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on Open Economy Macroeconomics |
| By: | Carl Grekou |
| Abstract: | In this paper, we address the issue of devaluations' effectiveness by investigating to what extent a nominal devaluation leads to a real depreciation. Beyond the traditional factors identified by the literature, we pay particular attention to the size of the nominal devaluation and to the initial misalignment of the real exchange rate. Using a sample of 57 devaluation episodes (in 40 developing and emerging countries) and relying on panel data techniques, we evidence that the existence of a sizeable overvaluation of the real exchange rate is a prerequisite to ensure that nominal devaluations will have an expected effect in terms of real depreciations. Furthermore, our results put forward a potential nonlinear relationship between the size of the devaluation and the effectiveness of the nominal adjustment: devaluations operate more efficiently when the magnitude of the nominal adjustment is lower. |
| Keywords: | Bayesian model averaging; Currency devaluations; Macroeconomic policies; Real exchange rates’ misalignments. |
| JEL: | C1 E6 F3 F41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2014-61&r=opm |
| By: | Kollmann, Robert (ECARES, Universite Libre de Bruxelles) |
| Abstract: | Standard macro models cannot explain why real exchange rates are volatile and disconnected from macro aggregates. Recent research argues that models with persistent growth rate shocks and recursive preferences can solve that puzzle. I show that this result is highly sensitive to the structure of financial markets. When just a bond is traded internationally, then long-run risk generates insufficient exchange rate volatility. A long-run risk model with recursive-preferences can generate realistic exchange rate volatility, if all agents efficiently share their consumption risk by trading in complete financial markets; however, this entails massive international wealth transfers, and excessive swings in net foreign asset positions. By contrast, a long-run risk, recursive-preferences model in which only a fraction of households trades in complete markets, while the remaining households lead hand-to-mouth lives, can generate realistic exchange rate and external balance volatility. |
| JEL: | F31 F36 F41 F43 F44 |
| Date: | 2014–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:212&r=opm |
| By: | Paul, Saumik; Ouyang, Alice; Li, Rachel Cho Suet |
| Abstract: | In this paper we build a theoretical model on the wage effect of skilled emigration to the fluctuations in real exchange rate through the relative prices of nontradables. Our theoretical model predicts that skilled emigration is associated with an increase in the prices of nontradable, which in turn appreciates the exchange rate. We provide robust empirical support to a higher skilled emigration associated with higher prices in nontradables and appreciation of the real effective exchange rate. Based on two samples of countries with 51 and 67 observations, in 1990 and 2000 respectively, we find robust empirical support to a higher skilled emigration associated with higher prices in nontradables and appreciation of the REER. In addition, the support for the remittance-channel of the Dutch disease is also significant; overall, our findings corroborate the remittance-based Dutch disease phenomenon by providing an additional channel through which the labor mobility across borders affects the real exchange rate volatility. |
| Keywords: | Migrant labor, Wages, Emigrant remittances, Foreign exchange, International finance, Migration, Emigration, Exchange Rate, The Dutch Disease |
| JEL: | F22 F3 J3 F24 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper484&r=opm |
| By: | Reiff, Adam; Rumler, Fabio |
| Abstract: | Using a comprehensive data set on retail prices across the euro area, we analyse within- and cross-country price dispersion in European countries. First, we study price dispersion over time, by investigating the time-series evolution of the coefficient of variation, calculated from price levels. Second, since we find that cross-sectional price dispersion by far dominates price dispersion over time, we study price dispersion across space and investigate the role of geographical barriers (distance and national borders). We find that (i) prices move together more closely in locations that are closer to each other; (ii) cross-country price dispersion is by an order of magnitude larger than within-country price dispersion, even after controlling for product heterogeneity; (iii) a large part of cross- country price differences can be explained by different tax rates, income levels and consumption intensities. In addition, we find some indication that price dispersion in the euro area has declined since the inception of the Monetary Union. JEL Classification: E31, F41 |
| Keywords: | border effect, international relative prices, price dispersion |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20141742&r=opm |
| By: | Markus K. Brunnermeier; Yuliy Sannikov |
| Abstract: | This paper develops a dynamic two-country neoclassical stochastic growth model with incomplete markets. Short-term credit flows can be excessive and reverse suddenly. The equilibrium outcome is constrained inefficient due to pecuniary externalities. First, an undercapitalized country borrows too much since each firm does not internalize that an increase in production capacity undermines their output price, worsening their terms of trade. From an ex-ante perspective each firm undermines the natural “terms of trade hedge.” Second, sudden stops and fire sales lead to sharp price drops of illiquid capital. Capital controls or domestic macro-prudential measures that limit short-term borrowing can improve welfare. |
| JEL: | F32 F43 G15 O41 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20803&r=opm |
| By: | Javier Guillermo Gómez-Pineda; Juan Manuel Julio-Román |
| Abstract: | We embed a small open economy model for Colombia into the global risk model of Gómez-Pineda, Guillaume, and Tanyeri (2014). The small open economy model is estimated by Bayesian methods and used for analysis and projections. The model enable us to give a consistent treatment of shocks to global risk, country risk, and oil and commodity prices. This treatment is consistent because these shocks affect the global economy as a whole, as dictated by a structural global model, in contrast with other treatments that deal with “rest of the world" shocks as univariate auto regressive processes. The a-priori parameter distributions were found by calibrating for impulse response functions, the evolution of latent variables, equation fit, error decompositions, and model forecast performance. Among other results, we found that the identified episodes of retrenchment and buoyancy in global risk were transmitted to Colombia's country risk premium and that global risk shocks are important drivers of Colombia's output and unemployment gaps. Furthermore, aggregate demand-related shocks are not important as drivers of non-core inflation in Colombia, in contrast with the findings for other countries. |
| Keywords: | Global risk, Financial linkages, Commodity prices |
| JEL: | F32 F37 F41 F31 F47 E58 |
| Date: | 2014–12–30 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:012386&r=opm |
| By: | Atsushi Sekine (Graduate School of Economics, Kyoto University); Takayuki Tsuruga (Graduate School of Economics, Kyoto University) |
| Abstract: | Since 2000s, large fluctuations in non-energy commodity prices have become a concern among policymakers about price stability. Using local projections, this paper investigates the effects of commodity price shocks on inflation. We estimate impulse responses of the consumer price indexes (CPIs) to commodity price shocks from a monthly panel consisting of 120 countries. Our analyses show that the effects of commodity price shocks on inflation are transitory. While the effect on the level of consumer prices varies across countries, the transitory effects on in- flation are fairly robust, suggesting that policymakers may not need to pay special attention to the recent fluctuation in non-energy commodity prices. Employing the smooth transition autoregessive models that use the past inflation rate as the transition variable, we also explore the possibility that the effect of commodity price shocks is influenced by the inflation regimes. In this specification, commodity prices may not have transitory effects when a country is less developed and its currency is pegged to the U.S. dollar. However, the effect remains transitory in developed countries with exchange rate flexibility. |
| Keywords: | Commodity prices, inflation, pass-through, local projections, smooth transition autoregressive models |
| JEL: | E31 E37 Q43 |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utppwp:038&r=opm |
| By: | Borio, Claudio (Bank of International Settlements); James, Harold (Princeton University); Shin, Hyun Song (Bank of International Settlements) |
| Abstract: | In analysing the performance of the international monetary and financial system (IMFS), too much attention has been paid to the current account and far too little to the capital account. This is true of both formal analytical models and historical narratives. This approach may be reasonable when financial markets are highly segmented. But it is badly inadequate when they are closely integrated, as they have been most of the time since at least the second half of the 19th century. Zeroing on the capital account shifts the focus from the goods markets to asset markets and balance sheets. Seen through this lens, the IMFS looks quite different. Its main weakness is its propensity to amplify financial surges and collapses that generate costly financial crises – its “excess financial elasticity”. And assessing the vulnerabilities it hides requires going beyond the residence/non-resident distinction that underpins the balance of payments to look at the consolidated balance sheets of the decision units that straddle national borders, be these banks or non-financial companies. We illustrate these points by revisiting two defining historical phases in which financial meltdowns figured prominently, the interwar years and the more recent Great Financial Crisis. |
| JEL: | E40 E43 E44 E50 E52 F30 F40 |
| Date: | 2014–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:204&r=opm |
| By: | Marcel Fratzscher (DIW Berlin and Humboldt University); Dagfinn Rime (BI Norwegian Business School); Lucio Sarno (Cass Business School); Gabriele Zinna (Bank of Italy) |
| Abstract: | The scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2013) suggests that market participants may attach excessive weight to individual economic fundamentals, which are picked as scapegoats to rationalize observed currency fluctuations at times when exchange rates are driven by unobservable shocks. Using novel survey data that directly measure foreign exchange scapegoats for 12 exchange rates, we find empirical evidence that supports the scapegoat theory. The resulting models explain a large fraction of the variation and directional changes in exchange rates in sample, although their out-of-sample forecasting performance is mixed. |
| Keywords: | scapegoat; exchange rates; economic fundamentals; survey data. |
| JEL: | F31 G10 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_991_14&r=opm |
| By: | Luis Eduardo Arango; Ximena Chavarro; Eliana González |
| Abstract: | A small open macroeconomic model, in which an optimal interest rate rule emerges to drive the inflation behavior, is used to model inflation within an inflation targeting framework. This set up is used to estimate the relationship between commodity prices shocks and the inflation process in a country that both export and import commodities. We found evidence of a positive, yet small, impact from food international price shocks to inflation. However, these effects are no longer observable once the sample is split in the periods before and after the boom. The lack of effect from oil and energy price shocks we obtain supports the recent findings in the literature of a substantial decrease in the pass-through from oil prices to headline inflation. Thus, our interpretation is that monetary authority has faced rightly the shocks to commodity prices. Inflation expectations are the main determinant of inflation during the inflation targeting regime. Commodity prices movements are to a great extent included in the information set to form expectations. Classification JEL: E43, E58. |
| Date: | 2014–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:858&r=opm |
| By: | Yung, Julieta (Federal Reserve Bank of Dallas) |
| Abstract: | This paper explores whether interest rate factors, derived from the yield curve, can explain exchange rate fluctuations at different horizons. Using a dynamic term structure model under no-arbitrage, exchange rates are modeled as the ratio of two countries’ stochastic discount factors. Key to this framework is that factors are observable, which allows the model to be estimated by Maximum Likelihood. Results show that interest rate factors can explain half of the variation in one-year exchange rates and up to ninety percent of five-year movements, for free-floating currencies from 1999 to 2014. These findings suggest that yield curves contain important information for modeling exchange rate dynamics, particularly at longer horizons. |
| JEL: | E43 F31 G15 |
| Date: | 2014–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:207&r=opm |