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on Open MacroEconomics |
| By: | Martin Bodenstein |
| Abstract: | The empirical literature provides a wide range of estimates for trade elasticities at the aggregate level. Furthermore, recent contributions in international macroeconomics suggest that low (implied) values of the trade elasticity of substitution may play an important role in understanding the disconnect between international prices and real variables. However, a standard model of the international business cycle displays multiple locally isolated equilibria if the trade elasticity of substitution is sufficiently low. The main contribution of this paper is to compute and characterize some dynamic properties of these equilibria. While multiple steady states clearly signal equilibrium multiplicity in the dynamic setup, this is not a necessary condition. Solutions based on log-linearization around a deterministic steady state are of limited to no help in computing the true dynamics. However, the log-linear solution can hint at the presence of multiple dynamic equilibria. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:934&r=opm |
| By: | M. Ayhan Kose; Christopher Otrok; Eswar Prasad |
| Abstract: | This paper analyzes the evolution of the degree of global cyclical interdependence over the period 1960-2005. We categorize the 106 countries in our sample into three groups-industrial countries, emerging markets, and other developing economies. Using a dynamic factor model, we then decompose macroeconomic fluctuations in key macroeconomic aggregates-output, consumption, and investment-into different factors. These are: (i) a global factor, which picks up fluctuations that are common across all variables and countries; (ii) three group-specific factors, which capture fluctuations that are common to all variables and all countries within each group of countries; (iii) country factors, which are common across all aggregates in a given country; and (iv) idiosyncratic factors specific to each time series. Our main result is that, during the period of globalization (1985-2005), there has been some convergence of business cycle fluctuations among the group of industrial economies and among the group of emerging market economies. Surprisingly, there has been a concomitant decline in the relative importance of the global factor. In other words, there is evidence of business cycle convergence within each of these two groups of countries but divergence (or decoupling) between them. |
| Date: | 2008–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/143&r=opm |
| By: | James M. Nason; John H. Rogers |
| Abstract: | Exchange rates have raised the ire of economists for more than twenty years. The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out-of-sample forecasts. Engel and West (2005) show that these failures can be explained by the standard present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root. This paper generalizes the Engel and West hypothesis to the larger class of open economy dynamic stochastic general equilibrium (DSGE) models. The Engel and West hypothesis is shown to hold for a canonical open economy DSGE model. We show that all the predictions of the standard PVM carry over to the DSGE PVM. The DSGE PVM also yields unobserved components (UC) models that we estimate using Bayesian methods and a quarterly Canadian-U.S. sample. Bayesian model evaluation reveals that the data support a UC model that calibrates the discount factor to one, implying the Canadian dollar–U.S. dollar exchange rate is a random walk dominated by permanent cross-country monetary and productivity shocks. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2008-16&r=opm |
| By: | Claudia S. Gómez-López; Luis A.Puch |
| Abstract: | Chile and Mexico, two Latin American countries that shared similar economic conditions in early’ 80s are studied in order to shed light about the role commodities play. In a general equilibrium growth accounting framework over the period 1980-2000 we show that Adjusted Total Factor Productivity net of oil and copper, has correspondingly decreased and increased less than TFP, suggesting that commodities are a relevant growth factor. Previous works have shown that Chile recovered more quickly than Mexico did. However, when commodity price changes are taken into account, we show that copper and oil have played a major role in the depressions and recoveries for both economies. We propose a neoclassical growth model where we distinguish between the role of commodities and the rest of the economy. The results complement the findings in Bergoeing et al.(2002). |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2008-27&r=opm |
| By: | Pascal Jacquinot (Directorate General Research, Econometric Modelling, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Roland Straub (Directorate General International and European Relations, International Policy Analysis, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | In this paper, we utilise the multi-country version of the NAWM to analyse the impact of globalisation on euro area macroeconomic aggregates. We provide alternative modelbased definitions of globalisation associated with an increase in potential output in emerging Asia and its impact on total factor productivity in the euro area, and a shift in international specialisation patterns leading to changes in relative demand and import substitutions. The results indicate that globalisation has a positive impact on output, consumption, investment and real labour income in the long-run. This impact is driven by the improvement in the terms of trade and associated positive wealth effects, as well as by spillovers of higher potential output in emerging Asia on euro area total factor productivity. Additionally, we provide evidence that structural reforms in goods and labour markets would amplify the benefits associated with globalisation. JEL Classification: E32, E62. |
| Keywords: | DSGE modelling, globalisation, euro area. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080907&r=opm |
| By: | William R. Cline (Peterson Institute) |
| Abstract: | This paper sets forth a new methodology for obtaining a consistent set of exchange rate realignments needed to accomplish international adjustment in current account imbalances to reach fundamental equilibrium exchange rates (FEERs). The approach is named the symmetric matrix inversion method (SMIM). It is symmetric in that ir treats all countries considered equally rather than seeking exact adjustment for the United States and obtaining other adjustments residually. Country-specific impact parameters based on assumed trade elasticities are applied to a target set of changes in current accounts as percentages of GDP to obtain a corresponding set of target changes in real effective (trade-weighted) exchange rates. A matrix inversion technique is then applied to identify the corresponding set of changes in bilateral exchange rates against the dollar needed to approach as closely as possible the target set of effective exchange rate changes. |
| Keywords: | Exchange Rates, Current Account Adjustment, Dollar |
| JEL: | F31 F32 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp08-6&r=opm |
| By: | Chris Papageorgiou; Subir Lall; Florence Jaumotte |
| Abstract: | We examine the relationship between trade and financial globalization and the rise in inequality in most countries in recent decades. We find technological progress as having a greater impact than globalization on inequality. The limited overall impact of globalization reflects two offsetting tendencies: whereas trade globalization is associated with a reduction in inequality, financial globalization-and foreign direct investment in particular-is associated with an increase. A key finding is that both globalization and technological changes increase the returns on human capital, underscoring the importance of education and training in both developed and developing countries in addressing rising inequality. |
| Keywords: | Income distribution , Globalization , Foreign direct investment , Human capital , Education , Economic models , Trade models , |
| Date: | 2008–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/185&r=opm |
| By: | Yuliya Rychalovska |
| Abstract: | The paper analyzes the stabilization objectives of optimal monetary policy and the trade-offs facing the central bank in a two-sector small open economy model obtained as a limiting case of a two-country DSGE framework. We introduce a more complicated economic structure, namely, multiple domestic sectors combined with a variety of exogenous shocks. In addition, our model includes a more general specication of consumers’ preferences than has been considered in the literature so far. As a result, we are able to uncover additional welfare effects specic to the open multi-sectoral economy and make a methodological contribution by deriving a utility-based welfare measure and the optimal reaction function of the central bank. We show that the optimal targeting rule is represented by a complex expression that prescribes the response to the appropriate measure of domestic inflation, sectoral output gaps, as well as to the relevant relative prices. We demonstrate that our model generates an endogenous conflict between the objectives of domestic inflation and real exchange rate stabilization in addition to the inflation-output gap policy trade-off common in the literature. Furthermore, we experiment with alternative simple rules and analyze their ability to replicate the optimal solution. |
| Keywords: | DSGE models, non-traded goods, optimal monetary policy, welfare. |
| JEL: | E52 E58 E61 F41 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2007/16&r=opm |
| By: | Matteo Ciccarelli; Benoît Mojon |
| Abstract: | This paper shows that inflation in industrialized countries is largely a global phenomenon. First, the inflation rates of 22 OECD countries have a common factor that alone accounts for nearly 70 percent of their variance. This large variance share that is associated with Global Inflation is not only due to the trend components of inflation (up from 1960 to 1980 and down thereafter) but also to fluctuations at business cycle frequencies. Second, we show that, in conformity to the prediction of New Keynesian open economy models, there is little spillover of inflationay shocks across countries. The comovement of inflation comes largely from common shocks. Global Inflation is a function of real developments at short horizons and monetary developments at longer horizons. Third, there is a robust "error correction mechanism" that brings national inflation rates back to Global Inflation. A simple model that accounts for this feature consistently beats the previous benchmarks used to forecast inflation 4 to 8 quarters ahead across samples and countries. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-08-05&r=opm |
| By: | Juan Zalduendo |
| Abstract: | This paper focuses on assessments of real exchange rates using PPP data and examines their limitations when these are based exclusively on bivariate estimations. It begins by presenting an analytical framework of the real exchange rate that shows that these estimations make many restrictive assumptions. In turn, the empirical evidence presented shows that the estimates are not robust to changes in sample, such as those that arise from differences in incomes per capita. The conclusion is that the bivariate assessment of real exchange rates do not control for the heterogeneity that exists across countries, thus limiting their usefulness. This critique of bivariate estimations does not apply however to multivariate approaches such as utilized by CGER |
| Keywords: | Working Paper , Exchange rates , Purchasing power parity , Prices , |
| Date: | 2008–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/153&r=opm |
| By: | Carol C. Bertaut; Steven B. Kamin; Charles P. Thomas |
| Abstract: | This paper addresses three questions about the prospects for the U.S. current account deficit. Is it sustainable in the long term? If not, how long will it take for measures of external debt and debt service to reach levels that could prompt some pullback by global investors? And if and when such levels are breached, how readily would asset prices respond and the current account start to narrow? ; To address these questions, we start with projections of a detailed partial-equilibrium model of the U.S. balance of payments. Based on plausible assumptions of the key drivers of the U.S. external balance, they indicate that the current account deficit will resume widening and the negative NIIP/GDP ratio will continue to expand. However, our projections suggest that even by the year 2020, the negative NIIP/GDP ratio will be no higher than it is in several industrial economies today, and U.S. net investment income payments will remain very low. The share of U.S. claims in foreigners' portfolios will likely rise, but not to an obviously worrisome extent. All told, it seems likely it would take many years for the U.S. debt to cumulate to a level that would test global investors' willingness to extend financing. ; Finally, we explore the historical responsiveness of asset prices and the current account in industrial economies to measures of external imbalances and debt. We find little evidence that, as countries' net indebtedness rises, the developments needed to correct the current account--including changes in growth rates, asset prices, or exchange rates--materialize all that rapidly. ; We would emphasize that these findings do not imply that U.S. current account adjustment is necessarily many years away, as any number of factors could trigger such adjustment. Our point is rather that international balance sheet considerations likely are not sufficient, by themselves, to require external adjustment any time soon. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:935&r=opm |
| By: | Christopher Adam; David Cobham |
| Abstract: | Middle East and North African (MENA) countries have traditionally anchored their currencies largely on the US dollar, but the creation of the euro means that there is now for the first time a real alternative numéraire and anchor available. This paper estimates the effect of a menu of exchange rate regimes on trade within a gravity model, using the Baier & Bergstrand (2006) Taylor expansion technique to allow for multilateral trade resistance. This approach allows simulations of the effects of changes in the exchange rate regime for a particular country or region which explicitly take into account the associated changes in multilateral and world trade resistance. Results are presented for eight different scenarios: pegging to the dollar, dollarising, pegging to the euro and euroising, each of these on an individual country basis and when the MENA countries all implement the change together. We find that in terms of the trade effects for most MENA countries it would be better to anchor on the euro than on the dollar, but for some others (typically small oil exporters with large exports to Asian countries) it would be better to continue to anchor on the dollar. |
| Keywords: | gravity, geography, trade, exchange rate regime, currency union, transactions costs, multilateral trade resistance, MENA, Middle East, North Africa, euro, dollar |
| JEL: | F10 F33 F49 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:hwe:certdp:0803&r=opm |
| By: | Olimov, Ulugbek; Sirajiddinov, Nishanbay |
| Abstract: | This study documents a quantitative analysis of exchange rate volatilities and misalignment in Uzbekistan for the period of 1994q3–2005q2. The results suggest thatthe real exchange rate volatility and misalignment have depressing effects on the volume of trade, mainly exports in Uzbekistan. The Governments currency rationing policy was lessening the volatility proving that the policy-induced changes in exchange rate has a stabilizing effect on trade flows. The implied elasticity for the most significant real exchange rate volatility coefficient is -0.20. Using a two-step Engle-Granger technique import demand and export supply price elasticities are computed. The results are consistent with the predictions from a number of previous studies, and in particular, the estimated exports price elasticity for Uzbek economy ranges from 1.65 to 1.84, while import demand price elasticity is between -0.78 and -0.83. At the same time, relatively lower elasticity during ’the currency rationing’ period indicate that large devaluations, most likely, did not generate the expected improvements in the overall export performance. |
| Keywords: | real exchange rate; volatility; misalignment; trade flows; Uzbekistan |
| JEL: | C32 F41 F31 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9749&r=opm |
| By: | Marcel Tirpák; Christoph B. Rosenberg |
| Abstract: | The paper investigates the determinants of foreign currency borrowing by the private sector in the new member states of the European Union. We find that striking differences in patterns of foreign currency borrowing between countries are explained by the loan-to-deposit ratios, openness, and the interest rate differential. Joining the EU appears to have played an important role, by providing direct access to foreign funding, offering hedging opportunities through greater openness, lending credibility to exchange rate regimes, and raising expectations of imminent euro adoption. The empirical evidence suggests that regulatory policies to slow foreign currency borrowing have had only limited success. |
| Keywords: | Europe , European Union , External borrowing , Private sector , Foreign investment , Exchange rate regimes , Euro , |
| Date: | 2008–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/173&r=opm |
| By: | Nadeem Ilahi; Riham Shendy |
| Abstract: | This paper tests the association between the Gulf Cooperation Council (GCC) countries' financial and remittance outflows and regional growth in the Middle East. The findings, based on 35-year panel data, indicate that growth rates of real GDP, private consumption and private investment in regional countries are strongly associated with remittance outflows from and the accumulation of financial surpluses in the GCC. Unlike in other developing and emerging market countries, growth in regional countries is not influenced by growth in the North, and is not export led. Linkages with the GCC could help sustain output growth in the regional countries in the face of the global economic slowdown and oil price shocks and could provide diversification gains to international capital seeking markets uncorrelated with Northern and emerging market countries. |
| Keywords: | Middle East , Oil producing countries , Cooperation Council for the Arab States of the Gulf , Economic growth , Capital flows , Gross domestic product , Private consumption , Private investment , Outward remittances , Regional shocks , Oil prices , Capital markets , Business cycles , Emerging markets , |
| Date: | 2008–07–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/167&r=opm |