nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2008‒07‒14
ten papers chosen by
Martin Berka
Massey University

  1. Pitfalls in Measuring Exchange Rate Misalignment: The Yuan and Other Currencies By Yin-Wong Cheung; Menzie D. Chinn; Eiji Fujii
  2. Trade and quality: theoretical and empirical evidence for the euro zone By Massimiliano Serati
  3. How Much Intraregional Exchange Rate Variability Could a Currency Union Remove? The Case of ASEAN+3 By Duo Qin; Tao Tan
  4. Estimating open economy Phillips curves for the euro area with directly measured expectations By Paloviita, Maritta
  5. Getting PPP Right: Identifying Mean-Reverting Real Exchange Rates in Panels By Georgios Chortareas; George Kapetanios
  6. Skill Upgrading and the Real Exchange Rate By Roberto Alvarez; Ricardo Lopez
  7. Informality and Macroeconomic Fluctuations By Fiess, Norbert M.; Fugazza, Marco; Maloney, William F.
  8. Exports and exchange rate : a firm-level investigation By Sarah Guillou
  9. Updating empirical evidence on business cycles synchronization between CEECs and the euro area : How important is the recent period By Sandrine Levasseur
  10. International spillovers of domestic reforms By Arjan Lejour; Hugo Rojas-Romagosa

  1. By: Yin-Wong Cheung; Menzie D. Chinn; Eiji Fujii
    Abstract: We evaluate whether the Renminbi (RMB) is misaligned, relying upon conventional statistical methods of inference. A framework built around the relationship between relative price and relative output levels is used. We find that, once sampling uncertainty and serial correlation are accounted for, there is little statistical evidence that the RMB is undervalued, even though the point estimates usually indicate economically significant misalignment. The result is robust to various choices of country samples and sample periods, as well as to the inclusion of control variables. We then update the results using the latest vintage of the data to demonstrate how fragile the results are. We find that whatever misalignment we detected in our previous work disappears in this data set.
    JEL: F31 F41
    Date: 2008–07
  2. By: Massimiliano Serati (Cattaneo University (LIUC))
    Abstract: Since the contribution of Linder (1961) product quality is considered as a factor potentially boosting exports, especially for the most industrialized countries. However, being quality difficult to be measured, the macro-econometric studies on its role are not numerous and have not produced clear-cut results. In this paper we shed some light on the theoretical and empirical impact of product quality on the export performance of the EU-12 area. To avoid problems of mis-specification and endogeneity usual in the empirical literature on trade equations, we model exports as jointly endogenous with GDP, inflation and exchange rate. For this purpose we modify and enlarge a New Keynesian open economy model à la Clarida, Galì and Gertler (2001) to adapt it to a large open economy. Sign restrictions, based on theoretical impact multipliers, enable the identification of quality as one of the structural shocks of the corresponding Bayesian VAR, avoiding drawbacks connected to the choice of an incomplete, partial or biased proxy of the phenomenon. The empirical evidence shows that a quality upgrade might reinforce the EU competitiveness leading to an improvement of the current account, without any unfavourable effect on terms of trade.
    Date: 2008–02
  3. By: Duo Qin (Queen Mary, University of London); Tao Tan (Tianjin University of Finance and Economics)
    Abstract: A multilateral currency union removes the intraregional exchange rates but not the union rate variability with the rest of the world. The intraregional exchange rate variability is thus latent. A two-step procedure is developed to measure the variability. The measured variables are used to model inflation and intraregional trade growth of individual union members. The resulting models form the base for counterfactual simulations of the union impact. Application to ASEAN+3 shows that the intraregional variability consists of mainly short-run shocks, which have significantly affected the inflation and trade growth of major ASEAN+3 members, and that a union would reduce inflation and promote intraregional trade on the whole but the benefits facing each member vary and may not be significant enough to warrant a vote for the union.
    Keywords: Currency union, Latent variables, Dynamic factor model, Simulation
    JEL: F02 F40 O19 O53
    Date: 2008–07
  4. By: Paloviita, Maritta (Bank of Finland Research)
    Abstract: This paper examines euro area inflation dynamics by estimating open economy New Keynesian Phillips curves based on the assumption that all imports are intermediate goods. Instead of imposing rational expectations a priori, Consensus Economics survey data and OECD inflation forecasts are used to proxy inflation expectations. The results suggest that, compared with a closed economy New Keynesian Phillips curve, euro area inflation dynamics are better captured by the open economy specification. Moreover, in the open economy context, and even if we allow for persistence in expectations, the hybrid specification of the New Keynesian Phillips curve is needed in order to capture the euro area inflation process properly. We also provide some evidence that in recent years of low and stable inflation, euro area inflation dynamics have become more forward-looking and the link between inflation and domestic demand has weakened (ie the euro area Phillips curve has flattened). On the other hand, in low-inflation euro area countries the inflation process seems to have been more forward-looking already since the early 1980s.
    Keywords: New Keynesian Phillips curve; open economy; expectations; euro area
    JEL: C52 E31 F41
    Date: 2008–06–25
  5. By: Georgios Chortareas (University of Athens); George Kapetanios (Queen Mary, University of London)
    Abstract: Recent advances in testing for the validity of Purchasing Power Parity (PPP) focus on the time series properties of real exchange rates in panel frameworks. One weakness of such tests, however, is that they fail to inform the researcher as to which cross-section units are stationary. As a consequence, a reservation for PPP analyses based on such tests is that a small number of real exchange rates in a given panel may drive the results. In this paper we examine the PPP hypothesis focusing on the stationarity of the real exchange rates in up to 25 OECD countries. We introduce a methodology that when applied to a set of established panel-unit-root tests, allows the identification of the real exchange rates that are stationary. We apply procedures that account for cross-sectional dependence. Our results reveal evidence of mean-reversion that is significantly stronger as compared to that obtained by the existing literature, strengthening the case for PPP. Moreover, our approach can be used to provide half-lives estimates for the mean-reverting real exchange rates. We find that the half-lives are shorter than the literature consensus and therefore that the PPP puzzle is less pronounced than initially thought.
    Keywords: PPP, Panel unit root tests, Real exchange rates, Half-lives, PPP puzzle
    JEL: C12 C15 C23 F31
    Date: 2008–07
  6. By: Roberto Alvarez (Central Bank of Chile); Ricardo Lopez (Indiana University Bloomington)
    Abstract: This paper examines the effect of changes in the real exchange rate on skill upgrading in the case of Chile. Using plant-level data from the manufacturing sector we find that a real depreciation increases the share of skilled workers in the total wage bill in exporters but not in non-exporters. This result suggests that depreciations or, more generally, increases in export profitability, may induce exporters to adopt more skilled-intensive technologies. This finding gives support to recent models of trade that highlight the possible effect of the real exchange rate on skill upgrading and wage inequality. This paper also finds that real depreciations increase the probability of exporting and the export intensity of plants that export, suggesting that these two channels may explain why changes in the real exchange rate may affect wages.
    JEL: F14 F16 O30 O54
    Date: 2008–07
  7. By: Fiess, Norbert M. (University of Glasgow); Fugazza, Marco (UNCTAD); Maloney, William F. (World Bank)
    Abstract: This paper examines the adjustment of developing country labor markets to macroeconomic shocks. It models as having two sectors: a formal salaried (tradable) sector that may or may not be affected by union or legislation induced wage rigidities, and an informal (nontradable) self-employment sector facing liquidity constraints to entry. This is embedded in a standard small economy macro model that permits the derivation of patterns of comovement among relative salaried/self-employed incomes, salaried/self-employed sector sizes and the real exchange rate with respect to different types of shocks in contexts with and without wage rigidities. The paper then explores time series data from Argentina, Brazil, Colombia and Mexico to test for cointegrating relationships corresponding to the patterns predicted by theory. We confirm episodes of expansion of informal self-employment consistent with the traditional segmentation views. However, we also identify episodes consistent with the sectoral expansion being driven by relative demand or productivity shocks to the nontradables sector that lead to “procyclical” behavior of the informal self-employed sector.
    Keywords: informality, labor market dynamics, self-employment, real exchange rates
    JEL: F41 J21 J24 J31 O17
    Date: 2008–05
  8. By: Sarah Guillou (Observatoire Français des Conjonctures Économiques)
    Date: 2008
  9. By: Sandrine Levasseur (Observatoire Français des Conjonctures Économiques)
    Date: 2008
  10. By: Arjan Lejour; Hugo Rojas-Romagosa
    Abstract: Using the CGE model WorldScan, we assess the benefits for the EU member states of jointly reaching four of the Lisbon targets (i.e. 70% employment, skills upgrades, increased R&D expenditures and administrative burden reductions of 25%), compared with the alternative when each country unilaterally pursues these reforms. With this approach, we estimate the associated international spillovers of joint EU coordination. Spillovers associated with R&D expenditures are a key factor. When the R&D target is jointly reached in the EU, output almost doubles and consumption experiments an even greater increase. The other three targets also produce positive spillovers, but of a much lower magnitude.
    Keywords: International Policy Spillovers; CGE models; R&D spillovers
    JEL: F42 C68 O33
    Date: 2008–05

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