nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2008‒05‒10
thirteen papers chosen by
Martin Berka
Massey University

  1. A Pragmatic Approach to Capital Account Liberalization By Prasad, Eswar; Rajan, Raghuram G.
  2. Issues on the choice of Exchange Rate Regimes and Currency Boards – An Analytical Survey By Moheeput, Ashwin
  3. Business Cycles in Small Developed Economies: The Role of Terms of Trade and Foreign Interest Rate Shocks By Jaime Guajardo
  4. Regime Switching, Learning, and the Great Moderation By James Murray
  5. Long Run Determinants of Real Exchange Rates in Latin America By Jorge Carrera; Romain Restout
  6. The Effects of Joining a Monetary Union on Output and Inflation Variability in Accession Countries By Holtemöller, Oliver
  7. Achieving a Soft Landing: The Role of Fiscal Policy By Daniel Leigh
  8. Business Cycles, Core and Periphery in Monetary Unions: Comparing Europe and North America By Alexandra Ferreira Lopes; Álvaro M. Pina
  9. TRADE THROUGH FDI: investing in services By Carmen Fillat-Castej—n; Joseph Francois; Julia Woerz
  10. Exchange Rate Assessment in a Resource - Dependent Economy: The Case of Botswana By Corinne Deléchat; Matthew Gaertner
  11. Pass-Through of External Shocks to Inflation in Sri Lanka By Nombulelo Duma
  12. International Trends in Current Account Deficit: The Case of Turkey By TOPRAK, Metin
  13. New Estimates of Capital Flight from Sub-Saharan African Countries: Linkages with External Borrowing and Policy Options By James Boyce; Léonce Ndikumana

  1. By: Prasad, Eswar (Cornell University); Rajan, Raghuram G. (University of Chicago)
    Abstract: Cross-country regressions suggest little connection from foreign capital inflows to more rapid economic growth for developing countries and emerging markets. This suggests that the lack of domestic savings is not the primary constraint on growth in these economies, as implicitly assumed in the benchmark neoclassical framework. We explore emerging new theories on both the costs and benefits of capital account liberalization, and suggest how one might adopt a pragmatic approach to the process.
    Keywords: capital account liberalization, capital controls, collateral benefits, thresholds
    JEL: F2 F3 F4
    Date: 2008–04
  2. By: Moheeput, Ashwin (Department of Economics, University of Warwick)
    Abstract: Currency boards have often been at the heart of monetary reforms proposed by the International Monetary Fund (IMF) : they have been instrumental either as a short term crisis management strategy that successfully restores financial order for many countries seeking stabilization in the aftermath of prolonged economic crisis or as a way of importing monetary credibility as part of a medium / long term strategy for conducting monetary policy. As backbone of a credible exchange-rate based stabilisation programme, they have also been the linchpin of several heterodox or orthodox programmes aimed at mitigating hyperinflation. This paper attempts to synthetize our thinking about currency boards by reviewing their strengths and weaknesses and endeavours to seek real world examples to rationalise their applicability as opposed to alternative exchange rate regimes. Architects of international financial stability at the IMF or at central banks often ponder about the prerequisites for such programme to work well. These are also reviewed using appropriate economic theory where necessary. Finally, this paper sheds light on the best exchange rate regime that may be adopted in the intermediate term by those countries wishing to adopt a currency board, not as a quick fix solution to end an economic chaos but rather, as integral part of a long term monetary strategy.
    Keywords: Currency Boards ; IMF ; Crisis Management ; Monetary Credibility ; Heterodox / Orthodox Programs ; Hyperinflation ; Exchange Rate Regimes
    Date: 2008
  3. By: Jaime Guajardo
    Abstract: Empirical evidence for small developed economies finds that consumption is procyclical and as volatile as output, and real net exports are coutercyclical. Earlier studies have not been able to reproduce these regularities in a DSGE small open economy model when productivity shocks drive the business cycles and households have a normal intertemporal elasticity of substitution. Instead, these studies have reduced this elasticity to make consumption more procyclical and volatile and real net exports countercyclical. This paper shows that a standard model can reproduce these regularities, without lowering the intertemporal substitution, if the terms of trade and foreign interest rate are added as source of business cycle fluctuations. These shocks, compared to productivity shocks, make consumption and investment more volatile and procyclical relative to output, and make real net exports countercyclical.
    Date: 2008–04–04
  4. By: James Murray (Indiana University Bloomington)
    Abstract: This paper examines the "bad luck" explanation for changing volatility in U.S. inflation and output when agents do not have rational expectations, but instead form expectations through least squares learning with an endogenously changing learning gain. It has been suggested that this type of endogenously changing learning mechanism can create periods of excess volatility without the need for changes in the variance of the underlying shocks. Bad luck is modeled into a standard New Keynesian model by augmenting it with two states that evolve according to a Markov chain, where one state is characterized by large variances for structural shocks, and the other state has relatively smaller variances. To assess whether learning can explain the Great Moderation, the New Keynesian model with volatility regime switching and dynamic gain learning is estimated by maximum likelihood. The results show that learning does lead to lower variances for the shocks in the volatile regime, but changes in regime is still significant in differences in volatility from the 1970s and after the 1980s.
    Keywords: Learning, regime switching, great moderation, New Keynesian model, maximum likelihood
    JEL: C13 E31 E50
    Date: 2008–04
  5. By: Jorge Carrera (Universidad Nacional de la Plata - Universidad Nacional de la Plata); Romain Restout (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This paper investigates the long run behavior of real exchange rates in nineteen countries of Latin America over the period 1970 - 2006. Our data does not support the Purchasing Power Parity (PPP) hypothesis, implying that real shocks tend to have permanent effects on Latin America’s real exchange rates. By exploiting the advantage of non stationary panel econometrics, we are able to determinate factors that drive real exchanges rate in the long run : the Balassa-Samuelson effect, government spending, the terms of trade, the openness degree, foreign capital flows and the de facto nominal exchange regime. The latter effect has policy implications since we find that a fixed regime tends to appreciate the real exchange rate. This finding shows the non neutrality of exchange rate regime regarding its effects on real exchange rates. We also run estimations for country subgroups (South America versus Caribbean and Central America). Regional results highlight that several real exchange rates determinants are specific to one geographic zone. Finally, we compute equilibrium real exchange rate estimations. Two main results are derived from the investigation of misalignments, [i ] eight real exchange rates are quite close to their equilibrium level in 2006, and [ii ] our model shows that a part of currencies crises that arose in Latin America was preceded by a real exchange rate overvaluation.
    Keywords: equilibrium real exchange rate ; panel cointegration. ; panel unit roots
    Date: 2008
  6. By: Holtemöller, Oliver
    Abstract: New EU member countries are supposed to adopt the Euro as soon as economic convergence is achieved. This paper analyzes the effects of joining a monetary union on output and inflation variability in small acceding countries. An asymmetric macroeconomic two-country model is specified and combined with two different monetary policy regimes: (i) national monetary policy, (ii) monetary union. The performance of the two regimes is analyzed in terms of inflation and output variability for a broad range of structural parameter specifications.
    Keywords: European monetary union; open economy macroeconomic models; optimal monetary policy
    JEL: F42 E52 F41
    Date: 2007–12–14
  7. By: Daniel Leigh
    Abstract: This paper utilizes an open-economy New Keynesian overlapping generations model to assess the extent to which fiscal policy, along side an inflation-forecast-based monetary policy, could enhance macroeconomic stability in Colombia. The model simulations indicate that, in addition to stabilizing output and inflation, a stronger response of the fiscal balance to excess tax revenue would reduce the burden on the central bank of adjusting interest rates, lessen the associated degree of exchange rate volatility, and contribute to a more stable external current account balance. The analysis also assesses how the success of fiscal policy in enhancing macroeconomic stability depends on the type of shock, the response of monetary policy, and the length of fiscal policy implementation lags.
    Keywords: Fiscal policy , Colombia , Monetary policy , Business cycles , Tax revenues ,
    Date: 2008–03–21
  8. By: Alexandra Ferreira Lopes; Álvaro M. Pina
    Abstract: We compare Europe with the USA and Canada as regards business cycle synchronization and core-periphery patterns. A long sample (1950-2005) makes it possible to study how these aspects have evolved over time. Results support the economic viability of EMU. Average cyclical correlations among European countries have risen significantly, reaching levels close to, or even higher than, those of North American regions. Applying fuzzy clustering to the analysis of core-periphery issues, we find Europe to actually outperform North America: the core-periphery divide is milder, and peripheral status seems generally less protracted.
    Keywords: European Union, Canada, United States, Monetary Unions, Business Cycles, Fuzzy Clustering.
    JEL: C65 E32 E42 F33
    Date: 2008–03
  9. By: Carmen Fillat-Castej—n (University of Zaragoza (Spain)); Joseph Francois (Johannes Kepler University (Linz)); Julia Woerz (Austrian National Bank)
    Abstract: The type of relationship between different modes of trading services across international borders is of great interest, not only for the academic literature but also for the formulation trade liberalization offers under the GATS. Even more than for trade in goods, it is thus important to know whether cross-border trade and trade through commercial presence abroad act as complements or substitutes in services. The most commonly used analytical tool in the empirical analysis of this question is the gravity model of trade. This paper offers a consistent theoretical foundation for the application of the gravity model to services and to commercial presence, using a composite demand model with offers testable hypothesis about the complementary or substitutive relationship between different modes of supply. It further links the results to policy variables like market regulations which may act directly or implicitly as barriers to trade. Our empirical test for the sample of OECD countries over the decade 1994- 2004 yields robust complementary effects in the short-run, which is reinforced in the long-run by an increased potential for cross-border imports based on previous FDI inflows. A detailed analysis by individual service sectors highlights business, communication and financial services as showing the largest potential for cross-border trade when market regulations are reduced and when commercial presence increases.
    Keywords: FDI, imports, services, panel data, substitution and complementary effects
    JEL: F10 F14 F21
    Date: 2008–05–01
  10. By: Corinne Deléchat; Matthew Gaertner
    Abstract: The paper combines various methodologies to assessing the level of the exchange rate in Botswana, explicitly taking into account the implications of its dependency on diamond exports. Real exchange rate estimation indicates that, after a period of overvaluation, Botswana's real effective exchange rate is now broadly in line with economic fundamentals. The projected current account path is also consistent with external sustainability, defined to ensure sufficient savings of diamond wealth in order to maintain a stable import and consumption path through 2050. Sustaining consumption over the longer term will however require to address obstacles to non-diamond exports' competitiveness.
    Date: 2008–04–01
  11. By: Nombulelo Duma
    Abstract: This paper investigates pass-through of external shocks (exchange rate, oil price, and import price shocks) to inflation in Sri Lanka. The analysis is based on a vector autoregression (VAR) model that incorporates a distribution chain of pricing. The paper finds low and incomplete pass-through of external shocks to consumer inflation, reflecting a combination of factors including the existence of administered prices, high content of food in the consumption basket, and low persistence and volatility of the exchange rate. External shocks explain about 25 percent of the variation in consumer price inflation, reflecting room for domestic policies in controlling inflation.
    Date: 2008–03–28
  12. By: TOPRAK, Metin
    Abstract: Bugünün serbest piyasa ortamında cari açık sorunu, 1980 öncesi kontrollü dış ekonomi politikaları dönemine nazaran, üstesinden daha kolay gelinebilecek bir sorundur. Bundan 54 yıl önce, temelinde ülkelerin ödemeler dengesi sorunlarıyla uğraşmak için kurulan IMF’nin, bugün benzer bir karar vermek gerekseydi, muhtemelen kurulmasına gerek kalmayacaktı. Cari açık, ülkelerin tasarruf-yatırım dengesi ve kamu bütçe dengesi ile de yakından ilişkilidir. Bugün için dünyada yaygın bir cari açık sorununundan bahsetmek oldukça güç. Bireysel bazda ülkelerin cari açıkları ve fazlaları sözkonusudur. Ne var ki, ABD’nin 750 milyar dolar civarındaki cari açığı kadar önemli diğer bir husus, cari fazla veren ülkelerin ellerindeki döviz rezervidir. Çin, Japonya, Rusya, G.Kore, Hindistan ve Brezilya gibi ülkelerin ellerindeki devasa döviz rezervleri, dünya ödemeler sistemi ve referans parası için istikrarsızlık kaynağı olabilecek bir husustur. Dünya finans ve üretim piyasalarının temel yöneticisi ve yönlendiricisi olan ABD ekonomisindeki dalgalanmalar, daha düşük düzeylerde de olsa bütün dünyayı paralel yönde etkileyecektir. Türkiye’de kamu bütçe açığı ve özel kesim tasarruf açığının giderilmesinde dış borçlar ve yatırım ve portföy akımlarının büyük bir katkısı sözkonusudur. Türkiye’nin dış kaynakla iç tasarruf açığını karşılamaya devam edebilmesi için AB üyeliği, Batı dünyasıyla dostane ilişkiler ile başta Körfez sermayesi olmak üzere doğal kaynak zengini ülkelerden doğrudan yatırım girişleri hayati önemdedir. Türkiye’nin bölgesinde demokrasi ve piyasa ekonomisi üssü olmasının önünde iç çatışma ve dirençlerin dışında kayda değer bir dışsal engel bulunmamaktadır. Cari açığın Türkiye için yakın tehdit olmaya başlayacağı zaman, dışa kapalı, yabancı düşmanlığının yükseldiği, piyasa ekonomisi ve demokrasinin kesintiye uğradığı, özgürlüklerin kısıtlandığı zamandır. Bugün itibariyle, Türkiye mevcut siyasal ve dışa açık ekonomi politikası yürüyüşünü koruduğu takdirde, kısa vadede bir cari açık kriziyle karşılaşması beklenmemektedir.
    Keywords: cari açık; türkiye; döviz rezervi; dış ticaret açığı
    JEL: F4 F0 F50 E01
    Date: 2008–03–01
  13. By: James Boyce; Léonce Ndikumana
    Abstract: Even as African countries became increasingly indebted from 1970 to 2004, they experienced large-scale capital flight. Some of this was legitimately acquired capital fleeing economic and political uncertainties; some was illegitimately acquired wealth spirited to safer havens abroad. This paper presents new estimates of the magnitude and timing of capital flight from 40 sub-Saharan African countries and analyzes its determinants, including linkages to external borrowing. Our results confirm that sub-Saharan <st1:place w:st="on">Africa</st1:place> is a <i>net creditor</i> to the rest of the world, in that the subcontinent’s private external assets exceed its public external liabilities: total capital flight amounted to $420 billion (in 2004 dollars), compared to the external debt of $227 billion. Econometric analysis indicates that for every dollar in external loans to <st1:place w:st="on">Africa</st1:place> in this period, roughly 60 cents flowed back out as capital flight in the same year, a finding that suggests the existence of widespread “debt-fueled” capital flight. The results also show a debt-overhang effect, as increases in the debt stock spur additional capital flight in later years. In addition to policies for recovery of looted wealth and repatriation of externally held assets, we discuss the need for policies to differentiate between legitimate and “odious” debts, both to ease current burdens and to improve international financial governance in the future.
    Keywords: capital flight; external indebtedness; stolen assets; odious debt
    JEL: F21 F33 F34 H26 O16 O24
    Date: 2008

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