nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2008‒04‒12
23 papers chosen by
Martin Berka
Massey University

  1. Oil Price Movements and the Global Economy: A Model-Based Assessment By Elekdag, Selim; Lalonde, Rene; Laxton, Doug; Muir, Dirk; Pesenti, Paolo
  2. Macroeconomic Interdependence and the International Role of the Dollar By Goldberg, Linda S; Tille, Cédric
  3. Financial Stability, the Trilemma, and International Reserves By Obstfeld, Maurice; Shambaugh, Jay C; Taylor, Alan M
  4. Takeoffs By Joshua Aizenman; Mark M. Spiegel
  5. Controls on Capital Flows and the Tobin Tax. By Paul De Grauwe
  6. Where Did All The Borrowing Go? A Forensic Analysis of the U.S. External Position By Lane, Philip R.; Milesi-Ferretti, Gian Maria
  7. International Capital Flows By Tille, Cédric; van Wincoop, Eric
  8. International financial remoteness and macroeconomic volatility By Andrew K. Rose; Mark M. Spiegel
  9. Non-linear adjustment of import prices in the European Union By Campa, Jose M.; Gonzalez, Jose M.; Sebastia, Maria
  10. Productivity and the Real Euro-Dollar Exchange Rate By Vivien Lewis
  11. Trading Population for Productivity: Theory and Evidence By Galor, Oded; Mountford, Andrew
  12. International Competitiveness, Job Creation and Job Destruction - An Establishment Level Study of German Job Flows By Moser, Christoph; Urban, Dieter M; Weder di Mauro, Beatrice
  13. The Impact of International Financial Integration on Industry Growth By Ellen Vanassche
  14. Are Capital Controls in the Foreign Exchange Market Effective? By Straetmans, Stefan; Versteeg, Roald; Wolff, Christian C
  15. One Europe, one product, two prices-the price disparity in the EU By Joanna Wolszczak-Derlacz
  16. Real Exchange Rates and Monetary Policy Effectiveness in EMU. By Yunus Aksoy
  17. Divergence in Labor Market Institutions and International Business Cycles By Raquel Fonseca; Lise Patureau; Thepthida Sopraseuth
  18. Choice of Exchange Rate Regime in Central and Eastern European Countries: an Empirical Analysis By Agnieszka Markiewicz
  19. Monetary Union in West Africa and Asymmetric Shocks: a Dynamic Structural Factor Model By Romain Houssa
  20. Growth and Risk at the Industry Level: the Real Effects of Financial Liberalization By Levchenko, Andrei A.; Rancière, Romain; Thoenig, Mathias
  21. International Dynamic Asset Allocation and the Effect of the Exchange Rate By Kristien Smedts
  22. Economic, Political, and Institutional Prerequisites for Monetary Union Among the Members of the Gulf Cooperation Council By Buiter, Willem H
  23. Markups in Canada: Have They Changed and Why? By Danny Leung

  1. By: Elekdag, Selim; Lalonde, Rene; Laxton, Doug; Muir, Dirk; Pesenti, Paolo
    Abstract: We develop a five-region version (Canada, a group of oil exporting countries, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations of oil prices with large effects on the terms of trade of oil-exporting versus oil-importing countries (in particular, emerging Asia), and result in significant wealth transfers between regions. This is especially true when we consider a sustained increase in productivity growth or a shift in production technology towards more capital- (and hence oil-) intensive goods in regions such as emerging Asia. In addition, we study the implications of higher taxes on gasoline that are used to reduce taxes on labour income, showing that such a policy could increase world productive capacity while being consistent with a reduction in oil consumption.
    Keywords: DSGE models; Oil prices; World economy
    JEL: E66 F32 F47
    Date: 2008–02
  2. By: Goldberg, Linda S; Tille, Cédric
    Abstract: The U.S. dollar holds a dominant place in the invoicing of international trade, along two complementary dimensions. First, most U.S. exports and imports invoiced in dollars. Second, trade flows that do not involve the United States are also substantially invoiced in dollars, an aspect that has received relatively little attention. Using a simple center-periphery model, we show that the second dimension magnifies the exposure of periphery countries to the center's monetary policy, even when direct trade flows between the center and the periphery are limited. When intra-periphery trade volumes are sensitive to the center's monetary policy, the model predicts substantial welfare gains from coordinated monetary policy. Our model also shows that even though exchange rate movements are not fully efficient, flexible exchange rates are a central component of optimal policy.
    Keywords: center-periphery; exchange rate pass-through; invoicing; monetary policy
    JEL: F41 F42
    Date: 2008–02
  3. By: Obstfeld, Maurice; Shambaugh, Jay C; Taylor, Alan M
    Abstract: The rapid growth of international reserves---a development concentrated in the emerging markets---remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt.
    Keywords: banking crises; capital flight; central banks; exchange rate regimes; financial development; foreign exchange; global imbalances; Guidotti-Greenspan rule; international liquidity; intervention; lender of last resort; net foreign assets; sterilization; sudden stop
    JEL: E44 E58 F21 F31 F36 F41 N10 O24
    Date: 2008–02
  4. By: Joshua Aizenman; Mark M. Spiegel
    Abstract: This paper identifies factors associated with takeoff--a sustained period of high growth following a period of stagnation. We examine a panel of 241 "stagnation episodes" from 146 countries, 54% of these episodes are followed by takeoffs. Countries that experience takeoffs average 2.3% annual growth following their stagnation episodes, while those that do not average 0% growth; 46% of the takeoffs are "sustained," i.e. lasting 8 years or longer. Using probit estimation, we find that de jure trade openness is positively and significantly associated with takeoffs. A one standard deviation increase in de jure trade openness is associated with a 55% increase in the probability of a takeoff in our default specification. We also find evidence that capital account openness encourages takeoff responses, although this channel is less robust. Measures of de facto trade openness, as well as a variety of other potential conditioning variables, are found to be poor predictors of takeoffs. We also examine the determinants of nations achieving sustained takeoffs. While we fail to find a significant role for openness in determining whether or not takeoffs are sustained, we do find a role for output composition: Takeoffs in countries with more commodity-intensive output bundles are less likely to be sustained, while takeoffs in countries that are more service-intensive are more likely to be sustained. This suggests that adverse terms of trade shocks prevalent among commodity exports may play a role in ending long-term high growth episodes.
    Keywords: Economic conditions
    Date: 2007
  5. By: Paul De Grauwe
    Abstract: The financial crises of the 1990s have given a new impetus to proposals aimed at controlling international capital movements. Well-known economists came out in favour of such controls, giving (some of these) capital controls a new respectability. In this paper we want to evaluate these proposals. In order to do so, it is important to distinguish between the different objectives that are pursued by those who propose capital controls. These objectives are very diverse. The most important ones are the following: A reduction of "excessive" exchange rate variability. A source of revenue for worthwhile international projects (e.g. development aid). Giving the monetary authorities more autonomy in setting domestic interest rates. Stabilisation of an emerging financial crisis due to large scale capital outflows. Preventing excessive capital inflows when countries liberalise their domestic markets. Some proposals for controlling capital movements have been aimed at several of these objectives. The best-known proposal in this category is the Tobin-tax. Other proposals have more narrowly defined objectives. In this paper we analyse some of these proposals and evaluate their effectiveness in achieving their stated objectives.
    Date: 2008–03
  6. By: Lane, Philip R.; Milesi-Ferretti, Gian Maria
    Abstract: The deterioration in the U.S. net external position in recent years has been much smaller than the extensive net borrowing associated with large current account deficits would have suggested. This paper examines the sources of discrepancies between net borrowing and accumulation of net liabilities for the U.S. economy over the past 25 years. In particular, it highlights and quantifies the role played by net capital gains on the U.S. external portfolio and ‘residual adjustments’ in explaining this discrepancy. It discusses whether these ‘residual adjustments’ are likely to be originating from measurement errors in external assets and liabilities, financial flows, or capital gains, and explores the implications of these conjectures for the U.S. financial account and external position.
    Keywords: capital flows; current account; external adjustment; external assets and liabilities; Financial integration; net foreign asset position
    JEL: F21 F32 F41
    Date: 2008–01
  7. By: Tille, Cédric; van Wincoop, Eric
    Abstract: The surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice, an aspect that was largely cast aside when the ad-hoc portfolio balance models of the 1970s were replaced by models of optimizing agents. We develop the implications of portfolio choice for both gross and net international capital flows in the context of a simple two-country dynamic stochastic general equilibrium (DSGE) model. Our focus is on the time-variation in portfolio allocation following shocks, and the resulting capital flows. We show how endogenous time-variation in expected returns and risk, which are the key determinants of portfolio choice, affect capital flows in often subtle ways. The model is shown to be consistent with a broad range of empirical evidence. An additional contribution of the paper is to overcome the technical difficulty of solving DSGE models with portfolio choice by developing a broadly applicable solution method
    Keywords: home bias; international capital flows; portfolio allocation
    JEL: F32 F36 F41
    Date: 2008–02
  8. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: This paper shows that proximity to major international financial centers seems to reduce business cycle volatility. In particular, we show that countries that are further from major locations of international financial activity systematically experience more volatile growth rates in both output and consumption, even after accounting for domestic financial depth, political institutions, and other controls. Our results are relatively robust in the sense that more financially remote countries are more volatile, though the results are not always statistically significant. The comparative strength of this finding is in contrast to the more ambiguous evidence found in the literature.
    Keywords: Business cycles
    Date: 2007
  9. By: Campa, Jose M. (IESE Business School); Gonzalez, Jose M. (Banco de España); Sebastia, Maria (Bank of England)
    Abstract: This paper focuses on the non-linear adjustment of import prices in national currency to shocks in exchange rates and foreign prices measured in the exporters' currency of products originating outside the euro area and imported into European Union countries (EU-15). The paper looks at three different types of non-linearities: a) non-proportional adjustment (the size of the adjustment grows more than proportionally with the size of the misalignments); b) asymmetric adjustment to cost-increasing and cost-decreasing shocks, and c) the existence of thresholds in the size of misalignments below which no adjustment takes place. There is evidence of more than proportional adjustment towards long-run equilibrium in manufacturing industries. In these industries, the adjustment is faster the further away current import prices are from their implied long-run equilibrium. In contrast, a proportional linear adjustment cannot be rejected for some other imports (especially within agricultural and commodity imports). There is also strong evidence of asymmetry in the adjustment to long-run equilibrium. Deviations from long-run equilibrium due to exchange rate appreciations of the home currency result in a faster adjustment than those caused by a home currency depreciation. Finally, we also find that adjustment takes place in the industries in our sample only when deviations are above certain thresholds and that these thresholds tend to be somewhat smaller for manufacturing industries than for commodities.
    Keywords: exchange rate adjustment; monetary union;
    JEL: F31 F36 F42
    Date: 2008–02–09
  10. By: Vivien Lewis
    Abstract: This paper analyses empirically how changes in productivity affect the real eurodollar exchange rate. We consider the two-sector new open macro model in Benigno and Thoenissen (2003). The model predictions are used, in the form of sign restrictions, to identify productivity shocks in a structural vector autoregression. We estimate economy-wide and traded sector productivity shocks, controlling for demand and nominal factors. Our results show that productivity shocks are much less important in explaining the variation in the euro-dollar exchange rate than are demand and nominal shocks. In particular, productivity can explain part of the appreciation of the dollar in the late 1990s only to the extent that it created a boost to aggregate demand in the US. We find an insignificant contribution of the Balassa-Samuelson effect.
    Keywords: real exchange rate, productivity, VAR, sign restrictions
    JEL: F41 F31
    Date: 2008–03
  11. By: Galor, Oded; Mountford, Andrew
    Abstract: This research argues that the differential effect of international trade on the demand for human capital across countries has been a major determinant of the distribution of income and population across the globe. In developed countries the gains from trade have been directed towards investment in education and growth in income per capita, whereas a significant portion of these gains in less developed economies have been channelled towards population growth. Cross-country regressions establish that indeed trade has positive effects on fertility and negative effects on education in non-OECD economies, while inducing fertility decline and human capital formation in OECD economies.
    Keywords: Demographic Transition; Growth; Human Capital; International Trade
    JEL: F11 F43 J10 N30 O40
    Date: 2008–02
  12. By: Moser, Christoph; Urban, Dieter M; Weder di Mauro, Beatrice
    Abstract: This study investigates the impact of international competitiveness on net employment, job creation, job destruction, and gross job flows for a representative sample of German establishments from 1993 to 2005. We find a statistically significant but economically small effect of real exchange rate shocks on employment, comparable to the one found in studies for the United States. However, contrary to the United States, the employment adjustment (among surviving firms) operates mainly through the job creation rather than the job destruction rate. Job destruction occurs essentially through discrete events such as restructuring, outsourcing and bankruptcy. We suggest that these findings are consistent with a highly regulated labour market, in which smooth adjustment is costly and possibly delayed.
    Keywords: attrition estimator; gross worker flows; international competitiveness; inverse probability weighted GMM; real exchange rate
    JEL: F16 F40
    Date: 2008–03
  13. By: Ellen Vanassche
    Abstract: The empirical relationship between financial openness and growth is examined in this paper. In contrast to a large body of cross-country work investigating this link, I study the impact of financial integration on growth at the industry level. This paper provides evidence that financial openness has a positive effect on growth of industrial sectors, regardless of their characteristics. Moreover, industries that rely relatively more on external finance grow disproportionately faster in countries with more integrated financial systems. However, this industry-specific effect of financial openness decreases when I control for the development of the domestic financial system. Finally, the hypothesis that financial integration improved growth also by enhancing the functioning of the domestic financial system is tested. I find evidence of this indirect transmission channel of financial openness.
    Keywords: Financial Integration, Financial Development, Growth
    JEL: D92 F3
    Date: 2008–03
  14. By: Straetmans, Stefan; Versteeg, Roald; Wolff, Christian C
    Abstract: One of the reasons for governments to use capital controls is to obtain some degree of monetary independence. This paper investigates the link between capital controls and interest differentials/ forward premia. This to test whether they can indeed give governments the power to drive exchange rates away from parity conditions. Two capital control variables are constructed in addition to the standard IMF capital control dummy. These variables are used to determine the date of capital account liberalization in a panel of Western European as well as emerging countries. Results show that capital controls do not give governments extra monetary freedom. There is even some evidence that capital controls decrease the level of monetary freedom governments enjoy for a number of countries.
    Keywords: Capital controls; Exchange Rates; Forward premia; Interest differentials; Monetary freedom
    JEL: E42 F21 F31 G15
    Date: 2008–02
  15. By: Joanna Wolszczak-Derlacz
    Abstract: This article examines the price dispersion in the European Union in the last fifteen years (1990-2005). The analysis of price convergence is examined on aggregate and disaggregate levels. The macro approach is based on Comparative Price Level index calculated as the ratio between PPPs and exchange rate. The disaggregate analysis utilizes actual prices of 148 individual products sold in the 15 capital cities of the EU. The calculations comprise of sigma and beta convergence adopted from the real growth literature. The different results of the speed of convergence are obtained according to the different econometric methods. Moreover the gravity model is tested to measure the contribution of different factors in explaining the observed convergence pattern.
    Keywords: price convergence, international price dispersion, law of one price,
    JEL: E31 F36 F41
    Date: 2008–03
  16. By: Yunus Aksoy
    Abstract: This paper extends the framework provided by De Grauwe, Dewachter and Aksoy (1998). Monetary policy effectiveness of the European Central Bank (ECB) in the open economy Euroland is addressed. The optimal feedback rules for the member states with the use of the backward looking variables are derived. The role of the real exchange rate is discussed. For alternative scenarios at the ECB Governing Council we simulate the monetary policy effectiveness and provide some welfare analysis.
    Date: 2008–03
  17. By: Raquel Fonseca (RAND, 1776 Main Street P.O. Box 2138 Santa Monica, CA 90407-2138, USA); Lise Patureau (THEMA Université de Cergy-Pontoise, 33, boulevard du Port 95011 Cergy-Pontoise Cedex, France); Thepthida Sopraseuth (EPEE Université d’Evry and PSE, 4 Bd F. Mitterand, 91025 Evry Cedex, France)
    Abstract: This paper investigates the sources of business cycle comovement within the New Open Economy Macroeconomy framework. It sheds new light on the business cycle comovement issue by examining the role of cross-country divergence in labor market institutions. We first document stylized facts supporting that heterogeneous labor market institutions are associated with lower cross-country GDP correlations among OECD countries. We then investigate this fact within a two-country dynamic general equilibrium model with frictions on the good and labor markets. On the good-market side, we model monopolistic competition and nominal price rigidity. Labor market frictions are introduced through a matching function à la Mortensen and Pissarides (1999). Our conclusions disclose that heterogenous labor market institutions amplify the crosscountry GDP differential in response to aggregate shocks. In quantitative terms, they contribute to reduce cross-country output correlation, when the model is subject to real and/or monetary shocks. Our overall results show that taking into account labor market heterogeneity improves our understanding of the quantity puzzle.
    Keywords: International business cycle, Search, Labor market institutions, Wage bargaining
    JEL: E24 E32 F41
    Date: 2008
  18. By: Agnieszka Markiewicz
    Abstract: This paper identifies the sources of divergences between current exchange rate policies in Central and Eastern European countries (CEECs). We use an ordered logit model for the official (de jure) and the actual (de facto) exchange rate classifications. We find that the differences of the exchange rate strategies among CEECs cannot be explained by these classifications. Financial and trade openness are the major determinants of divergences among exchange rate strategies in CEECs. More financially and trade integrated countries switch to more rigid regimes.
    Date: 2008–03
  19. By: Romain Houssa
    Abstract: We analyse the costs of a monetary union in West Africa by means of asymmetric aggregate demand and aggregate supply shocks. Previous studies have estimated the shocks with the VAR model. We discuss the limitations of this approach and apply a new technique based on the dynamic factor model. The results suggest the presence of economic costs for a monetary union in West Africa because aggregate supply shocks are poorly correlated or asymmetric across these countries. Aggregate demand shocks are more correlated between West African countries.
    Date: 2008–03
  20. By: Levchenko, Andrei A.; Rancière, Romain; Thoenig, Mathias
    Abstract: This paper analyzes the effects of financial liberalization on growth and volatility at the industry level in a large sample of countries. We estimate the impact of liberalization on production, employment, firm entry, capital accumulation, and productivity, using both de facto and de jure measures of liberalization. In order to overcome omitted variables concerns, we employ a number of alternative difference-in-differences estimation strategies. We implement a propensity score matching algorithm to find a control group for each liberalizing country. In addition, we exploit variation in industry characteristics to obtain an alternative set of difference-in-differences estimates. Financial liberalization is found to have a positive effect on both growth and volatility of production across industries. The positive growth effect comes from increased entry of firms, higher capital accumulation, and an expansion in total employment. By contrast, we do not detect any effect of financial liberalization on measured productivity. Finally, the growth effects of liberalization appear temporary rather than permanent.
    Keywords: difference-in-differences estimation; financial liberalization; growth; industry-level data; propensity score matching; volatility
    JEL: F02 F21 F36 F4
    Date: 2008–02
  21. By: Kristien Smedts
    Abstract: This paper analyzes a stylized theoretical framework to examine optimal portfolio selection in an international context with an explicit focus on the effect of the exchange rate. More specifically, we study how the elimination of the exchange rate induces shifts in the optimal international portfolio. We show that the effect of the elimination of the exchange rate on the optimal portfolio is twofold. First, the volatility of the international portfolio changes (volatility effect of the exchange rate), and second, the national market prices of risk converge to common international market prices of risk (price effect of the exchange rate). This induces important shifts in the optimal international portfolio.
    Keywords: International Financial Markets, Portfolio Diversification, Foreign Exchange.
    JEL: G11 G15 F31 F21
    Date: 2008–03
  22. By: Buiter, Willem H
    Abstract: The paper reviews the arguments for and against monetary union among the six members of the Gulf Cooperation Council - the United Arab Emirates, the State of Bahrain, the Kingdom of Saudi Arabia, the Sultanate of Oman, the State of Qatar and the State of Kuwait. Both technical economic arguments and political economy considerations are discussed I conclude that there is an economic case for GCC monetary union, but that it is not overwhelming. The lack of economic integration among the GCC members is striking. Without anything approaching the free movement of goods, services, capital and persons among the six GCC member countries, the case for monetary union is mainly based on the small size of all GCC members other than Saudi Arabia, and their high degree of openness. Indeed, even without the creation of a monetary union, there could be significant advantages to all GCC members, from both an economic and a security perspective, from greater economic integration, through the creation of a true common market for goods, services, capital and labour, and from deeper political integration. The political arguments against monetary union at this juncture appear overwhelming, however. The absence of effective supranational political institutions encompassing the six GCC members means that there could be no effective political accountability of the GCC central bank. The surrender of political sovereignty inherent in joining a monetary union would therefore not be perceived as legitimate by an increasingly politically sophisticated citizenry. I believe that monetary union among the GCC members will occur only as part of a broad and broadly-based movement towards far-reaching political integration. And there is little evidence of that as yet.
    Keywords: convergence; currency union; exchange rate regime; GCC
    JEL: E42 E52 E63 F33 F42
    Date: 2008–01
  23. By: Danny Leung
    Abstract: Many empirical studies have examined the cyclical nature of the markup ratio. Until recently, few have attempted to ascertain the changes in the markup over a longer time horizon. These changes are of no less interest in view of the posited effects of increasing import competition and lower inflation on the markup. This paper offers evidence on the evolution of the markups for the Canadian business sector and 33 disaggregate industries over the 1961–2004 period. It is found that the business sector markup has declined since the mid-1980s, and that import competition has made a statistically significant but small contribution to this decline.
    Keywords: Econometric and statistical methods
    JEL: E31 F41 L11
    Date: 2008

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