreciation, panel cointegration |
| JEL: | C33 E31 F31 F41 |
| Date: | 2010–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:fpo:wpaper:6&r=opm |
| By: | Sengupta, Rajeswari; Aizenman, Joshua |
| Abstract: | In this paper we evaluate the current account patterns of China and Germany. We point out that China's current account surplus as a share of global GDP in recent years resembles that of Germany’s. Yet, an important difference is that the Euro block’s current account inclusive of Germany, has overall been balanced, whereas emerging Asia's current account inclusive of China, has mostly been characterized by sizable surpluses. We further find that both China and Germany's current account surpluses seem to be accounted for by common factors. However we have reasons to doubt the long run viability of these current account trends in future decades. Demographic transitions in China and Germany are projected to reduce their surpluses, and this effect is stronger for Germany. We also discuss plausible reasons to doubt the extent to which the Euro block will move towards significant surplus in the coming years. |
| Keywords: | current accounts; demographic transitions; global imbalances |
| JEL: | F15 F32 |
| Date: | 2010–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:25578&r=opm |