|
on Open MacroEconomics |
| By: | Gunther Schnabl (Institute for Economic Policy, University of Leipzig); Stephan Freitag (Institute for Economic Policy, University of Leipzig) |
| Abstract: | The paper discusses global current account imbalances in the context of an asymmetric world monetary system and asymmetric current account developments. It identifies the US and Germany as center countries with rising / high current account deficits (US) and surpluses (Germany). These are matched by current account surpluses of countries stabilizing their exchange rates against the dollar (dollar periphery) and current account deficits of countries stabilizing their exchange rate against the euro or members of the euro area (euro periphery). The paper finds that changes of world current account positions are closely linked to the monetary policy decision patterns both in the centers and peripheries. Whereas in the centers current account positions are affected by monetary policies, in the peripheries exchange rate stabilization cum sterilization matters. In specific, monetary expansion in the US as well as exchange rate stabilization and sterilization policies in the dollar periphery are found to have contributed to global imbalances. |
| Keywords: | Global Imbalances, Intra-European Imbalances, Asymmetric Monetary Policies, Foreign Reserve Accumulation, Sterilization, Granger Causality Tests, Panel Regressions |
| JEL: | F31 F32 |
| Date: | 2012–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:hlj:hljwrp:25-2011&r=opm |
| By: | Mario J. Crucini; Anthony Landry |
| Abstract: | The classical dichotomy predicts that all of the time series variance in the aggregate real exchange rate is accounted for by nontraded goods in the CPI basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) found that traded goods had comparable volatility to the aggregate real exchange. Our work reconciles these two views by successfully applying the classical dichotomy at the level of intermediate inputs into the production of final goods using highly disaggregated retail price data. Since the typical good found in the CPI basket is about equal parts traded and nontraded inputs, we conclude that the classical dichotomy applied to intermediate inputs restores its conceptual value. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:108&r=opm |
| By: | Zsolt Darvas (Institute of Economics Research Centre for Economic and Regional Studies Hungarian Academy of Sciences) |
| Abstract: | We use data on exchange rates and consumer price indices and the weighting matrix derived by Bayoumi, Lee and Jaewoo (2006) to calculate consumer price index-based REER. The main novelties of our database are that (1) it includes data for 178 countries -many more than in any other publicly available database- plus an external REER for the euro area, using a consistent methodology; (2) it includes up-to-date REER values, such as data for January 2012; and (3) it is relatively easy to calculate REER against any arbitrary group of countries. The annual database is complete for 172 countries and the euro area for 1992-2011 and data is available for six other countries for a shorter period. For several countries annual data is available for earlier years as well, eg data is available for 67 countries from 1960. The monthly database is complete for 138 countries for January 1995-January 2012, and data is also available for 15 other countries for a shorter period. The indicators calculated by us are freely downloadable from the website of this working paper and will be irregularly updated. |
| Keywords: | effective exchange rates |
| JEL: | F31 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:has:discpr:1210&r=opm |
| By: | Fernando Borraz; Alberto Cavallo; Roberto Rigobon; Leandro Zipitría |
| Abstract: | The “border effect” literature finds that political borders have a very large impact on relative prices, implicitly adding several thousands of miles to trade. In this paper we show that the standard empirical specification suffers from selection bias, and propose a new methodology based on quantile regressions. Using a novel data set from Uruguay, we apply our procedure to measure the segmentation introduced by city borders. City borders should matter little for trade. We find that when the standard methodology is used, two supermarkets separated by 10 kilometers across two different cities have the same price dispersion as two supermarkets separated by 30 kilometers within the same city; so the city border triples the distance. When our methodology is used, the city border effect becomes insignificant. We further test our methodology using online prices for the largest supermarket chain in the country, and show that the “online border” is equivalent to the average distance from the online warehouse to each of the offline stores. |
| JEL: | F40 F41 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18122&r=opm |
| By: | Tiago C. Berriel; Saroj Bhattarai |
| Abstract: | This paper explains two puzzling facts: international nominal bonds and equity portfolios are biased domestically. In our two-country model, holding domestic government nominal debt provides a hedge against shocks to bond returns and the impact on taxes they induce. For this result, only two features are essential: some nominal risk and taxes falling only on domestic agents. A third feature explains why agents choose to hold primarily domestic equity: government spending falls on domestic goods. Then, an increase in government spending raises the returns on domestic equity, providing a hedge against the subsequent increase in taxes. These conclusions are robust to a wide range of preference parameter values and the incompleteness of financial markets. A calibrated version of the model predicts asset holdings that quantitatively match the data. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:113&r=opm |
| By: | Ben Cheikh, Nidhaleddine |
| Abstract: | This paper examines the presence of nonlinear mechanisms in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using smooth transition models, we explore the existence of non-linearities with respect to three macroeconomic factors, namely inflation rate, exchange rate fluctuations and business cycle. Our results reveals that exchange rate transmission is higher when inflation rate surpass some threshold. We give a supportive evidence to the Taylor’s view that pass-through is decreasing in a lower and more stable inflation environment. Next, we check the asymmetry of pass-through with respect to both direction and magnitude of exchange rate. In one hand, results provide an asymmetrical ERPT to appreciations and depreciations, but there is no clear direction of asymmetry. In the other hand, the degree of pass-through is found to be higher for large exchange rate changes than for small ones. Finally, when we examine the non-linearities of ERPT relative to business cycle, we report that passthrough depends positively on economic activity; that is, when real GDP is growing above some threshold, the extent of ERPT becomes higher. |
| Keywords: | Exchange Rate Pass-Through; Inflation; Smooth transition regression models; Euro area |
| JEL: | E31 C22 F41 F31 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39258&r=opm |
| By: | Mototsugu Shintani (Department of Economics, Vanderbilt University); Akiko Terada-Hagiwara (Economics and Research Department, Asian Development Bank); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University) |
| Abstract: | This paper investigates the relationship between the exchange rate pass-through (ERPT) and inflation by estimating a nonlinear time series model. Based on a simple theoretical model of ERPT determination, we show that the dynamics of ERPT can be well approximated by a class of smooth transition autoregressive (STAR) models using the past inflation rate as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to US domestic prices. The estimation result suggests that declines in the ERPT during the 1980s and 1990s are associated with lowered inflation. |
| Keywords: | Import prices, inflation indexation, pricing-to-market, smooth transition autoregressive models, sticky prices |
| JEL: | C22 E31 F31 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:1207&r=opm |
| By: | Matthias Gubler; Christoph Sax (University of Basel) |
| Keywords: | Real Exchange Rate, Balassa-Samuelson Hypothesis, Skill-biased Technological Change, General Equilibrium |
| JEL: | F16 F31 F41 J24 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bsl:wpaper:2012/08&r=opm |
| By: | Knut Are Aastveit; Hilde C. Bjørnland; Leif Anders Thorsrud |
| Abstract: | This paper bridges the new open economy factor augmented VAR (FAVAR) studies with the recent findings in the business cycle synchronization literature emphasizing the importance of regional factors. That is, we estimate and identify a three block FAVAR model with separate world, regional and domestic blocks and study the transmission of both global and regional shocks to four small open economies (Canada, New Zealand, Norway and UK). The results show that foreign shocks explain a major share of the variance in all countries, most so shocks that are common to the world. However, regional shocks also play an important role, explaining more than 20 percent of the variance in the variables. Hence in small open economies, the world is not enough. The regional factors impact the four countries differently, though, some through trade and some through consumer sentiment. Our findings of a strong transmission of both global and regional shocks to open economies are in sharp contrast to the evidence from recently developed open economy DSGE models. |
| Keywords: | International transmission, world and region, small open economy, FAVAR, Business cycles |
| JEL: | C32 E32 F41 |
| Date: | 2011–11 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0005&r=opm |
| By: | Andreas Bachmann |
| Abstract: | The extent to which exchange rate fluctuations are passed through to domestic prices is of high relevance for open economies and for monetary authorities targeting price stability. Existing empirical studies estimating the exchange rate pass-through for Switzerland are based on either single equation estimation or on VAR models. However, these approaches feature some major drawbacks. The former cannot account for dynamic interactions between the time series and both methods disregard long-run equilibrium relations between the variable levels. This paper contributes to the evidence on the exchange rate pass-through in Switzerland by using a vector error correction model, which has the advantage of incorporating both short-run dynamics and long-run equilibrium relations among variables. The results reveal a significant impact of exchange rate shocks on various price (sub-)indices. Pass-through to import prices is substantial both in the short-run and in the long-run and occurs relatively quickly. It is slower, but still considerable in the long-run for the consumer price index and some of its sub-indices. Producer prices react significantly to exchange rate shocks as well. In contrast, consumer price inflation for services and for goods of domestic origin show hardly any significant response. The findings of this paper indicate a decline in the pass-through over time. |
| Keywords: | Exchange rate pass-through; consumer prices; import prices; cointegration; vector error correction models; new open economy macroeconomic model |
| JEL: | E31 F31 F41 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp1205&r=opm |
| By: | Pippenger, John |
| Abstract: | The literature assumes that the theory of uncovered interest parity fails because investing without cover is risky and investors are risk adverse. But covered interest parity implies that the theory can fail even when investors are risk neutral and hold when investors are risk adverse and there is a risk premium. The failure to fully appreciate the relation between uncovered interest parity and risk premiums has probably contributed to our failure to understand why UIP fails empirically. |
| Keywords: | International Economics, Finance, General, Economics, General, exchange rate, interest rates, arbitrage, covered interest parity, uncovered interest parity |
| Date: | 2012–05–30 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsbec:qt0zk6t2hj&r=opm |
| By: | Enrique Alberola; Aitor Erce Bank; José Maria Serena |
| Abstract: | This paper explores the role of international reserves as a stabilizer of international capital flows during periods of global financial stress. In contrast with previous contributions, aimed at explaining net capital flows, we focus on the behavior of gross capital flows. We analyze an extensive cross-country quarterly database using event analyses and standard panel regressions. We document significant heterogeneity in the response of resident investors to financial stress and relate it to a previously undocumented channel through which reserves are useful during financial stress. International reserves facilitate financial disinvestment overseas by residents, offsetting the simultaneous drop in foreign financing. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:110&r=opm |
| By: | Bahar, Dany (Harvard University); Hausmann, Ricardo (Harvard University); Hidalgo, Cesar A. (MIT and Harvard University) |
| Abstract: | In this paper we document that the probability that a product is added to a country's export basket is, on average, 65% larger if a neighboring country is a successful exporter of that same product. We interpret our result as evidence of international intra-industry knowledge diffusion. Our results are consistent with the overall consensus in the literature on technology spillovers: diffusion is stronger at shorter distances; is weaker for more knowledge-intensive products; and has become faster over time. |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp12-020&r=opm |