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on Open Economy Macroeconomics |
| By: | Hilde C. Bjørnland (BI Norwegian Business School and Norges Bank (Central Bank of Norway)); Leif Anders Thorsrud (BI Norwegian Business School) |
| Abstract: | Traditional studies of the Dutch disease do not account for productivity spillovers between the booming resource sector and other domestic sectors. We put forward a simple theory model that allows for such spillovers. We then identify and quantify these spillovers using a Bayesian Dynamic Factor Model (BDFM). The model allows for resource movements and spending effects through a large panel of variables at the sectoral level, while also identifying disturbances to the commodity price, global demand and non-resource activity. Using Australia and Norway as representative cases studies, we find that a booming resource sector has substantial productivity spillovers on non-resource sectors, effects that have not been captured in previous analysis. That withstanding, there is also evidence of two-speed economies, with non-traded industries growing at a faster pace than traded. Furthermore, commodity prices also stimulate the economy, but primarily if an increase is caused by higher global demand. Commodity price growth unrelated to global activity is less favourable, and for Australia, there is evidence of a Dutch disease effect with crowding out of the tradable sectors. As such, our results show the importance of distinguishing between windfall gains due to volume and price changes when analysing the Dutch disease hypothesis. |
| Keywords: | Resource boom, Commodity prices, Dutch disease, Learning by doing, Two-speed economy, Bayesian Dynamic Factor Model (BDFM) |
| JEL: | C32 E32 F41 Q33 |
| Date: | 2014–08–28 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2014_12&r=opm |
| By: | Emmanuel Farhi; Ivan Werning |
| Abstract: | We study cross-country risk sharing as a second-best problem for members of a currency union using an open economy model with nominal rigidities and provide two key results. First, we show that, if financial markets are incomplete, the value of gaining access to any given level of aggregate risk sharing is greater for countries that are members of a currency union. Second, we show that, even if financial markets are complete, privately optimal risk sharing is constrained inefficient. A role emerges for government intervention in risk sharing to both guarantee its existence and to influence its operation. The constrained efficient risk sharing arrangement can be implemented by contingent transfers within a fiscal union. The benefits of such a fiscal union are larger, the bigger the asymmetric shocks affecting the members of the currency union, the more persistent these shocks, and the less open the member economies. |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:qsh:wpaper:198816&r=opm |
| By: | Angelo Marsiglia Fasolo |
| Abstract: | This paper describes the steady state allocations and prices for small open economies under optimal monetary and fiscal policy in a medium-scale DSGE model. The model encompasses the most common nominal and real rigidities normally found in the literature in a single framework. The Ramsey solution for the optimal monetary and fiscal policy is computed for a large space of the parameter set and for different combinations of fiscal policy instruments. Results show that, despite the large number of frictions in the model, optimal fiscal policy follows the usual results in the literature, with high taxes over labor income and low taxes (subsidies) on capital income. On the other hand, the choice of fiscal policy instruments is critical to characterize optimal monetary policy. Frictions associated with the small open economy framework do not play a critical role in characterizing the Ramsey planner's policy choices |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:357&r=opm |
| By: | Y. Kalantzis |
| Abstract: | Episodes of large capital inflows in small open economies are often associated with a shift of resources from the tradable to the non-tradable sector and sometimes lead to balance-of-payments crises. This paper builds a two-sector dynamic model to study the evolution of the sectoral structure and its impact on financial fragility. The model embeds a static mechanism of balance-of-payments crisis which produces multiple equilibria within a single time period when the non-tradable sector is large enough compared to the tradable sector. The paper studies the dynamics induced by an increase in financial openness. It shows that the relative size of the non-tradable sector overshoots, which makes the economy more likely to be financially fragile during the transitory dynamics. Using an extended version of the model, the paper conducts a quantitative analysis and shows that this mechanism accounts well for several episodes of large capital inflows that led to financial crises. |
| Keywords: | two-sector models, capital account liberalization, balance-of-payments crises, foreign currency debt, borrowing constraint, euro area crisis. |
| JEL: | E44 F32 F34 F43 O41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:505&r=opm |
| By: | Agnès Bénassy-Quéré (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique); Dramane Coulibaly (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense) |
| Abstract: | We study the contribution of market regulations in the dynamics of the real exchange rate within the European Union. Based on a model proposed by De Gregorio et al. (1994a), we show that both product market regulations in montradable sectors and employment protection tend to inflate the real exchange rate. We then carry out an econometric estimation for European countries over 1985-2006 to quantify the contributions of the pure Balassa-Samuelson effect and those of market regulations in real exchange-rate variations. Based on this evidence and on a counter-factual experimient, we conclude that the relative evolution of product market regulations and employment protection across countries play a very significant role in real exchange-rate variations within the European Union and especially within the Euro area, through theirs impacts on the relative price of nontradable goods. |
| Keywords: | Real exchange rate; Balassa-Samuelson effect; product market regulations; employment protection |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00786095&r=opm |
| By: | Tantisantiwong, Nongnuch |
| Abstract: | The framework presents how trading in the foreign commodity futures market and the forward exchange market can affect the optimal spot positions of domestic commodity producers and traders. It generalizes the models of Kawai and Zilcha (1986) and Kofman and Viaene (1991) to allow both intermediate and final commodities to be traded in the international and futures markets, and the exporters/importers to face production shock, domestic factor costs and a random price. Applying mean-variance expected utility, we find that a rise in the expected exchange rate can raise both supply and demand for commodities and reduce domestic prices if the exchange rate elasticity of supply is greater than that of demand. Whether higher volatilities of exchange rate and foreign futures price can reduce the optimal spot position of domestic traders depends on the correlation between the exchange rate and the foreign futures price. Even though the forward exchange market is unbiased, and there is no correlation between commodity prices and exchange rates, the exchange rate can still affect domestic trading and prices through offshore hedging and international trade if the traders are interested in their profit in domestic currency. It illustrates how the world prices and foreign futures prices of commodities and their volatility can be transmitted to the domestic market as well as the dynamic relationship between intermediate and final goods prices. The equilibrium prices depends on trader behaviour i.e. who trades or does not trade in the foreign commodity futures and domestic forward currency markets. The empirical result applying a two-stage-least-squares approach to Thai rice and rubber prices supports the theoretical result. |
| Keywords: | commodity markets, offshore hedging, currency hedging, asset pricing, price transmission, |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:edn:sirdps:541&r=opm |
| By: | Enrique Moral-Benito (Banco de España); Oliver Roehn (OECD and CESIFO) |
| Abstract: | Global imbalances and financial market (de)regulation both feature prominently among the potential causes of the global financial crisis, but they have been generally discussed separately. In this paper, we take a different angle and investigate the relationship between financial market regulation and current account balances, an area for which there is limited empirical evidence. We use a panel of countries over the period 1980-2010 and employ a novel empirical approach which allows us to simultaneously account for model uncertainty, current account persistence and unobserved heterogeneity. We find robust evidence that financial market regulations affect current account balances and that different aspects of these regulations can have opposing effects on the current account. In particular we find that lowering bank entry barriers is negatively associated with the current account balance. In contrast, bank privatisation and securities market deregulation tend to raise current account balances. Our results also highlight the need to control for persistence and unobserved heterogeneity. Once we control for these factors, we find robust evidence for a wide range of current account theories in contrast to previous studies. |
| Keywords: | current account, financial markets, financial regulation, Bayesian model averaging, model uncertainty |
| JEL: | C11 F32 F41 G28 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:1424&r=opm |
| By: | Baas, Timo; Belke, Ansgar |
| Abstract: | Member countries of the Economic and Monetary Union (EMU) initiated wide-ranging labour market reforms in the last decade. This process is ongoing as countries that are faced with serious labour market imbalances perceive reforms as the fastest way to restore competitiveness within a currency union. This fosters fears among observers about a beggar-thy-neighbour policy that leaves non-reforming countries with a loss in competitiveness and an increase in foreign debt. Using a two-country, two-sector search and matching DSGE model, we analyse the impact of labour market reforms on the transmission of macroeconomic shocks in both non-reforming and reforming countries. By analysing the impact of reforms on foreign debt, we contribute to the debate on whether labour market reforms increase or reduce current account imbalances. |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:9621&r=opm |
| By: | Jong-Wha Lee (Asian Development Bank Institute (ADBI)); Warwick J. McKibbin |
| Abstract: | This paper explores the impacts of more rapid growth in labor productivity in the service sector in Asia based on an empirical general equilibrium model. The model allows for input–output linkages and capital movements across industries and economies, and consumption and investment dynamics. We find that faster productivity growth in the service sector in Asia benefits all sectors eventually, and contributes to the sustained and balanced growth of Asian economies, but the dynamic adjustment is different across economies. This adjustment depends on the sectoral composition of each economy, the capital intensity of each sector, and the openness of each sector to international trade. In particular, during the adjustment to higher services productivity growth, there is a significant expansion of the durable manufacturing sector that is required to provide the capital stock that accompanies the higher aggregate economic growth rate. |
| Keywords: | the service sector, Labour Productivity, general equilibrium model, balanced growth |
| JEL: | J21 O11 O14 O41 O53 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:24361&r=opm |