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on Open Economy Macroeconomic |
| By: | Philippe Bacchetta; Eric van Wincoop |
| Abstract: | While the 2008-2009 financial crisis originated in the United States, we witnessed steep declines in output, consumption and investment of similar magnitudes around the globe. This raises two questions. First, given the observed strong home bias in goods and financial markets, what can account for the remarkable global business cycle synchronicity during this period? Second, what can explain the difference relative to previous recessions, where we witnessed far weaker co-movement? To address these questions, we develop a two-country model that allows for self-fulfilling business cycle panics. We show that a business cycle panic will necessarily be synchronized across countries as long as there is a minimum level of economic integration. Moreover, we show that several factors generated particular vulnerability to such a global panic in 2008: tight credit, the zero lower bound, unresponsive fiscal policy and increased economic integration. |
| Keywords: | Great Recession; international co-movements; contagion |
| JEL: | F40 F41 F44 E32 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:lau:crdeep:13.05&r=opm |
| By: | Boucekkine, Raouf |
| Abstract: | A simple open-economy AK model with collateral constraints accounts for growth breaks and growth-reversal episodes, during which countries face abrupt changes in their growth rate that may lead to either growth miracles or growth disasters. Absent commitment to investment by the borrowing country, imperfect contract enforcement leads to an informational lag such that the debt contracted upon today depends upon the past stock of capital. The no-commitment delay originates a history effect by which the richer a country has been in the past, the more it can borrow today. For (arbitrarily) small delays, the history effect offsets the growth benefits from international borrowing and dampens growth, and it leads to both leapfrogging in long-run levels and growth breaks. When large enough, the history effect originates growth reversals and we connect the latter to leapfrogging. Finally, we argue that the model accords with the reported evidence on changes in the growth rate at break dates. We also provide examples showing that leapfrogging and growth reversals may coexist, so that currently poor but fast-growing countries experiencing sharp growth reversals may end up, in the long-run, significantly richer than currently rich but declining countries. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ner:louvai:info:hdl:2078.1/118044&r=opm |
| By: | Barbara Rossi |
| Abstract: | The main goal of this article is to provide an answer to the question: “Does anything forecast exchange rates, and if so, which variables?†It is well known that exchange rate fluctuations are very difficult to predict using economic models, and that a random walk forecasts exchange rates better than any economic model (the Meese and Rogoff puzzle). However, the recent literature has identified a series of fundamentals/methodologies that claim to have resolved the puzzle. This article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up- to-date, thorough empirical analysis. Overall, our analysis of the literature and the data suggests that the answer to the question: "Are exchange rates predictable?" is, "It depends" –on the choice of predictor, forecast horizon, sample period, model, and forecast evaluation method. Predictability is most apparent when one or more of the following hold: the predictors are Taylor rule or net foreign assets, the model is linear, and a small number of parameters are estimated. The toughest benchmark is the random walk without drift. |
| Keywords: | exchange rates, forecasting, instability, forecast evaluation |
| JEL: | F3 C5 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:690&r=opm |
| By: | Murphy, Daniel (University of Michigan) |
| Abstract: | Empirical studies show that tradable consumption goods are more expensive in rich countries. This paper proposes a simple yet novel explanation for this apparent failure of the law of one price: Consumers' utility from tradable goods depends on their consumption of complementary goods and services. Monopolistically competitive firms charge higher prices in countries with more complementary goods and services because consumer demand is less elastic there. The paper embeds this explanation within a static Krugman (1980)-style model of international trade featuring differentiated tradable goods. Extended versions of the model can account for the high prices of services in rich countries, as well as for several stylized facts regarding investment rates and relative prices of investment and consumption across countries. The paper provides direct evidence in support of this new explanation. Using free-alongside-ship prices of U.S. and Chinese exports, I demonstrate that prices of specific subsets of tradable goods are higher in countries with high consumption of relevant complementary goods, conditional on per capita income and other country-level determinants of consumer goods prices. |
| Keywords: | real exchange rates, investment, demand complementarity, monopolistic competition |
| JEL: | E22 E31 F12 F14 L11 O16 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:mie:wpaper:636&r=opm |
| By: | Guglielmo Maria Caporale; Faek Menla Ali; Nicola Spagnolo |
| Abstract: | This paper examines the impact of exchange rate uncertainty on different components of portfolio flows, namely equity and bond flows, as well as the dynamic linkages between exchange rate volatility and the variability of these two types of flows. Specifically, a bivariate GARCH-BEKK-in-mean model is estimated using bilateral data for the US vis-à-vis Australia, the UK, Japan, Canada, the euro area, and Sweden over the period 1988:01- 2011:12. The results indicate that the effect of exchange rate uncertainty on equity flows is negative in the euro area, the UK and Sweden, and positive in Australia, whilst it is negative in all countries except Canada (where it is positive) in the case of bond flows. Under the assumption of risk aversion, this suggests that exchange rate uncertainty induces a home bias and causes investors to reduce their financing activities to maximise returns and minimise exposure to uncertainty. Furthermore, since exchange rate volatility and the variability of flows are interlinked, exchange rate or credit controls on these flows can be used to pursue economic and financial stability. |
| Keywords: | Exchange rate uncertainty, Equity flows, Bond flows, Causality-in-variance |
| JEL: | F31 F32 G15 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1296&r=opm |
| By: | Periklis Gogas (Department of Economics, Democritus University of Thrace, Greece; The Rimini Center for Economic Analysis, Italy) |
| Abstract: | In this paper, I analyse the synchronization of business cycles within the E.U., as this is an important ingredient for the implementation of a successful monetary policy. The business cycles of twelve E.U. countries and two sub-groups of countries are extracted for the period 1989Q1-2010Q2. The cycle of G3, the group of the three largest European economies (Germany, France and Italy) is then used as a benchmark series for the comparisons. The sensitivity of the data to alternative cycle extraction methodologies is explored employing the Hodrick-Prescott and Baxter-King filters using alternative parameter specifications and leads/lags. The strength of cycle synchronization is measured using linear regressions, cross-correlation coefficients and the Cycle Synchronization Index (CSI). To assess whether synchronization is stronger after the introduction of the common currency, we also test two sub-samples pre- and post-EMU (1999Q1). The empirical results provide evidence that cycle synchronization within the Eurozone has become stronger in the common currency period. |
| Keywords: | Business Cycle, Synchronization, Eurozone |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:18_13&r=opm |
| By: | Giuseppe Fiori (University of Sao Paulo); Fabio Ghironi (Boston College); Matteo Cacciatore (HEC Montreal) |
| Abstract: | The global crisis that began in 2008 reheated the debate on market deregulation as a tool to spur economic performance. This paper addresses the consequences of increased flexibility in goods and labor markets for the conduct of monetary policy in a monetary union. We model a two-country monetary union with endogenous product creation, labor market frictions, and price and wage rigidities. We allow regulation in goods and labor markets to differ across countries. We first characterize optimal monetary policy when regulation is high and show that the Ramsey allocation requires significant departures from price stability both in the long run and over the business cycle. Welfare gains from the Ramsey-optimal policy are sizable. Second, we show that the adjustment to market reform requires expansionary policy to reduce transition costs. Third, deregulation reduces static and dynamic inefficiencies, making price stability more desirable. International coordination of reforms is beneficial as it eliminates policy tradeoffs generated by asymmetric deregulation. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:678&r=opm |
| By: | Marcel Fratzscher; Lucio Sarno; Gabriele Zinna |
| Abstract: | This paper provides an empirical test of the scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2011). This theory suggests that market participants may at times attach significantly more weight to individual economic fundamentals to rationalize the pricing of currencies, which are partly driven by unobservable shocks. Using novel survey data which directly measure foreign exchange scapegoats for 12 currencies and proprietary data on order flow, we find empirical evidence that strongly supports the scapegoat theory of exchange rates, with the resulting models explaining a large fraction of the variation and directional changes in exchange rates. |
| Keywords: | scapegoat, exchange rates, economic fundamentals, survey data |
| JEL: | F31 G10 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1290&r=opm |
| By: | Luca Fornaro (London School of Economics) |
| Abstract: | This paper develops a dynamic small open economy model featuring an occasionally binding collateral constraint and nominal wage rigidities. The goal is to study the performance of alternative exchange rate policies in economies that endogenously alternate between tranquil times and crises. Financial frictions introduce a trade-off between price and financial stability. For low levels of foreign debt the probability of a future crisis is small and the best policy consists in targeting wage inflation. For high levels of foreign debt the probability of a future crisis is high and wage inflation targeting is dominated by a flexible exchange rate targeting rule, because the latter policy does a better job in mitigating the fall in output, consumption and capital inflows during crisis events. In contrast, pegging the exchange rate is always welfare dominated by targeting wage inflation. I also find that the exchange rate regime affects both the behavior of the economy during crisis events and the crisis probability, through its impact on debt accumulation during tranquil times. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:726&r=opm |
| By: | Jeff Chelsky |
| Keywords: | Macroeconomics and Economic Growth - Financial Economics Finance and Financial Sector Development - Debt Markets International Economics and Trade - Capital Flows Finance and Financial Sector Development - Currencies and Exchange Rates Private Sector Development - Emerging Markets |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wboper:10054&r=opm |
| By: | Keiichi Morimoto (Department of Economics, Meisei University); Takeo Hori (College of Economics, Aoyama Gakuin University); Noritaka Maebayashi (Graduate School of Economics, Osaka University); Koichi Futagami (Graduate School of Economics, Osaka University) |
| Abstract: | We construct a small open economy model of endogenous growth with public capital accumulation and examine how a debt policy rule under which the government gradually reduces its debt-GDP ratio to a target level affects macroeconomic stability, fiscal sustainability, and welfare. We obtain the following implications for fiscal policy design in small countries. First, to ensure fiscal sustainability, the government should adjust public spending rather than the income tax rate to finance public debt. In addition, it has to set the target level of the debt-GDP ratio sufficiently low to avoid expectations-driven economic instabilities. Under sustainability and stability, a tighter (looser) debt rule brings welfare gains when the world interest rate is relatively high (low). |
| Keywords: | Fiscal policy, Public debt, Welfare, Fiscal sustainability, Equiribrium indeterminacy |
| JEL: | E32 E62 H63 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:osk:wpaper:1307&r=opm |
| By: | Mansoor Dailami |
| Keywords: | Finance and Financial Sector Development - Debt Markets Banks and Banking Reform Private Sector Development - Emerging Markets International Economics and Trade - External Debt Finance and Financial Sector Development - Bankruptcy and Resolution of Financial Distress |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wboper:10050&r=opm |
| By: | Hyoung-kyu Chey (National Graduate Institute for Policy Studies) |
| Abstract: | The international statuses of currencies shape a fundamental characteristic of the international monetary system, which has significant impacts on the world political economy by affecting the political as well as economic relationships among states. The study of international currencies has been long dominated largely by economists, however, with political economy research in this area quite underdeveloped. However, the 2008/9 global financial crisis, the subsequent European debt crisis and the recent active Chinese promotion of renminbi internationalization have spurred new and considerable interest among political economists on issues surrounding international currencies. Political economy study of international currencies has thus been gradually growing of late, and making notable progress. This study provides a comprehensive and systematic review of the literature on international currencies—covering both political economy and economics—with the primary aim of building a useful groundwork to help develop a better research framework for the political economy study of them. In particular, it discusses the international currency concept, the costs and benefits of international currency issuance, the determinants of currency internationalization, and the future prospects of the current dollar-centered international monetary system. This research in addition highlights a group of important issues that need further investigation by future political economy study of international currencies, by drawing special attention to the following issues: historical events, the political determinants of currency internationalization, government policy strategies, and the consequences of international currency choice. |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:ngi:dpaper:13-03&r=opm |
| By: | Stephen Hall; Amangeldi Kenjegaliev; P.A.V.B. Swamy; George S. Tavlas |
| Abstract: | We investigate bilateral currency pressures against the U.S. dollar for three currencies: the Japanese yen, the Chinese yuan, and the U.K. pound during the period 2000:Q1 to 2009:Q4. We employ a model-based methodology to measure exchange market pressure over the period. Conversion factors required to estimate the pressure on these currencies are computed using a time-varying coefficient regression. We then use our measures of currency pressures to assess deviations of exchange rates from their market-equilibrium levels. For the yen, our measure of currency pressure suggests undervaluation during the initial part of our estimation period, a period during which the Bank of Japan sold yen in the foreign exchange market. We find persistent undervaluation of the yuan throughout the estimation period, with the undervaluation peaking at about 20 per cent in 2004 and 2007. For the pound, the results indicate low pressure - - suggesting a mainly free-floating currency - - throughout the sample period. These results appear consistent with the policies pursued by the central banks of the currencies in question. |
| Keywords: | Exchange Market Pressure; Currency Misalignment; Time-Varying-Coefficient |
| JEL: | C22 F31 F41 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:13/10&r=opm |
| By: | Antonio Accetturo (Bank of Italy, Italy); Valter Di Giacinto (Bank of Italy, Italy); Giacinto Micucci (Bank of Italy, Italy); Marcello Pagnini (Bank of Italy, Italy) |
| Abstract: | Two main hypotheses are usually put forward to explain the productivity advantages of larger cities: agglomeration economies and firm selection. Combes et al. (2012) propose an empirical approach to disentangle these two effects and fail to find any impact of selection on local productivity differences. We theoretically show that selection effects do emerge when asymmetric trade and entry costs and different spatial scale at which agglomeration and selection may work are properly taken into account. The empirical findings confirm that agglomeration effects play a major role. However, they also show a substantial increase in the importance of the selection effect when asymmetric trade costs and a different spatial scale are taken into account. |
| Keywords: | agglomeration economies, firm selection, market size, entry costs, openness to trade |
| JEL: | C52 R12 D24 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:24_13&r=opm |