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on Open MacroEconomics |
| By: | Eichengreen, Barry (Asian Development Bank Institute); Rua, Gisela (Asian Development Bank Institute) |
| Abstract: | This paper considers the general equilibrium relationship between exchange rates and global imbalances. It emphasizes that the exchange rate is not a primitive but an equilibrium price determined by the policy mix. It uses extensions of the two-country Obstfeld-Rogoff model to analyze the response of imbalances and real exchange rates to shocks. Finally, it analyzes the characteristics of episodes in which chronic current account surpluses (as opposed to deficits) come to an end. |
| Keywords: | global imbalances; exchange rates; current account; economic rebalancing; global rebalancing |
| JEL: | F00 F30 F40 |
| Date: | 2011–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0278&r=opm |
| By: | Arnoldo Lopez Marmolejo |
| Abstract: | This paper investigates the effect of trade liberalization on the exchange rate pass-through (ERPT) to import prices. To do so, it employs an empirical estimation of the effects of NAFTA on the Mexican ERPT, and uses a Ricardian general equilibrium model. The model identifes the direct relationship between the tariffs and the pass-through by good. The second channel is the effect that tariffs have on the composition of imports, altering indirectly the aggregate pass-through. |
| Keywords: | Ricardian model, exchange rate pass-through, NAFTA. JELS F31 and F41 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1102&r=opm |
| By: | Stéphane Auray (CNRS, THEMA, EQUIPPE, Universités Lille Nord de France (ULCO),Université de Sherbrooke (GREDI) and CIRPEE, Canada.); Beatriz de Blas (Universidad Autonoma de Madrid, Departamento de Analisis Economico, T. et H. Economico, Campus de Cantoblanco, 28049 Madrid, Spain.); Aurélien Eyquem (Université de Lyon, Lyon, F-69003, France ; CNRS, GATE Lyon St Etienne,F-69130 Ecully, France) |
| Abstract: | This paper analyzes jointly optimal fiscal and monetary policies in a small open economy with capital and sticky prices. We allow for trade in consumption goods under perfect international risk sharing. We consider balanced-budget fiscal policies where authorities use distortionary taxes on labor and capital together with monetary policy using the nominal interest rate. First, as long as a symmetric equilibrium is considered, the steady state in an open economy is isomorphic to that of a closed economy. Second, whereas sticky prices allocations are almost indistinguishable from flexible prices allocations, the open economydimension delivers results that are qualitatively similar to those of a closed economy but with significant quantitative changes. Fluctuations in terms of trade implied by complete international financial markets affect (i) consumption through changes in the consumption price index (CPI), (ii) hours through changes in the CPI-based real wage and (iii) capital accumulation through the relative price of capital goods. These wedges affect the volatility and persistence of optimal tax rates, and resulting allocations are quite different, as compared to a closed economy. |
| Keywords: | small open economy, Sticky prices, optimal monetary and fiscal policies |
| JEL: | E52 E62 E63 F41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:1115&r=opm |
| By: | Gianluca Benigno; Hande Küçük-Tuger |
| Abstract: | Recent contributions have shown that it is possible to account for the so-called consumption-real exchange anomaly in models with goods market frictions where international asset trade is limited to a riskless bond. In this paper, we consider a more realistic international asset market structure and show that as soon as we depart from the single bond economy, we can no longer account for the consumption-real exchange anomaly. Our central result holds for a simple asset market structure in which two nominal bonds are traded across countries. We explore the role of demand shocks such as news shocks in generating meaningful market incompleteness. We show that only under specific settings news shocks can improve the performance of the model in matching the portfolio positions and consumption-real exchange rate correlations that we observe in the data. |
| Keywords: | Portfolio choice, incomplete financial markets, international risk sharing, consumption-real exchange rate anomaly |
| JEL: | F31 F41 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1048&r=opm |
| By: | Hoffmann, Mathias; Krause, Michael; Laubach, Thomas |
| Abstract: | This paper examines to what extent the build-up of 'global imbalances' since the mid-1990s can be explained in a purely real open-economy DSGE model in which agents' perceptions of long-run growth are based on filtering observed changes in productivity. We show that long-run growth estimates based on filtering U.S. productivity data comove strongly with long-horizon survey expectations. By simulating the model in which agents filter data on U.S. productivity growth, we closely match the U.S. current account evolution. Moreover, with household preferences that control the wealth effect on labor supply, we can generate output movements in line with the data. -- |
| Keywords: | open economy DSGE models,trend growth,Kalman filter,real-time data,news and business cycles,current account |
| JEL: | F32 E32 D83 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201101&r=opm |
| By: | Stéphane Dées (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Nico Zorell (University of Tübingen.) |
| Abstract: | Drawing on a large sample of countries, this paper explores whether closer economic ties between countries foster business cycle synchronisation and disentangles the role of the various channels, including trade and financial linkages as well as the similarity in sectoral specialisation. Overall, our results confirm that trade integration fosters business cycle synchronisation. Similar patterns of sectoral specialisation also lead to closer business cycle co-movement. By contrast, it remains difficult to find a direct relationship between bilateral financial linkages and output correlation. However, our results suggest that financial integration affects business cycle synchronisation indirectly by raising the similarity in sectoral specialisation. Through this indirect link, financial integration tends to raise business cycle comovement between countries. JEL Classification: E32, F41, E44. |
| Keywords: | International transmission of shocks, Financial integration, International business cycle. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111322&r=opm |
| By: | Miguel Fuentes; Pablo Ibarrarán |
| Abstract: | In this paper we study the effect of NAFTA on the responsiveness of the Mexican economy to real exchange rate shocks. We argue that, by opening the U.S. and Canadian markets to Mexican goods, NAFTA made it easier for domestic producers to take advantage of the opportunities brought by the depreciation of the real exchange rate. To identify this mechanism, we use plant-level data and compare the behavior of employment, production and investment after two big real exchange rate shocks: the first observed in the mid 1980s, the second the Tequila Crisis of 1994-1995. The evidence indicates that after passage of NAFTA exporting firms exhibited higher growth rates of employment, sales, and investment vis-à-vis non-exporters. We confirm our results by analyzing the behavior of a control group of firms, that had complete access to the U.S. market during both devaluations, and we show that they responded in a similar way in both events. Finally, we also provide direct evidence on the relationship between exports and tariff reductions brought about by NAFTA. Our results support the view that NAFTA has allowed Mexican producers to respond more quickly to real exchange rate shocks. |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:583&r=opm |
| By: | Sandra Gomes (Bank of Portugal, Economic Research Department, Av. Almirante Reis 71, 1150-012 Lisbon, Portugal.); Pascal Jacquinot (European Central Bank, Directorate General of Research, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Matthias Mohr (European Central Bank, Directorate General of Economics, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Massimiliano Pisani (Bank of Italy, Research Department, Via Nazionale 91, 00184 Rome, Italy.) |
| Abstract: | We quantitatively assess the macroeconomic effects of country-specific supply-side reforms in the euro area by simulating EAGLE, a multi-country dynamic general equilibrium model. We consider reforms in the labor and services markets of Germany (or, alternatively, Portugal) and the rest of the euro area. Our main results are as follows. First, there are benefits from implementing unilateral structural reforms. A reduction of markup by 15 percentage points in the German (Portuguese) labor and services market would induce an increase in the long-run German (Portuguese) output equal to 8.8 (7.8) percent. As reforms are implemented gradually over a period of five years, output would smoothly reach its new long-run level in seven years. Second, cross-country coordination of reforms would add extra benefits to each region in the euro area, by limiting the deterioration of relative prices and purchasing power that a country faces when implementing reforms unilaterally. This is true in particular for a small and open economy such as Portugal. Specifically, in the long run German output would increase by 9.2 percent, Portuguese output by 8.6 percent. Third, cross-country coordination would make the macroeconomic performance of the different regions belonging to the euro area more homogeneous, both in terms of price competitiveness and real activity. Overall, our results suggest that reforms implemented apart by each country in the euro area produce positive effects, cross-country coordination produces larger and more evenly distributed (positive) effects. JEL Classification: C53, E52, F47. |
| Keywords: | Economic policy, structural reforms, dynamic general equilibrium modeling, competition, markups, monetary policy. |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111323&r=opm |
| By: | Gus, Garita; Chen, Zhou |
| Abstract: | We identify the benefits and costs of financial openness in terms of currency crises based on a novel quantification of the systemic impact of currency (financial) crises. We find that systemic currency crises mainly exist regionally, and that financial openness helps diminish the probability of a currency crisis after controlling for their systemic impact. To clarify further the effect of financial openness, we decompose it into the various types of capital inflows. We find that the reduction of the probability of a currency crisis depends on the type of capital and on the region. Finally yet importantly, we find that monetary policy geared towards price stability, through a flexible inflation target that takes into account systemic impact, reduces the probability of a currency crisis. |
| Keywords: | Exchange market pressure; systemic risk; capital flows |
| JEL: | F42 E52 F41 F31 F36 |
| Date: | 2011–04–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30218&r=opm |
| By: | Ariel Burstein; Marc J. Melitz |
| Abstract: | In this paper, we analyze the transition dynamics associated with an economy's response to trade liberalization. We start by reviewing the recent literature that incorporates firm dynamics into models of international trade. We then build upon that literature to characterize the role of firm dynamics, export-market selection, firm-level innovation, and firms' expectations regarding the time path of liberalization in generating those transition dynamics following trade liberalization. These modeling ingredients generate substantial aggregate transition dynamics as they shift and shape the endogenous distribution of firms over time. Our results show how the responses of trade volumes, innovation, and aggregate output can vary greatly over time depending on those modeling ingredients. This has important consequences for many issues in international economics that rely on predictions for the effects of globalization over time on those key aggregate outcomes. |
| JEL: | F1 F4 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16960&r=opm |
| By: | A. Kerem Coşar (The University of Chicago Booth School of Business); Nezih Guner (ICREA-MOVE, Universitat Autònoma de Barcelona and Barcelona GSE); James Tybout (Pennsylvania State University and NBER) |
| Abstract: | This paper explores the effects of tariffs, trade costs, and firing costs on firm dynamics and labor markets outcomes. The analysis is based on a general equilibrium model with labor market search frictions, wage bargaining, firing costs, firm-specific productivity shocks, and endogenous entry/exit decisions. Firing costs reduce firms' profits and discourage them from quickly adjusting their employment levels in response to idiosyncratic shocks. Tariffs and other trade costs reduce rents for efficient firms and increase rents for inefficient firms, as in Melitz (2003). These well-known effects interact with idiosyncratic productivity shocks and with scale economies in hiring costs to determine the equilibrium size distribution of firms, entry/exit rates, job turnover rates, rate of informality, and cross-firm wage distributions. |
| Date: | 2011–04–12 |
| URL: | http://d.repec.org/n?u=RePEc:imd:wpaper:wp2011-06&r=opm |