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on Open Economy Macroeconomic |
| By: | Philip R. Lane |
| Abstract: | The global financial crisis provides an important testing ground for the financial globalisation model. We ask three questions. First, did financial globalisation materially contribute to the origination of the global financial crisis? Second, once the crisis occurred, how did financial globalisation affect the incidence and propagation of the crisis across different countries? Third, how has financial globalisation affected the management of the crisis at national and international levels? |
| Keywords: | financial globalization, global financial crisis |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:397&r=opm |
| By: | Giancarlo Corsetti (Cambridge University, Rome III and CEPR); Luca Dedola (European Central Bank and CEPR); Francesca Viani (Banco de España) |
| Abstract: | Accounting for the pervasive evidence of limited international risk sharing is an important hurdle for open-economy models, especially when these are adopted in the analysis of policy trade-offs likely to be affected by imperfections in financial markets. Key to the literature is the evidence, at odds with efficiency, that consumption is relatively high in countries where its international relative price (the real exchange rate) is also high. We reconsider the relation between cross-country consumption differentials and real exchange rates, by decomposing it into two components, reflecting the prices of tradable and nontradable goods, respectively. We document that, as a common pattern among OECD countries, both components tend to contribute to the overall lack of risk sharing, with the tradable price component playing the dominant role in accounting for efficiency deviations. We relate these findings to two mechanisms proposed by the literature to reconcile open economy models with the data. One features strong Balassa-Samuelson effects on nontradable prices due to productivity gains in the tradable sector, with a muted offsetting response of tradable prices. The other, endogenous income effects causing nontradable but especially tradable prices to appreciate with a rise in domestic consumption demand. |
| Keywords: | incomplete markets, Harrod-Balassa-Samuelson effect, consumption-real exchange rate anomaly, terms of trade, international transmission mechanism. |
| JEL: | F41 F42 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1242&r=opm |
| By: | Eichengreen, Barry; Gupta, Poonam |
| Abstract: | We consider the determinants of exports of services, distinguishing between modern and traditional services. We consider both the growth of export volumes and so-called export surges – periods of rapid sustained export growth. We ask whether the determinants of export growth rates and surges differ between merchandise, traditional services and modern services and whether developing countries are different. Our findings confirm the importance of the real exchange rate for export growth. We find that the effect of the real exchange rate is even stronger for exports of services than exports of goods; it is especially strong for exports of modern services. While the evidence of differential effects between advanced and developing countries is weaker, our results nonetheless suggest that as developing countries shift from exporting primarily commodities and merchandise to exporting traditional and modern services in the course of their development, appropriate policies toward the real exchange rate become even more important. |
| Keywords: | Real Exchange Rate; Exports; Services; Traditional Services |
| JEL: | F15 F43 |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43358&r=opm |
| By: | Bacchetta, Philippe; Benhima, Kenza |
| Abstract: | In the recent decade, capital outflows from emerging economies, in the form of a demand for liquid assets, have played a key role in the context of global imbalances. In this paper, we model the demand for liquid assets by firms in a dynamic open-economy macroeconomic model. We find that the implications of this model are very different from standard models, because the demand for foreign bonds is a complement to domestic investment rather than a substitute. We show that this complementarity is at work when an emerging economy is on its convergence path or when it has a higher TFP growth rate. This framework is consistent with global imbalances and with a number of stylized facts such as high corporate saving rates in high-growth, high-investment, emerging countries. |
| Keywords: | Capital flows; Credit constraints; Global imbalances |
| JEL: | E22 F21 F41 F43 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9268&r=opm |
| By: | A. Craig Burnside; Jeremy J. Graveline |
| Abstract: | Recent research in international finance has equated changes in real exchange rates with differences between the marginal utility growths of representative agents in different economies. The asset market view of exchange rates, encapsulated in this equation, has been used to gain insights into exchange rate determination, foreign exchange risk premia, and international risk sharing. We argue that, in fact, this equation is of limited usefulness. By itself, the asset market view does not identify the economic mechanism that determines the exchange rate. It only holds under complete markets, and even then, it does not generally allow us to identify the marginal utility growths of distinct agents. Moreover, if we allow for incomplete asset markets, measures of agents' marginal utility growths, and international risk sharing, cannot be based on asset market and exchange rate data alone. Instead, we argue that in order to explain how exchange rates are determined, it is necessary to make specific assumptions about preferences, goods market frictions, the assets agents can trade, and the nature of endowments or production. |
| JEL: | F31 G15 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18646&r=opm |
| By: | Amiti, Mary; Itskhoki, Oleg; Konings, Jozef |
| Abstract: | Large exporters are simultaneously large importers. In this paper, we show that this pattern is key to understanding low aggregate exchange rate pass-through as well as the variation in pass-through across exporters. First, we develop a theoretical framework that combines variable markups due to strategic complementarities and endogenous choice to import intermediate inputs. The model predicts that firms with high import shares and high market shares have low exchange rate pass-through. Second, we test and quantify the theoretical mechanisms using Belgian firm-product-level data with information on exports by destination and imports by source country. We confirm that import intensity and market share are the prime determinants of pass-through in the cross-section of firms. A small exporter with no imported inputs has a nearly complete pass-through of over 90%, while a firm at the 95th percentile of both import intensity and market share distributions has a pass-through of 56%, with the marginal cost and markup channels playing roughly equal roles. The largest exporters are simultaneously high-market-share and high-import-intensity firms, which helps explain the low aggregate pass-through and exchange rate disconnect observed in the data. |
| Keywords: | exchange rate pass-through; import intensity; pricing-to-market |
| JEL: | F14 F31 F41 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9260&r=opm |
| By: | Raphael A. Auer; Raphael S. Schoenle |
| Abstract: | In this paper, we examine the extent to which market structure and the way in which it affects pricing decisions of profit-maximizing firms can explain incomplete exchange rate pass-through. To this purpose, we evaluate how pass-through rates vary across trade partners and sectors depending on the mass and size distribution of firms affected by a particular exchange rate shock. In the first step of our analysis, we decompose bilateral exchange rate movements into broad US Dollar (USD) movements and trade-partner currency (TPC) movements. Using micro data on US import prices, we show that the passthrough rate following USD movements is up to four times as large as the pass-through rate following TPC movements and that the rate of pass-through following TPC movements is increasing in the trade partner's sector-specific market share. In the second step, we draw on the parsimonious model of oligopoly pricing featuring variable markups of Dornbusch (1987) and Atkeson and Burstein (2008) to show how the distribution of firms' market shares and origins within a sector affects the trade-partner specific pass-through rate. Third, we calibrate this model using our exchange rate decomposition and information on the origin of firms and their market shares. We find that the calibrated model can explain a substantial part of the variation in import price changes and pass-through rates across sectors, trade partners, and sector-trade partner pairs. |
| Keywords: | Price levels |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:130&r=opm |
| By: | Jiandong Ju; Kang Shi; Shang-Jin Wei |
| Abstract: | While a reduction in import barriers in a partial equilibrium may be thought to lead to an increase in imports and a reduction in trade surplus, the general equilibrium effect can go in the opposite direction. We study how trade reforms affect current accounts by embedding a modified Heckscher-Ohlin structure and an endogenous discount factor into an intertemporal model of current account. We show that trade liberalizations in a developing country would generally lead to capital outflow. In contrast, trade liberalizations in a developed country would result in capital inflow. Thus, efficient trade reforms can contribute to global current account imbalances, but these imbalances do not need policy "corrections" |
| JEL: | F2 F3 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18653&r=opm |
| By: | Timo Bettendorf |
| Abstract: | This paper investigates the development of external imbalances from an international perspective by estimating a Global VAR model for the period 1981Q1-2009Q4 with a setup close to that of an international real business cycle model. The model considers 28 countries of which 10 are aggregated as the Eurozone. We compute generalized impulse response functions, as well as generalized forecast error variance decompositions, in order to measure the effects of shocks on international trade balances. The United States, Eurozone and China are considered as the sources of those shocks. We account for imbalances using real GDP, real effective exchange rates (REER) and real interest rates (RIR) as well as the oil price. Overall, we find evidence for the joint dynamics of our variables as drivers of the imbalances and relate our findings to theories of Global Imbalances. We show that real GDP is a relatively unimportant variable compared to the REER, RIR and the oil price. Moreover, we provide a counterfactual analysis of the US trade balance. |
| Keywords: | Global Imbalances; Global VAR; International Trade; Open Economy Macroeconomics |
| JEL: | F10 F32 F41 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:1217&r=opm |
| By: | Das, Debasish Kumar |
| Abstract: | This research presents an empirical investigation of the determinants of current account imbalance for the large sample of developed, emerging and developing countries during 1980-2011. Using dynamic panel GMM techniques, this study characterizes that current account balance are positively correlated with net foreign assets, trade openness and exchange rate stability and negatively associated with commodity price, real GDP growth and real effective exchange rate for the developed countries. While, among emerging countries, commodity price, real GDP growth, trade openness and de-jure capital openness is positively and net foreign asset, exchange rate stability index is negatively related with current account balance. These findings suggest that the current account determinants explain different characteristics in terms of different country groups. The results also hold Chinn and Ito (2007) and Chinn and Prasad (2003) along with three more important determinants with significant influence on current account, which have not ever considered in literature. |
| Keywords: | Current account Determinants; Global imbalance; Dynamic Panel GMM |
| JEL: | F40 F30 C33 |
| Date: | 2012–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:42419&r=opm |
| By: | Erica Clower (Asian Development Bank Institute (ADBI)); Hiro Ito |
| Abstract: | This paper examines the statistical nature of the persistency of current account balances and its determinants. With the assumption that stationary current account series ensures the long-run budget constraint while countries may experience “local non-stationarity†in current account balances, we examine the dynamics of current account balances across a panel of 70 countries. We find that once we allow current account series to take regime shifts by applying a Markovswitching (MS) process, we are able not only to reject the unit root null hypothesis for a much increased number of countries than with standard linear unit root tests, but also to identify notable cross-country differences in the timing and duration of stationary and locally nonstationary regimes. Armed with the structural break dates the MS-ADF testing provides, we investigate the determinants of the different degrees of current account persistence. We find that emerging market countries with fixed exchange rate regime or countries with greater financial openness are more likely to enter a random walk regime, which is more evident among countries with current account deficits. For countries with all levels of income, trade openness decreases the likelihood of entering the random walk regime, presumably reducing the cost of current account adjustments. Also, countries with budget deficits tend to stay in stationary regimes, so do those with current account deficits, implying that markets force these countries to rebalance their current account imbalances. When we examine the determinants of various degrees of current account persistence, the type of exchange rate regimes no longer affects the extent of current account persistence. However, countries with greater trade or financial openness, or those with mounting pressure from real exchange rate misalignment tend to have a smaller degree of current account persistence while international reserves holding seems to contribute to a larger degree of persistence. |
| Keywords: | Current Account Balances, Global rebalancing, financial openness, real exchange rate misalignment |
| JEL: | F32 F41 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23381&r=opm |
| By: | Adam Copeland; James A. Kahn |
| Abstract: | A large body of research has established that exporters do not fully adjust their prices across countries in response to exchange rate movements, but instead allow their markups to vary. But while markups are difficult to observe directly, we show in this paper that inventory-sales ratios provide an observable counterpart. We then find evidence that inventory-sales ratios of imported vehicles respond to exchange rate movements to a degree consistent with pass-through on the order of 50 to 75 percent, on the high end of the range found in the literature. |
| Keywords: | Exports ; Inventories ; Automobile industry and trade - Finance ; Automobiles - Prices ; Foreign exchange rates ; International trade |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:584&r=opm |
| By: | Valentina Bruno; Hyun Song Shin |
| Abstract: | This paper examines the relationship between low interests maintained by advanced economy central banks and credit booms in emerging economies. In a model with crossborder banking, low funding rates increase credit supply, but the initial shock is amplified through the "risk-taking channel" of monetary policy where greater risk-taking interacts with dampened measured risks that are driven by currency appreciation to create a feedback loop. In an empirical investigation using VAR analysis, we find that expectations of lower short-term rates dampen measured risks and stimulate cross-border banking sector capital flows. |
| Keywords: | Capital flows, exchange rate appreciation, credit booms |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:400&r=opm |
| By: | Alan M. Taylor |
| Abstract: | What can history can tell us about the relationship between the banking system, financial crises, the global economy, and economic performance? Evidence shows that in the advanced economies we live in a world that is more financialized than ever before as measured by importance of credit in the economy. I term this long-run evolution "The Great Leveraging" and present a ten-point examination of its main contours and implications. |
| Keywords: | financial development, credit, booms, crises, recessions, global imbalances, Great Recession, fiscal policy |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:398&r=opm |
| By: | Jacek Rothert (University of Texas, Austin) |
| Abstract: | Business cycles in emerging markets are different than in developed economies: consumption fluctuates more than output and trade balance is strongly counter-cyclical. The two leading theories to account for those differences are: (i) permanent productivity shocks and (ii) interest rate shocks. I show movements in terms of trade can distinguish between these two theories. Expansionary productivity shocks reduce the relative price of country's exports. Expansionary interest rate shocks raise the relative price of country's exports. Application of this method to Mexican fluctuations in the 1990s yields results consistent with leading methods based on Bayesian inference. The difference is that in this paper identification relies on instantaneous response of price rather than long-run properties of quantities. Identification can be based on relatively short time series and the method can be applied to real-time events. The method is best suited for cases when manufacturing constitutes large portion of both exports and imports. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:187&r=opm |
| By: | Joseph W. Gruber; Robert J. Vigfusson |
| Abstract: | We purpose a novel explanation for the observed increase in the correlation of commodity prices over the past decade. In contrast to theories that rely on the increased influence of financial speculators, we show that price correlation can increase as a result of a decline in the interest rate. More generally, we examine the effect of interest rates on the volatility and correlation of commodity prices, theoretically through the framework of Deaton and Laroque (1992) and empirically via a panel GARCH model. In theory, we show that lower interest rates decrease the volatility of prices, as lower inventory costs promote the smoothing of transient shocks, and can increase price correlation if common shocks are more persistent than idiosyncratic shocks. Empirically, as predicted by theory, we find that price volatility attributable to transitory shocks declines with interest rates, while, for many commodity pairs, price correlation increases as interest rates decline. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1065&r=opm |
| By: | Mirko Abbritti (School of Economics and Business Administration, University of Navarra) |
| Abstract: | Empirical evidence shows that the pass-through of cost shocks to prices is very low, and delayed. This is in stark contrast with the standard framework of monopolistic competition used in macro models, which, absent nominal rigidities, implies complete pass-through of cost shocks to prices. This paper develops a model of pricing dynamics in business to business relationships where incomplete pass-through arises endogenously. The model is based on two assumptions. First, both retailers and wholesalers invest resources to form new, long-term, business relationships. Second, once a business relationship is formed, the prices and the quantities of the intermediate good exchanged are set in a bilateral bargaining between wholesalers and retailers. The repeated nature of the interactions between firms raises the question of whether wholesale prices are allocative. We show that wholesale prices still play an allocative role in the model, but this role is likely to be quite limited. |
| Keywords: | price dynamics, product market frictions, price bargain, customer relations, real rigidities, incomplete pass-through |
| JEL: | E10 E30 |
| Date: | 2012–11–14 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp1912&r=opm |
| By: | Marianne Baxter; Anthony Landry |
| Abstract: | With over 300 stores in 40 countries, IKEA is a major international presence in retail housewares and furnishings. IKEA publishes country-specific catalogs with local-currency prices guaranteed to hold for 1 year. This paper explores a new dataset of IKEA products and catalog prices covering six countries for the time period 1994–2010. The dataset, with over 140,000 observations, is uniquely poised to shed light on the way in which a large multinational retailer operates in a setting characterized by a very large number of goods, distributed and priced in many countries. Thus, the goal of this paper is to document the choices made by IKEA in several related decision areas. In doing so, this paper provides evidence against which existing theories can be evaluated and revised in the light of this new information. |
| Keywords: | International trade ; Finance |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:132&r=opm |
| By: | Matteo Ciccarelli (European Central Bank); Eva Ortega (Banco de España); Maria Teresa Valderrama (Oesterreichische Nationalbank) |
| Abstract: | We investigate heterogeneity and spillovers in macro-financial linkages across developed economies, with a particular emphasis on the most recent recession. A panel Bayesian VAR model including real and financial variables identifies a statistically significant common component, which proves to be very significant during the most recent recession. Nevertheless, countryspecific factors remain important, which explains the heterogeneous behaviour across countries observed over time. Moreover, spillovers across countries and between real and financial variables are found to matter: a shock to a variable in a given country affects all other countries, and the transmission seems to be faster and deeper between financial variables than between real variables. Finally, shocks spill over in a heterogeneous way across countries |
| Keywords: | financial crisis, macro-financial linkages, panel VAR models |
| JEL: | C11 C33 E32 F44 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1241&r=opm |
| By: | Mona Haddad (The World Bank); Jamus Jerome Lim (The World Bank); Cosimo Pancaro (European Central Bank); Christian Saborowski (International Monetary Fund) |
| Abstract: | This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export concentration measures, we present strong evidence pointing to an important role for export diversification in conditioning the effect of trade openness on growth volatility. Indeed, the effect of openness on volatility is shown to be negative for a significant proportion of countries with relatively diversified export baskets. JEL Classification: F15, F43, O24 |
| Keywords: | Export diversification, growth volatility, trade openness |
| Date: | 2012–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20121491&r=opm |