nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2008‒09‒13
seven papers chosen by
Martin Berka
Massey University

  1. Fluctuations in the Foreign Exchange Market: How Important are Monetary Policy Shocks? By Hafedh Bouakez; Michel Normandin
  2. Current Account Sustainability and Relative Reliability By Stephanie E. Curcuru; Charles P. Thomas; Francis E. Warnock
  3. Are EU budgets stationary? By Mark J. Holmes; Theodore Panagiotidis; Jesus Otero
  4. External and Budget Deficits in Developing Countries By Foued Chihi; Michel Normandin
  5. Intertemporal adjustment and fiscal policy under a fixed exchange rate regime By Aloy, Marcel; Moreno-Dodson, Blanca; Nancy, Gilles
  6. Real exchange rates, saving and growth : is there a link ? By Montiel, Peter J.; Serven, Luis
  7. Crossing the Lines: The Conditional Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets By Bartram, Söhnke M.; Bodnar, Gordon M.

  1. By: Hafedh Bouakez; Michel Normandin
    Abstract: We study the effects of U.S. monetary policy shocks on the bilateral exchange rate between the U.S. and each of the G7 countries. We also estimate deviations from uncovered interest rate parity and exchange rate pass-through conditional on these shocks. The analysis is based on a structural vector autoregression in which monetary policy shocks are identified through the conditional heteroscedasticity of the structural disturbances. Unlike earlier work in this area, our empirical methodology avoids making arbitrary assumptions about the relevant policy indicator or transmission mechanism in order to achieve identification. At the same time, it allows us to assess the implications of imposing invalid identifying restrictions. Our results indicate that the nominal exchange rate exhibits delayed overshooting in response to a monetary expansion, depreciating for roughly ten months before starting to appreciate. The shock also leads to large and persistent departures from uncovered interest rate parity, and to a prolonged period of incomplete pass-through. Variance-decomposition results indicate that monetary policy shocks account for a non-trivial proportion of exchange rate fluctuations.
    Keywords: Conditions heteroscedasticity, delayed overshooting, exchange rate pass-through, identification, structural vector autoregression, uncovered interest rate parity
    JEL: C32 E52 F31 F41
    Date: 2008
  2. By: Stephanie E. Curcuru; Charles P. Thomas; Francis E. Warnock
    Abstract: The sustainability of the large and persistent U.S. current account deficits is one of the biggest issues currently being confronted by international macroeconomists. Some very plausible theories suggest that the substantial global imbalances can continue in a benign manner, other equally plausible theories predict a disorderly resolution, and in general it is very difficult to discern between competing theories. To inform the debates, we view competing theories through the perspective of the relative reliability of the data the theories rely on. Our analysis of the dark matter theory is cursory; from a relative reliability perspective, it fails as it is built on the assumption that an item that is largely unmeasured is the most accurate component of the entire set of international accounts. Similarly, the best data currently available suggest that U.S. returns differentials are much smaller than implied by the exorbitant privilege theory. Our analysis opens up questions about potential inconsistencies in the international accounts, which we address by providing rough estimates of various holes in the accounts.
    JEL: F3
    Date: 2008–09
  3. By: Mark J. Holmes (Department of Economics, Waikato University Management School); Theodore Panagiotidis (Department of Economics, University of Macedonia); Jesus Otero (Facultad de Economia, Universidad del Rosario)
    Abstract: In this paper, we test for the stationarity of European Union budget deficits over the period 1971 to 2006, using a panel of thirteen member countries. Our testing strategy addresses two key concerns with regard to unit root panel data testing, namely (i) the presence of cross-sectional dependence among the countries in the panel and (ii) the identification of potential structural break s that might have occurred at different points in time. To address these concerns, we employ an AR-based bootstrap approach that allows us to test the null hypothesis of joint stationarity with endogenously determined structural breaks. In contrast to the existing literature, we find that the EU countries considered are characterised by fiscal stationarity over the full sample period irrespective of us allowing for structural breaks. This conclusion also holds when analysing sub-periods based on before and after the Maastricht treaty.
    Keywords: Heterogeneous dynamic panels, fiscal sustainability, mean reversion, panel stationarity test.
    JEL: C33 F32 F41
    Date: 2008–09
  4. By: Foued Chihi; Michel Normandin
    Abstract: This paper documents and explains the positive comovement between external and budget deficits for several developing countries. First, the covariance estimated from post-1960 time-series data is numerically positive for each of the 24 countries and statistically significant for almost all cases. This is consistent with previous findings obtained from panel regressions. Second, the empirical covariance is close to that predicted from a tractable small open economy, overlapping generation model with heterogeneous goods. Also, the predicted covariance is induced by shocks which are closely related to internal conditions such as domestic resources and fiscal policies, and to a much lesser extent to external conditions such as the world interest rate, real exchange rate, and terms of trade. This structural analysis explaining the joint behavior of external and budget deficits sharply contrasts with earlier reduced-form studies characterizing the individual behavior of either the external deficit or budget deficit.
    Keywords: Covariance decomposition, dynamic responses, internal and external conditions, restricted vector autoregression, small open economy, overlapping generation model with heterogeneous goods
    JEL: E62 F32 F41
    Date: 2008
  5. By: Aloy, Marcel; Moreno-Dodson, Blanca; Nancy, Gilles
    Abstract: The paper presents a dynamic model for small to medium open economies operating under a fixed exchange rate regime. The model provides a partial explanation of the channels through which fiscal and monetary policy affects the real exchange rate. An empirical investigation is conducted for the case of Argentina during the currency board period of 1991-2001. Empirical estimates show that fiscal policy may indeed be an efficient instrument for promoting macroeconomic stability insofar as it encourages convergence toward long-run equilibrium and alters the long-term balance between exports and consumption, both private and public. The simulation applied to Argentina shows that if the share of public spending in the economy is higher than the share of imports, an increase in the tax rate will stimulate capital stock slightly, at least in the short term, and depreciate the real effective exchange rate. In the long run, the fiscal policy affects the value of the real exchange rate and consequently external competitiveness.
    Keywords: Currencies and Exchange Rates,Economic Stabilization,Debt Markets,Economic Theory&Research,Emerging Markets
    Date: 2008–04–01
  6. By: Montiel, Peter J.; Serven, Luis
    Abstract: The view that policies directed at the real exchange rate can have an important effect on economic growth has been gaining adherents in recent years. Unlike the traditional"misalignment"view that temporary departures of the real exchange rate from its equilibrium level harm growth by distorting a key relative price in the economy, the recent literature stresses the growth effects of the equilibrium real exchange rate itself, with the claim being that a depreciated equilibrium real exchange rate promotes economic growth. While there is no consensus on the precise channels through which this effect is generated, an increasingly common view in policy circles points to saving as the channel of transmission, with the claim that a depreciated real exchange rate raises the domestic saving rate -- which in turn stimulates growth by increasing the rate of capital accumulation. This paper offers a preliminary exploration of this claim. Drawing from standard analytical models, stylized facts on saving and real exchange rates, and existing empirical research on saving determinants, the paper assesses the link between the real exchange rate and saving. Overall, the conclusion is that saving is unlikely to provide the mechanism through which the real exchange rate affects growth.
    Keywords: Macroeconomic Management,Economic Stabilization,Debt Markets,Emerging Markets,Currencies and Exchange Rates
    Date: 2008–05–01
  7. By: Bartram, Söhnke M.; Bodnar, Gordon M.
    Abstract: This paper examines the importance of exchange rate risk in the return generating process for a large sample of non-financial firms from 37 countries. We argue that the effect of exchange rate exposure on the cost of capital should be conditional and show evidence of a significant return premium to firm-level currency exposures when conditioning on the exchange rate change. The return premium is directly related to the size and sign of the subsequent exchange rate change, suggesting fluctuations in exchange rates themselves as a source of time-variation in currency risk premia. For the entire sample the return premia ranges from 1.2 - 3.3% per unit of currency exposure. The premium is larger for firms in emerging markets, while in developed markets it is statistically significant only for local currency depreciations. Overall, the results indicate that exchange rate exposure plays an important role in generating cross-sectional return variation. Moreover, we show that the impact of exchange rate risk on stock returns is predominantly a cash flow effect as opposed to a discount rate effect.
    Keywords: Exchange rate exposure; exchange rate risk; return premia; international finance
    JEL: F4 F3 G3
    Date: 2006–06–22

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