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on Open Economy Macroeconomic |
| By: | Nidhaleddine Ben Cheikh (University of Rennes 1 - CREM UMR CNRS 6211, France) |
| Abstract: | This paper examines the presence of nonlinear mechanism in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using logistic smooth transition models, we explore the existence of nonlinearity with respect to economic activity along the business cycle. Our results provide a strong evidence of nonlinearity in 6 out of 12 EA countries with significant differences in the degree of ERPT between the periods of expansion and recession. However, we find no clear direction in this regime-dependence of pass-through to business cycle. In some countries, ERPT is higher during expansions than in recessions; however, in other countries, this result is reversed. These cross-country differences in the nonlinear mechanism of pass-through would have important implications for the design of monetary policy and the control of inflation in the EA context. |
| Keywords: | Exchange Rate Pass-Through, Inflation, Smooth Transition Regression |
| JEL: | C22 E31 F31 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:tut:cremwp:201306&r=opm |
| By: | Bussière, M.; Delle Chiaie, S.; Peltonen, T. A. |
| Abstract: | This paper estimates export and import price equations for 40 countries – including 19 emerging market economies (EMEs) – and aims to understand heterogeneity across countries in the degree of exchange rate pass-through to import and to export prices. Results indicate that (i) the elasticities of trade prices are sizeable in EMEs, and higher on average than in advanced economies for export prices; (ii) such elasticities are primarily influenced by macroeconomic factors; (iii) export and import price elasticities tend to be strongly correlated across countries; (iv) lower exchange rate pass-through in the United States, compared to other advanced economies, can be related to the geographical distribution of U.S. imports, more heavily concentrated in countries with high elasticity of export prices. Overall, these results yield an enhanced understanding of exchange rate pass-through, emphasizing the role of external factors. |
| Keywords: | emerging market economies; exchange rate pass-through; terms of trade. |
| JEL: | F10 F30 F41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:424&r=opm |
| By: | Leif Anders Thorsrud |
| Abstract: | We study the synchronization of real and nominal variables across four different regions of the world, Asia, Europe, North and South America, covering 32 different countries. Employing a FAVAR framework, we distinguish between global and regional demand and supply shocks and document the relative contributions of these shocks to explaining macroeconomic fluctuations and synchronization. Our results support the decoupling hypothesis advanced in recent business cycle studies and yields new insights regarding the causes of business cycle synchronization. In particular, global supply shocks cause more severe activity fluctuations in European and North American economies than in Asian and South American economies, whereas global demand shocks shift activity in the different regions in opposite directions at longer horizons. Furthermore, demand shocks play a larger role than that found in related studies. Finally, only innovations to the Asian activity and price factors have significant spillover effects on shared global factors, demonstrating the growing importance of Asia in the global economy. |
| Keywords: | Business cycles, Factor model, Globalization, International macro |
| JEL: | C11 C38 F41 F44 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0012&r=opm |
| By: | Michael Bleaney; Sharmila Devadas |
| Abstract: | As some emerging market economies have amassed large quantities of foreign exchange reserves, concern has arisen over the sterilisation of the domestic money stock from these flows. Existing studies focus mostly on narrow (reserve) money, and estimate a high degree of sterilisation. Empirical work on the long-run relationship between money and prices emphasises broad money, yet the long-run effect of foreign exchange inflows on broad money has been almost entirely ignored. Using a sample of quarterly data from 28 countries over the period 1990-2010, it is shown that broad money is sterilised to a significantly smaller degree than reserve money. This pattern is not confined to any particular group of countries and is unrelated to the nature of the flows (e.g. current account versus capital account surpluses). Sterilisation rates have increased in Asia during the recent period of persistent accumulation of foreign exchange reserves. |
| Keywords: | foreign exchange intervention, money, sterilisation, emerging markets JEL codes: E51, E52, F31, F33 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:not:notecp:13/01&r=opm |
| By: | Hideaki Hirata; M. 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. |
| Keywords: | Business cycles, Comovement; Synchronization, Trade linkages, Financial linkages |
| JEL: | C11 C32 E32 F41 F42 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-09&r=opm |
| By: | Hsiu-Hsin Ko (National University of Kaohsiung); Masao Ogaki |
| Abstract: | We use a residual-based bootstrap method to re-examine the finding of the Granger causality relationship from exchange rates to fundamentals in Engel and West (Exchange rate and fundamentals, Journal of Political Economy 2005, 113 (3), 485–517), in which the evidence for the relation is taken as evidence for the present-value model for exchange rates. The test results are against the previous findings. The Monte Carlo experiment results suggest that the causality test implemented in the previous study tends to spuriously reject null hypotheses. Thus, the existing evidence for the present value model for exchange rates is not robust. |
| Keywords: | Bootstrap, Granger causality, exchange rates, fundamentals |
| JEL: | F30 F31 C32 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:roc:rocher:577&r=opm |
| By: | Senbeta, Sisay R. |
| Abstract: | How do key macroeconomic variables of a small open economy with segmented labour markets behave in response to domestic and external shocks? In this paper we attempt to address this question by modeling the coexistence of a formal labour market with higher wage rates and search frictions, and an informal labour market with the opposite attributes in the standard multi-sector small open economy New Keynesian DSGE model. The model is calibrated for a typical Sub-Saharan African economy and the behaviour of key macroeconomic variables in response to domestic and external shocks is analysed. The results show that almost all the impulse response functions of our model are consistent with what theory predicts and what other empirical works show about the responses of low income countries to the shocks we consider. However, our results do not seem to corroborate the widely held wisdom that the existence of an informal sector plays a stabilizing role in the event of shocks. |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:ant:wpaper:2013002&r=opm |
| By: | Shu-Ling Chen; John D. Jackson; Hyeongwoo Kim; Pramesti Resiandini |
| Abstract: | This paper examines common forces driving the prices of 51 highly tradable commodities. We demonstrate that highly persistent movements of these prices are mostly due to the first common component, which is closely related to the US nominal exchange rate. In particular, our simple factor-based model outperforms the random walk model in out-of-sample forecast for the US exchange rate. The second common factor and de-factored idiosyncratic components are consistent with stationarity, implying short-lived deviations from the equilibrium price dynamics. In concert, these results provide an intriguing resolution to the apparent inconsistency arising from stable markets with nonstationary prices. |
| Keywords: | Commodity Prices; US Nominal Exchange Rate; Panel Analysis of Nonstationarity in Idiosyncratic and Common Components; Cross-Section Dependence; Out-of-Sample Forecast |
| JEL: | C53 F31 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2013-03&r=opm |
| By: | Jörgensen, Christian; Persson, Morten |
| Abstract: | This study evaluates the degree of segmentation of the market for agricultural machinery and equipment in the EU. We focus on agricultural tractors, the most common and biggest investment in machinery and equipment in the agricultural sector. By using country price data for individual tractor models, we test the law of one price, i.e. the existence of a common price for tractors across EU member states. We find that significant price differences exist, yet unlike most other studies we find that large price deviations are penalised within a short time. The study also shows that transport costs are an important source of price differences, as domestic production leads to lower prices on the domestic market and as price convergence is negatively correlated with distance. Finally, price differences should not solely be understood from a geographical perspective, as evidence supports the idea that farmers’ buying power is significant in explaining price differences within countries. |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:eps:fmwppr:145&r=opm |
| By: | Sandra Eickmeier; Leonardo Gambacorta; Boris Hofmann |
| Abstract: | We explore the concept of global liquidity based on a factor model estimated using a large set of financial and macroeconomic variables from 24 advanced and emerging market economies. We measure global liquidity conditions based on the common global factors in the dynamics of liquidity indicators. By imposing theoretically motivated sign restrictions on factor loadings, we achieve a structural identification of the factors. The results suggest that global liquidity conditions are largely driven by three common factors and can therefore not be summarised by a single indicator. These three factors can be identified as global monetary policy, global credit supply and global credit demand. |
| Keywords: | global liquidity, monetary policy, credit supply, credit demand, international business cycles, factor model, sign restrictions |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:402&r=opm |