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on Open MacroEconomics |
| By: | Julian di Giovanni; Andrei A. Levchenko |
| Abstract: | This paper proposes a new mechanism by which country size and international trade affect macroeconomic volatility. We study a multi-country, multi-sector model with heterogeneous firms that are subject to idiosyncratic firm-specific shocks. When the distribution of firm sizes follows a power law with an exponent close to -1, the idiosyncratic shocks to large firms have an impact on aggregate output volatility. We explore the quantitative properties of the model calibrated to data for the 50 largest economies in the world. Smaller countries have fewer firms, and thus higher volatility. The model performs well in matching this pattern both qualitatively and quantitatively: the rate at which macroeconomic volatility decreases in country size in the model is very close to what is found in the data. Opening to trade increases the importance of large firms to the economy, thus raising macroeconomic volatility. Our simulation exercise shows that the contribution of trade to aggregate fluctuations depends strongly on country size: in the largest economies in the world, such as the U.S. or Japan, international trade increases volatility by only 1.5-3.5%. By contrast, trade increases aggregate volatility by some 15-20% in a small open economy, such as Denmark or Romania. |
| JEL: | F12 F15 F41 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17335&r=opm |
| By: | Auer, Raphael; Fischer, Andreas M; Kropf, Andreas |
| Abstract: | What is the impact of Chinese import competition on Nordic producer prices? In a panel covering 23 (2 digit) NACE manufacturing sectors from 1995 to 2008, instrumental variable estimations predict that when Chinese imports capture a 1% increase in market share, Nordic producer prices decrease by about 2.0%. This China effect entails a drop of 14% in producer prices for the analyzed period. |
| Keywords: | comparative advantage; globalization; intra-industry trade |
| JEL: | F11 F12 F14 F16 F40 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8544&r=opm |
| By: | Fabio Canova (Universitat Pompeu Fabra, Ramon Trias Fargas 25-27, 08005 Barcelona, Spain.); Matteo Ciccarelli (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | We investigate the similarities of macroeconomic fluctuations in the Mediterranean basin and their convergence. A model with three indicators, covering the West, the East and the MENA portions of the Mediterranean, characterizes well the historical experience since the early 1980. Convergence and divergence coexist in the region and are reversible. Except for the West, domestic cyclical fluctuations are still due to national and idiosyncratic causes. The outlook for the next few years looks rosier for the MENA and the East blocks than for the West. JEL Classification: C11, C33, E32. |
| Keywords: | Bayesian methods, business cycles, Mediterranean basin, developing and developed countries. |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111367&r=opm |
| By: | Broner, Fernando; Didier, Tatiana; Erce, Aitor; Schmukler, Sergio L. |
| Abstract: | This paper analyzes the joint behavior of international capital flows by foreign and domestic agents -- gross capital flows -- over the business cycle and during financial crises. The authors show that gross capital flows are very large and volatile, especially relative to net capital flows. When foreigners invest in a country, domestic agents tend to invest abroad, and vice versa. Gross capital flows are also pro-cyclical, with foreigners investing more in the country and domestic agents investing more abroad during expansions. During crises, especially during severe ones, there is retrenchment, that is, a reduction in both capital inflows by foreigners and capital outflows by domestic agents. This evidence sheds light on the nature of shocks driving capital flows and helps discriminate among existing theories. The findings seem consistent with shocks that affect foreign and domestic agents asymmetrically, such as sovereign risk and asymmetric information. |
| Keywords: | Emerging Markets,Macroeconomic Management,Economic Theory&Research,Debt Markets,Capital Flows |
| Date: | 2011–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5768&r=opm |
| By: | Jimborean, R. |
| Abstract: | This paper aims to complete our understanding of the relationship between changes in nominal effective exchange rates and prices in the new EU member states. We investigate the exchange rate pass-through to import, producer and consumer prices for ten Central and Eastern European countries with quarterly data from January 1996 to June 2010. In a first step, the pass-through estimates are derived from a dynamic panel data model, through the generalized method of moments. A statistically significant exchange rate pass-through to import prices is found, while no statistically significant exchange rate pass-through is estimated to consumer and producer prices. We further investigate whether exchange-rate pass-through estimates have declined in response to a change in inflation environment and find evidence of such decline only for import prices, both in the short run and the long run. In a second step, we proceed to an individual analysis, country by country, and find support for an increased heterogeneity in the exchange rate pass-through estimates. We equally test for the stability of the estimated. |
| Keywords: | inflation and prices, exchange rate pass-through, GMM, international topics. |
| JEL: | C33 E31 E42 E52 F31 O52 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:341&r=opm |
| By: | Luiz de Mello; Pier Carlo Padoan; Linda Rousová |
| Abstract: | This paper assesses empirically whether or not current account reversals have permanent growth effects and the role of macroeconomic policies in this process. The methodology developed in de Mello, Padoan and Rousova (2010) to identify a chronology of current account reversals is applied to the real growth rate of GDP of more than 100 countries during the period 1971-2007. We use ordered probit models to show that current account reversals associated with improvements in external positions increase the probability of a sustained rise in the rate of growth of GDP (growth acceleration) beyond those generated by real exchange rate effects. Current account reversals associated with a deterioration of external positions make impending GDP accelerations less likely. The macroeconomic policy stance prevailing at the time of current account reversals also matters. High budget deficits thwart the positive effect of a current account improvement on the probability of a growth acceleration. By contrast, a monetary tightening in association with a current account deterioration makes an impending growth acceleration more likely. This paper improves our understanding of how macroeconomic policies help countries maximise the growth payoff of current account improvements.<P>Effet sur la croissance des inversions de balance courante : le rôle des politiques macroéconomiques<BR>Ce document examine de manière empirique si les inversions de balance courante ont ou non des effets permanents sur la croissance et quel rôle les politiques macroéconomiques jouent dans ce processus. La méthodologie développée par de Mello, Padoan et Rousova (2010) pour déterminer une chronologie des inversions de balance courante est appliquée aux taux de croissance réelle du PIB de plus de 100 pays sur la période 1971-2007. Des modèles probit sont utilisés pour montrer que les inversions de balance courante associées à des améliorations des positions extérieures augmentent la probabilité d’une hausse soutenue du taux de croissance du PIB (accélération de la croissance). Des inversions de balance courante associées à une dégradation des positions extérieures rendent moins probable une accélération imminente du PIB. L’orientation des politiques macroéconomiques au moment des inversions est également importante. Des déficits budgétaires élevés neutralisent l’effet positif d’un redressement de la balance courante sur la probabilité d’une accélération de la croissance. A l’inverse, un durcissement monétaire associé à une dégradation de la balance courante rend plus probable une accélération imminente de la croissance. Cette étude permet de mieux comprendre comment les politiques macroéconomiques peuvent aider les pays à maximiser les gains de croissance découlant d’améliorations de la balance courante. |
| Keywords: | fiscal policy, monetary policy, current account reversals, trend GDP growth, politique budgétaire, politique monétaire, inversions de balance courante, croissance du PIB tendanciel |
| JEL: | C32 C35 F32 F43 |
| Date: | 2011–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:871-en&r=opm |
| By: | Petar Vujanovic |
| Abstract: | This paper looks at the empirical determinates of foreign currency reserve holdings across a panel of around 130 countries between 1980 and 2008. The paper builds on the existing literature by adopting a panel error-correction model specification and by extending the sample to include the recent period that saw a continuing acceleration in the accumulation of reserves in many countries. The results of the analysis suggest that the levels of trade and domestic financial depth are robust determinates of the level of reserves in the long run, particularly over the past decade and a half. The estimations also find that changes in GDP, the exchange rate regime, exchange rate volatility, and financial openness can all have permanent one-off effects on the level of reserves. Furthermore, country fixed effects are found to be significant, suggesting that time-invariant country specific factors are important in explaining the variance in reserve holdings across countries. Nevertheless, several countries stick out in terms of holding reserves well in excess of that implied by these empirical results, above all in recent years. Among these countries, China and Japan are particularly notable, especially when the deviation from average behaviour is expressed in dollar terms.<P>Comprendre la récente accélération de l'accumulation de réserves internationales<BR>Ce document est consacré à l’étude des déterminants économétriques des réserves de change de 1980 à 2008 à partir d’un panel de quelque 130 pays. Il s’appuie sur les publications existantes en adoptant un modèle à correction d’erreurs sur données de panel et en élargissant l’échantillon de façon à couvrir la période récente qui a été marquée par une accélération continue de l’accumulation de réserves dans de nombreux pays. Les résultats de l’analyse tendent à montrer que le volume des échanges commerciaux et la profondeur du système financier national sont des déterminants robustes du volume des réserves sur le long terme, en particulier depuis une quinzaine d’années. Les estimations permettent aussi de constater que des changements en matière de PIB, de régime de change, d’instabilité des cours de change ou d’ouverture financière sont autant de facteurs ponctuels qui peuvent produire un effet permanent sur le volume des réserves. En outre, on observe des effets fixes significatifs spécifiques aux pays, ce qui suggère que des facteurs spécifiques à des pays et invariants dans le temps sont importants pour expliquer la variance des réserves de change entre différents pays. Néanmoins, plusieurs pays continuent à détenir des réserves très supérieures à ce qu’impliquent ces résultats économétriques, surtout ces dernières années. Parmi ces pays, on retiendra en particulier la Chine et le Japon, surtout lorsque l’on exprime en dollars l’écart que présentent ces pays avec le comportement moyen. |
| Keywords: | trade, current account, crisis, central banks, reserves, foreign currency, money supply, sudden stop, balance courante, banque centrale, crise, échanges commerciaux, réserves, changes, masse monétaire, arrêt brutal |
| JEL: | E44 E58 F21 F31 F36 F41 N10 O24 |
| Date: | 2011–05–24 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:866-en&r=opm |
| By: | Joscha Beckmann |
| Abstract: | Although the literature on purchasing power parity (PPP) is rich in controversy, the relative contribution of prices and nominal exchange rates to real exchange rate movements which restore PPP disequilibria has rarely been put under any close scrutiny. Using monthly data from 1973:01 to 2009:12 from the USA, UK, Germany, France and Japan, this paper as a fi rst step applies a cointegrated VAR framework to test for stationary real exchange rates and linear adjustments in prices and nominal exchange rates. As a second step, ESTR error correction models are fi tted to test whether nonlinear error correctional behaviour characterizes the data. The results clearly indicate that the nominal exchange rate is responsible for the nonlinear mean reverting behaviour in real exchange rates and also mainly drives overall adjustment. Applying dynamic stochastic simulations based on the estimated models, this study also confi rms recent results that the half-life times of real exchange rate shocks are signifi cantly smaller than the consensus benchmark of three to fi ve years. |
| Keywords: | Purchasing power parity; cointegration; nonlinear vector error correction |
| JEL: | E44 F31 G15 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0272&r=opm |
| By: | Karlygash Kuralbayeva |
| Abstract: | The paper examines implications of inflation persistence for business cycle dynamics following terms of trade shock in a small oil producing economy, under inflation targeting and exchange rate targeting regimes. It is shown that due to the 'Walters critique' effect, the country's adjustment paths are slow and cyclical if there is a significant backward-looking element in the inflation dynamics and the exchange rate is fixed. It is also shown that such cyclical adjustment paths are moderated if there is a high proportion of forward-looking price setters in theh economy, so that when the Phillips curve becomes completely forward-looking cyclicality in adjustment paths disappears and the response of the real exchange rate becomes hump-shaped. In contrast, with an independent monetary policy, irrespective of the degree of inflation persistence, flexible exchange rate allows to escape severe cycles, which results in a smooth response of the real exchange rate. |
| Keywords: | inflation inertia, inflation targeting, exchange rate targeting, Phillips curve, oil shocks, small open economy |
| JEL: | E32 F40 F41 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:oxcrwp:063&r=opm |
| By: | Spolaore, Enrico; Wacziarg, Romain |
| Abstract: | We document an empirical relationship between the cross-country adoption of technologies and the degree of long-term historical relatedness between human populations. Historical relatedness is measured using genetic distance, a measure of the time since two populations’ last common ancestors. We find that the measure of human relatedness that is relevant to explain international technology diffusion is genetic distance relative to the world technological frontier (“relative frontier distance”). This evidence is consistent with long-term historical relatedness acting as a barrier to technology adoption: societies that are more distant from the technological frontier tend to face higher imitation costs. The results can help explain current differences in total factor productivity and income per capita across countries. |
| Keywords: | genetic distance; technological adoption; technological frontier; total factor productivity |
| JEL: | F43 O33 O57 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8541&r=opm |
| By: | Athanasios Geromichalos; Ina Simonovska |
| Abstract: | We study optimal asset portfolio choice in a two-country search-theoretic model of monetary exchange. We allow assets not only to represent claims on future consumption, but also to serve as means of payment. Assuming foreign assets trade at a cost, we characterize equilibria in which different countries' assets arise as media of exchange in different types of trades. More frequent trading opportunities at home result in agents holding proportionately more domestic over foreign assets. Consequently, agents have larger claims to domestic over foreign consumption goods. Moreover, foreign assets turn over faster than home assets because the former have desirable liquidity properties, but unfavorable returns over time. Our mechanism offers an answer to a long-standing puzzle in international finance: a positive relationship between consumption and asset home bias, coupled with higher turnover rates of foreign over domestic assets. |
| JEL: | E44 F15 F36 G11 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17331&r=opm |
| By: | Viktors Ajevskis; Kristine Vitola |
| Abstract: | We evaluate implications of inflation targeting versus fixed exchange rate regime for the UK, Sweden, Poland, the Czech Republic, Estonia, Latvia and Lithuania, i.e. seven EU non-euro area countries. To this end, we estimate a small open economy DSGE model and simulate a model under estimated structural parameters and different sets of policy parameters. The results obtained are compared in terms of inflation, output gap and interest rate volatility. For inflation targeting countries, a policy switch to fixed exchange rate would entail 3–6 times higher inflation volatility. In the Baltic economies, a policy change to inflation targeting with fully flexible exchange rate would amplify inflation volatility 2–4 times, whereas the existing price stabilisation and exchange rate fluctuations within the ERM II bands would entail 3–6 times more volatile inflation. Policy simulations thus show evidence that in all the countries the existing monetary rule guarantees more stable inflation and output than under alternative regimes. |
| Keywords: | DSGE, small open economy, fixed exchange rate, inflation targeting, Bayesian estimation |
| JEL: | C11 C3 C51 D58 E58 F41 |
| Date: | 2011–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:201102&r=opm |