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on Open Economy Macroeconomic |
| By: | Javier Bianchi; Juan Carlos Hatchondo; Leonardo Martinez |
| Abstract: | Two striking facts about international capital flows in emerging economies motivate this paper: (1) Governments hold large amounts of international reserves, for which they obtain a return lower than their borrowing cost. (2) Purchases of domestic assets by nonresidents and purchases of foreign assets by residents are both procyclical and collapse during crises. We propose a dynamic model of endogenous default that can account for these facts. The government faces a trade-off between the benefits of keeping reserves as a buffer against rollover risk and the cost of having larger gross debt positions. Long-duration bonds, the countercyclical default premium, and sudden stops are important for the quantitative success of the model. |
| JEL: | F41 F42 F44 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:18628&r=opm |
| By: | Canuto, Otaviano; Cavallari, Matheus |
| Abstract: | Confidence in combining inflation-targeting-cum-flexible-exchange-rate regimes with isolated microprudential regulation as a means to guarantee both macroeconomic and financial stability has been shattered by the scale and synchronization of asset price booms and busts that preceded the current global financial crisis. This paper has a two-fold purpose. On the one hand, it explores the implications and challenges of acknowledging the need for coordination between monetary policies and macroprudential regulation. On the other, it points out specific challenges currently faced by central bankers in emerging economies, as they cope with policy and regulatory coordination in a context of debt overhang and unconventional monetary policies in advanced economies. |
| Keywords: | Currencies and Exchange Rates,Debt Markets,Emerging Markets,Economic Theory&Research,Banks&Banking Reform |
| Date: | 2013–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6310&r=opm |
| By: | Borenstein, Eliezer; Elkayam, David |
| Abstract: | In this paper we attempt to reproduce both the business cycle facts and the equity premium of the Israeli economy—an economy which is "typical" in the sense that investment is much more volatile than output (and consumption). We show that GHH preferences, which are quite common in RBC models of small open economies, are not suited for reproducing both the business cycle and the equity premium facts of a "typical" small open economy. We found that a way to progress is to "correct" the GHH preferences by adding some degree of wealth effect on labor supply. That is, by switching to the Jaimovich-Rebelo (2006) type of preferences. However, in this case we also need to add to the model some kind of limitations on labor supply (we used both real wage rigidity and habits in labor). Our main finding is that the use of Jaimovich-Rebelo preferences considerably improves the results relative to that achieved by GHH preferences. The reason for this is that the GHH preferences are characterized by a relatively high degree of substitutability between consumption and leisure and this moderates the volatility of the stochastic discount factor (SDF). By adding some degree of wealth effect we can achieve a significant increase in the volatility of the SDF, and hence an increase in the equity premium and in the volatility of investment. Following the relevant literature we used three shocks: to productivity, to government expenditure and to the world interest rate. Our analysis suggests that by adding one or more of two kinds of shocks: shocks to wealth and shocks to the real exchange rate – one can achieve a significant progress in reproducing both the business cycle facts and the equity premium. |
| Keywords: | Equity Premium; Asset Pricing; Business Cycle; Small Open Economy |
| JEL: | E32 G12 F41 E44 |
| Date: | 2013–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43909&r=opm |
| By: | HIRATA Hideaki; Ayhan KOSE; Christopher OTROK |
| Abstract: | Both global and regional economic linkages have strengthened substantially over the past quarter century. We employ a dynamic factor model to analyze the implications of these linkages for the evolution of global and regional business cycles. Our model allows us to assess the roles played by the global, regional, and country-specific factors in explaining business cycles in a large sample of countries and regions over the period 1960-2010. We find that, since the mid-1980s, the importance of regional factors has increased markedly in explaining business cycles, especially in regions that experienced a sharp growth in intra-regional trade and financial flows. By contrast, the relative importance of the global factor has declined over the same period. In short, the recent era of globalization has witnessed the emergence of regional business cycles. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:13004&r=opm |
| By: | António Portugal Duarte (Faculty of Economics University of Coimbra and GEMF, Portugal); João Sousa Andrade (Faculty of Economics University of Coimbra and GEMF, Portugal); Adelaide Duarte (Faculty of Economics University of Coimbra and GEMF, Portugal) |
| Abstract: | The aim of this paper is to examine to what extent the adoption by Portugal of an exchange rate target zone regime in the context of its participation in the ERM of the EMS can be characterised by the existence of a nonlinear S-shaped relationship between the exchange rate and its fundamental. If there is such a relationship, a target zone would have a stabilising effect on the exchange rate, the so-called ‘honeymoon effect’, as predicted by the basic target zone model developed by Krugman (1991). We tested three models: OLS, Auto-correlation by Maximum Likelihood and GARCH (p, q). However, the evidence of a negative trend in the interest rate differential prevented the empirical confirmation of a nonlinear relationship. The use of LSTAR and ESTAR models also failed to reconcile the theory with the data. This does not mean that a stabilising effect on the exchange rate had not happened. Portugal’s current participation in the EMU is demonstrative of this reality. Maintaining a downward trend in interest rate differential turns out to reflect the increased credibility in the conduct of monetary policy, allowing the objective of exchange rate stability to be pursued, framed by the main objective of price stability. Without this policy it would not be possible to participate in the Euro Zone. The adoption of a target zone has functioned as an important foreign exchange regime of transition to a single currency ‘strategy’. This study also supports the idea that a target zone regime should be considered a feasible solution for ‘tomorrow’ to countries that ‘today’ can be forced to abandon the Euro Zone, since this kind of option combines monetary policy autonomy with macroeconomic stability. |
| Keywords: | ERM, honeymoon effect, STAR model, nonlinearities and target zones. |
| JEL: | F31 F41 G15 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:gmf:wpaper:2013-03.&r=opm |
| By: | António Afonso; Michael G. Arghyrou; Alexandros Kontonikas |
| Abstract: | We use a panel of euro area countries to assess the determinants of long-term sovereign bond yield spreads over the period 1999.01-2010.12. We find that, unlike the period preceding the global financial crisis, European government bond yield spreads are well-explained by macro- and fiscal fundamentals over the crisis period. We also find that the menu of macro and fiscal risks priced by markets has been significantly enriched since March 2009, including the risk of the crisis’ transmission among EMU member states, international risk and liquidity risk. Finally, we find that sovereign credit ratings are statistically significant in explaining spreads, yet compared to macro- and fiscal fundamentals their role is limited. |
| Keywords: | sovereign yields, government debt, panel analysis, credit ratings |
| JEL: | C23 E62 H50 |
| Date: | 2012–10 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2012_14&r=opm |
| By: | Robert A. Blecker; Carlos A. Ibarra |
| Abstract: | Previous studies have found that a tightening of the balance of payments (BP) constraint can explain the slowdown in Mexico’s growth after its trade liberalization in the late 1980s. This paper develops a disaggregated model of the BP constraint with two types of exports (manufactured and primary commodities) and two types of imports (intermediate and final goods). Econometric estimates (including tests for structural breaks) show that the BPequilibrium growth rate did not fall, but instead rose in the post-liberalization period, so this model cannot account for the country’s growth slowdown. Instead, the analysis points to the need to consider the real exchange rate as well as internal obstacles and policies. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:amu:wpaper:2013-02&r=opm |
| By: | Canofari Paolo; Di Bartolomeo Giovanni; Piersanti Giovanni |
| Abstract: | This paper analyzes strategic interactions and contagion effects in countries joined to a monetary union. Using game theory and a cost-benefit analysis, the paper determines the set of equilibrium solutions under which country-specific shocks are transmitted to other member countries giving rise to contagion. Numerical simulations, obtained by a simple calibration of the model on some key Mediterranean countries of the Euro Zone, show the probabilities of contagion from Greece to Spain and Italy. |
| Keywords: | Shadow exchange rate, currency crisis, monetary unions, contagion, Nash equilibria |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:ter:wpaper:0098&r=opm |
| By: | Nicholas Li; Gee Hee Hong |
| Abstract: | We examine the extent to which vertical and horizontal market structure can together explain incomplete pass-through. We develop a model that highlights the interactions between horizontal and vertical structure and their effects on pass-through from commodity to wholesale prices and wholesale to retail prices. Using scanner data from a large U.S. retailer, we estimate product level pass-through rates for three different vertical structures: national brands, private label goods not manufactured by the retailer and private label goods manufactured by the retailer. We find that greater control of the value chain by the retailer results in higher commodity price pass-through into retail prices compared to national brands – 40% higher for private label manufactured goods and 10% higher for private label non-manufactured goods. We also find substantial effects of horizontal structure on pass-through – products and brands with higher market shares have higher retail markups and lower cost pass-through. Our results emphasize that accounting for both vertical and horizontal structure is important for understanding how market structure affects pass-through, as a reduction in double-marginalization can raise pass-through directly but can also reduce it indirectly by increasing market share. |
| Keywords: | pass-through; market structure; market power; pricing; retail; vertical integration; intra-firm; private labels; |
| JEL: | D4 E3 E31 |
| Date: | 2013–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-470&r=opm |
| By: | Franto Ricka (EBRD) |
| Abstract: | This paper investigates the political implications of tax competition between countries of different sizes. We show that smaller countries competing for internationally mobile capital would set lower tax rates than their larger counterparts when run by similar governments. Moreover, small-country governments are actually politically to the right of those in larger countries, adding a second reason for lower tax rates in the former. Then a higher number of small countries competing for capital with large countries not only decreases the large-country tax rates on capital, but also results in more right-wing governments being elected. Small countries thus have ”right-wing power”. |
| Keywords: | tax competition, government, elections |
| JEL: | D72 F5 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:ebd:wpaper:153&r=opm |
| By: | Stephane Verani; Till Gross |
| Abstract: | There is growing empirical support for the conjecture that access to credit is an important determinant of firms' export decisions. We study a multi-country general equilibrium economy in which entrepreneurs and lenders engage in long-term credit relationships. Financial constraints arise as a consequence of financial contracts that are optimal under private information. Consistent with empirical regularities, the model implies that older and larger firms have lower average and more stable growth rates, and are more likely to survive. Exporters are larger, their survival in international markets increases with the time spent exporting, and the sales of older exporters are larger and more stable. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2013-02&r=opm |
| By: | Mustafa Yavuz Cakir and Alain Kabundi |
| Abstract: | This paper investigates the co-movement of business cycles between South Africa and the other BRICS countries namely, Brazil, Russia, India, and China, the so-called BRICs. In particular, it identi.es the nature and key features of the co-movement of cycles of South African economy with cycles of the BRICs. It uses the dynamic factor model to a set of 307 macroeconomic series during the period 1995Q2-2009Q4. We .nd signi.cant evidence of synchronization between South Africa and the BRIC countries over the business cycle, although the magnitude of co-movement di¤ers with each country. India portrays strong ties with South Africa over time. Moreover, Brazil, China, and Russia lead South Africa in the long-run, while India is contemporaneous. Further, the .ndings imply that the .rst two factors are BRICS factors while the third one is a US factor. |
| Keywords: | Dynamic Factor Model, International Business Cycles, Co-movement, BRICS |
| JEL: | C3 E32 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:324&r=opm |
| By: | Joern Kleinert (Karl-Franzens University of Graz); Nico Zorell (European Central Bank, Frankfurt am Main) |
| Abstract: | In this paper we propose a novel mechanism that helps explain the surge in world trade over the last two decades: the export-magnification effect of offshoring. We show analytically in a general equilibrium model with heterogeneous firms that a fall in variable offshoring costs boosts trade in differentiated final goods through an intra-industry reallocation of resources towards the more productive firms. More specifically, lower barriers to offshoring reduce the average costs of inputs for offshoring firms and allow more firms to source cheap foreign intermediates, which improves firm-level price competitiveness. This, in turn, translates into higher export quantities of incumbent exporters (intensive margin) and the entry of new exporters (extensive margin). The increase in final goods trade comes on top of the boost to trade in intermediates. Hence the mechanism proposed in this paper is consistent with the fact that the share of intermediate goods in international trade has remained broadly stable. |
| Keywords: | offshoring, international trade, multinational firms |
| JEL: | F12 F15 F23 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:grz:wpaper:2012-09&r=opm |
| By: | JaeBin Ahn (Research Department, International Monetary Fund); Alexander McQuoid (Department of Economics, Florida International University) |
| Abstract: | This study challenges a central assumption of standard trade models: constant marginal cost technology. We present evidence consistent with the view that increasing marginal cost is present in the data, and further identify financial and physical capacity constraints as the main sources of increasing marginal cost. To understand and quantify the importance of increasing marginal cost faced by financially and physically constrained exporters, we develop a novel structural estimation framework that incorporates these micro frictions. Our structural estimates suggest that the presence of such capacity constrained firms can (1) reduce aggregate output responses to external demand shocks by 30% and (2) result in welfare loss by around 23%. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:1301&r=opm |
| By: | Kohonen, Anssi |
| Abstract: | The paper develops an easy-to-apply test for contagion. In order to address the main challenge of any contagion test, that of endogeneity, the testing is conducted in the structural vector autoregression (SVAR) framework where we assume the reduced form errors follow a mixed-normal distribution. This distributional assumption enables us to use a recently developed SVAR model identification method with no need to restrict any of the instantaneous linkages between the variables. In the empirical part of the paper, we apply our test to the eurozone's ten years government bond spreads over Germany. In this maturity, the bond spreads mainly reflect governments' default risk. The years we consider are 2005-2010, and we find evidence of contagion in the spreads. Furthermore, it appears that, during the beginning of the euro debt crisis, there was transmission of government default risk from Greece to the other countries. However, Greece was not the only source country of contagion. |
| Keywords: | SVAR; contagion; interdependencies; hypothesis testing; sovereign spreads |
| JEL: | C10 F30 C30 E40 G10 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:43823&r=opm |