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on Open MacroEconomics |
| By: | Kenneth D. West |
| Abstract: | This paper develops asymptotic econometric theory to help understand data generated by a present value model with a discount factor near one. A leading application is to exchange rate models. A key assumption of the asymptotic theory is that the discount factor approaches 1 as the sample size grows. The finite sample approximation implied by the asymptotic theory is quantitatively congruent with modest departures from random walk behavior with imprecise estimation of a well-studied regression relating spot and forward exchange rates. |
| JEL: | C58 F31 F37 G12 G15 G17 |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18247&r=opm |
| By: | Enrique Mendoza; Marco Terrones |
| Abstract: | What are the stylized facts that characterize the dynamics of credit booms and the associated fluctuations in macro-economic aggregates? This paper answers this question by applying a method proposed in our earlier work for measuring and identifying credit booms to data for 61 emerging and industrialized countries over the 1960-2010 period. We identify 70 credit boom events, half of them in each group of countries. Event analysis shows a systematic relationship between credit booms and a boom-bust cycle in production and absorption, asset prices, real exchange rates, capital inflows, and external deficits. Credit booms are synchronized internationally and show three striking similarities between industrialized and emerging economies: (1) credit booms are similar in duration and magnitude, normalized by the cyclical variability of credit; (2) banking crises, currency crises or sudden stops often follow credit booms, and they do so at similar frequencies in industrialized and emerging economies; and (3) credit booms often follow surges in capital inflows, TFP gains, and financial reforms, and are far more common with managed than flexible exchange rates. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:670&r=opm |
| 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. Two surprising results are obtained. First, that a pegging economy might be better off with a closed capital account than with an open one. Second, that the welfare gain from switching from a peg to the optimal (full-employment) monetary policy might be greater in financially open economies than in financially closed ones. |
| Date: | 2012–07 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:672&r=opm |
| By: | Carlos Carvalho; Fernanda Nechio |
| Abstract: | The standard argument for abstracting from capital accumulation in sticky-price macro models is based on their short-run focus: over this horizon, capital does not move much. This argument is more problematic in the context of real exchange rate (RER) dynamics, which are very persistent. In this paper we study RER dynamics in sticky-price models with capital accumulation. We analyze both a model with an economy-wide rental market for homogeneous capital, and an economy in which capital is sector specific. We find that, in response to monetary shocks, capital increases the persistence and reduces the volatility of RERs. Nevertheless, versions of the multi-sector sticky-price model of Carvalho and Nechio (2011) augmented with capital accumulation can match the persistence and volatility of RERs seen in the data, irrespective of the type of capital. When comparing the implications of capital specificity, we find that, perhaps surprisingly, switching from economy-wide capital markets to sector-specific capital tends to decrease the persistence of RERs in response to monetary shocks. Finally, we study how RER dynamics are affected by monetary policy and find that the source of interest rate persistence - policy inertia or persistent policy shocks - is key. |
| Keywords: | Capital ; Monetary policy |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2012-08&r=opm |
| By: | Wen Yao |
| Abstract: | This paper builds a two-country DSGE model to study the quantitative impact of financial frictions on business cycle co-movements when investors have foreign asset exposure. The investor in each country holds capital in both countries and faces a leverage constraint on her debt. I show quantitatively that financial frictions along with foreign asset exposure give rise to a multiplier effect that amplifies the transmission of shocks between countries. The key mechanism is that a negative shock in the home country reduces the wealth of investors in both countries, which tightens their leverage constraints, leading to a fall in investment, consumption, and hours worked in the foreign country. Compared to the existing literature, which tends to produce either negative or positive but small cross-country correlations, this model produces positive and sizable correlations that are consistent with the data. The model can account for most of the investment, employment and consumption correlations and predicts more than half of the output correlation. In addition, the model shows that, consistent with empirical findings, when investors have more foreign asset exposure to the other country, the output correlation between the two countries increases. |
| Keywords: | Business fluctuations and cycles; International financial markets; International topics |
| JEL: | E30 F42 F44 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-19&r=opm |
| By: | Amdur, David; Ersal Kiziler, Eylem |
| Abstract: | From 1960-2009, the U.S. current account balance has tended to decline during expansions and improve in recessions. We argue that trend shocks to productivity can help explain the countercyclical U.S. current account. Our framework is a two-country, two-good real business cycle (RBC) model in which cross-border asset trade is limited to an international bond. We identify trend and transitory shocks to U.S. productivity using generalized method of moments (GMM) estimation. The specification that best matches the data assigns a large role to trend shocks. The estimated model generates a countercyclical current account without excessive consumption volatility. |
| Keywords: | Current account; trend shocks; business cycles; open economy macroeconomics; DSGE models; GMM estimation |
| JEL: | E32 F32 F41 E21 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:40147&r=opm |
| By: | Claudio Raddatz ;; Sergio L. Schmukler |
| Abstract: | Using micro-level data on mutual funds from different financial centers investing in equity and bonds, this paper analyzes how investors and managers behave and transmit shocks across countries. The paper shows that the volatility of mutual fund investments is quantitatively driven by investors through injections of capital into, or redemptions out of, each fund, and by managers changing the country weights and cash in their portfolios. Both investors and managers respond to returns and crises, and substantially adjust their investments accordingly. These mechanisms generated large capital reallocations during the global financial crisis. Their behavior tends to be pro-cyclical, reducing their exposure to countries experiencing crises and increasing it when conditions improve. Managers actively change country weights over time, although there is significant short-run "pass-through," meaning that price changes affect country weights. Consequently, capital flows from mutual funds do not seem to stabilize markets and instead expose countries to foreign shocks. |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:668&r=opm |
| By: | Nidhaleddine Ben Cheikh (University of Rennes 1 - CREM (UMR 6211 CNRS)) |
| Abstract: | This paper examines the exchange rate pass-through (ERPT) into import prices using recent panel data techniques. For a sample of 27 OECD countries, panel cointegration tests provide an evidence for the existence of long-run equilibrium relationship in pass-through equation. Following Pedroni (2001), we employ both FM-OLS and DOLS estimators and show that long-run ERPT elasticity does not exceed 0.70%. Individual estimates of ERPT are heterogeneous across 27 OECD countries, ranging from 0.23% in France to 0.98% in Poland. When we look for the macroeconomic determinants of this long-run heterogeneity, we implement a panel threshold methodology as introduced by Hansen (2000). Our results indicate a regime-dependence of ERPT, that is, countries with higher inflation regime and more exchange rate volatility would experience a higher degree of pass-through. |
| Keywords: | Exchange Rate Pass-Through, Import Prices, Panel Cointegration, Panel Threshold |
| JEL: | C23 E31 F31 F40 |
| Date: | 2012–06 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:201225&r=opm |
| By: | Shutao Cao; Wei Dong; Ben Tomlin |
| Abstract: | This paper studies the sensitivity of Canadian producer prices to the Canada-U.S. exchange rate. Using a unique product-level price data set, we estimate and analyze the impact of movements in the exchange rate on both domestic and export producer prices. First, we find that both domestic and export prices are sensitive to movements in the exchange rate. A one percent depreciation in Canadian dollar is associated with a 0.18 (0.25 conditional on price changes in the currency of pricing) percent increase in domestic prices, and a 0.39 (0.60 conditional on price changes in the currency of pricing) percent increase in export prices (once prices are converted into a single currency). Next, we find that there is an important difference in export price sensitivity to the exchange rate depending on the currency of pricing. Those Canadian producers that invoice their exported products in Canadian dollars do not adjust prices to movements in the exchange rate. Meanwhile, those invoicing in U.S. dollars increase their Canadian dollar prices when the Canadian dollar depreciates. Finally, for the same good sold in both the domestic and U.S. markets, the currency of pricing appears to play an important role in determining mark-up adjustment and the degree of pricing to market. These findings shed light on understanding the sources of incomplete exchange rate pass-through into import prices, as well as the indirect effect of the exchange rates on domestic prices through import competition and the use of imported inputs. |
| Keywords: | Exchange rates; Inflation and prices; Market structure and pricing |
| JEL: | F31 F41 E30 L11 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:12-20&r=opm |
| By: | Sandrine Noblet; Antoine Belgodere |
| Abstract: | The distance puzzle has been wildly discussed in the literature since Leamer and Levinsohn (1995) shed the light on it. This puzzle simply says that “the world is not getting smaller”: distance still matters to account for trade. This is reflected in a decreasing distance of trade (DOT), or in a stable or increasing (negative) elasticity of trade with respect to distance (Disdier and head, 2008). Several explanations of this puzzle have been emphasized in the empirical International Economics literature. Duranton and Storper (2008) contribute to this issue in offering a full theoretical framework to account for this puzzle. They explain that an improvement in transport technology can increase the transport costs, because it creates an incentive to trade higher quality goods. Our paper proposes a new theoretical explanation of this puzzle. This explanation shares with Duranton and Storper's two important characteristics: i) there is a non monotonic relationship between transport cost and trade cost. ii) this phenomenon is due to contract incompleteness. However, the mechanism that we underline is quite different: in our model, based on a Dixit-Stiglitz increasing return to scale technology, a fall in transport cost increases the international division of labour. It follows that input-output linkages require a higher level of coordination. Such a coordination is easier between neighbors than between very distant countries. As a result, trade increases with all partners, but more quickly for neighbors than for distant countries. |
| Date: | 2011–09 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwrsa:ersa10p756&r=opm |