nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2008‒04‒04
six papers chosen by
Martin Berka
Massey University

  1. The effect of trade openness on optimal government size under endogenous firm entry By Sandra Hanslin
  2. Demographic Change, Relative Factor Prices, International Capital Flows, and their Differential Effects on the Welfare of Generations By Ludwig, Alexander; Krüger, Dirk; Börsch-Supan, Axel
  3. Anticipated and unanticipated oil price shocks and optimal monetary policy By Wohltmann, Hans-Werner; Winkler, Roland
  4. Financial markets and the current account – emerging Europe versus emerging Asia By Herrmann, Sabine; Winkler, Adalbert
  5. The Currency Denomination of Trade and Price Discrimination: The Euro after European Union Expansion By Mark David Witte;
  6. The Effect of the Exchange Rates on Investment in Mexican Manufacturing Industry By Caglayan, Mustafa; Muñoz Torres, Rebeca I.

  1. By: Sandra Hanslin (Socioeconomic Institute, University of Zurich)
    Abstract: This paper analyzes the effect of trade liberalization on government spending in a general equilibrium model with a continuum of industries supplying tradable and nontradable goods under monopolistic competition. Trade liberalization is modeled as the opening up of product markets between two countries, which may differ in total factor productivity, factor endowment and fix cost technology. In this setup, I show that the optimal provision of a public consumption good depends positively on the degree of openness. Moreover, the richer and more productive country chooses a lower optimal government share.
    Keywords: international trade, monopolistic competition, trade openness, public expenditure
    JEL: F12 H40 F15
    Date: 2008–03
  2. By: Ludwig, Alexander (Mannheim Research Institute for the Economics of Aging (MEA) and Sonderforschungsbereich 504); Krüger, Dirk (University of Pennsylvania); Börsch-Supan, Axel (Sonderforschungsbereich 504)
    Abstract: Demographic change has differential impacts on the welfare of current and future generations. In a simple closed economy, aging -- a relative scarcity of young workers -- increases wages, increasing the welfare of the young. At the same time, population aging will reduce rates of return to capital, thereby reducing the welfare of asset holders who are usually older than the population average. In a global world with pension systems, however, these effects are less straightforward, since international capital flows dampen the factor price changes. Moreover, pay-as-you-go pension systems financed by payroll taxes create a wedge between net and gross wages, and their intergenerational redistribution has important additional effects on the welfare of generations. To quantify these effects, we develop a large-scale multi-country overlapping generations model with uninsurable labor productivity and mortality risk. Due to the predicted relative abundance of the factor capital, the rate of return falls between 2005 and 2050 by roughly 90 basis points. Our simulations indicate that capital flows from rapidly ageing regions to the rest of the world will initially be substantial, but that trends are reversed when households de-cumulate savings. In terms of welfare, our model suggests that young individuals with little assets and currently low labor productivity indeed gain from higher wages associated with population aging. Older, asset-rich households tend to loose because of the predicted decline in real returns to capital.
    Date: 2007–06–12
  3. By: Wohltmann, Hans-Werner; Winkler, Roland
    Abstract: This paper studies the welfare effects of severalmonetary policy rules in the presence of anticipated and unanticipated oil price shocks. Our analysis is based on a stylized New Keynesian model of a small open economy. Our main findings are the following: i) Standard interest rate rules amplify the welfare loss compared to neutral monetary policies. ii) The optimal policy under commitment, by contrast, dampens the welfare loss. iii) Optimized simple rules can replicate the outcome under the optimal unrestricted rule if they are history-dependent, contain the exchange rate and, in the anticipated case, forward-looking elements. iv) Anticipated oil shocks lead to a higher welfare loss than unanticipated shocks.
    Keywords: Anticipated Shocks, Oil Price Shocks, Open Economy, Optimal Monetary Policy, Simple Policy Rules
    JEL: E32 E52 F41
    Date: 2008
  4. By: Herrmann, Sabine; Winkler, Adalbert
    Abstract: Financial globalisation has been associated with divergent current account patterns in emerging market economies. While countries in emerging Asia have been running sizeable current account surpluses, countries in emerging Europe have been facing large current account deficits. In this paper we test for the relevance of financial market characteristics in explaining divergent current account patterns in emerging Europe and emerging Asia based on the assumption that both regions constitute two different convergence clubs with the euro area and the US representing the core, respectively. In line with the theoretical literature, we find that better developed and more integrated financial markets increase emerging markets´ ability to borrow abroad. The degree of financial integration within the convergence clubs as well as the extent of reserve accumulation are found to be the most significant factors to explain divergent current account patterns in emerging Europe and emerging Asia. We conclude that the overall character of integration matters for the pattern of current account developments in catching-up economies.
    Keywords: real convergence, economic integration, saving and investment, current account developments, financial markets, emerging market economies
    JEL: F15 F21 O16 O52 O53
    Date: 2008
  5. By: Mark David Witte (Department of Economics and Finance, College of Charleston);
    Abstract: If a country’s imports are invoiced in a foreign currency then the import prices paid by consumers, and the importing country’s inflation rate, are vulnerable to exchange rate movements. Using a unique multiple market model I exam a representative firm’s currency denomination decision when selling to different countries. The simulation studies the impact of EU expansion on the currency denomination of trade. Results suggest that when preferences are similar across countries EU expansion decreases the likelihood of price discrimination and could decrease the use of the euro as an invoicing currency in the original EU’s imports.
    Keywords: currency invoicing, exchange rate, inflation, EU expansion, price discrimination
    JEL: F14 F31
  6. By: Caglayan, Mustafa (University of Sheffield); Muñoz Torres, Rebeca I. (Department of Economics, University of Warwick)
    Abstract: This paper, considering revenue and cost exposure channels, investigates the effects of exchange rate behaviour on fixed capital investment in Mexican manufacturing sector over 1994-2002. We find that i) currency depreciation has a positive (negative) effect on fixed investment through the export (import) channel; ii) exchange rate volatility impacts mostly export oriented sectors ; iii) the sensitivity of investment to exchange rate movements is stronger in non-durable goods sectors and industries with low mark-up ratios.
    Keywords: Exchange rate volatility ; investment ; external exposure ; market structure
    JEL: E22
    Date: 2008

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