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on Open MacroEconomics |
| By: | Takashi Kano (University of Tokyo) |
| Abstract: | A recent paper claims that habit formation in consumption plays an important role in current account fluctuations in selected developed countries, extending the present-value model of the current account (PVM) with consumption habits. In this paper, however, I show that the habit-forming PVM is observationally equivalent to the PVM augmented with persistent transitory consumption, which is induced by world real interest rate shocks. Based on a small open-economy real business cycle (SOE-RBC) model endowed with consumption habits as well as persistent world real interest rate shocks, this paper resolves the inherent identification problem of the habit-forming PVM by Bayesian methods to seek effects of habit formation on current account fluctuations in typical small open economies, Canada and the United Kingdom. Results reveal no clear evidence that habit formation plays a crucial role in current account fluctuations. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2008cf572&r=opm |
| By: | Barry Eichengreen |
| Abstract: | Alexander Swoboda is one of the originators of the bipolar view that capital mobility creates pressure for countries to abandon intermediate exchange rate arrangements in favor of greater flexibility and harder pegs. This paper takes another look at the evidence for this hypothesis using two popular de facto classifications of exchange rate regimes. That evidence supports the bipolar view for the advanced countries, the sample for which it was originally developed, but not obviously for emerging markets and other developing countries. One interpretation of the contrast is that there is a tendency to move away from intermediate regimes in the course of economic and financial development, implying that emerging markets and other developing countries will eventually abandon intermediate regimes as well. Another interpretation is that the advanced countries have been faster to abandon soft pegs because they have been faster to develop attractive alternatives, notably Europe's monetary union. In this view, other countries are unlikely to abandon soft pegs because of the absence of the distinctive political conditions that have made the European alternative feasible. A final interpretation is that the advanced countries have been able to abandon soft peg because of their success in substituting inflation targeting for exchange rate targeting as the anchor for monetary policy. The paper presents some evidence for this view, which suggests the feasibility of further movement by emerging markets and developing countries in the direct of greater exchange rate flexibility. |
| JEL: | F31 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14100&r=opm |
| By: | Fidrmuc, Jarko (BOFIT); Korhonen, Iikka (BOFIT); Bátorová, Ivana (BOFIT) |
| Abstract: | We analyze the business cycles in China and in selected OECD countries between 1992 and 2006 using dynamic correlations. Nearly all OECD countries showpositive correlations of the very hort-run developments which may correspond to intensive supplier linkages. However, dynamic correlations at the business cycle frequencies are negative. Countries facing a comparably longer history of intensive trading links tend to show slightly higher correlations of business cycles with China. Even though trade and financial flows do not really increase correlations of business cycles between China and OECD countries, they lower the degree of business cycle synchronization within the OECD area. |
| Keywords: | business cycles; synchronization; trade; FDI; dynamic correlation |
| JEL: | E32 F15 F41 |
| Date: | 2008–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2008_007&r=opm |
| By: | Ippei Fujiwara (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ippei.fujiwara @boj.or.jp)); Yuki Teranishi (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi @boj.or.jp)) |
| Abstract: | In this paper, we investigate the relationship between real exchange rate dynamics and financial market imperfections. For this purpose, we first construct a New Open Economy Macroeconomics (NOEM) model that incorporates international staggered loan contracts as a simple form of the financial market imperfections. Recent empirical studies show that such staggered loan contracts are prevalent in the US, UK, and Japan and direct shocks to the bank lending interest rate (risk premium shocks) are major drivers of business cycle dynamics. Simulation results only with such a financial market friction and a risk premium shock can generate persistent, volatile, and realistic hump-shaped responses of real exchange rates, which have been thought very difficult to reproduce in standard NOEM models. This implies that these financial market developments can possibly be a major source of real exchange rate fluctuations. |
| Keywords: | Financial Market Imperfections, Real Exchange Rates, Staggered Loan Contracts |
| JEL: | F31 E41 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:08-e-11&r=opm |
| By: | Alessandro Calza |
| Abstract: | This paper tests whether the proposition that globalisation has led to greater sensitivity of domestic inflation to the global output gap (the "global output gap hypothesis") holds for the euro area. The empirical analysis uses quarterly data over the period 1979-2003. Measures of the global output gap using two different weighting schemes (based on PPPs and trade data) are considered. We find little evidence that global capacity constraints have either explanatory or predictive power for domestic consumer price inflation in the euro area. Based on these findings, the prescription that central banks should specifically react to developments in global output gaps does not seem to be justified for the euro area. |
| Keywords: | Globalization ; Inflation (Finance) ; Monetary policy - Europe ; International trade - Europe |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:13&r=opm |
| By: | Syed A. Basher (Department of Economic Policies, Qatar Central Bank, Doha, Qatar.); Josep Lluis Carrión-i-Silvestre (AQR-IREA, University of Barcelona.) |
| Abstract: | This paper analyzes the persistence of shocks that affect the real exchange rates for a panel of seventeen OECD developed countries during the post-Bretton Woods era. The adoption of a panel data framework allows us to distinguish two different sources of shocks, i.e. the idiosyncratic and the common shocks, each of which may have di¤erent persistence patterns on the real exchange rates. We first investigate the stochastic properties of the panel data set using panel stationarity tests that simultaneously consider both the presence of cross-section dependence and multiple structural breaks that have not received much attention in previous persistence analyses. Empirical results indicate that real exchange rates are non-stationary when the analysis does not account for structural breaks, although this conclusion is reversed when they are modeled. Consequently, misspecification errors due to the non-consideration of structural breaks leads to upward biased shocks' persistence measures. The persistence measures for the idiosyncratic and common shocks have been estimated in this paper always turn out to be less than one year. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:xrp:wpaper:xreap2008-06&r=opm |
| By: | Pierre-Richard Agenor; Joshua Aizenman |
| Abstract: | This paper studies how capital market imperfections affect the welfare effects of forming a currency union. The analysis considers a bank-only world where intermediaries compete in Cournot fashion and monitoring and state verification are costly. The first part determines the credit market equilibrium and the optimal number of banks, prior to joining the union. The second part discusses the benefits from joining a currency union. A competition effect is identified and related to the added monitoring costs that banks may incur when operating outside their home country, through an argument akin to the Brander-Krugman "reciprocal dumping" model of bilateral trade. Whether joining a union raises welfare of the home country is shown to depend on the relative strength of "investment creation" and "intermediation diversion" effects. |
| JEL: | F12 F15 F2 F36 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14088&r=opm |
| By: | Torben G. Andersen; Tim Bollerslev; Francis X. Diebold; Clara Vega (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps, hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news, in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news. |
| Keywords: | Asset Pricing, Macroeconomic News Announcements, Financial Market Linkages, Market Microstructure, High-Frequency Data, Survey Data, Asset Return Volatility, Forecasting |
| JEL: | F3 F4 G1 C5 |
| Date: | 2007–08–16 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2007-20&r=opm |
| By: | Takumi Naito (Tokyo Institute of Technology); Laixun Zhao (Research Institute for Economics and Business Administration, Kobe University) |
| Abstract: | We formulate a two-country, two-good, two-factor, two-period-lived overlapping generations model to examine how population aging determines the pattern of and gains from trade. We obtain two main results. First, the aging country endogenously becomes a small country exporting the capital-intensive good, whereas the younger country endogenously dominates the world economy determining the world prices, in the free trade steady state. Second, although uncompensated free trade cannot be Pareto superior to autarky, there exists a compensation scheme applied within each country such that free trade is Pareto superior to autarky. |
| Keywords: | Aging and trade, Gains from trade, Overlapping generations model, Transitional dynamics, Compensation scheme |
| JEL: | F43 J11 O41 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:kob:dpaper:215&r=opm |
| By: | Sven Blank; Claudia M. Buch |
| Abstract: | International bank portfolios constitute a large component of international country portfolios. Yet, their response to macroeconomic conditions and their impact on the international transmission of business cycles developments remains largely unexplored. We use a novel dataset on banks’ international portfolios to answer three questions. First, what are the long-run determinants of banks’ international portfolios? Second, how do banks’ international portfolios adjust to short-run macroeconomic developments? Third, does the speed of adjustment change with the degree of financial integration? We provide evidence of significant long-run cointegration relationships between cross-border assets and liabilities of banks and key macroeconomic variables. Both, the long-run determinants of banks’ international portfolios as well as the short-run dynamics show a significant degree of heterogeneity across countries and, to some extent, over time. Gravitytype variables help explaining differences in the speed of adjustment to new equilibria. |
| Keywords: | international bank portfolios, macroeconomic developments, transmission channels |
| JEL: | F32 F42 F34 |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:iaw:iawdip:29&r=opm |
| By: | Koen De Backer; Norihiko Yamano |
| Abstract: | One of the distinctive characteristics of the current globalisation process is the emergence of global value chains. Within global value chains and international production networks, not only are final goods traded internationally, but intermediate goods (parts and components) and, in recent years, services also increasingly are. This trend significantly alters the economic relations between countries and increasingly casts doubt on empirical indicators such as trade and FDI that are traditionally used to measure globalisation. Input-output tables may provide much finer detail in describing current globalisation as they offer information on the use of goods instead of the rather arbitrary classification schemes that divide goods into intermediate and other categories. Moreover, input-output tables also incorporate information on the use of services, enabling measurement of the increasing offshoring of service activities in today's business activities. Based on the OECD Input-Output Database, which includes harmonised tables for 38 countries (of which 10 emerging non-OECD economies), this paper brings together empirical evidence on the growing importance of global value chains and the increasing interdependence between countries. Input-output indicators are presented for individual countries and individual industries, aiming to demonstrate the changing characteristics of current globalisation. |
| Date: | 2007–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:oec:stiaaa:2007/8-en&r=opm |
| By: | Akram, Qaisar Farooq; Rime, Dagfinn; Sarno, Lucio |
| Abstract: | This paper provides real-time evidence on the frequency, size, duration and economic significance of arbitrage opportunities in the foreign exchange market. We investigate deviations from the covered interest rate parity (CIP) condition using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency. The analysis unveils that: i) short-lived violations of CIP arise; ii) the size of CIP violations can be economically significant; iii) their duration is, on average, high enough to allow agents to exploit them, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency. |
| Keywords: | arbitrage; covered interest rate parity; exchange rates; foreign exchange microstructure |
| JEL: | F31 F41 G14 G15 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6878&r=opm |
| By: | Søren Johansen; Katarina Juselius; Roman Frydberg; Michael Goldberg (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | This paper discusses a number of likelihood ratio tests on long-run relations and common trends in the I(2) model and provide new results on the test of overidentifying restrictions on beta’xt and the asymptotic variance for the stochas- tic trends parameters, alpha 1: How to specify deterministic components in the I(2) model is discussed at some length. Model specification and tests are illustrated with an empirical analysis of long and persistent swings in the foreign exchange market between Germany and USA. The data analyzed consist of nominal exchange rates, relative prices, US in.ation rate, two long-term interest rates and two short-term interest rates over the 1975-1999 period. One important aim of the paper is to demonstrate that by structuring the data with the help of the I(2) model one can achieve a better understanding of the empirical regularities underlying the persistent swings in nominal exchange rates, typical in periods of floating exchange rates. |
| Keywords: | PPP puzzle, Forward premium puzzle, cointegrated VAR, likelihood inference |
| JEL: | C32 C52 F41 |
| Date: | 2008–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2008-03&r=opm |
| By: | Malin Adolfson; Stefan Laseen; Jesper Linde; Lars E.O. Svensson |
| Abstract: | We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports that the model may be regarded as structural in a stable low inflation environment. Past policy of the Riksbank until 2007:3 (the end of the sample used) is better explained as following a simple instrument rule than as optimal policy under commitment. We show and discuss the differences between policy projections for the estimated instrument rule and for optimal policy under commitment, under alternative definitions of the output gap, different initial values of the Lagrange multipliers representing policy in a timeless perspective, and different weights in the central-bank loss function. |
| JEL: | E52 E58 F41 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14092&r=opm |
| By: | Fung, K.C. (BOFIT); Korhonen, Iikka (BOFIT); Li, Ke (BOFIT); Ng, Francis (BOFIT) |
| Abstract: | China has emerged as one of the world's leading recipients of foreign direct investment (FDI). Meanwhile, the successful transition experience of many Central and Eastern European countries (CEECs) also enables them to attract an increasing share of global foreign investment, particularly from the European Union (EU). What is the relationship between inward FDI of China and the CEECs? We conceptualize the relationship according to three alternative paradigms: 1) China and the CEECs each exist in its own regional production network, with no linkage between FDI flows into China and into CEECs; 2) China and the CEECs together comprise a global production network, so that FDI into China is positively related to FDI into CEECs; and 3)FDI into China is a substitute for FDI into the CEECs, so that the correlation between them is negative. In this paper, we employ panel data to study this issue in detail. Specifically, we compare empirical estimates for 15 CEECs over the 15-year period 1990-2004 using four different econometric approaches: FGLS with Random effects, FGLS with fixed effects, EC2SLS and GMM. The result supports the conclusion that China's inward FDI does not crowd out CEECs' inward FDI. In fact, it shows that in some circumstances FDI flows in these two regions are moderately complementary. In addition, our analysis confirms the importance for FDI flows of recipient-country characteristics such as market size, degree of trade liberalization and labor quality, as well as a healthy global capital market. |
| Keywords: | foreign direct investment (FDI); regional networks; global supply chain; China’s FDI; Central and Eastern European Countries’ FDI |
| JEL: | F20 F21 F43 |
| Date: | 2008–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2008_009&r=opm |
| By: | Marco Del Negro; Frank Schorfheide |
| Abstract: | This paper estimates a small open-economy dynamic stochastic general equilibrium (DSGE) model, specified along the lines of Galí and Monacelli (2005) and Lubik and Schorfheide (2007), using Chilean data for the full inflation-targeting period of 1999 to 2007. We study the specification of the policy rule followed by the Central Bank of Chile, the dynamic response of inflation to domestic and external shocks, and the change in these dynamics under different policy parameters. We use the DSGE-VAR methodology from our earlier work (2007) to assess the robustness of the conclusion to the presence of model misspecification. |
| Keywords: | Stochastic analysis ; Time-series analysis ; Econometric models ; Banks and banking, Central ; Monetary policy |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:329&r=opm |