nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2008‒07‒30
fourteen papers chosen by
Martin Berka
Massey University

  1. How do Fiscal and Technology Shocks affect Real Exchange Rates? New Evidence for the United States By Zeno Enders; Gernot J. Müller; Almut Scholl
  2. The Composition of Government Spending and the Real Exchange Rate By Galstyan, Vahagn A.; Lane, Philip R.
  3. How Has the Euro Changed the Monetary Transmission? By Jean Boivin; Marc P. Giannoni; Benoît Mojon
  4. Frequency of Price Adjustment and Pass-through By Gita Gopinath; Oleg Itskhoki
  5. Home Bias: Asset Prices, Securitization of Mortgage Debt and International Risk Sharing By Mathias Hoffmann; Thomas Nitschka
  6. Manufacturing restructuring and the role of Real exchange rate shocks: A firm level analysis By Ekholm, Karolina; Moxnes, Andreas; Ulltveit-Moe, Karen-Helene
  7. Exchange Rate Puzzles: A Review of the Recent Theoretical and Empirical Developments By Thabo Mokoena; Rangan Gupta; Renee van Eyden
  8. Trade policies, concentration, growth and welfare By González-Val, Rafael; Lanaspa, Luis; Pueyo, Fernando
  9. Private Information and a Macro Model of Exchange Rates: Evidence from a Novel Data Set By Menzie D. Chinn; Michael J. Moore
  10. Optimal Monetary Policy in an Operational Medium-Sized DSGE Model By Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Svensson, Lars E O
  11. Procyclical Fiscal Policy in Developing Countries: Truth or Fiction? By Ethan Ilzetzki; Carlos A. Vegh
  12. Recurrent Support Vector Regression for a Nonlinear ARMA Model with Applications to Forecasting Financial Returns By Shiyi Chen; Kiho Jeong; Wolfgang K. Härdle
  13. Economic diversification in central Africa By KAMGNA, Severin Yves

  1. By: Zeno Enders (University of Bonn, Bonn Graduate School of Economics); Gernot J. Müller (Goethe University Frankfurt); Almut Scholl (Goethe University Frankfurt)
    Abstract: Using vector autoregressions on U.S. time series relative to an aggregate of industrialized countries, this paper provides new evidence on the dynamic effects of government spending and technology shocks on the real exchange rate and the terms of trade. To achieve identi¬fication, we derive robust restrictions on the sign of several impulse responses from a two-country general equilibrium model. We find that both the real exchange rate and the terms of trade – whose responses are left unrestricted – depreciate in response to expansionary govern¬ment spending shocks and appreciate in response to positive technology shocks.
    Keywords: Real Exchange Rate, Terms of Trade, International Transmission Mechanism, Government Spending Shocks, Technology Shocks, VAR, Sign Restrictions
    JEL: F41 F42 E32
    Date: 2008–07–18
  2. By: Galstyan, Vahagn A.; Lane, Philip R.
    Abstract: We show that the composition of government spending influences the long-run behaviour of the real exchange rate. We develop a two-sector small open economy model in which an increase in government consumption is associated with real appreciation, while an increase in government investment may generate real depreciation. Our empirical work confirms that government consumption and government investment have differential effects on the real exchange rate and the relative price of nontradables.
    Keywords: government consumption; government investment; real exchange rate
    JEL: E62 F31 F41
    Date: 2008–07
  3. By: Jean Boivin; Marc P. Giannoni; Benoît Mojon
    Abstract: This paper characterizes the transmission mechanism of monetary shocks across countries of the euro area, documents how this mechanism has changed with the introduction of the euro, and explores some potential explanations. The factor-augmented VAR (FAVAR) framework used is sufficiently rich to jointly model the euro area dynamics while permitting the transmission of shocks to be different across countries. We find important heterogeneity across countries in the effect of monetary shocks before the launch of the euro. In particular, we find that German interest-rate shocks triggered stronger responses of interest rates and consumption in some countries such as Italy and Spain than in Germany itself. According to our estimates, the creation of the euro has contributed 1) to a greater homogeneity of the transmission mechanism across countries, and 2) to an overall reduction in the effects of monetary shocks. Using a structural open-economy model, we argue that the combination of a change in the policy reaction function -- mainly toward a more aggressive response to inflation and output -- and the elimination of an exchange-rate risk can explain the evolution of the monetary transmission mechanism observed empirically.
    JEL: C3 D2 E31 E4 E5 F4
    Date: 2008–07
  4. By: Gita Gopinath; Oleg Itskhoki
    Abstract: A common finding across empirical studies of price adjustment is that there is large heterogeneity in the frequency of price adjustment. However, there is little evidence of how distant prices are from the desired flexible price. Without this evidence, it is difficult to discern what the frequency measure implies for the transmission of shocks or to understand why some firms adjust more frequently than others. We exploit the open economy environment, which provides a well-identified and sizeable cost shock namely the exchange rate shock to shed light on these questions. First, we empirically document that high frequency adjusters have a long-run pass-through that is at least twice as high as low frequency adjusters in the data. Next, we show theoretically that long-run pass-through is determined by the same primitives that shape the curvature of the profit function and, hence, also affect frequency. In an environment with variable mark-ups or variable marginal costs, theory predicts a positive relation between frequency and pass-through, as documented in the data. Consequently, estimates of long-run pass-through shed light on the determinants of the duration of prices. The standard workhorse model with constant elasticity of demand and Calvo or state dependent pricing generates long-run pass-through that is uncorrelated with frequency, contrary to the data. Lastly, we calibrate a dynamic menu-cost model and show that variable mark-ups chosen to match the variation in pass-through in the data can generate substantial variation in price duration, equivalent to one third of the observed variation in the data.
    JEL: E3 E31 F41
    Date: 2008–07
  5. By: Mathias Hoffmann; Thomas Nitschka
    Abstract: We study the impact of global asset price fluctuations on the international allocation of consumption risk at the business cycle frequency in a cross-section of 16 industrialized countries. International risk sharing increases when global equity prices are high and decreases when they are low. In explaining this finding, we focus on the differential degree of international integration of residential housing and equity markets. We argue that globally high equity prices increase the effective international diversification of the average country's national portfolio. Conversely, relatively high housing prices increase the weight of domestic assets in national portfolios - they literally worsen the home bias. In line with this mechanism, we find that global equity prices are good predictors of major portfolio shifts between housing and equity in most of the economies we study. In addition, the dependence of international risk sharing on the global equity price cycle is much less pronounced in countries where the securitization of mortgage-related debt is widely used: securitization seems to play an important role in improving international risk sharing by making mortgage-related risks internationally tradeable.
    Keywords: Asset prices, portfolio shifts, wealth effects, housing, equity, international risk sharing, securitization, mortgages.
    JEL: F36 F37 F41 G15 G21
    Date: 2008–07
  6. By: Ekholm, Karolina; Moxnes, Andreas; Ulltveit-Moe, Karen-Helene
    Abstract: Empirical analyses of the impact of real exchange rate (RER) fluctuations on employment and economic performance do not take heterogeneity with respect to trade exposure into account. In this paper we use detailed Norwegian firm-level data on exports and imports to calculate firm-specific measures of trade exposure. This allows us to provide a more accurate assessment of the adjustment to real exchange rate shocks. We treat the sharp real appreciation of the Norwegian Krone in the early 2000s as a natural experiment to identify firms' response to an RER shock with respect to employment, productivity, and offshoring. We find that the relative cost shock that hit the Norwegian economy led to a significant decline in the more exposed firms' employment. But the RER shock also appears to have contributed to a process of manufacturing restructuring that boosted productivity of firms exposed to foreign markets. A sizable increase in offshoring can also be attributed to the RER shock.
    Keywords: Employment; Productivity; Real Exchange Rates; Trade
    JEL: F14 F16 F4
    Date: 2008–07
  7. By: Thabo Mokoena (South African Reserve Bank, Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria)
    Abstract: This paper presents a comprehensive literature review of the theoretical and empirical developments that have taken place over the last two decades in an attempt to address the exchange rate puzzles. Specifically, we discuss non-linear and Bayesian econometric techniques, Dynamic General Equilibrium models, and the Market Microstructure approach that has been designed to address three exchange rate puzzles, namely, the Purchasing Power Parity (PPP) puzzle, the exchange rate disconnect puzzle and the exchange rate determination puzzle. We conclude that the exchange rate puzzles are likely to be less puzzling, if researchers decide to move to non-linear econometric frameworks and microfounded general equilibrium models.
    Keywords: Dynamic General Equilibrium Models, Exchange Rate Puzzles, Non-Linear and Bayesian Econometric Models
    JEL: C1 C4 F3 F4
    Date: 2008–07
  8. By: González-Val, Rafael; Lanaspa, Luis; Pueyo, Fernando
    Abstract: The aim of this paper is to analyse, through a theoretical model, the effects that the trade integration of two countries may have on industrial location, growth and welfare. The conclusions reached finally depend both on whether the import or the export costs are affected by the trade policies on which the integration process is based and on whether the rich or the poor country introduces them. In general, when integration leads to an increase of industrial concentration in the rich country, the growth rate increases and welfare improves in both countries. If integration means that industry moves to the poor country, the growth rate decreases; in spite of this, in this case the poor country can also improve its welfare.
    Keywords: Trade integration; industrial location; growth; welfare
    JEL: H54 F15 R12 F43
    Date: 2008–05–26
  9. By: Menzie D. Chinn; Michael J. Moore
    Abstract: We propose an exchange rate model which is a hybrid of the conventional specification with monetary fundamentals and the Evans-Lyons microstructure approach. It argues that the failure of the monetary model is principally due to private preference shocks which render the demand for money unstable. These shocks to liquidity preference are revealed through order flow. We estimate a model augmented with order flow variables, using a unique data set: almost 100 monthly observations on inter-dealer order flow on dollar/euro and dollar/yen. The augmented macroeconomic, or "hybrid", model exhibits out of sample forecasting improvement over the basic macroeconomic and random walk specifications.
    JEL: D82 F31 F41 F47
    Date: 2008–07
  10. By: Adolfson, Malin; Laséen, Stefan; Lindé, Jesper; Svensson, Lars E O
    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.
    Keywords: Instrument rules; Open-economy DSGE models; Optimal monetary policy; Optimal policy projections
    JEL: E52 E58
    Date: 2008–07
  11. By: Ethan Ilzetzki; Carlos A. Vegh
    Abstract: A large empirical literature has found that fiscal policy in developing countries is procyclical, in contrast to high-income countries where it is countercyclical. The idea that fiscal policy in developing countries is procyclical has all but reached the status of conventional wisdom. This has sparked a growing theoretical literature that attempts to explain such a puzzle. Some authors, however, have suggested that procyclical fiscal policy could be more fiction than truth since, by and large, the current literature has ignored endogeneity problems and may have simply misidentified a standard expansionary effect of fiscal policy. To settle this issue of causality, we build a novel quarterly dataset for 49 countries covering the period 1960-2006, and subject the data to a battery of econometric tests: instrumental variables, simultaneous equations, and time-series methods. We find overwhelming evidence to support the idea that procyclical fiscal policy in developing countries is in fact truth and not fiction. We also find evidence that fiscal policy is expansionary -- a channel disregarded by the existing literature -- lending empirical support to the notion that when "it rains, it pours."
    JEL: E62 F41
    Date: 2008–07
  12. By: Shiyi Chen; Kiho Jeong; Wolfgang K. Härdle
    Abstract: Motivated by the recurrent Neural Networks, this paper proposes a recurrent Support Vector Regression (SVR) procedure to forecast nonlinear ARMA model based simulated data and real data of financial returns. The forecasting ability of the recurrent SVR is compared with three competing methods, MLE, recurrent MLP and feedforward SVR. Theoretically, MLE and MLP only focus on fit in-sample, but SVR considers both fit and forecast out-of-sample which endows SVR with an excellent forecasting ability. This is confirmed by the evidence from the simulated and real data based on two forecasting accuracy evaluation metrics (NSME and sign). That is, for one-step-ahead forecasting, the recurrent SVR is consistently better than the MLE and the recurrent MLP in forecasting both the magnitude and turning points, and really improves the forecasting performance as opposed to the usual feedforward SVR.
    Keywords: Recurrent Support Vector Regression; MLE; recurrent MLP; nonlinear ARMA; financial forecasting
    JEL: C45 F37 F47
    Date: 2008–07
  13. By: KAMGNA, Severin Yves
    Abstract: The CEMAC’s countries are characterized by a weak diversification of their products and exports. Their economic performances are thus dependent of the activities of vulnerable sectors, and in general of the production of one or some raw materials. In fact, in spite of the growth of the weight of the exports of goods in the wealth creation during the period 1987 - 2006, with as corollary an accentuation of the openness, the exported products are stayed quasi-identical on the whole period. Besides, it is evident from the macro-econometrics modelling that the most explanatory factors of the diversification are i) the budgetary balance (macroeconomic variable), ii) the degree of commercial openness (political variable), and iii) the rate of investment (physical variable). These results show that all these variables are rather likely to encourage the concentration.
    Keywords: Diversification; concentration; CEMAC
    JEL: F10 F14 F41 F43
    Date: 2007–10–02
  14. By: Athina Zervoyianni (University of Patras, Greece and The Rimini Centre for Economic Analysis)
    Abstract: This paper explores the relation between trade flows and cross-country symmetry of supply and demand shocks using data from the EU27 countries. Increased bilateral trade intensity is found to have a positive impact on the correlation of both demand and supply shocks. Intra-industry trade is found to be positively linked to correlations of supply-side shocks but negatively linked to correlation of demand shocks. Our results thus provide support for the argument that aggregate demand spill-overs and intra-industry trade, rather than specialization, dominate in the process through which trade flows affect the cross-country transmission of shocks in Europe. At the same time, our estimates suggest that monetary-policy convergence in Europe (the circulation of the euro), while having increased symmetry of supply-side shocks, has had no direct favourable impact on symmetry of demand shocks. By contrast, the process of fiscal-policy convergence is found to have resulted in more correlated demand shocks across the EU member states. Classification-JEL: F4, F15, E32
    Keywords: convergence of shocks; trade flows; European integration; cyclical macroeconomic fluctuations
    Date: 2008–01

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