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on Open MacroEconomics |
| By: | Christopher Gust; Sylvain Leduc; Nathan Sheets |
| Abstract: | This paper assesses whether partial exchange rate pass-through to trade prices has important implications for the prospective adjustment of global external imbalances. To address this question, we develop and estimate an open-economy DGE model in which pass-through is incomplete due to the presence of local currency pricing, distribution services, and a variable demand elasticity that leads to fluctuations in optimal markups. We find that the overall magnitude of trade adjustment is similar in a low and high pass-through world with more adjustment in a low pass-world occurring through a larger response of the exchange rate and terms of trade rather than real trade flows. |
| Keywords: | Foreign exchange rates ; Imports - Prices |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-16&r=opm |
| By: | Marcel Fratzscher; Luciana Juvenal; Lucio Sarno |
| Abstract: | This paper analyses the role of asset prices in comparison to other factors, in particular exchange rates, as a driver of the US trade balance. It employs a Bayesian structural VAR model that requires imposing only a minimum of economically meaningful sign restrictions. We find that equity market shocks and housing price shocks have been major determinants of the US current account in the past, accounting for up to 32% of the movements of the US trade balance at a horizon of 20 quarters. By contrast, shocks to the real exchange rate have been much less relevant, explaining less than 7% and exerting a more temporary effect on the US trade balance. Our findings suggest that sizeable exchange rate movements may not necessarily be a key element of an adjustment of today's large current account imbalances, and that in particular relative global asset price changes could be a more potent source of adjustment. |
| Keywords: | Asset pricing ; Foreign exchange rates ; Balance of trade |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-031&r=opm |
| By: | Yelena Takhtamanova |
| Abstract: | Recent research suggests that there has been a decline in the extent to which firms “pass through” changes in exchange rates to prices. Beyond providing further evidence in support of this claim, this paper proposes an explanation for the phenomenon. It then presents empirical evidence of a structural break during the 1990s in the relationship between the real exchange rate and CPI inflation for a set of fourteen OECD countries. It is suggested that the recent reduction in the real exchange rate pass-through can be attributed in part to the low-inflation environment of the 1990s. |
| Keywords: | Foreign exchange rates |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-13&r=opm |
| By: | Joshua Aizenman; Reuven Glick |
| Abstract: | This paper investigates the changing pattern and efficacy of sterilization within emerging market countries as they liberalize markets and integrate with the world economy. We estimate the marginal propensity to sterilize foreign asset accumulation associated with net balance of payments inflows, across countries and over time. We find that the extent of sterilization of foreign reserve inflows has risen in recent years to varying degrees in Asia as well as in Latin America, consistent with greater concerns about the potential inflationary impact of reserve inflows. We also find that sterilization depends on the composition of balance of payments inflows. |
| Keywords: | Emerging markets ; Bank reserves ; International finance |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-15&r=opm |
| By: | Zhang, Yan |
| Abstract: | In his paper "Does utility curvature matter for indeterminacy", Kim (2005) analyzed the relationship among the utility function form, curvature and indeterminacy, concluding that the relationship between curvature and indeterminacy is not robust in neoclassical growth model and the indeterminacy may disappear under the utility specification as in Greenwood et.al (1998). The models he discussed are confined within one sector closed economy. Weder (2001), Meng and Velasco (2004) extend the Benhabib and Farmer (1996) and Benhabib and Nishimura (1998)'s closed economy two sector models into open economy, showing that indeterminacy can occur under small external effects, independently of the intertemporal elasticities in consumption. Meng and Velasco (2003) went further, showing the independence between the elasticity of labor supply and indeterminacy in open economy. Under nonseparable utility forms like in King, Plosser and Rebelo (1988, henceforth KPR) or Bennett-Farmer (2000) form, do we still have this property? In other words, is the independence between curvature and indeterminacy in small open economy models robust to the specification of the utility functions? In this note, I tackle this issue under two different versions of nonseparable utility functions commonly used in the literature. The answer is "yes" to KPR form but "no" to Bennett-Farmer form. Endogenous time preference and consumable nontradable goods are two elements to deliver this result. |
| Keywords: | Indeterminacy; Endogenous time preference |
| JEL: | F4 E32 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10045&r=opm |
| By: | Balli, Faruk; Sorensen, Bent E. |
| Abstract: | We estimate the amount of income and consumption smoothing (risk sharing) between OECD countries during the period 1970{2003 with a particular focus on EU and EMU countries. Income smoothing from international factor income has increased in the EU and, in particular, the EMU but not in the non-EU OECD since the introduction of the Euro. Consumption smoothing from pro-cyclical government saving has declined in the EMU, but not in the non-EU OECD, since the signing of the Maastricht treaty. We find that when capital gains and losses on international asset positions are considered part of income, the magnitude of capital gains leads to huge amounts of income smoothing and dis-smoothing although, at the time horizons we examine, the capital gains or losses are only weakly reflected in consumption. Understanding the role of capital gains in risk sharing appears to be of first order importance. |
| Keywords: | Government De¯cits; Income Insurance; International Capital Markets; International Integration; Risk Sharing; External Capital Gains. |
| JEL: | F41 F36 |
| Date: | 2007–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10223&r=opm |
| By: | Luciana Juvenal; Mark P. Taylor |
| Abstract: | Using self-exciting threshold autoregressive models, we explore the validity of the law of one price (LOOP) for sixteen sectors in nine European countries. We and strong evidence of nonlinear mean reversion in deviations from the LOOP and highlight the importance of modelling the real exchange rate in a nonlinear fashion in an attempt to measure speeds of real exchange rate adjustment. Using the US dollar as a reference currency, the half-lives of sectoral real exchange rates shocks, calculated by Monte Carlo integration, imply much faster adjustment than the consensus half-life estimates of three to five years. The results also imply that transaction costs vary significantly across sectors and countries. |
| Keywords: | Prices ; Foreign exchange rates |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-027&r=opm |
| By: | Carmen Broto (Banco de España); Javier Díaz-Cassou (Banco de España); Aitor Erce-Domínguez (Banco de España) |
| Abstract: | This paper analyzes the determinants of the volatility of different types of capital inflows to emerging countries. After calculating a variable that proxies capital flows volatility, we study its possible causality relations with a set of explanatory variables by type of flow through a panel data model. We show that in recent years the significance of global factors, beyond the control of emerging economies, has increased at the expense of that of country specific factors. In addition, various factors exhibit a non-robust effect on the volatility of the three different categories of capital flows, which poses additional challenges for policy-makers. |
| Keywords: | capital fl ows, volatility, panel data, emerging markets |
| JEL: | F21 F36 C22 C23 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0817&r=opm |
| By: | Stephan Schulmeister (WIFO) |
| Abstract: | The study analyses the interaction between the trading behaviour of 1,024 moving average and momentum models and the fluctuations of the yen-dollar exchange rate. I show first that these models would have exploited exchange rate trends quite profitably between 1976 and 2007. I then show that the aggregate transactions and positions of technical models exert an excess demand pressure on currency markets since they are mostly on the same side of the market. When technical models produce trading signals almost all of them are either buying or selling, when they maintain open positions they are either long or short. A strong interaction prevails between exchange rate movements and the transactions triggered by technical models. An initial rise of the exchange rate due to news, e.g., is systematically lengthened through a sequence of technical buy signals. |
| Keywords: | Exchange rate, Technical Trading, Speculation, Heterogeneous Agents |
| Date: | 2008–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2008:i:324&r=opm |
| By: | Thomas Nitschka |
| Abstract: | The empirical failure of the uncovered interest rate parity condition seems to be the reflection of risk premia on foreign currencies. After the formation of foreign currency portfolios according to interest rate differentials or forward discounts, recent studies suggest that either consumption- or currency return-based pricing factors explain the cross-section of foreign currency portfolio returns. The contribution of this paper is twofold. It shows that the returnbased explanation applies to foreign currency portfolios sorted from the perspective of a Euro Area investor. Secondly, the main results of this paper suggest that the decisive pricing factor, the so called carry trade premium, mirrors business cycle related risks. Times of relatively large amounts of uninsured Euro Area consumption growth risk are associated with an expected increase of the carry trade premium. |
| Keywords: | Consumption risk sharing, foreign currency returns, return predictability, UIP |
| JEL: | F31 G10 G15 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:zur:iewwpx:387&r=opm |
| By: | Giri, Rahul |
| Abstract: | Observed trade flows provide one metric to gauge the degree of international goods market segmentation. Deviations from the law of one price provide another. New survey data on retail prices for a broad cross section of goods across 13 EU countries, compiled by Crucini, Telmer and Zachariadis (2005), show that (i) the average dispersion of law of one price deviations across all goods is 28 percent and (ii) the range of that dispersion across goods is large, varying from 2 percent to 83 percent. Quantitative multi-country Ricardian models, a la Eaton and Kortum, use data on bilateral trade volumes to estimate international trade barriers or trade costs. This paper investigates whether the degree of international goods market segmentation implied by these models can account for observed cross-country dispersion in prices. When heterogeneous and asymmetric trade costs are carefully calibrated to match observed bilateral trade volumes, the model can account for 85 percent of the average dispersion of law of one price deviations found in the data. However, it generates only 21 percent of the good by good variation in price dispersion. The model is augmented to permit heterogeneity in local costs of distribution - across goods and countries - and is calibrated to match data on distribution margins. While the augmented model can reproduce 96.5 percent of the average dispersion of law of one price deviations, it can match only 32 percent of the variation in that dispersion. Heterogeneity in trade costs, and in local distribution costs, cannot account for observed heterogeneity in the dispersion of law of one price deviations. |
| Keywords: | Trade; international trade costs; distribution costs; law of one price; price dispersion |
| JEL: | F15 E31 F10 |
| Date: | 2008–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10257&r=opm |
| By: | Torben M. Andersen; Allan Sørensen (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | It is widely perceived that globalization squeezes public sector activities by making taxation more costly. This is attributed to increased factor mobility and to a more elastic labour demand due to improved scope for relocation of production and thus employment across countries. We argue that this consensus view overlooks that gains from trade unambiguously work to lower the marginal costs of public funds, and moreover that globalization via increased trade in intermediaries may actually lower the labour demand elasticity. |
| Keywords: | Globalization, marginal costs of public funds, labour taxation |
| JEL: | F15 F4 H20 H40 |
| Date: | 2008–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:aah:aarhec:2008-08&r=opm |