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on Open MacroEconomics |
| By: | Barthélemy, J.; Cléaud, G. |
| Abstract: | We estimate a medium-scale DSGE model for the euro area in an open economy framework. The model includes structural trends on all variables, which allow us to estimate on gross data. We first provide a theoretical balanced growth path consistent with permanent productivity shocks, inflation target changes, and permanent shocks to the openness of the economies. We then define the cycle as the gap between this sustainable trajectory and the gross data, thus our model properly deals with deviations of the trade balance. Finally, we find persistent and strong effects from the asymmetric increase of euro area imports during the last ten years on domestic inflation. From the first quarter of 2000 to the last quarter of 2008, we estimate the contribution of the imbalanced development of international trade on euro area inflation to an average of -0.7%, and on the 3-Month interest rate to an average of -1.4%. |
| Keywords: | Global Imbalances, Disinflation, Business Fluctuations, Open Economy Macroeconomics. |
| JEL: | E32 F41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:329&r=opm |
| By: | David Cook; Michael B. Devereux |
| Abstract: | With integrated trade and financial markets, a collapse in aggregate demand in a large country can cause ‘natural real interest rates’ to fall below zero in all countries, giving rise to a global ‘liquidity trap’. This paper explores the policy choices that maximize the joint welfare of all countries following such a shock, when governments cooperate on both fiscal and monetary policy. Adjusting to a large negative demand shock requires raising world aggregate demand, as well as redirecting demand towards the source (home) country. The key feature of demand shocks in a liquidity trap is that relative prices respond perversely. A negative shock causes an appreciation of the home terms of trade, exacerbating the slump in the home country. At the zero bound, the home country cannot counter this shock. Because of this, it may be optimal for the foreign policy-maker to raise interest rates. Strikingly, the foreign country may choose to have a positive policy interest rate, even though its ‘natural real interest rate’ is below zero. A combination of relatively tight monetary policy in the foreign country combined with substantial fiscal expansion in the home country achieves the level and composition of world expenditure that maximizes the joint welfare of the home and foreign country. Thus, in response to conditions generating a global liquidity trap, there is a critical mutual interaction between monetary and fiscal policy. |
| JEL: | E5 F41 F42 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17131&r=opm |
| By: | Giorgio Di Giorgio (LUISS Guido Carli University); Salvatore Nistico' (La Sapienza University of Rome and LUISS Guido Carli University) |
| Keywords: | Fiscal Deficit, Net Foreign Assets, DSGE Models, Monetary and Fiscal Policy. |
| JEL: | E43 E44 E52 E58 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:lui:casmef:1101&r=opm |
| By: | Domenico Ferraro; Ken Rogoff; Barbara Rossi |
| Abstract: | This paper investigates whether oil price shocks have a reliable and stable out-of-sample relationship with the Canadian/U.S Dollar nominal exchange rate. Despite state-of-the-art methodologies and clean data, we find paradoxically little systematic relation between oil prices and the exchange rate, especially if one takes the monthly and quarterly frequencies into account. In contrast, the very short term relationship between oil prices and exchange rates at the daily frequency is rather robust, and holds no matter whether we use contemporaneous (realized) or lagged oil price shocks in our regression. However, the short-term out-of-sample predictive ability is ephemeral, and it mostly appears after time variation in the forecasting ability of the models has been appropriately taken into account. We show that a similar results hold for other currencies and commodity price shocks. |
| JEL: | F31 F37 C22 C53 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:duk:dukeec:11-05&r=opm |
| By: | Felbermayr, Gabriel J.; Jung, Benjamin |
| Abstract: | The business literature and recent descriptive evidence show that exporting firms typically require the help of foreign trade intermediaries or need to set up own foreign wholesale affiliates. In contrast, conventional trade theory models assume that producers can directly access foreign consumers. This paper introduces intermediaries in an international trade model where producers differ with respect to productivity as well as regarding their varieties' perceived quality and tradability. We assume that trade intermediation is prone to frictions due to the absence of enforceable cross-country contracts while own wholesale subsidiaries require capital investment. We derive the sorting pattern of firms according to their degree of competitive advantage and show how the relative prevalence of intermediation depends on the degree of heterogeneity among producers, on the importance of market-specificity of goods, or on expropriation risk. We use US export data for 50 sectors and 133 destination countries to check the empirical validity of this predictions and find robust empirical support. -- |
| Keywords: | Trade intermediation,international trade, heterogeneous firms,incomplete contracts |
| JEL: | F12 F23 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:tuedps:331&r=opm |
| By: | Gianluca Benigno; Pierpaolo Benigno; Salvatore Nisticò |
| Abstract: | In this research, we provide new empirical evidence on the importance of time-varying uncertainty for the exchange rate and the excess return in currency markets. Following an increase in monetary policy uncertainty, the dollar exchange rate appreciates in the medium run, while an increase in the volatility of productivity leads to a dollar depreciation. We propose a general-equilibrium theory of exchange rate determination based on the interaction between monetary policy and time-varying uncertainty aimed at understanding these regularities. In the model, the behaviour of the exchange rate following nominal and real volatility shocks is consistent with the empirical evidence. Furthermore we show that risk factors and interest-rate smoothing are important in accounting for the negative coefficient in the UIP regression. |
| JEL: | E0 E43 E52 F3 F31 F41 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17133&r=opm |
| By: | Philippe Andrade and Marios Zachariadis |
| Abstract: | A number of recent papers point to the importance of distinguishing between the price reaction to micro and macro shocks in order to reconcile the volatility of individual prices with the observed persistence of aggregate inflation. We emphasize instead the importance of distinguishing between global and local shocks. We exploit a panel of 276 micro price levels collected on a semi-annual frequency from 1990 to 2010 across 88 cities in 59 countries around the world, that enables us to distinguish between different types (local and global) of micro and macro shocks. The persistence associated with each of these components and its relation with volatility of the different components, provides a number of new facts. Prices respond more slowly to global shocks as compared to local ones .in particular, prices respond faster to local macro shocks than to global micro ones .implying that the relatively slow response of prices to macro shocks documented in recent studies comes from global rather than local sources. In addition, more volatility in local conditions leads to more persistent relative price distortions due to slower response of prices to global shocks, with this local -global link more than twice as large as the corresponding micro-macro link. Finally, global shocks account for half of the volatility in prices. Overall, our results imply that global shocks are important when analyzing price dynamics or assessing price-setting models. |
| Keywords: | global shocks, local shocks, micro shocks, macro shocks, price adjustment, micro-macro gap, price-setting models, micro prices |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:ucy:cypeua:10-2011&r=opm |
| By: | Thierry Bracke (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Irina Bunda (IMF-Singapore Regional Training Institute, 10 Shenton Way, MAS Building, Singapore 079117.) |
| Abstract: | The paper provides a measure of exchange rate anchoring behaviour across 149 emerging market and developing economies for the 1980-2010 period. An extension of the Frankel and Wei (2008) methodology is used to determine whether exchange rates are pegged or floating, and in the case of pegs, to which anchor currencies they are pegged. To capture the role of major currencies over time, an aggregate trade-weighted indicator is constructed based on exchange rate regimes of individual countries. The evolution of this aggregate indicator suggests that the US dollar has continuously dominated exchange rate regimes, despite some temporary decoupling during major financial crises. JEL Classification: F30, F31, F33. |
| Keywords: | de facto exchange rate regimes, international monetary system, emerging and developing economies, global currencies. |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111353&r=opm |
| By: | Park, Cyn-Young (Asian Development Bank); Lee, Jong-Wha (Korea University) |
| Abstract: | Using both quantity- and price-based measures of financial integration, this paper shows an increasing degree of financial openness and integration in emerging Asian markets. This paper also assesses the impact of a regional shock relative to a global shock on local equity and bond markets. The findings of this paper suggest that the region’s equity markets are integrated more globally than regionally, although the degrees of both regional and global integration have increased significantly since the 1997/98 Asian financial crisis. However, emerging Asia’s local currency bond markets remain generally segmented, being neither regionally nor globally integrated. A case can be made for the benefits of increased regional integration of financial markets. Financial integration at the regional level allows for the region’s economies to benefit from allocation efficiency and risk diversification. The findings of this paper suggest that policymakers in the region must strike the right balance between maximizing the net benefits from regional and global financial openness, and minimizing the potential costs of financial contagion and crisis. |
| Keywords: | emerging Asia; financial integration; cross-border financial flows; crossborder asset holdings; convergence of asset returns |
| JEL: | F30 F36 F41 G15 |
| Date: | 2011–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbrei:0079&r=opm |
| By: | Colin Davis (Institute for International Education, Doshisha University); Ken-ichi Hashimoto (Graduate School of Economics, Kobe University) |
| Abstract: | This paper investigates the relationship between geographic patterns of industrial activity and endogenous growth in a two region model of trade that exhibits no scale effect. The in-house process innovation of manufacturing firms drives productivity growth and is closely associated with firm-level scales of production and relative levels of accessible technical knowledge. Focusing on long-run industry shares and a cross-region productivity gap, we find that dispersed equilibria with positive industry shares for both regions always produce higher growth rates than core-periphery equilibria with all industry locating in one region. Moreover, the highest growth rate arises in a symmetric steady state that features no productivity gap and equal shares of industry leading to the conclusion that the geographic concentration of industry has a negative impact on overall growth. Convergence towards a dispersed equilibrium, however, is contingent on the levels of inter-regional transport costs and knowledge dispersion. Finally, we explore the implications of greater economic integration arising from reduced transport costs and greater knowledge dispersion for patterns of industry and productivity, and for regional welfare levels within a dispersed equilibrium. |
| Keywords: | Industry Concentration, Industry Share, Productivity Gap, Productivity Growth, Scale Effect |
| JEL: | F43 O30 O40 R12 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:1106&r=opm |