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on Open MacroEconomics |
| By: | Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stéphane Adjemian (Université du Maine, Avenue Olivier Messiaen, 72085 Le Mans Cedex 9, France.) |
| Abstract: | The objective of this paper is to examine the main features of optimal monetary policy cooperation within a micro-founded macroeconometric framework. First, using Bayesian techniques, we estimate a two-country dynamic stochastic general equilibrium (DSGE) model for the United States (US) and the euro area (EA). The main features of the new open economy macroeconomics (NOEM) are embodied in our framework: in particular, imperfect exchange rate pass-through and incomplete financial markets internationally. Each country model incorporates the wide range of nominal and real frictions found in the closed-economy literature: staggered price and wage settings, variable capital utilization and fixed costs in production. Then, using the estimated parameters and disturbances, we study the properties of the optimal monetary policy cooperation through welfare analysis, impulse responses and variance decompositions. JEL Classification: E4, E5, F4. |
| Keywords: | DSGE models, Optimal monetary policy, New open economy macroeconomics, Bayesian estimation. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080884&r=opm |
| By: | Lorenzo Cappiello (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gianluigi Ferrucci (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper deals with two related issues: the sustainability of China’s exchange rate regime and the opening up of its capital account. The exchange rate discussion deliberately passes over the issue of the “equilibrium” value of the renminbi and its alleged undervaluation – typically at the heart of the current policy debate – and focuses instead on the domestic costs of the current regime and the potential risks to domestic financial stability in the long run. The paper argues that the renminbi exchange rate should be increasingly determined by market forces and that administrative controls should be progressively relinquished. The exchange rate is obviously linked to well-functioning and efficient capital markets, which require no barriers to capital flows. Thus, exchange rate reform has to be correctly sequenced with reform of the capital account to avoid disruptive capital flows. The paper discusses China’s twin surpluses of the current and capital accounts and attempts to identify the drivers of this “anomalous” external position. The pragmatic strategy pursued by the Chinese authorities in the aftermath of the Asian crisis encouraged FDI inflows and favoured the accumulation of a large stock of foreign exchange reserves. Combined with a relatively weak institutional setting, these factors have been important determinants of the pattern and composition of the country’s capital flows and international investment position. Finally, the paper speculates on the outlook for Chinese capital flows should barriers to capital movements be lifted. It argues that whether China continues to supply capital to the rest of the world or eventually becomes a net borrower in international capital markets – as was the case for most of its recent history – will depend on the evolution of its institutions. JEL Classification: F10, F21, F31, F32, P48. |
| Keywords: | China, exchange rate policy, international investment position, capital account liberalisation, institutions. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080082&r=opm |
| By: | Kirk Hamilton; John Hartwick (Queen's University) |
| Abstract: | We set out a model of a small open economy exporting oil and a traditional exportable in return for produced capital. The small open economy also has local production of a non-traded good. We first observe that the size of the traditional export sector declines with an exogenous increase in the country's oil stock. Strong Dutch disease (SDD) involves a net diminution in produced capital in use in the small open economy after the oil discovery shock. SDD turns on the exportable sector being relatively capital intensive. |
| Keywords: | Dutch disease, resource discovery, invariant earnings |
| JEL: | F43 Q33 Q32 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1163&r=opm |
| By: | Jurgen Von Hagen (University of Bonn); Iulia Siedschlag (Economic and Social Research Institute (ESRI)) |
| Abstract: | The countries of Central and Eastern Europe went from being largely closed to being largely open to international capital flows. This paper discusses their experience with capital account liberalization and coping with large capital inflows. We start with a discussion of basic economic characteristics and the real convergence achieved so far, and then discuss the pace and sequencing of capital account liberalization and the degree of international financial integration over the past decade. We then analyze trends and patterns of capital inflows in these countries in recent years. These stylized facts are useful for understanding the macroeconomic implications and policy challenges of coping with large capital inflows, which we discuss next. Finally we conclude with policy implications for emerging Asian economies. |
| Keywords: | International financial integration, Macroeconomic policy, Central and Eastern Europe, Emerging Asian economies |
| JEL: | E44 F36 F41 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp234&r=opm |
| By: | Yamin Ahmad (Department of Economics, University of Wisconsin - Whitewater) |
| Abstract: | This paper investigates the properties of a class of models which incorporate nonlinear dynamics, known as Threshold Autoregressive (TAR) models. Simulations show that within the context of the real exchange rate literature, a threshold model of exchange rates exhibits significant small sample bias even with long time series data. The results of this paper has severe implications for the properties of estimated coefficients within TAR models. |
| Keywords: | Threshold Autoregressive Models, Nonlinear Models, Small Sample Bias, Real Exchange Rates, Simulation |
| JEL: | F47 C15 C32 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:uww:wpaper:07-01&r=opm |
| By: | Metodij Hadzi-Vaskov |
| Abstract: | The negative correlation between relative consumption growth and real exchange rate changes is a recurrent puzzle in international macroeconomics (Backus and Smith, 1993). Using panel dataset with quarterly observations for all 12 countries from the Eurozone after the introduction of the common currency (1999-2006), this paper demonstrates that the nominal exchange rate is the main source of the puzzle. When nominal exchange rates fluctuations are eliminated, relative consumption growth is positively correlated with the change in the real exchange rate. Moreover, this result is contrasted with alternative samples of (relatively) flexible exchange rate: while the inflation differential is still positively correlated, the nominal exchange rate is negatively correlated with the relative consumption growth. These findings are robust to alternative regression specifications, estimation methods, and data samples. |
| Keywords: | International Risk-Sharing, Exchange Rates, Backus-Smith Puzzle |
| JEL: | F31 F33 F41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0732&r=opm |
| By: | Christopher D. Carroll (Johns Hopkins University, Department of Economics, 440 Mergenthaler Hall 3400 N. Charles Street, Baltimore, MD 21218, USA.); Jiri Slacalek (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Martin Sommer (International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431, USA.) |
| Abstract: | We estimate the degree of ‘stickiness’ in aggregate consumption growth (sometimes interpreted as reflecting consumption habits) for thirteen advanced economies. We find that, after controlling for measurement error, consumption growth has a high degree of autocorrelation, with a stickiness parameter of about 0.7 on average across countries. The sticky-consumption-growth model outperforms the random walk model of Hall (1978), and typically fits the data better than the popular Campbell and Mankiw (1989) model. In several countries, the sticky-consumption- growth and Campbell–Mankiw models work about equally well. JEL Classification: E21, F41. |
| Keywords: | Sticky Expectations, Consumption Dynamics, Habit Formation. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080886&r=opm |
| By: | Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Lucio Sarno (Finance Group, Warwick Business School, University of Warwick, Coventry CV4 7AL, UK.) |
| Abstract: | This paper considers a stylized asset pricing model where the returns from exchange rates, stocks and bonds are linked by basic risk-arbitrage relationships. Employing GMM estimation and monthly data for 18 economies and the US (treated as the domestic country), we identify through a simple test the countries whose assets strongly comove with US assets and the countries whose assets might offer larger diversification benefits. We also show that the strengthening of the comovement of returns across countries is neither a gradual process nor a global phenomenon, reinforcing the case for international diversi.cation. However, our results suggest that fund managers are better of constructing portfolios selecting assets from a subset of countries than relying on either fully internationally diversified or purely domestic portfolios. JEL Classification: F31, G10. |
| Keywords: | Asset pricing, exchange rates, international parity conditions, market integration, stochastic discount factor. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080883&r=opm |
| By: | Michiel van Leuvensteijn (CPB Netherlands Bureau for Economic Policy Analysis, P.O. Box 80510, 2508 GM The Hague, The Netherlands.); Christoffer Kok Sørensen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Jacob A. Bikker (De Nederlandsche Bank (DNB), Supervisory Policy Division, Strategy Department, P.O. Box 98, 1000 AB Amsterdam, The Netherlands.); Adrian A.R.J.M. van Rixtel (Banco de España, International Economics and International Relations Department, Alcalá 48, 28014 Madrid, Spain.) |
| Abstract: | This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products. Using an error correction model(ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective. JEL Classification: D4, E50, G21, L10. |
| Keywords: | Monetary transmission, banks, retail rates, competition, panel data. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080885&r=opm |