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on Open MacroEconomics |
| By: | Michele Ca’Zorzi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Alexander Chudik (Federal Reserve Bank of Dallas, 2200 N. Pearl Street, Dallas, TX 75201, USA); Alistair Dieppe (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | The global financial crisis has led to a revival of the empirical literature on current account imbalances. This paper contributes to that literature by investigating the importance of evaluating model and parameter uncertainty prior to reaching any rm conclusion. We explore three alternative econometric strategies: examining all models, selecting a few, and combining them all. Out of thousands (or indeed millions) of models a story emerges. Prior to the nancial crisis, current account positions of major economies such as the US, UK, Japan and China were not aligned with fundamentals. JEL Classification: C11, C33, F32, F34, F41, O52. |
| Keywords: | current account, global imbalances, panel data, model uncertainty, model combination. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121441&r=opm |
| By: | George Alessandria; Joseph Kaboski; Virgiliu Midrigan |
| Abstract: | The large, persistent fluctuations in international trade that can not be explained in standard models by changes in expenditures and relative prices are often attributed to trade wedges. We show that these trade wedges can reflect the decisions of importers to change their inventory holdings. We find that a two-country model of international business cycles with an inventory management decision can generate trade flows and wedges consistent with the data. Moreover, matching trade flows alters the international transmission of business cycles. Specifically, real net exports become countercyclical and consumption is less correlated across countries than in standard models. We also show that ignoring inventories as a source of trade wedges substantially overstates the role of trade wedges in business cycle fluctuations. |
| JEL: | F41 F44 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18191&r=opm |
| By: | Emmanuel Farhi; Ivan Werning |
| Abstract: | We lay down a standard macroeconomic model of a small open economy with a fixed exchange rate and study optimal capital controls (defined as maximizing the utility of a representative household). We provide sharp analytical and numerical characterizations for a variety of shocks. We find that capital controls are employed to respond to some shocks but not others. They are particularly effective to address risk-premium shocks that affect the interest rate differential foreign investors require in a particular country. We also discuss how the solution depends on the degree of nominal rigidity and the openness of the economy. We show that capital controls may be optimal even if the exchange rate is not fixed in response to risk premium shocks or if wages, in addition to prices, are sticky. Finally, we compare the single country’s optimum to a coordinated world solution. Our results show a limited need for coordination. However, the uncoordinated solution features the same capital controls as the coordinated solution. |
| JEL: | E5 F3 F32 F33 F41 F42 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18199&r=opm |
| By: | Sascha Buetzer (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Maurizio Michael Habib (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Do oil shocks matter for exchange rates? This paper addresses this question based on data on real and nominal exchange rates as well as an exchange market pressure index for 44 advanced and emerging countries. We identify three structural shocks (oil supply, global demand, and oil specific demand) which raise the real oil price and analyse their effect on individual exchange rates. Contrary to the predictions of the theoretical literature, we find no evidence that exchange rates of oil exporters systematically appreciate against those of oil importers after shocks raising the real oil price. However, oil exporters experience significant appreciation pressures following an oil demand shock, which they tend to counter by accumulating foreign exchange reserves. Results for general commodity exporters are similar, showing minor differences compared with oil exporters. JEL Classification: F31, Q43. |
| Keywords: | Oil, structural VAR, exchange rate, exchange market pressure, global imbalances. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121442&r=opm |
| By: | Alexander Chudik (Federal Reserve Bank of Dallas, 2200 N. Pearl Street, Dallas, Texas 75201, USA and CIMF.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.) |
| Abstract: | The paper analyses the transmission of liquidity shocks and risk shocks to global financial markets. Using a Global VAR methodology, the findings reveal fundamental di¤erences in the transmission strength and pattern between the 2007-08 financial crisis and the 2010-11 sovereign debt crisis. Unlike in the former crisis, emerging market economies have become much more resilient to adverse shocks in 2010-11. Moreover, a flight-to-safety phenomenon across asset classes has become particularly strong during the 2010-11 sovereign debt crisis, with risk shocks driving down bond yields in key advanced economies. The paper relates this evolving transmission pattern to portfolio choice decisions by investors and finds that countries' sovereign rating, quality of institutions and their financial exposure are determinants of cross-country differences in the transmission. JEL Classification: E44, F3, C5. |
| Keywords: | Global financial crisis, sovereign debt crisis, liquidity, risk, capital flows, transmission, high dimensional VARs, advanced economies, emerging market economies. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121416&r=opm |
| By: | Iyabo Masha; Chanho Park |
| Abstract: | This study examines the degree of exchange rate pass through (EPRT) into producer and consumer prices in Maldives. ERPT to consumer prices is first estimated using a nonparametric approach. A recursive vector autoregression is then used to model both consumer and producer price changes. The nonparametric estimation indicates that ERPT to consumer prices is very high, both in absolute terms and relative to other countries. The dynamics of ERPT as derived from the empirical estimation indicate that ERPT to consumer and producer prices is significant but not complete, and that the impact of exchange rate changes persists into the second year. |
| Keywords: | Consumer prices , Economic models , Exchange rates , Producer prices , |
| Date: | 2012–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/126&r=opm |
| By: | Jenny E. Ligthart (CentER and Department of Economics, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands.); Sebastian E. V. Werner (Tilburg University, Warandelaan 2, 5037 AB Tilburg, The Netherlands.) |
| Abstract: | We present a new approach to study empirically the effect of the introduction of the euro on the pattern of currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice is explained by both currency-specific and country-specific determinants. We use unique quarterly panel data on the invoicing of Norwegian imports from OECD countries for the 1996-2006 period. We find that eurozone countries have substantially increased their share of home currency invoicing after the introduction of the euro, whereas the home currency share of non-eurozone countries fell slightly. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The substantial rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility and can only to a small extent be explained by an unobserved euro effect. JEL Classification: F33, F41, F42, E31, C25. |
| Keywords: | Euro, invoicing currency, exchange rate risk, inflation volatility, vehicle currencies, compositional multinomial logit. |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121414&r=opm |
| By: | Furlan, Benjamin (University of Salzburg); Gächter, Martin (Foreign Research Division, Oesterreichische Nationalbank); Krebs, Bob (Economics and Research Department, Banque centrale du Luxembourg); Oberhofer, Harald (University of Salzburg) |
| Abstract: | This paper empirically assesses how democratization affects real exchange rates. Specifically, in line with the democratic peace theory we argue that democratization reduces currency undervaluation, and thus, might bring misalignments in foreign exchange markets to an end. We test this hypothesis for a sample of countries observed from 1980 to 2007. Econometrically, we combine a difference-in-difference (DID) approach with propensity score matching estimators. Our estimation results reveal that democratization causes real exchange rates to appreciate, lending empirical support to the democratic peace theory in this specific economic context. |
| Keywords: | Real exchange rates; democratization; democratic peace theory; difference-in-differences-estimator; matching estimators |
| JEL: | C21 C23 F02 F31 F59 N20 |
| Date: | 2012–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:sbgwpe:2012_006&r=opm |
| By: | Grenville, Stephen (Asian Development Bank Institute) |
| Abstract: | Since the 1980s, emerging countries have been urged to welcome foreign capital inflows. The result has often been a pattern of surges, where excessive inflows were followed by damaging “sudden stops” and reversals. What is needed is a strategy that makes use of the potential benefits of capital “flowing downhill” (that would require these countries to run current account deficits) while at the same time protecting them from both the excessive inflows and the reversals. |
| Keywords: | asian financial crisis; east asia; financial markets; capital flows; current account |
| JEL: | F21 F31 F32 |
| Date: | 2012–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0362&r=opm |
| By: | Ivohasina F. Razafimahefa |
| Abstract: | This paper analyzes the exchange rate pass-through to domestic prices and its determinants in sub-Saharan African countries. It finds that the pass-through is incomplete. The pass-through is larger following a depreciation than after an appreciation of the local currency. The average elasticity is estimated at about 0.4. It is lower in countries with more flexible exchange rate regimes and in countries with a higher income. A low inflation environment, a prudent monetary policy, and a sustainable fiscal policy are associated with a lower pass-through. The degree of pass-through has declined in the SSA region since the mid-1990s following marked improvements in macroeconomic and political environments. |
| Date: | 2012–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/141&r=opm |
| By: | Cécile Couharde; Issiaka Coulibaly; David Guerreiro; Valérie Mignon |
| Abstract: | This paper aims at explaining why the CFA countries have successfully maintained a currency union for several decades, despite failing to meet many of optimum currency area criteria. We suggest that the CFA zone, while not optimal, has been at least sustainable. We test this sustainability hypothesis by relying on the Behavioral Equilibrium Exchange Rate (BEER) approach. In particular, we assess and compare the convergence process of real exchange rates towards equilibrium for the CFA zone countries and a sample of other sub-Saharan African (SSA) countries. Our findings evidence that internal and external balances have been fostered and adjustments facilitated in the CFA zone as a whole?compared to other SSA countries?as well as in each of its ember countries. |
| Keywords: | Equilibrium exchange rates, CFA zone, Optimum Currency Areas, currency union sustainability |
| JEL: | F31 F33 C23 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2012-13&r=opm |
| By: | Ceballos, Francisco; Didier, Tatiana; Schmukler, Sergio L. |
| Abstract: | Financial globalization has gathered attention since the early 1990s because of its macro-financial implications and growing importance. But financial globalization has taken shape via different forms over time. This paper examines two important, concurrent dimensions of financial globalization: diversification and offshoring. The diversification dimension refers to the increase in foreign assets and liabilities in countries'portfolios. Offshoring is related to the reallocation of financial activities to international markets. The former focuses on who holds the assets, the latter on where transactions take place. The authors find that globalization via the diversification channel expanded throughout the world during the 2000s, as domestic residents invested more abroad and foreigners increased their investments at home, generating more cross-border holdings. However, financial globalization via offshoring displays more mixed patterns, with variations across markets and countries. The paper also shows that the nature of financing through both diversification and offshoring has improved for emerging countries. |
| Keywords: | Debt Markets,Emerging Markets,Mutual Funds,Economic Theory&Research,Banks&Banking Reform |
| Date: | 2012–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6105&r=opm |
| By: | Luis-Felipe Zanna; Marco Airaudo |
| Abstract: | We present an extensive analysis of the consequences for global equilibrium determinacy in flexible-price open economies of implementing active interest rate rules, i.e., monetary rules where the nominal interest rate responds more than proportionally to inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on specific characteristics of open economies. In particular, rules that respond to expected future inflation are more prone to induce endogenous cyclical and chaotic dynamics the more open the economy to trade. |
| Keywords: | Business cycles , Economic models , Flexible pricing policy , Interest rates , International trade , Monetary policy , Real effective exchange rates , |
| Date: | 2012–05–11 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/121&r=opm |
| By: | Jinzhao Chen (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Thérèse Quang (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense) |
| Abstract: | Recent research highlights that countries differ with respect to their experience with capital flows and do not systematically gain from capital account liberalization. This paper is related to the empirical literature that investigates the particular conditions under which international financial integration (IFI) is growth-enhancing. Relying on non-linear panel techniques, we find that countries that are able to reap the benefits of IFI satisfy certain threshold conditions regarding the level of economic, institutional and financial development, and the inflation rate. Our results also reveal a differentiated behaviour of foreign direct investment and portfolio liabilities compared to debt liabilities. |
| Keywords: | International financial integration ; Economic growth ; Panel threshold regression model |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00710139&r=opm |
| By: | David Sondermann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Sizable prevailing real economic disparities among countries in a currency union potentially involve costs for those countries for which the aggregate policy stance is not appropriate. This paper contributes to the literature by testing for productivity convergence among euro area countries. While no convergence can be found on the aggregate level, selected service sectors and manufacturing sub-industries indicate evidence of convergence. In a search for factors in uencing productivity, investments in research and development as well as a high skill level of employees are shown to be benecial whereas regulations constitute a burden. Consequently, euro area countries should engage in structural reforms where necessary to provide a more competitive environment, eventually facilitating economic convergence. JEL Classification: C33, O47, J24, L60, L80. |
| Keywords: | Productivity, Convergence, Panel Unit Root Test, Manufacturing and Service Sector |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121431&r=opm |
| By: | Amélie Barbier-Gauchard; Francesco De Palma; Giuseppe Diana |
| Abstract: | In this paper, we assume a world of two countries in a fixed exchange rate system. The main difference between the two countries lies in the features of their labor markets. In the home country, we assume the existence of a dual labor market, with formal and informal sectors. In the foreign country, the labor market is homogeneous and characterized by a nominal wage rigidity. In this context, the situation of labor market in each country is not optimal through a misallocation of workers between sectors in domestic economy, and unemployment in foreign economy. Our article shows that a devaluation of domestic currency implies a fall in production in each country, an increase in unemployment in foreign economy and a worse reallocation of workers by a growth of informal sector in domestic economy. |
| Keywords: | efficiency wage, dualism, exchange rate, devaluation. |
| JEL: | F16 F41 J31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2012-04&r=opm |
| By: | Luca Gambetti |
| Abstract: | This paper investigates the effects of government spending on the real exchange rate and the trade balance in the US using a new VAR identification procedure based on spending forecast revisions. I find that the real exchange rate appreciates and the trade balance deteriorates after a government spending shock, although the effects are quantitatively small. The findings broadly match the theoretical predictions of the standard Mundell-Fleming model and differ substantially from those existing in literature. Differences are attributable to the fact that, be- cause of fiscal foresight, the government spending is non-fundamental for the variables typically used in open economy VARs. Here, on the contrary, the estimated shock is fundamental. |
| Keywords: | VARs, fiscal policy, twin deficits, trade balance, Mundell-Fleming, forecast revisions, fiscal news, survey of professional forecasters. |
| JEL: | C32 E32 E62 |
| Date: | 2012–06–22 |
| URL: | http://d.repec.org/n?u=RePEc:aub:autbar:907.12&r=opm |
| By: | Luca Gambetti |
| Abstract: | This paper investigates the effects of government spending on the real exchange rate and the trade balance in the US using a new VAR identification procedure based on spending forecast revisions. I find that the real exchange rate appreciates and the trade balance deteriorates after a government spending shock, although the effects are quantitatively small. The findings broadly match the theoretical predictions of the standard Mundell-Fleming model and differ substantially from those existing in literature. Differences are attributable to the fact that, because of fiscal foresight, the government spending is non-fundamental for the variables typically used in open economy VARs. Here, on the contrary, the estimated shock is fundamental. |
| Keywords: | VARs, fiscal policy, twin deficits, trade balance, Mundell-Fleming, forecast revisions, fiscal news, survey of professional forecasters |
| JEL: | C32 E32 E62 |
| Date: | 2012–05 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:644&r=opm |
| By: | Sunel, Enes |
| Abstract: | This study investigates quantitative properties of the transitional dynamics produced by gradual disinflation in a small open economy inhabited by heterogeneous consumers. The main exercise is to feed the empirically observed declining path for inflation into the calibrated model and account for its macroeconomic, distributional and welfare effects under alternative fiscal arrangements. The results show that (i) when uniform transfers are endogenous, gradual decline in the inflation rate from 14.25% to 2.25% increases aggregate welfare by 0.28%. (ii) When wasteful spending is endogenous, aggregate welfare increases by 0.53%. These welfare effects are substantially different from those implied by steady state comparisons. This is because when transition is accounted for, fiscal variables do not jump to their low inflation steady state levels immediately. |
| Keywords: | Small open economy; incomplete markets; welfare effects of inflation |
| JEL: | D31 E52 F41 |
| Date: | 2012–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:39690&r=opm |
| By: | Victor Pontines; Reza Siregar |
| Abstract: | The objective of our paper is to provide an empirical platform to the debate on the macroeconomic consequences of large currency appreciations. Observing the experiences of six major Asian economies (the ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand and Singapore) and Korea) during the past two decades, the primary aim of this study is to ascertain the consequences of strong currencies, on the one hand, and reserves accumulation, on the other, for a set of vital macroeconomic indicators, namely, exports, growth and price. We then deal squarely, in retrospect, with the question of whether there is any justification to the so-called fear of appreciation phenomenon among the policy makers of these Asian economies. |
| JEL: | F4 F31 F32 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2012-31&r=opm |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.) |
| Abstract: | The empirical analysis of the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued exchange rates. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy regime and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows. JEL Classification: F30, F31. |
| Keywords: | Capital controls, capital flows, exchange rates, financial stability, economic policy, G20. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121415&r=opm |