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on Open Economy Macroeconomic |
| By: | Tommaso Trani (School of Economics and Business Administration University of Navarra) |
| Abstract: | In this paper, I study the international transmission of shocks when assets traded across borders are differently suitable as collateral for borrowing (i.e., pledgeability). Under financial integration, differences in pledgeability have implications for the demand for assets. For instance, if a shock makes it more difficult to pledge the assets of the country receiving the shock, agents expect these assets to yield a relatively higher premium than foreign assets in the near future. I develop an approach to determine the optimal portfolio allocations, as existing methods cannot be directly applied to capture differences in asset pledgeability. In this case of heterogeneously pledgeable assets, financial shocks are transmitted from one country to another because the same asset is held by residents of different countries. Valuation effects arise as a consequence of the reaction of asset returns in different countries. In contrast, a standard model cannot generate any of these implications when assets have the same degree of pledgeability. Indeed, when assets have the same degree of pledgeability, financial shocks are country-specific and hinder the access to credit only for the residents of the country hit by the shock. * The external appendix with the methodological details is available upon request. |
| Keywords: | international portfolio choice, riskiness of pledged collateral, return dierentials, macroeconomic interdependence |
| JEL: | E44 F32 F41 G11 G15 |
| Date: | 2013–02–20 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp0213&r=opm |
| By: | George Alessandria; Sangeeta Pratap; Vivian Yue |
| Abstract: | We study the source and consequences of sluggish export dynamics in emerging markets following large devaluations. We document two main features of exports that are puzzling for standard trade models. First, given the change in relative prices, exports tend to grow gradually following a devaluation. Second, high interest rates tend to suppress exports. To address these features of export dynamics, we embed a model of endogenous export participation due to sunk and per period export costs into an otherwise standard small open economy. In response to shocks to productivity, the interest rate, and the discount factor, we find the model can capture the salient features of export dynamics documented. At the aggregate level, the features giving rise to sluggish exports lead to more gradual net export reversals, sharper contractions and recoveries in output, and endogenous stagnation in labor productivity. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1087&r=opm |
| By: | Magali Dauvin |
| Abstract: | This paper investigates the relationship between energy prices and the real effective exchange rate of commodity-exporting countries. We consider two sets of countries: 10 energy-exporting and 23 non-fuel commodity-exporting countries over the period 1980-2011. Estimating a panel cointegrating relationship between the real exchange rate and its fundamentals, we provide evidence for the existence of "energy currencies". Relying on the estimation of panel smooth transition regression (PSTR) models, we show that there exists a certain threshold beyond which the real effective exchange rate of both energy and commodity exporters reacts to oil prices, through the terms-of-trade. More specifically, when oil price variations are low, the real effective exchange rates are not determined by terms-of-trade but by other usual fundamentals. Nevertheless, when the oil market is highly volatile, currencies follow an "oil currency" regime, terms-of-trade becoming an important driver of the real exchange rate. |
| Keywords: | energy prices, terms-of-trade, exchange rate, commodity-exporting countries, panel cointegration, nonlinear model, PSTR |
| JEL: | C33 F31 Q43 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2013-33&r=opm |
| By: | Marcel Schröder |
| Abstract: | The Washington Consensus emphasizes the economic costs of real exchange rate distortions. However, a sizable recent empirical literature finds that undervalued real exchange rates help countries to achieve faster economic growth. This paper shows that recent findings are driven by inappropriate homogeneity assumptions on cross-country long-run real exchange rate behavior and/or growth regression misspecification. When these problems are redressed, the empirical results for a sample of 63 developing countries suggest that deviations of the real exchange rate in either direction from the value that is consistent with external and internal equilibrium reduces economic growth. Deviations from Balassa-Samuelson adjusted purchasing power parity on the other hand do not seem to matter for growth performance. The real exchange rate should thus be consistent with external and internal balance irrespective of implied purchasing power parity benchmarks. |
| Keywords: | Real exchange rate misalignment, Undervaluation, Economic growth |
| JEL: | F31 F41 F43 O11 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:pas:papers:2013-12&r=opm |
| By: | Martin Feldkircher |
| Abstract: | This paper puts forward a global macro model comprising 43 countries and covering the period from Q1 1995 to Q4 2011. Our regional focus is on countries in Central, Eastern and Southeastern Europe (CESEE) and the Commonwealth of Independent States (CIS). Applying a global VAR (GVAR) model, we are able to assess the spatial propagation and the time profile of foreign shocks to the region. Our results show that first, the region’s real economy reacts nearly equally strongly to an U.S. output shock as it does to a corresponding euro area shock. The pivotal role of the U.S.A. in shaping the global business cycle thus seems to partially offset the region’s comparably stronger trade integration with the euro area. Second, an increase in the euro area’s short-term interest rate has a negative effect on output in the long run throughout the region. This effect is stronger in the CIS as well as in Southeastern Europe, while it is comparably milder in Central Europe. Third, the region is negatively affected by an oil price hike, with the exception of Russia, one of the most important oil exporters worldwide. The oil-driven economic expansion in Russia seems to spill over to other – oil-importing – economies in CIS, thereby offsetting the original drag brought about by the hike in oil prices. Finally, our results corroborate the strong integration of advanced economies with the global economy. By contrast, the responses in emerging Europe are found to be more diverse, and country-specifics seem to play a more important role. JEL classification: C32, F44, E32, O54 |
| Keywords: | Global VAR, transmission of international shocks, Eastern Europe, CESEE, great recession, emerging Europe, global macro model, foreign shock |
| Date: | 2013–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:185&r=opm |
| By: | Herger Nils (Study Center Gerzensee) |
| Abstract: | This paper develops an empirical framework giving rise to a nonlinear behaviour of the exchange rate pass-through (ERPT). Rather than shifts between low and high infl ation, the nonlinearity arises when large swings in the exchange rate trigger market entries and exits of importing firms. Switching regressions are used to distinguish between low and high pass-through regimes of the exchange rate into import prices. For the case of Switzerland, the corresponding results suggest that, though infl ation has been low and stable, the ERPT still doubles in value in times of a rapid appreciation of the Swiss Franc. |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:1308&r=opm |
| By: | Cristina Arellano; Yan Bai |
| Abstract: | We develop a multicountry model in which default in one country triggers default in other countries. Countries are linked to one another by borrowing from and renegotiating with common lenders with concave payoffs. A foreign default increases incentives to default at home because it makes new borrowing more expensive and defaulting less costly. Foreign defaults tighten home bond prices because they lower lenders' payoffs. Foreign defaults make home default less costly by lowering future recoveries, because countries can extract more surplus if they renegotiate simultaneously. In our model, the home country may default only because the foreign country is defaulting. This dependency arises during fundamental foreign defaults, where the foreign country defaults because of high debt and low income, and also during self-fulfilling defaults, where both countries default only because the other is defaulting. The simultaneity in defaults induces a correlation in interest rate spreads across countries. The model can rationalize some of the recent economic events in Europe. |
| JEL: | F3 G01 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19548&r=opm |
| By: | Carolina Achury (Exeter School of Business, University of Exeter); Christos Koulovatianos (CREA, University of Luxembourg); John Tsoukalas (Department of Economics, University of Glasgow) |
| Abstract: | We study how excessive debt-GDP ratios affect political sustainability of prudent fiscal policy in country members of a monetary union. We develop a model with free choice of distinct rent-seeking groups to cooperate (or not) in providing public goods, in seeking rents, and in austere debt issuing through international markets. Noncooperation of rent-seeking groups on fiscal prudence triggers collective fiscal impatience: fiscal debt is issued excessively because each group expropriates extra rents before other groups do so, too. Such collective fiscal impatience leads to a vicious circle of high international interest rates and external-debt default. Our calibration suggests that debt-GDP ratios below 137% foster cooperation among rent-seeking groups, which avoids collective fiscal impatience and default. Our analysis helps in understanding the politicoeconomic sustainability of sovereign rescue packages, emphasizing the need for fiscal targets and for possible debt haircuts. |
| Keywords: | sovereign debt, rent seeking, world interest rates, international lending, incentive compatibility, tragedy of the commons, EU crisis |
| JEL: | H63 F34 F36 E44 E43 D72 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:13-23&r=opm |
| By: | Martin Gächter; Aleksandra Riedl |
| Abstract: | The authors examine whether the introduction of the euro had a significantly positive impact on the synchronization of business cycles among members of Economic and Monetary Union (EMU) which might arise due to the lack of country-specific monetary policy shocks in the euro area. Empirical evidence on this relationship is rare so far and suffers from methodical weaknesses, such as the absence of time variability, which is crucial for addressing this issue. Using a synchronization index that is constructed on a year-by-year basis (1993{2011), the authors uncover a strong and robust empirical finding: the adoption of the euro has significantly increased the correlation of member countries' business cycles above and beyond the effect of higher trade integration. Thus, the authors’ results substantially strengthen the conclusion by Frankel & Rose (1998), i.e. a country is more likely to satisfy the criteria for entry into a currency union ex post rather than ex ante. Remarkably, however, this reasoning is even verifed when controlling for the effect of increased trade linkages implied by entering a currency union. JEL classification: E02, E32, E58, F15, F33 |
| Keywords: | Business cycles, EMU, endogeneity, optimum currency areas |
| Date: | 2013–09–25 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:186&r=opm |
| By: | Dungey, Mardi (School of Economics and Finance, University of Tasmania); Fry-McKibbin, Renée; Linehan, Verity |
| Abstract: | This paper provides empirical evidence on the effects of Chinese resource demand on the resource rich natural resource supplier using the example of Australia. A structural VAR model is used to examine the effects of Chinese resource demand, commodity prices and foreign output on the macroeconomy with a formally specified mining and resources exports sector. The key findings of the paper are that shocks to Chinese demand and commodity prices result in a sustained increase in commodity prices and mining investment and a positive impact on the resources sector. However, these shocks eventually lead to lower real domestic output with factors of production moving out of the non-resources sectors and into the resources sector, resulting in a fall in non-resource sector output which is not fully offset by the rise in resources sector output. The results also indicate some market power by the natural resource supplier. |
| Keywords: | China, resource demand, commodity prices, mining investment, resources sector Speci?cation tests, weak instruments, bootstrap. |
| JEL: | Q30 F41 |
| Date: | 2013–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:tas:wpaper:17027&r=opm |