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on Open MacroEconomics |
| By: | Kappler, Marcus; Reisen, Helmut; Schularick, Moritz; Turkisch, Edouard |
| Abstract: | In this paper we study the macroeconomic effects of large exchange rate appreciations. Using a sample of 128 countries from 1960-2008, we identify large nominal and real appreciations shocks and study their macroeconomic effects in a dummy-augmented panel autoregressive model. Our results show that an exchange rate appreciation can have strong effects on current account balances. Within three years after the appreciation event, the current account balance on average deteriorates by three percentage points of GDP. This effect occurs through a reduction of savings without a meaningful reduction in investment. Real export growth slows down substantially, while imports remain by and large unaffected. The output costs of appreciation are small and not statistically significant, indicating a shift towards domestic sources of growth. All these effects appear somewhat more pronounced in developing countries. -- |
| Keywords: | Current account adjustment,global imbalances,exchange rate changes |
| JEL: | F4 F31 F32 N10 O16 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:11016&r=opm |
| By: | Michael Artis (Swansea University); Toshihiro Okubo (Research Institute for Economics and Business Administration, Kobe University) |
| Abstract: | This paper re-estimates the correlation between trade and business cycle synchronization. Different from other previous studies, we employ long-run GDP and trade data and use the GDP cross-correlation index a la Cerqueira and Martins (2009) rather than over-time cross-correlations. We find a positive impact of trade on business cycle synchronization particularly in the current wave of globalization, although the inter-war period sees negative impacts. The current economic integration and currency unions also positively affect business cycle synchronization. |
| Keywords: | business cycle synchronization, trade, panel approach |
| JEL: | E32 F15 F43 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2011-05&r=opm |
| By: | Eduardo Levy-Yeyati; Tomas Williams |
| Abstract: | Financial globalization (FG), defined as global linkages through cross-border financial flows, has become increasingly relevant for emerging markets (EM) as they integrate financially to the rest of the world. In this paper, we argue that, because of the way it is often measured, it has also led to the misperception that FG in EM has been growing in recent years. We characterize the evolution of FG in EM using alternative measures, and find that, in the 2000s, FG have grown only marginally and international portfolio diversification has been very limited, and declining over time. Next, we revisit the empirical literature on the implications of FG for local market deepening, international risk diversification, financial contagion, and financial dollarization, and we find them to be rather limited. Whereas FG has indeed fostered domestic market deepening in good times, it has yielded neither the dividends of consumption smoothing (in line with the limited portfolio diversification) nor the costs of amplifying global financial shocks. In turn, financial de-dollarization has largely reflected the undoing of financial offshoring and the valuation effects of real appreciation. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:udt:wpbsdt:2011-01&r=opm |
| By: | Romain Houssa (Center for Research in the Economics of Development, University of Namur) |
| Abstract: | This paper develops a Spatial Vector Auto-Regressive (SpVAR) model that takes into account both the time and the spatial dimensions of economic shocks. We apply this framework to analyze the propagation through space and time of macroeconomic (inflation, output gap and interest rate) shocks in Europe. The empirical analysis identifies an economically and statistically significant spatial component in the transmission of macroeconomic shocks in Europe. |
| Keywords: | Macroeconomics, Spatial Models, VAR |
| JEL: | E3 E43 E52 C51 C33 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:nam:wpaper:1009&r=opm |
| By: | Francesca Viani |
| Abstract: | Whether financial market integration raised global insurance is a crucial, still open issue. All empirical methods to measure cross-border risk-sharing are based on the implicit assumption that international prices do not fluctuate in response to business cycle shocks. This paper shows that these methods can be completely misleading in the presence of large fluctuations in international prices as those observed in the data. I then propose a new empirical method that is immune from this issue. The risk-sharing inefficiency between two countries is measured by the wedge between their Stochastic Discount Factors (SDFs). This measure is a proxy for the welfare losses created by imperfect insurance. Welfare losses can be attributed either to the strength of uninsurable shocks (the extent of risk to be pooled) or to the degree of insurance against different sources of risk. The method is applied to study the evolution of risk-sharing between the US and OECD countries, assuming either constant or time-varying risk-aversion. The degree of insurance is found to have improved over time only for some countries and only if SDFs are estimated assuming time-varying risk-aversion. The results are also informative on the implications of different macro models for international risk. When confronted with the data, standard open-macro models (featuring constant risk-aversion) imply that nominal exchange rate fluctuations do not contain wealth divergences across countries, but rather represent an important source of risk. Time-varying risk-aversion instead implies that limiting welfare losses from imperfect risk-sharing requires reducing the volatility of macro fundamentals. |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2011/10&r=opm |
| By: | Carlos Llano-Verduras (Universidad Autónoma de Madrid, Spain); Asier Minondo (Deusto Business School, Spain); Francisco Requena-Silvente (Universidad de Valencia, Spain) |
| Abstract: | The existence of a large border effect is considered as one of the main puzzles of international macroeconomics. We show that the border effect is, to a large extent, an artefact of geographic concentration. In order to do so we combine international flows with intranational flows data characterised by a high geographic grid. At this fine grid, intra-national flows are highly localised and dropping sharply with distance. The use of a small geographical unit of reference to measure intra-national bilateral trade flows allows to estimating correctly the negative impact of distance on shipments. When we use sector disaggregated export flows of 50 Spanish provinces in years 2000 and 2005 split into interprovincial and inter-national flows, we find that the border effect is reduced substantially and even becomes statistically not different from zero in some estimations. |
| Keywords: | border effect, distance, interregional trade, international trade, Spanish provinces |
| JEL: | F14 F15 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:eec:wpaper:1108&r=opm |
| By: | Enrique Martinez-Garcia |
| Abstract: | I build a symmetric two-country model that incorporates nominal rigidities, local-currency pricing and monopolistic competition distorting the goods markets. The model is similar to the framework developed in Martínez-García and Søndergaard (2008a, 2008b), but it also introduces frictions in the assets markets by restricting the financial assets available to two uncontingent nominal bonds in zero-net supply and by adding quadratic costs on international borrowing (see, e.g., Benigno and Thoenissen (2008) and Benigno (2009). The technical part of the paper contains three basic calculations. First, I derive the equilibrium conditions of the open economy model under local-currency pricing and incomplete asset markets. Second, I compute the zero-inflation (deterministic) steady state and discuss what happens with a non-zero net foreign asset position. Third, I derive the log-linearization of the equilibrium conditions around the deterministic steady state. The quantitative part of the paper aims to give a broad overview of the role that incomplete international asset markets can play in accounting for the persistence and volatility of the real exchange rate. I find that the simulation of the incomplete and complete asset markets models is almost indistinguishable whenever the business cycle is driven primarily by either nonpersistent monetary or persistent productivity (but not permanent) shocks. In turn, asset market incompleteness has more sizeable wealth effects whenever the cycle is driven by persistent (but not permanent) investment-specific technology shocks, resulting in significantly lower real exchange rate volatility. |
| Keywords: | Foreign exchange ; International finance ; International trade ; Macroeconomics |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:74&r=opm |
| By: | Raddatz, Claudio |
| Abstract: | A long empirical literature has examined the idea that, in the absence of hedging mechanisms, currency risk should have an adverse effect on the export volumes of risk averse exporters. But there are no clear conclusions from this literature, and the current consensus seems to be that there is at most a weak negative effect of exchange rate volatility on aggregate trade flows. However, most of this literature examines the impact of exchange rate volatility on aggregate trade flows, implicitly assuming a uniform impact of this volatility on exporters across sectors. This paper explots the fact that, if exchange rate volatility is detrimental for trade, firms exporting goods that offer a natural hedge against exchange rate fluctuations -- i.e. those whose international price is negatively correlated with the nominal exchange rate of the country where they operate -- should be relatively benefited in environments of high exchange rate volatility, and capture a larger share of the country's export basket. This hypothesis is tested using detailed data on the composition of trade of 132 countries at 4-digit SITC level. The results show that the commodities that offer natural hedge capture a larger share of a country's export basket when the exchange rate is volatile, but there is only weak evidence that the availability of financial derivatives to hedge currency risk reduces the importance of a sector's natural hedge. |
| Keywords: | Emerging Markets,Debt Markets,Currencies and Exchange Rates,Economic Theory&Research,Economic Stabilization |
| Date: | 2011–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5590&r=opm |
| By: | Sanusi, Aliyu Rafindadi |
| Abstract: | This paper develops a Structural Vector Autoregression (SVAR) model for the Ghanaian economy to estimate the pass-through effects of exchange rate changes to consumer prices. The model incorporates the special features of the Ghanaian economy, especially its dependence on foreign aid and primary commodity exports for foreign exchange earnings. The findings show that the pass-through to consumer prices, although incomplete, is substantially large. This suggests that exchange rate depreciation is a potentially important source of inflation in Ghana. Using variance decomposition analyses, it is found that monetary expansion has been more important in explaining Ghana’s actual inflationary process than the exchange rate depreciation. One policy implication of these findings is that policies that aim at lowering inflation must focus on monetary and exchange rate stability. |
| Keywords: | Exchange Rate Pass-Through; Inflation; Structural Vector-Autoregression; Foreign Aid; Ghana |
| JEL: | E31 F41 F31 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29491&r=opm |
| By: | Diallo, Ibrahima Amadou |
| Abstract: | This paper study, in panel data, the relationship between real exchange rate and total factor productivity on a sample of 68 developed and developing countries for the period 1960-1999. The theoretical part presents the arguments advanced to explain the effects of real exchange rate on productivity, technical efficiency and technological progress. The productivity is obtained as a Solow residual of an estimation of a Cobb-Douglas stochastic production function frontier. The results show that an exchange rate appreciation causes an increase of total factor productivity. The results also illustrates that this effect of real exchange rate on productivity is non linear: threshold effect. Below the threshold exchange rate reacts negatively on productivity while above the threshold it acts positively. Robustness analysis demonstrates that these results hold both in subsamples of developed and developing countries. |
| Keywords: | O11; O16; O47 |
| JEL: | O11 O47 O16 |
| Date: | 2010–11–13 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29548&r=opm |
| By: | Mundaca, Gabriela |
| Abstract: | Instead of just focusing on the effect of exchange rate levels (undervalued or overvalued exchange rates) on trade, this paper provides an analysis of the effects of exchange rate volatility levels on international trade. Intuitively, an increase in exchange rate volatility leads to uncertainty for agents participating in international trade, and such uncertainty might have a negative impact on international trade flows and participation, thereby reducing the advantages of world-wide specialization. This is especially crucial for countries where exchange rate derivatives markets are not yet well developed and the costs of hedging exchange rate risk are very high. The model here considers optimal decisions about participation in international trade under uncertainty about the exchange rate. The main conclusion is that a high level of exchange rate volatility can deter entrepreneurs from becoming exporters, even though exporting can be highly profitable. For those already participating in international trade, it is opposite: they may, optimally, choose not to leave the market even though staying in this market is highly unprofitable in the short run. |
| Keywords: | Trade Law,Debt Markets,Emerging Markets,Currencies and Exchange Rates,Markets and Market Access |
| Date: | 2011–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5593&r=opm |
| By: | Ferguson, Shon (Dept. of Economics, Stockholm University); Formai, Sara (Stockholm School of Economics) |
| Abstract: | The theory of the rm suggests that firms can respond to poor contract enforcement by vertically integrating their production process. The purpose of this paper is to examine whether firms' integration opportunities affect the way institutions determine international trade patterns. We find that vertical integration lessens the impact of a country's ability to enforce contracts on the comparative advantage of complex goods. We also find that countries with good financial institutions export disproportionately more in sectors that produce complex goods and that have a high propensity for vertical integration. In doing so we use a new outcome-based measure of vertical integration propensity and we employ several empirical strategies: cross section, panel and event study analysis. Our results confirm the role of institutions as source of comparative advantage and suggest that this depends not only on the technological characteristics of the goods produced but also on the way firms are able to organize the production process. |
| Keywords: | International Trade; Comparative Advantage; Contract Enforcement; Financial Institutions; Vertical Integration |
| JEL: | D23 F10 F14 G20 G34 L22 L23 |
| Date: | 2011–03–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sunrpe:2011_0010&r=opm |
| By: | Sidorov, Alexander |
| Abstract: | The paper studies the Krugman's CP model in the weakly explored case of asymmetric regions in two settings: international trade and agglomeration processes. First setting implies that the industrial labor is immobile, while second one consider mobile industrial labor and long-run equilibria. Analytical study of both settings requires application of advanced mathematical analysis, e.g. implicit function theory. For international trade we find how equilibrium prices, production, consumption, wages and welfare for all population groups respond to shifts in all exogenous parameters: characteristics of utility function, transportation costs and degree of asymmetry in initial labor endowment. As for agglomeration process, it was found that the asymmetry in the population distribution simplifies pattern of agglomeration, making the direction of migration more definite, so the well-known ambiguity of final destination may disappear under sufficiently large extent of asymmetry. From political point of view, it means that under some conditions, openness of international trade may be harmful to immobile population of the smaller country. |
| Keywords: | Agglomeration; international trade; migration dynamics |
| JEL: | F12 R12 D51 C62 R23 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29627&r=opm |
| By: | Le Viet Trung (Research Institute for Economics and Business Administration, Kobe University); Nguyen Thi Thuy Vinh (Graduate School of Economics, Kobe University) |
| Abstract: | The goal of this paper is to examine the impact of oil prices on Vietnam's economic activity using vector autoregressive (VAR) modeling and cointegration techniques. We use monthly data for the period 1995 – 2009 and include inflation and the real effective exchange rate as additional determinants of economic activity. We find evidence of a long-run relationship between oil prices, inflation, exchange rate, and economic activity. The results suggest that both oil prices and the real effective exchange rates have strongly significant impact on economic activity. An increase in oil price or depreciation may enhance economic activity. Vietnamese economic activity is influenced more by changes of value of Vietnamese currency than the fluctuations of oil prices. Inflation has a positive impact on economic activity however its impact is not highly significant. This suggests that moderate inflation is helpful rather than harmful to economic activity. |
| Keywords: | Oil price, Economic activity, Vietnam |
| JEL: | E60 F41 O53 Q43 P20 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:dp2011-09&r=opm |