nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2008‒05‒24
six papers chosen by
Martin Berka
Massey University

  1. Optimal growth and competitive equilibrium business cycles under decreasing returns in two-country models By Alain Venditti; Kazuo Nishimura; Makoto Yano
  2. Currency Crises and Monetary Policy in an Economy with Credit Constraints: The No Interest Parity Case By U. Michael Bergman; Shakill Hassan
  3. "A Regime Switching Analysis of Exchange Rate Pass-through" By Kólver Hernández; Asli Leblebicioglu
  4. Crude Oil Prices and the Euro-Dollar Exchange Rate: A Forecasting Exercise By Jesus Crespo Cuaresma; Andreas Breitenfellner
  5. Learning about the Interdependence between the Macroeconomy and the Stock Market By Fabio Milani
  6. Does Globalization Benefit the Poor? Evidence from Pakistan By Shahbaz, Muhammad

  1. By: Alain Venditti (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Kazuo Nishimura (Kyoto University - Kyoto University); Makoto Yano (Kyoto University - Kyoto University)
    Abstract: This paper investigates the interlinkage in the business cycles of large-country economies in a free-trade equilibrium. We consider a two-country, two-good, two-factor general equilibrium model with<br />Cobb-Douglas technologies and linear preferences. We also assume decreasing returns in both sectors. We first identify the determinants of each country's accumulation pattern in autarky equilibrium, and second we show how a country's business cycle may spread throughout the world once trade opens. We prove indeed that under free-trade, globalization and market integration may generate a contagion of the capital exporting country's business cycles and thus have destabilizing effects on the capital importing country.
    Keywords: Two-country general equilibrium model, busines cycles, capital intensities, decreasing returns
    Date: 2008–05–19
  2. By: U. Michael Bergman (Department of Economics, University of Copenhagen); Shakill Hassan (University of South Africa)
    Abstract: This paper revisits the currency crises model of Aghion, Bacchetta and Banerjee (2000, 2001, 2004), who show that if there exist nominal price rigidities and private sector credit constraints, and the credit multiplier depends on real interest rates, then the optimal monetary policy response to the threat of a currency crisis is restrictive. We demonstrate that this result is primarily due to the uncovered interest parity assumption. Assuming that the exchange rate is a martingale restores the case for expansionary reaction - even with foreign-currency debt in firms' balance sheets. The effect of lower interest rates on output can help restore the value of the currency due to increased money demand.
    Keywords: currency crises; foreign–currency debt; balance sheets; interest parity; monetary policy
    JEL: E51 F30 O11
    Date: 2008–05
  3. By: Kólver Hernández (Department of Economics,University of Delaware and CIDE); Asli Leblebicioglu (North Carolina State University)
    Abstract: We investigate changes in the pricing policies of exporters, including changes in the exchange rate pass-through elasticity, and changes in the elasticities of variables that affect the firm’s markup. We set up a theoretical model of optimal export pricing in order to illustrate how changes in the pass-through elasticity can emerge together with changes in other elasticities in the pricing policy. Based on our theoretical formulation, we empirically study changes in all the elasticities that define the pricing policy as opposed to focusing only on the exchange rate pass-through. In the empirical model, we assume that in every period exporters get to set prices by following either a “high pass-through” or a “low passthrough” pricing policy. The transition from one policy to the other is governed by a Markov process whose transition probabilities depend on economic fundamentals. We estimate the model using data we have collected on 35 lines of imported cars to the US, from seven exporting countries, for the 1980-2004 period. We find that the “low pass-through” regime is characterized by: a low exchange rate pass-through; a low response to misalignments in the firm’s relative price; a low volatility of technology and preference shocks; and a higher duration than the high pass-through regime. Monetary stability and the market structure are significant factors behind the switching of pricing policies. Ceteris paribus, monetary stability measured as the cross-country inflation differential explains abut 22% of the year-to-year variation in the exchange rate pass-through coefficient; when measured by the volatility of the exchange rate, it explains 37%. Market concentration measured by the Herfindahl index explains about 40%.
    Keywords: Exchange Rate Pass-through; Markov Regime Switching; Export Pricing
    JEL: E31 F31 F41
  4. By: Jesus Crespo Cuaresma; Andreas Breitenfellner
    Abstract: If oil exporters stabilize the purchasing power of their export revenues in terms of imports, exchange rate developments (and particularly, developments in the US dollar/euro exchange rate) may contain information about oil price changes. This hypothesis depends on three conditions: (a) OPEC has price setting capacity, (b) a high share of OPEC imports comes from the euro area and (c) alternatives to oil invoicing in US dollar are costly. We give evidence that using information on the US dollar/euro exchange rate (and its determinants) improves oil price forecasts significantly. We discuss possible implications that these results might suggest with regard to the stabilization of oil prices or the adjustment of global imbalances.
    Keywords: oil price, exchange rate, forecasting, multivariate time series models.
    JEL: Q43 F31 C53
  5. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: How strong is the interdependence between the macroeconomy and the stock market? This paper estimates a New Keynesian general equilibrium model, which includes a wealth effect from asset price fluctuations to consumption, to assess the quantitative importance of interactions among the stock market, macroeconomic variables, and monetary policy. The paper relaxes the assumption of rational expectations and assumes that economic agents learn over time and form near-rational expectations from their perceived model of the economy. The stock market, therefore, affects the economy through two channels: through a traditional ``wealth effect" and through its impact on agents' expectations. Monetary policy decisions also affect and are potentially affected by the stock market. The empirical results show that the direct wealth effect is modest, but asset price fluctuations have had important effects on output expectations. Shocks in the stock market can account for a large portion of output fluctuations. The effect on expectations, however, has declined over time.
    Keywords: Stock market; Wealth channel; Monetary policy; Constant-gain learning; Bayesian estimation; Expectations
    JEL: E32 E44 E52 E58
    Date: 2008–05
  6. By: Shahbaz, Muhammad
    Abstract: In present endeavor we have addressed a key and very sizzling issue in the current contest in the area of economic development: the effect of trade liberalization on poverty levels in the case for Pakistan. We received empirical evidence on the relationship between trade liberalization and poverty through the application of FMOLS (Fully Modified Ordinary Least Square) for long run parameters and ECM for short run dynamics. To measure globalization or pace of openness, we used standard indices of trade openness, financial openness and public intervention in the country while head-count ratio for poverty measurement and, remittances and urbanisation are considered control variables. Respectively our findings suggested that, trade liberalization has a cumulative effect on poverty reduction in long-run but not in short run in the case of Pakistan. Economic shocks deteriorate the situation of poverty in the economy. Remittances decline poverty trends in long run but not in short span of time.
    Keywords: Trade; Liberalization; Poverty
    JEL: A10
    Date: 2007–08–14

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