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on Open Economy Macroeconomics |
| By: | Pau Rabanal; Juan F. Rubio-Ramirez |
| Abstract: | Real exchange rates exhibit important low-frequency fluctuations. This makes the analysis of real exchange rates at all frequencies a more sound exercise than the typical business cycle one, which compares actual and simulated data after the Hodrick-Prescott …lter is applied to both. A simple two-country, two-good, international real business cycle model can explain the volatility of the real exchange rate when all frequencies are studied. The puzzle is that the model generates too much persistence of the real exchange rate instead of too little, as the business cycle analysis asserts. We show that the introduction of input adjustment costs in production, cointegrated productivity shocks across countries, and lower home bias allows us to reconcile theory and this feature of the data. |
| Keywords: | Economic Analysis, Global, Research, Working Paper |
| JEL: | E32 F32 F33 F41 |
| Date: | 2015–01 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1508&r=opm |
| By: | Franz Hamann; Jesús Bejarano; Diego Rodríguez |
| Abstract: | The sudden collapse of oil prices poses a challenge to inflation targeting central banks in oil exporting economies. This paper illustrates that challenge and conducts a quantitative assessment of the impact of permanent changes in oil prices in a small and open economy, in which oil represents an important fraction of its exports. We calibrate and estimate a variety of real and monetary dynamic stochastic general equilibrium models using Colombian historical data. We find that, in these artificial economies the macroeconomic effects can be large but vary depending on the structure of the economy. The main channels through which the shock passes to the economy come from the increased country risk premium, the real exchange rate depreciation, the sectoral reallocation of resources from nontradables to tradables and the sluggish adjustment of prices. Contrary to the conventional findings in the literature of the financial accelerator mechanism for single-good closed economies, in multiple-goods small open economies the financial accelerator does not play a significant role in magnifying macroeconomic fluctuations. The sectoral reallocation from nontradable to tradables diminishes the financial amplification mechanism. |
| Keywords: | oil prices, precautionary savings, monetary policy, credit, leverage, financial accelerator, Colombia |
| JEL: | C61 E31 E37 E52 F41 |
| Date: | 2015–03–06 |
| URL: | http://d.repec.org/n?u=RePEc:col:000094:012615&r=opm |
| By: | Fornaro, Luca |
| Abstract: | This paper provides a framework to understand debt deleveraging in a group of financially integrated countries. During an episode of international deleveraging, world consumption demand is depressed and the world interest rate is low, reflecting a high propensity to save. If exchange rates are allowed to float, deleveraging countries can rely on depreciations to increase production and mitigate the fall in consumption associated with debt reduction. The key insight of the paper is that in a monetary union this channel of adjustment is shut off, because deleveraging countries cannot depreciate against the other countries in the monetary union, and therefore the fall in the demand for consumption and the downward pressure on the interest rate are amplified. Hence, deleveraging can easily push a monetary union against the zero lower bound and into a recession. |
| Keywords: | Debt Deflation; Global Debt Deleveraging; Liquidity Trap; Monetary Union; Precautionary Savings; Sudden Stops |
| JEL: | E31 E44 E52 F32 F34 F41 G01 G15 |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:10469&r=opm |
| By: | Taya Dumrongrittikul; Heather M. Anderson |
| Abstract: | This paper examines real exchange rate responses to shocks in exchange rate determinants for fourteen Asian developing countries. The analysis is based on a panel structural vector error correction model, and the shocks are identified using sign and zero restrictions. We find that trade liberalization generates permanent depreciation, and higher government consumption causes persistent appreciation. Traded-sector productivity gains induce appreciation but their effects are not immediate and last only for a few years. Real exchange rate responses to unexpected monetary tightening are consistent with the long-run neutrality of money. The evidence suggests that trade liberalization and government consumption have a strong effect on real exchange rates, while the effects of traded-sector productivity shocks are much weaker. |
| Keywords: | Exchange rate fundamentals, Government consumption, Monetary policy, Panel vector error correction model, Productivity improvement in the traded sector, Real exchange rates, Sign and zero restrictions, Trade liberalization. |
| JEL: | C33 C51 E52 F31 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:msh:ebswps:2015-4&r=opm |
| By: | Janice Boucher Breuer; Vikram Kumar; Shyam Gouri Suresh |
| Abstract: | We adapt the Casselian version of purchasing power parity to a two-period framework. In this framework, we show that inter-temporal trade plays a role and can drive a wedge betweenthe nominal exchange rate and relative prices. The size of trade flows, the real interest rate, and the constraint on trade balance over two periods establish the conditions under which Casselian and inter-temporal purchasing power parity hold. We test our model using consumer price indices and bilateral trade flows between the United States and the United Kingdom. We find evidence favorable to inter-temporal purchasing power parity. |
| Keywords: | Purchasing power parity, Real exchange rate, Inter-temporal trade |
| JEL: | F31 |
| URL: | http://d.repec.org/n?u=RePEc:dav:wpaper:14-10&r=opm |
| By: | Dennis Appleyard; Shyam Gouri Suresh |
| Abstract: | This paper examines possible determinants of the long-run bilateral commodity terms of trade between the United Kingdom and British India during the Crown Rule period of 1858-1947. The potential influences of aggregate real incomes, price levels/money supplies, international transportation costs, and the exchange rate are included in the analysis, but we especially focus on the Home Charges that India was obliged to pay to Britain. The econometric results provide some support for the hypothesis that a rise in Home Charges was associated with an improvement in Britain’s terms of trade with India. In addition, a clear role was played by changes in transport costs and in the exchange rate. |
| JEL: | F14 F54 N73 N74 N75 |
| URL: | http://d.repec.org/n?u=RePEc:dav:wpaper:14-12&r=opm |
| By: | IWAISAKO Tokuo; NAKATA Hayato |
| Abstract: | By using the framework of a structural vector autoregression (VAR) model, in this paper, we provide a quantitative assessment of the relative importance of exogenous shocks to Japanese output, as measured by aggregate sales, industry sales, and the sales of different firm-size groups. We analyze four structural shocks: (i) oil supply shock; (ii) oil price fluctuations not related to supply and demand; (iii) world economic activity (an aggregate demand shock); and (iv) exchange rate fluctuations not related to other structural shocks. We find that exogenous variation in oil production has little effect, whereas global economic conditions have a clear positive effect on output. The impact of the exchange rate depends on industry and firm size. Although appreciation of the yen has a negative impact on the Japanese economy as a whole, it has a clear positive effect on small and medium-sized enterprises in the nonmanufacturing sector. Our results suggest that recognizing the difference between fluctuations in the exchange rate and an exchange rate "shock" is important for macroeconomic policy management. In particular, much of the yen's appreciation following the Lehman Brothers collapse can be explained by the sudden slowdown in global real economic activity and the sharp decline in crude oil prices. Ignoring these factors greatly exaggerates the negative impact of the yen's appreciation on the Japanese economy. |
| Date: | 2015–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:15028&r=opm |
| By: | Juliana Araujo; Povilas Lastauskas; Chris Papageorgiou |
| Abstract: | The capital flows network has changed substantially, bringing new investors and target economies into play. Related, a recent intensification of capital flows to low income countries (LICs) has posed a number of questions. Most importantly, the very nature of those flows and important factors affecting foreign investors decision which can ultimately affect growth prospects of low income countries (together with an issue of sustainability) remain open for an academic probe. Due to an existence of a share of costs which is fixed in nature, there is a need to analyze capital flows and their evolution at two margins: intensive and extensive. This paper presents a parsimonious theoretical account that is consequently mapped into an econometric framework where we allow for two-tier decisions and cross-sectional dependence. Results indicate that market entry costs affect investment decisions pertinent to the LICs, consistently with the static theory. However, persistence in extensive margin eliminates this effect once dynamics is allowed for. |
| Keywords: | Bilateral Capital Flows, Foreign Direct Investment, Portfolio Flows, Developing Economies, Extensive and Intensive Margins, Heterogeneous Panels, Cross-Sectional Dependence, Copulae. |
| JEL: | C33 C34 F21 O16 |
| Date: | 2015–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1502&r=opm |
| By: | Katarina Juselius; Katrin Assenmacher-Wesche |
| Abstract: | Asset prices tend to undergo wide swings around long-run equilibrium values, which can have detrimental effects on the real economy. To get a better understanding of how the financial sector and the real economy interact, this paper models the long swings in the Swiss franc-US dollar foreign currency market using the I(2) Cointegrated VAR model. The results show strong evidence of self-reinforcing feedback mechanisms in the Swiss-US foreign exchange market that are consistent with the observed pronounced persistence in Swiss-US parity conditions. Generally, the results provide support for models allowing expectations formation in financial markets to be based on imperfect information. |
| Keywords: | Long swings, Imperfect Knowledge, I(2) analysis, Self-reinforcing feed-back |
| JEL: | C32 C51 F31 |
| Date: | 2015 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2015-03&r=opm |