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on Open Economy Macroeconomics |
| By: | Horioka, Charles Yuji; Ford, Nicholas |
| Abstract: | Meese and Rogoff (1983) and subsequent studies find that economic fundamentals are apparently not able to explain exchange rate movements, but we argue that this so†called “Exchange Rate Disconnect Puzzle†arose because researchers such as Meese and Rogoff (1983) did not use the right fundamentals and because they did not allow for the forward†looking nature of exchange rate determination. Further, because they apparently were not aware that financial markets by themselves could not equalise interest rates across countries, they did not properly appreciate that the exchange rate is strongly influenced by agents’ expectations of aggregated differences in local returns. Thus, we believe that the same underlying explanation provided by Ford (2015) and Ford and Horioka (2016a and 2016b) for the Feldstein†Horioka (1980) Puzzle and the PPP Puzzle††namely that financial markets alone cannot achieve net transfers of financial capital and cannot equalise real interest rates across countries††also helps explain why previous attempts to connect changes in the exchange rate to economic fundamentals have not been successful, and so can also be said to contribute to solving the Exchange Rate Disconnect Puzzle. |
| Keywords: | Exchange Rate Disconnect Puzzle, exchange rate determination, exchange rate volatility, Feldstein†Horioka puzzle or paradox, financial market integration, goods market integration, international capital flows, international capital mobility, net transfers of capital, PPP puzzle, purchasing power parity puzzle, real interest rate equalisation, real interest rate parity, Exchange Rate Disconnect Puzzle, exchange rate determination, exchange rate volatility, Feldstein†Horioka puzzle or paradox, financial market integration, goods market integration, international capital flows, international capital mobility, net transfers of capital, PPP puzzle, purchasing power parity puzzle, real interest rate equalisation, real interest rate parity, F21, F31, F32, F36, G15 |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:agi:wpaper:00000112&r=opm |
| By: | Yin-Wong Cheung; Menzie Chinn; Xin Nong |
| Abstract: | We investigate the strength of the Penn effect in the most recent version of the Penn World Tables (PWTs). We find that the earlier findings of a Penn effect are confirmed, but that there is some evidence for nonlinearity. Developed and developing countries display different types of nonlinear behaviors. The nonlinear behaviors are likely attributable to differences across countries and do not change when additional control variables are added. We confirm earlier findings of large RMB misalignment in the mid-2000’s, but find that by 2011, the RMB seems near equilibrium. While the Penn effect is quite robust across datasets, estimated misalignment can noticeably change from a linear to a nonlinear specification, and from dataset to dataset. |
| JEL: | F3 F4 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:22539&r=opm |
| By: | Horioka, Charles Yuji |
| Abstract: | This paper shows that global capital markets cannot, by themselves, achieve net transfersof financial capital between countries and that both the integration of global financialmarkets as well as the integration of global goods markets are needed to achieve nettransfers of capital between countries. Frictions (barriers to mobility) in one or both ofthese markets can impede net transfers of capital between countries, produce the Feldsteinand Horioka (1980) results, and prevent real interest rates from being equalized acrosscountries. Moreover, there is empirical evidence that barriers to the mobility of goodsand services are an important obstacle to international capital mobility. |
| Keywords: | Barriers to capital mobility, Feldstein-Horioka paradox, Feldstein-Horioka puzzle, financial market integration, goods market integration, international capital flows, international capital mobility, net transfers of capital, real interest rate equalization, real interest rate parity, saving-investment correlations, trade frictions, Barriers to capital mobility, Feldstein-Horioka paradox, Feldstein-Horioka puzzle, financial market integration, goods market integration, international capital flows, international capital mobility, net transfers of capital, real interest rate equalization, real interest rate parity, saving-investment correlations, trade frictions, F21, F32, F36, G15 |
| Date: | 2016–03 |
| URL: | http://d.repec.org/n?u=RePEc:agi:wpaper:00000104&r=opm |
| By: | Horioka, Charles Yuji |
| Abstract: | This article shows that global financial markets cannot, by themselves, achieve net transfers of financial capital and real interest rate equalisation across countries and that the integration of both global financial markets and global goods markets is needed to achieve net transfers of capital and real interest rate equalisation across countries. Thus, frictions (barriers to mobility) in one or both of these markets can impede the net transfer of capital between countries, produce the Feldstein and Horioka (1980) finding of high saving-investment correlations, and prevent real interest rates from being equalised across countries. Moreover, frictions in globalgoods markets can explain why real exchange rates deviate from PPP (purchasing power parity) for extended periods of time and can therefore also explain the PPP puzzle. Thus, we are able to resolve 2 of Obstfeld and Rogoff’s (2000) “6 major puzzles in macroeconomics†with essentially the same explanation. |
| Keywords: | Exchange rate volatility, Feldstein-Horioka paradox or puzzle, financial market integration, goods market integration, international capital flows, international capital mobility, net transfers of capital, PPP puzzle, purchasing power parity puzzle, real interest rate equalisation, real interest rate parity, saving-investment correlations, Exchange rate volatility, Feldstein-Horioka paradox or puzzle, financial market integration, goods market integration, international capital flows, international capital mobility, net transfers of capital, PPP puzzle, purchasing power parity puzzle, real interest rate equalisation, real interest rate parity, saving-investment correlations, E40, F21, F31, F32, F36, G15 |
| Date: | 2016–04 |
| URL: | http://d.repec.org/n?u=RePEc:agi:wpaper:00000105&r=opm |
| By: | Kan Chen; Mario Crucini |
| Abstract: | This approach is characterized by two key assumptions. The first is that the world interest rate is unaffected by economic developments in the small open economy, an exogeneity assumption. The second assumption is that this exogenous interest rate combined with domestic productivity is sufficient to describe equilibrium choices |
| Keywords: | Economic Analysis , Global , USA , Working Paper |
| JEL: | C55 C68 F41 F44 |
| Date: | 2016–08 |
| URL: | http://d.repec.org/n?u=RePEc:bbv:wpaper:1612&r=opm |
| By: | Rick van der Ploeg |
| Abstract: | Policy prescriptions for managing natural resource windfalls are based on the permanent income hypothesis: none of the windfall is invested at home and saving in an intergenerational SWF is dictated by smoothing consumption across different generations. Furthermore, with Dutch disease effects the optimal response is to intertemporally smooth the real exchange rate, smooth public and private consumption, and limit sharp fluctuations in the intersectoral allocation of production factors. We show that these prescriptions need to be modified for the following reasons. First, to cope with volatile commodity prices precautionary buffers should be put in a stabilisation fund. Second, with imperfect access to capital markets the windfall must be used to curb capital scarcity, invest domestically and bring consumption forward. Third, with real wage rigidity consumption must also be brought forward to mitigate transient unemployment. Fourth, the real exchange rate has to temporarily appreciate to signal the need to invest in the domestic economy to gradually improve the ability to absorb the extra spending from the windfall. Fifth, with finite lives the timing of handing back the windfall to the private sector matters and consumption and the real exchange rate will be volatile. Finally, with nominal wage rigidity we show that a Taylor rule is a better short-run response to a crash in commodity prices than a nominal exchange rate peg. |
| Keywords: | Dutch disease, permanent income, volatility, capital scarcity, domestic investment, absorption constraints, overlapping generations, nominal wage rigidity |
| JEL: | E60 F34 F35 F43 H21 H63 O11 Q33 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:oxcrwp:178&r=opm |
| By: | Gregory Bauer; Gurnain Pasricha; Rodrigo Sekkel; Yaz Terajima |
| Abstract: | This paper analyzes the implications of the global financial cycle for conventional and unconventional monetary policies and macroprudential policy in small, open economies such as Canada. The paper starts by summarizing recent work on financial cycles and their growing correlation across borders. The resulting global financial cycle may be followed by a financial crisis that is quite costly. The cycle causes time variation in global risk premia in fixed income, equity and foreign exchange markets. In turn, time-varying global risk premia affect the transmission mechanisms of both conventional and unconventional monetary policies in small, open economies. While there are large costs associated with financial crises, the paper summarizes new work showing that the central banks’ leaning against the effects of the global financial cycle would typically be too costly. The paper concludes with some suggestions for the formation of macroprudential policies that are designed to offset the financial imbalances that grow during the boom phase of the cycle. |
| Keywords: | International financial markets; Financial stability; Housing; Monetary policy framework |
| JEL: | E42 E43 E44 E52 F41 |
| Date: | 2016 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:16-38&r=opm |
| By: | Pierre Perron (Boston University); Tatsuma Wada (Keio University) |
| Abstract: | This paper first generalizes the trend-cycle decomposition framework of Perron and Wada (2009) based on unobserved components models with innovations having a mixture of normals distribution, which is able to handle sudden level and slope changes to the trend function as well as outliers. We investigate how important are the differences in the implied trend and cycle compared to the popular decomposition based on the Hodrick and Prescott (HP) (1997) filter. Our results show important qualitative and quantitative differences in the implied cycles for both real GDP and consumption series for the G7 countries. Most of the differences can be ascribed to the fact that the HP filter does not handle well slope changes, level shifts and outliers, while our method does so. Then, we reassess how such different cycles affect some socalled “stylized facts†about the relative variability of consumption and output across countries. |
| Keywords: | Trend-Cycle Decomposition, Unobserved Components Model, International Business Cycle, Non Gaussian Filter |
| JEL: | C22 E32 |
| Date: | 2015–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2015-016&r=opm |
| By: | Lommatzsch, Kirsten; Silgoner, Maria; Ramskogler, Paul |
| Abstract: | It has been argued that the increasing importance of global value chains necessitates a modification of conventional competitiveness measures. We compile a broad dataset including value added trade, gross exports and conventional and value added based real exchange rates. To sharply focus on external competitiveness, a new price competitiveness indicator is introduced, the TWULC (Trade Weighted Unit Labour Cost indicator). It weights sector-specific cost trends according to sector shares in exports. Econometric tests for a panel of 38 countries show that the focus on value added trade generally improves the explanatory power of export equations. Value added exports’ sensitivity towards real exchange rates is up to four times higher than that of gross exports. Real effective ex-change rates focusing on exporting industries and on value added weights yield more robust results across the specifications, but do not systematically outperform the more conventional measures of price of cost competitiveness. JEL Classification: F14, J30 |
| Keywords: | competitiveness, external trade, labour costs |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161936&r=opm |
| By: | Stefania Garetto (Boston University) |
| Abstract: | A large body of empirical work documents that prices of traded goods change by a smaller proportion than real exchange rates between the trading countries (incomplete pass-through). I present a Ricardian model of trade and international price-setting with heterogeneous firms, Bertrand competition and incomplete information. The model implies that: 1) firm-level pass- through is incomplete and a U-shaped function of firm-level productivity and market share; and 2) controlling for firm market share, producers operating under incomplete information, like for example new entrants in a market, exhibit lower pass-through rates than producers operating under complete information. Estimates from a panel data set of cars prices support the predictions of the model. |
| Keywords: | Heterogeneous firms, incomplete information, incomplete pass-through |
| JEL: | F12 F31 L13 D44 |
| Date: | 2016–04–18 |
| URL: | http://d.repec.org/n?u=RePEc:bos:wpaper:wp2016-004&r=opm |
| By: | Staehr, Karsten; Vermeulen, Robert |
| Abstract: | This paper considers the short-term effects of competitiveness shocks on macroeconomic performance in the euro area. Vector autoregressive models are estimated on quarterly data from 1995 to 2013 for individual countries and the whole euro area. The results show that competitiveness shocks help to explain subsequent GDP developments in most countries but have little explanatory power for the current account balance and domestic credit. These results apply for all of the competitiveness measures considered, but a non-traditional competitiveness measure accounting for quality differences fares better in some cases. The effects of the competitiveness measures vary substantially across the countries in the euro area, which likely reflects their different economic structures and institutions. This heterogeneity suggests that policy measures seeking to improve competitiveness may have very different effects on economic performance and financial stability in different countries. JEL Classification: E32, E61, F32 |
| Keywords: | competitiveness, euro area, macroeconomic variables, transmission |
| Date: | 2016–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20161940&r=opm |