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on Open MacroEconomics |
| By: | Kiminori Matsuyama |
| Abstract: | This paper presents a stylized model of the world economy to study how the crosscountry differences in the institutional quality (IQ) of the domestic credit markets shape the patterns of international capital flows when such IQ differences also cause productivity differences across countries. Institution affects productivity by changing the composition of credit across heterogeneous investment projects with different productivity. Such institution-induced productivity differences are shown to have effects on the investment and capital flows that are opposite of exogenous productivity differences. This implies that the overall effect of IQ could generate U-shaped responses of the investment and capital flows, which means, among other things, that capital flows out from middle-income countries and flows into both low-income and high-income countries, and that, starting from a very low IQ, a country could experience both a growth and a current account surplus after a successful institutional reform. More generally, it provides some cautions when interpreting the empirical evidence on the role of productivity differences and institutional differences on capital flows. |
| Keywords: | Institution-dependent productivity-agency cost trade-off, Endogenous productivity through the composition of credit across heterogeneous investment projects, Pledgeability approach to modeling credit market imperfections, Reverse capital flows, Chains of comparative advantage in intertemporal trade; Strict logsubmodularity, Envelope Theorem |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd10-179&r=opm |
| By: | Aßmann, Christian |
| Abstract: | Several empirical studies are concerned with measuring the effect of currency and current account crises on economic growth. Using different empirical models this paper serves two aspects. It provides an explicit assessment of country specific factors influencing the costs of crises in terms of economic growth and controls via a treatment type model for possible sample selection governing the occurrence of crises in order to estimate the impact on economic growth correctly. The applied empirical models allow for rich intertemporal dependencies via serially correlated errors and capture latent country specific heterogeneity via random coefficients. For accurate estimation of the treatment type model a simulated maximum likelihood approach employing efficient importance sampling is used. The results reveal significant costs in terms of economic growth for both crises. Costs for reversals are linked to country specific variables, while costs for currency crises are not. Furthermore, shocks explaining current account reversals and growth show strong significant positive correlation. -- |
| Keywords: | Currency crises,Current account reversals,Treatment Model,Discrete dependent variable,Efficient Importance Sampling,Panel Data |
| JEL: | F32 C15 C23 C33 O10 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:80&r=opm |
| By: | Marcin Kolasa (National Bank of Poland and Warsaw School of Economics.); Giovanni Lombardo (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | A growing number of papers have studied positive and normative implications of financial frictions in DSGE models. We contribute to this literature by studying the welfare-based monetary policy in a two-country model characterized by financial frictions, alongside a number of key features, like capital accumulation, non-traded goods and foreign-currency debt denomination. We compare the cooperative Ramsey monetary policy with standard policy benchmarks (e.g. PPI stability) as well as with the optimal Ramsey policy in a currency area. We show that the two-country perspective offers new insights on the trade-offs faced by the monetary authority. Our main results are the following. First, strict PPI targeting (nearly optimal in our model if credit frictions are absent) becomes excessively procyclical in response to positive productivity shocks in the presence of financial frictions. The related welfare losses are non-negligible, especially if financial imperfections interact with nontradable production. Second, (asymmetric) foreign currency debt denomination affects the optimal monetary policy and has important implications for exchange rate regimes. In particular, the larger the variance of domestic productivity shocks relative to foreign, the closer the PPI-stability policy is to the optimal policy and the farther is the currency union case. Third, we find that central banks should allow for deviations from price stability to offset the effects of balance sheet shocks. Finally, while financial frictions substantially decrease attractiveness of all price targeting regimes, they do not have a significant effect on the performance of a monetary union agreement. JEL Classification: E52, E61, E44, F36, F41. |
| Keywords: | financial frictions, open economy, optimal monetary policy. |
| Date: | 2011–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111338&r=opm |
| By: | Chang-Tai Hsieh; Ralph Ossa |
| Abstract: | We revisit a classic question in international economics: how does a country's productivity growth affect worldwide real incomes through international trade? We first identify the channels through which productivity shocks transmit in a model featuring inter-industry trade as in Ricardo (1817), intra-industry trade as in Krugman (1980), and firm heterogeneity as in Melitz (2003). We then estimate China's productivity growth at the industry level and use our model to quantify what would have happened to real incomes throughout the world if nothing but China's productivity had changed. We find that average real income in the rest of the world increased by a cumulative 0.48% from 1992-2007 due to China's productivity growth. This represents 2.2% of the total income gains to the world. |
| Keywords: | Productivity growth, China |
| JEL: | F1 F4 O4 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:hst:ghsdps:gd10-166&r=opm |
| By: | Heboyan, Vahe; Gunter, Lewell F. |
| Keywords: | International Relations/Trade, Risk and Uncertainty, |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:ags:aaea11:103952&r=opm |
| By: | Aoki, Shuhei |
| Abstract: | Why did the Japanese economy stagnate beforeWorldWar II, how did it achieve rapid economic growth after the war, and why did it stagnate again after the 1970s? To answer these questions, I developed a two-country trade model with technology transfer, where firms in a developed country (the U.S.) transfer technology to the competitors in a developing country (Japan) if it is profitable to do so and where the technology transfer is the engine of economic growth. In this model, among multiple equilibria, the equilibrium with low labor cost in Japan was chosen during the rapid growth period. Then, the firms in the developed country transferred technology to the firms in the developing country, resulting in rapid growth. However, during the other periods, the equilibrium with high labor cost in Japan was chosen, which caused stagnation. The model is quantitatively consistent with the per capita GDP relative to the U.S., the purchasing power parity-exchange rate ratio, and to some degree, the swings in labor share of postwar Japan. |
| Keywords: | Japan's rapid economic growth, Licensing, Technology transfer, Undervaluation of yen |
| JEL: | F43 O11 O41 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:hit:iirwps:11-05&r=opm |
| By: | Lim, Ewe Ghee; Goh, SooKhoon |
| Abstract: | This paper examines Bank Negara Malaysia’s (BNM) monetary policy autonomy in 1991-2009, a period of volatile capital flows, during which BNM operated under several exchange regimes: managed floating; fixed exchange rates; and fixed exchange rates with selective capital controls. Using a modified version of the Brissimis, Gibson and Tsakalotos (2002) model, the paper’s empirical estimates show that the same-period offset coefficients are significantly less than unity under all regimes, indicating that the Malaysian central bank possesses some short-run control over monetary policy (even under fixed exchange rates). Although the long-run offset coefficient continues to be less than unity under managed floating, it is not significantly less than unity under fixed exchange rates. These results show that Malaysia is not exempted from the impossible trinity except in the very short-run. Perhaps one of the reasons Malaysia abandoned its US dollar exchange rate peg on 20 July 2005 to move back to managed floating is to increase its monetary policy independence. One implication of the Malaysian monetary policy experience is that managed floating with active sterilization may be a viable strategy for emerging market economies to deal with volatile capital flows. |
| Keywords: | Offset Coefficient; Sterilization Coefficient; Monetary Autonomy; Impossible Trinity |
| JEL: | F41 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:30804&r=opm |