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on Open MacroEconomics |
| By: | Stephanie Schmitt-Grohé; Martín Uribe |
| Abstract: | This paper studies the relationship between financial structure and the welfare consequences of fixed exchange rate regimes in small open emerging economies with downward nominal wage rigidity. The paper presents two surprising results. First, a pegging economy might be better off with a closed than with an open capital account. Second, the welfare gain from switching from a peg to the optimal (full-employment) monetary policy might be larger in financially open economies than in financially closed ones. |
| JEL: | F41 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18223&r=opm |
| By: | Kalemli-Ozcan, Sebnem; Papaioannou, Elias; Perri, Fabrizio |
| Abstract: | We study the effect of financial integration on the transmission of international business cycles. In a sample of 20 developed countries between 1978 and 2009 we find that, in periods without financial crises, increases in bilateral financial linkages are associated with more divergent output cycles. This relation is significantly weaker during financial turmoil periods, suggesting that financial crises induce co-movement among more financially integrated countries. We also show that countries with stronger, direct and indirect, financial ties to the U.S. experienced more synchronized cycles with the U.S. during the recent 2007-2009 crisis. We then interpret these findings using a simple general equilibrium model of international business cycles with banks and shocks to banking activity. The model suggests that the change in the relation between integration and synchronization can be driven by changes in the nature of shocks hitting the world economy, and that shocks to global banks played an important role in triggering and spreading the 2007-2009 crisis. |
| Keywords: | co-movement; crisis; financial integration; international business cycles |
| JEL: | E32 F15 F36 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9044&r=opm |
| By: | Berger, Helge; Nitsch, Volker |
| Abstract: | This paper examines the association between trade and financial linkages among European countries. We find that, with the introduction of the euro, trade imbalances among euro area members widened considerably, even after allowing for permanent asymmetries in trade competitiveness within pairs of countries or in the overall trade competitiveness of individual countries. Moreover, there is a significant relationship between patterns of trade and bilateral financial linkages, especially within the euro area; a surplus of a country in a bilateral trade relationship is typically accompanied by a country’s positive net financial position vis-à-vis the respective partner country. |
| Keywords: | trade balance, international investment position, euro, EMU, European integration |
| Date: | 2012–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:dar:ddpeco:58438&r=opm |
| By: | George Alessandria; Joseph Kaboski; Virgiliu Midrigan |
| Abstract: | The large, persistent fluctuations in international trade that cannot 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. |
| Keywords: | Exports ; Trade |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:12-16&r=opm |
| By: | Lin, Justin Yifu; Treichel, Volker |
| Abstract: | The simmering sovereign debt crisis in the Euro Zone represents a looming threat to the recovery of the world economy and could lead to a renewed global financial crisis. The purpose of this paper is to analyze the root causes of the crisis in Europe and assess the extent to which it was driven by the global financial crisis and by factors internal to Europe, notably the adoption of the common currency. Adoption of the euro led to convergence of interest rates in periphery countries to the levels in core countries and, in combination with rising capital inflows owing to greater financial integration, set off a consumption and real estate boom in periphery countries, leading to higher growth and increases in government revenue and spending. The resulting real appreciation led to a loss of competitiveness in periphery countries, adversely affecting export performance and causing rising current account imbalances. While the fiscal position remained manageable before the crisis owing to rising revenue, the recession brought about by the global financial crisis led to the burst of real estate bubbles and a financial sector crisis and to sharply increased budget deficits and worsened debt indicators and triggered the sovereign debt crisis. Core countries, in particular Germany, maintained a competitive edge through wage restraint allowing them to increase exports to periphery countries, while their banks profited from increased lending to non-core countries. In sum, the euro exacerbated intra-European imbalances whose unsustainability became evident in the aftermath of the global financial crisis and triggered the current sovereign debt crisis. |
| Keywords: | Debt Markets,Currencies and Exchange Rates,Banks&Banking Reform,Access to Finance,Emerging Markets |
| Date: | 2012–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6127&r=opm |
| By: | Olivier de Bandt; Tovonony Razafindrabe |
| Abstract: | Using a new database of actual import price data, and not unit value indices, for several euro area countries during the period between June 2005 and April 2011, we provide new results on the Exchange Rate Pass Through (ERPT). First, we use a multi-currency approach to distinguish between invoicing strategies across the most important currencies for euro area imports and show that the effective ERPT is primarily driven by the US Dollar ERPT. The firms which invoice in US Dollar (and in Chinese Yuan) are more concerned with demand conditions, while those which invoice in British Pound are more concerned with profit margins. Second, in contrast to several papers in the empirical literature that argue that ERPT is incomplete and its value is declining, we find that short run effective ERPT is incomplete, while long run effective ERPT is complete for a large number of products. Third, we uncover significant heterogeneity across products and countries: ERPT in US Dollar and British Pound appears higher than average for raw materials (e.g. petroleum products) and lower for transformed manufacturing products (chemical, pharmaceutical products and motor vehicles), and ERPT is higher in Spain than in the other euro area countries considered. Fourth, the 2008 global crisis triggered a temporary increase in the effective ERPT. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2012-32&r=opm |
| By: | SATO Kiyotaka; SHIMIZU Junko; Nagendra SHRESTHA; Shajuan ZHANG |
| Abstract: | In considering the empirical importance of the exchange rate on exporters' price competitiveness and producer profits in specific industries, the industry-specific real effective exchange rate (REER) is far more useful than the aggregate REER published by the International Monetary Fund (IMF) and the Bank for International Settlements (BIS). The novelty of this study is to construct a new dataset of the industry-specific REER of the yen on a daily basis from 2005 to the present to provide a better indicator for the international price competitiveness of Japanese exporters. By conducting simulation analysis, we show whether recent fluctuations of the REER have been driven by various factors such as domestic and foreign price changes. By running a near-vector autoregression (VAR) estimation with block exogeneity, we demonstrate that Japanese exports of major machinery industries are affected not by the nominal exchange rate shock but by the world output fluctuations and the domestic price changes in Japan. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:12044&r=opm |
| By: | Hassan, Gazi; Holmes, Mark |
| Abstract: | We examine the long-run relationship between remittances and the real exchange rate for less developed countries using a panel cointegration approach. We employ an innovative method for the measurement of the multilateral real effective exchange rate and we focus on high remittance economies. We find a small inelastic, but significant, long-run relationship which confirms a “Dutch disease” type effect. Short-run confirmation is given by a panel error correction model. Potential asymmetries in this relationship are explored using quantile regression analysis. |
| Keywords: | Remittances; Real Effective Exchange Rate; Panel cointegration; Panel error correction; Quantile regression |
| JEL: | O1 F0 F1 F24 |
| Date: | 2012–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40084&r=opm |
| By: | Lorenzo Forni (International Monetary Fund); Andrea Gerali (Bank of Italy); Alessandro Notarpietro; Massimiliano Pisani (Bank of Italy) |
| Abstract: | We assess the impact of oil shocks on euro-area macroeconomic variables by estimating a new-Keynesian small open economy model with Bayesian methods. Oil price is determined according to supply and demand conditions in the world oil market. We find that the impact of an increase in the price of oil depends upon the underlying sources of variation: when the driver of higher oil prices is an increase in the rest of the world's aggregate demand, both euro-area GDP and CPI inflation increase, whereas negative oil supply shocks and positive worldwide oil-specific demand shocks have stagflationary effects on the euro-area economy. Moreover, the increase in oil prices during the 2004-2008 period did not induce stagflationary effects on the euro-area economy because it was associated with positive aggregate demand shocks in the rest of the world. Similarly, a drop in world aggregate demand helps to explain the recent (2008) simultaneous drop in oil prices, euro-area GDP and inflation - particularly its fuel component. |
| Keywords: | oil shocks, DSGE modelling, open-economy macroeconomics, Bayesian inference, euro area |
| JEL: | C11 C51 E32 F41 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_873_12&r=opm |
| By: | Samir Jahjah; Bin Wei; Vivian Zhanwei Yue |
| Abstract: | This paper empirically analyzes how exchange rate policy affects the issuance and pricing of international bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher sovereign bond spreads and are less likely to issue bonds. Quantitatively, changing a free-floating regime to a fixed regime decreases the likelihood of bond issuance by 4.6% and increases the bond spread by 1.3% on average. Furthermore, countries with real exchange rate overvaluation have higher bond spreads and higher bond issuance probabilities. Moreover, such positive effects of real exchange rate overvaluation tend to be magnified for countries with fixed exchange rate regimes. Our results suggest that choosing a less flexible exchange rate regime in general leads to higher borrowing costs for developing countries, especially when their currencies are overvalued. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1049&r=opm |
| By: | Parello, Carmelo Pierpaolo |
| Abstract: | This paper presents a dynamic small open economy version of the standard neoclassical exogenous growth model with international migration. It considers both the case of perfect world capital markets and the case of imperfect capital markets and shows that local indeterminacy always arises independently of the capital market regime. To study the dynamic implications of migration on domestic consumption, current account and capital accumulation, we simulate the model numerically by distinguishing three different scenarios depending on whether the initial immigration ratio is larger, equal or smaller than its steady-state value. In the case of perfect world capital markets, we find that migration has only a temporary impact on capital accumulation, but a permanent impact on domestic consumption and foreign debt. Instead, in the case of imperfect world capital markets, we find that migration has only temporary impacts on all the main macroeconomic variables. |
| Keywords: | Small Open Economy; Indeterminacy; International Migration; Capital Adjustment Costs; First best |
| JEL: | F22 O41 C61 F43 C62 |
| Date: | 2012–07–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40013&r=opm |
| By: | Jacob Wibe (University of Western Ontario) |
| Abstract: | The great recession of 2008-2009 resulted in a large fall in trade relative to output. Real trade fell roughly three times more than real GDP in the U.S. and Mexico, and by a factor of five in Canada. The decline in trade and output was particularly large in sectors with high levels of production sharing (goods produced in multiple, sequential stages in more than one country). Motivated by these observations, this paper asks two quantitative questions: 1) What was the role of trade in the transmission of the recession in North America? 2) What was the contribution of production sharing to the large fall in trade? To answer these questions this paper develops a quantitative open economy model of production sharing. The benchmark calibration can account for 72% of the fall in output in Canada, 19% of the fall in output in Mexico, and about two-thirds of the fall in trade for both countries. In the quantitative exercises production sharing can account for 40% of the fall in trade. |
| Keywords: | None |
| JEL: | F4 F1 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:uwo:epuwoc:20123&r=opm |
| By: | Etsuro Shioji (Professor, Faculty of Economics, Hitotsubashi University) |
| Abstract: | This paper re-examines the evolution over time of influences of the Japanese exchange rate on its exports, imports, and domestic prices. By employing the time varying parameter VAR (vector autoregression) method, this study reveals the timings of the pass-through rates changed and by how much. The sample period is January 1980 through January 2010. It shows that the pass-through rates on both import and domestic prices trended down throughout much the sample period. While the pass-through rate on domestic prices experienced a sharp decline during the 1980s and continued to decline gradually afterwards, the rate on import prices went through the second sharp decline in the latter half of the 1990s. In contrast, the pass-through rate on export prices increased, especially during the 1980s. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:mof:journl:ppr015d&r=opm |
| By: | J.E. Bosca; Rafael Domenech; J. Ferri |
| Abstract: | We use a small open economy general equilibrium model to analyse the effects of a fiscal devaluation in EMU. The model has been calibrated for the Spanish economy, that is a good example of the advantages of a change in the tax mix, given that its tax system shows a positive bias in the ratio of social security contributions over consumption taxes. The preliminary empirical evidence for European countries shows that this bias was negatively correlated with the current account balance in the expansionary years previous to the 2009 crisis, where many EMU members accumulated large external imbalances. Our simulations results point to positive significant effects of a fiscal devaluation on GDP and employment similar to the ones that could be obtained with a exchange rate devaluation. However, although the effects in terms of GDP and employment are similar, the composition effects of fiscal and nominal devaluations are not alike. In both cases, there is an improvement in net exports, but the effects on domestic and external demand are quite different. |
| Keywords: | tax mix, fiscal devaluation, nominal devaluation |
| JEL: | E62 E47 F31 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1211&r=opm |
| By: | Joseph E. Gagnon (Peterson Institute for International Economics) |
| Abstract: | Widespread currency manipulation, mainly in developing and newly industrialized economies, is the most important development of the past decade in international financial markets. In an attempt to hold down the values of their currencies, governments are distorting capital flows by around $1.5 trillion per year. The result is a net drain on aggregate demand in the United States and the euro area by an amount roughly equal to the large output gaps in the two economies. In other words, millions more Americans and Europeans would be employed if other countries did not manipulate their currencies and instead achieved sustainable growth through higher domestic demand. Gagnon identifies the 20 most egregious currency manipulators over the past 11 years. Four groups of countries stand out: (1) longstanding advanced economies such as Japan and Switzerland; (2) newly industrialized economies such as Israel, Singapore, and Taiwan; (3) developing Asian economies such as China, Malaysia, and Thailand; and (4) oil exporters such as Algeria, Russia, and Saudi Arabia. Although currency manipulation to boost trade balances is a violation of the Articles of Agreement of the International Monetary Fund (IMF), there is currently no procedure to punish or curtail it. The best forum for sanctions against currency manipulators is the World Trade Organization, operating in consultation with the IMF. Countries affected by currency manipulation would be authorized to impose tariffs on imports from manipulators. In order to get manipulators to agree to this change in international rules, the main targets of currency manipulation—the United States and the euro area—may have to play tough. One strategy would be to tax or otherwise restrict purchases of US and euro area financial assets by currency manipulators. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb12-19&r=opm |