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on Open MacroEconomics |
| By: | Fabrizio Perri (University of Minnesota and Federal Reserve Bank of Minneapolis (email: fperri@umn.edu)); Vincenzo Quadrini (University of Southern California) |
| Abstract: | The 2008-2009 crisis was characterized by an unprecedented degree of international synchronization as all major industrialized countries experienced large macroeconomic contractions. Countries also experienced large and synchronized contractions in the growth of financial flows. In this paper we present a two-country model with financial markets frictions where credit-driven recessions can explain these features of the recent crisis. A credit contraction can emerge as a self-fulling equilibrium caused by pessi- mistic but fully rational expectations. As a result of the credit contraction, in a financially integrated world, countries experience large and, endogenously synchronized, declines in asset prices and economic activity ( international recessions). |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:11-e-26&r=opm |
| By: | Hirose, Yasuo |
| Abstract: | We estimate a two-country open economy version of the New Keynesian DSGE model for the U.S. and the Euro area, using Bayesian techniques that allow for both determinacy and indeterminacy of the equilibrium. Our empirical analysis shows that the worldwide equilibrium is indeterminate due to a passive monetary policy in the Euro area, even if U.S. policy is aggressive enough. We demonstrate that the impulse responses under indeterminacy exhibit different dynamics than those under determinacy and that sunspot shocks affect the Euro economy to a substantial degree, while the transmission of sunspots to the U.S. is limited. |
| Keywords: | Monetary Policy; Indeterminacy; Sunspot Shock; Open Economy Model; Bayesian Analysis |
| JEL: | E52 F41 C11 C62 |
| Date: | 2010–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:33693&r=opm |
| By: | Esteban Jaimovich; Vincenzo Merella |
| Abstract: | We propose a theory of trade in which comparative advantages reveal themselves gradually over the path of development. Following the Ricardian tradition, countries specialise and export the set of goods they are able to produce at relatively lower cost given their exogenous initial endowments. However, we introduce two new features into a Ricardian trade model with horizontally and vertically differentiated goods. First, individuals have nonhomothetic preferences in that their willingness to pay for quality rises with their income. Second, heterogeneities in productivity become more pronounced at higher levels of quality of production. As a result, our theory predicts that the scope for international trade widens and productive specialisation increases as real incomes grow and wealthier consumers raise the quality of their consumption baskets. Our predictions find empirical support in a number tests performed using bilateral trade data at the product level. |
| Keywords: | International Trade; Nonhomothetic Preferences; Quality Ladders |
| JEL: | F11 F43 O40 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:cca:wpaper:216&r=opm |
| By: | Smith, Constance (University of Alberta, Department of Economics) |
| Abstract: | Large external imbalances have become a policy concern. This study investigates the determinants of external balances for regions within a single country — Canadian provinces — as well as for a sample of 18 OECD countries. External balance adjustment may differ for provinces since there are few intranational barriers to the mobility of capital, goods and labour within Canada. Also, because Canada is a monetary union, there is no currency risk associated with lending and borrowing across provinces, and this may promote inter-provincial financial flows. The estimates show that the short run response of the external balance to disturbances, such as a deterioration in the terms of trade, is typically larger for Canadian provinces than for OECD countries. There is also a much greater speed of adjustment of the external balance in the Canadian provinces. This faster adjustment speed, combined with the larger response of the external balance, means that provinces may see a quicker resolution of external imbalances, but larger deficits or surpluses may emerge before adjustment occurs. |
| Keywords: | current account; external balance; global imbalances; currency union |
| JEL: | F32 F36 |
| Date: | 2011–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:albaec:2011_013&r=opm |
| By: | Juha Tervala |
| Abstract: | This study shows that the learning by doing (LBD) effect has substantial, both quantitative and qualitative, consequences for the international transmission of monetary policy. LDB implies that a country can increase its productivity-increasing skill level, at the expense of the neighbour, by competitive devaluation engineered through low interest rates. If measured by the cumulative change in output after 12 quarters, LBD increases the harmful effect of competitive devaluation on foreign output by 85Ð125%, when compared to the case without it. If LBD is sufficiently strong and the cross-country substitutability is high (low), it reverses the effect of monetary policy on foreign (domestic) welfare into negative (positive). Moreover, a combination of a high crosscountry substitutability and a sufficiently strong LDB effect implies that competitive devaluation increases both domestic output and welfare, at the expense of foreign output and welfare. |
| Keywords: | Beggar-thyself, beggar-thy-neighbour, competitive devaluation, learning by doing, open economy macroeconomics |
| JEL: | E52 F30 F41 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp67&r=opm |
| By: | Pietro Alessandrini (Universit… Politecnica delle Marche, Department of Economics, MoFiR); Andrea Filippo Presbitero (Universit… Politecnica delle Marche, Department of Economics, MoFiR) |
| Abstract: | The global financial crisis, the weakening role of the dollar and the increasing importance of China in the global arena are calling for a reform of the international monetary system (IMS) in the direction of a greater multilateralism. We agree with the necessity to reform the IMS and we advance a proposal based on a greater role of the Special Drawing Rights (SDRs), focusing on the potential benefits that a new monetary order could brings to Low-Income Countries (LICs). Given their extreme vulnerability to external shocks and their dependence on the exchange rate vis-vis the US dollar, poor countries would benefit from the creation of a more stable multi-currency monetary system. The new SDRs will created exogenously - with a disproportionate allocation to LICs -, but also endogenously, through the substitution account and the overdraft facility. Finally, we discuss the superiority of this proposal in the context of the current foreign assistance framework. |
| Keywords: | International Mometary System, Key Currency, Low-Income Countries, Reserves, SDR |
| JEL: | F33 F35 O11 O19 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:55&r=opm |
| By: | Hassan Suleiman; Zahid Muhammad |
| Abstract: | In this study the long-run relationship between real oil price, real effective exchange rate and productivity differentials is examined using annual data for Nigeria over the period 1980 to 2010. We aim to investigate whether oil price fluctuations and productivity differentials affect the real effective exchange rate. The empirical results suggest that whereas real oil price exercise a significant positive effect on the real exchange rate in the long run. Productivity differentials exercise a significant negative influence on the real exchange rate. The study noted that, the real exchange rate appreciation of 2000-2010 was driven by oil prices. The findings of this study have important implications for exchange rate policy and are relevant to many developing economies where oil exports constitute a significant share of their exports. |
| Keywords: | Exchange rate, oil price, Nigerian economy |
| JEL: | F31 C22 |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:wpaper:y:2011:i:072&r=opm |