|
on Open MacroEconomics |
| By: | Maurice Obstfeld; Jay C. Shambaugh; Alan M. Taylor |
| Abstract: | The rapid growth of international reserves---a development concentrated in the emerging markets---remains a puzzle. In this paper we suggest that a model based on financial stability and financial openness goes far toward explaining reserve holdings in the modern era of globalized capital markets. The size of domestic financial liabilities that could potentially be converted into foreign currency (M2), financial openness, the ability to access foreign currency through debt markets, and exchange rate policy are all significant predictors of reserve stocks. Our empirical financial-stability model seems to outperform both traditional models and recent explanations based on external short-term debt. |
| JEL: | E44 E58 F21 F31 F36 F41 N10 O24 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14217&r=opm |
| By: | Jose Antonio Rodriguez Lopez (Department of Economics, University of California-Irvine) |
| Abstract: | I present partial and general equilibrium versions of a sticky-wage model of exchange rate pass-through with heterogeneous producers and endogenous markups. The model's results are consistent with a story of substantial expenditure-switching effects of exchange rate changes in the presence of low levels of exchange rate pass-through to firm-level and aggregate import prices. After an exchange rate shock, aggregate import prices are subject to a survivorship bias due to changes in the extensive margin of trade. At the firm level, each producer adjusts its markups depending on its own productivity and the change in the competition environment generated by the exchange rate movement. Firm-level price responses are asymmetric -- different for appreciations and depreciations -- and adjustments in the intensive margin of trade are substantial. The general equilibrium model, solved with a second-order solution method, preserves the partial equilibrium results and shows how firm relocations increase the persistence of exogenous shocks. |
| Keywords: | Exchange rate pass-through; Heterogeneous firms; Endogenous markups |
| JEL: | F12 F41 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:irv:wpaper:080902&r=opm |
| By: | Wei Dong |
| Abstract: | This paper investigates the impact of exchange rate movements on the conduct of monetary policy in Australia, Canada, New Zealand and the United Kingdom. We develop and estimate a structural general equilibrium two-sector model with sticky prices and wages and limited exchange rate pass-through. Different specifications for the monetary policy rule and the real exchange rate process are examined. The results indicate that the Reserve Bank of Australia, the Bank of Canada and the Bank of England paid close attention to real exchange rate movements, whereas the Reserve Bank of New Zealand did not seem to incorporate exchange rate movements explicitly into their policy rule. With a higher degree of intrinsic inflation persistence, the central bank of New Zealand seems less concerned about future inflation pressure induced by current exchange rate movements. In addition, the structure of the shocks driving inflation and output variations in New Zealand is such that it may be sufficient for the Reserve Bank of New Zealand to only respond to exchange rate movements indirectly through stabilizing inflation and output. |
| Keywords: | Exchange rates; Monetary policy framework; International topics |
| JEL: | F3 F4 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-24&r=opm |
| By: | Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany) |
| Abstract: | This paper studies stabilisation policies in a multi-country currency union of small open economies. It abstracts from key factors favouring currency union formation, such as reduced transaction costs and enhanced credibility, which are exogenous to the factors studied here. Demand-side shocks hamper monetary union stabilisation unless members face identical output-inflation tradeoffs and their business cycles are perfectly synchronised. Under supply shocks, welfare implications from joining a currency union are less clear cut. In particular, when these shocks are common across participating countries a tradeoff arises whereby the latter bene?t if they are relatively open but are at a disadvantage in case they are of small size. Monetary-?scal interaction leads to a free rider problem, with area-wide supply shocks eliciting higher interest rate variability. Compared with the case of real wage rigidity, increased real wage ?exibility mitigates the free rider problem. Higher trade union decentralisation overall favours a currency union. The present multi-country currency union setup should not be seen as an attempt at settling the sharp differences that exist in the literature. Our model could be modi?ed in order to derive results that are valid in more realistic environments. These include the analysis of public debt considerations in the case of ?scal policies, and both institutional and (further) macroeconomic aspects in the area of wage determination. JEL Classification: E52, E58, F33, F42, E63. |
| Keywords: | Monetary union, stabilisation, welfare, small open economies, fi?scal policy, wage setting. |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080927&r=opm |
| By: | Matthew Canzoneri; Robert E. Cumby; Behzad Diba; David Lopez-Salido |
| Abstract: | What are the macroeconomic consequences of the dominant role of the dollar in the international monetary system? Here, we present a calibrated two country model in which exports are invoiced in the key currency, and government bonds denominated in the key currency are held internationally to facilitate trade. Domestic government bonds and money are held in each country to facilitate domestic transactions. Our model generates deviations from uncovered interest parity that are as volatile as some empirical estimates, but much too small by others. Our model also speaks to some other empirical anomalies, such as the Backus - Smith puzzle. Shocks affecting asset supplies -- such as bond financed tax cuts, and open market operations -- have large effects in our model because they generate non-Ricardian changes in household wealth. Generally, shocks emanating from the key currency country do more to destabilize the world economy than equal sized shocks coming from the other country. Similarly, monetary and fiscal policy innovations in the key currency country are more potent than those in the other country. On the other hand, the key currency country is more vulnerable to financial market turbulence, such as a sell off of key currency bonds, which can lower consumption dramatically. |
| JEL: | F3 F4 F41 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14242&r=opm |
| By: | Maher Hasan; Hesham Alogeel |
| Abstract: | This paper investigates the factors that affect inflation in the GCC region by examining the inflationary processes in Saudi Arabia and Kuwait. The paper utilizes a model that accounts for foreign factors affecting inflation, such as trading partners' inflation and exchange rate pass-through effect, as well as domestic influences. The analysis concludes that, in the long run, higher inflation in trading partners' countries is the main driving force for inflation in the two countries, with significant but lower contributions from the exchange rate pass-through effect and oil prices. Demand and money supply shocks affect inflation in the short run. |
| Keywords: | Inflation , Saudi Arabia , Kuwait , Money supply , Exchange rate stability , Bilateral trade , Cooperation Council for the Arab States of the Gulf , |
| Date: | 2008–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/193&r=opm |
| By: | Zhang, Yan |
| Abstract: | We establish conditions under which indeterminacy can occur in a small open economy oil-in the production RBC model with lump sum tariff revenue transfers. The indeterminacy would require that the steady state tariff rates be in an open interval. This means that as long as the government revenues are exogenous, our indeterminacy result will be robust to the usage of the government revenue. |
| Keywords: | Indeterminacy; Endogenous Tariff Rate; Small Open Economy; Lump Sum Transfers. |
| JEL: | F41 Q43 |
| Date: | 2008–06–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10043&r=opm |
| By: | Zhang, Yan; Chen, Yan |
| Abstract: | We explore the equivalence between the factor income taxes (in Schmitt-Grohe and Uribe 1997) in the closed economy and the tariff in the open economy, in the sense that they share similar propagation mechanism of sunspot and fundamental shocks under a balanced-budget rule. |
| Keywords: | Sunspots; Endogenous Tariff Rate; Comovement |
| JEL: | F41 Q43 |
| Date: | 2008–06–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10044&r=opm |
| By: | Johansson, Pernilla (Department of Economics, Lund University) |
| Abstract: | The donor community provided around $400 billion in debt relief to developing countries between 1989 and 2004. This paper empirically assesses the impact of debt relief on growth and investment by examining two potential mechanisms. The resource mechanism refers to the resources made available from reduced debt service payments whereas the incentive mechanism takes into account the incentive effects of a reduced debt stock. Based on a sample of 61 developing countries between 1989 and 2004, this study shows that debt relief did not affect growth directly or through capital investment. |
| Keywords: | Debt relief; growth; investment; developing countries; HIPC |
| JEL: | F34 F35 F43 O11 O16 |
| Date: | 2008–08–07 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2008_011&r=opm |
| By: | Pham Van Ha and Tom Kompas |
| Abstract: | Standard tests of the Harrod-Balassa-Samuelson (HBS) hypothesis treat productivity levels in and across countries as fixed and observable, and offer little empirical support for the hypothesis. If productivity follows a jump-diffusion process, these standard tests will generate biased estimates, measuring productivity levels with error. This paper instead proposes an ‘errors in variables’ approach to correct this bias, and finds support for the HBS hypothesis assuming a jump-diffusion process in productivity. Empirical results are obtained for a data set available for the United States, Japan, West Germany and France over the period 1960 to 1996. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:idc:wpaper:idec08-03&r=opm |