nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2008‒10‒13
eleven papers chosen by
Martin Berka
Massey University

  1. Sudden Stops, Sectoral Reallocations, and the Real Exchange Rate By Timothy J. Kehoe; Kim J. Ruhl
  2. The High Cross-Country Correlations of Prices and Interest Rates By Henriksen, Espen; Kydland, Finn; Sustek, Roman
  3. Nontraded Goods, Market Segmentation, and Exchange Rates By Michael Dotsey; Margarida Duarte
  4. Inflation-Output Tradeoff as Equilibrium Outcome of Globalization By Alon Binyamini; Assaf Razin
  5. Cost pass-through under delegation By Robert A. Ritz
  6. The Intranational Business Cycle: Evidence from Japan By Michael Artis; Toshihiro Okubo
  7. The Current Global Financial Turmoil and Asian Developing Countries By Yilmaz Akyuz
  8. Testing Mundell’s Intuition of Endogenous OCA Theory By Warin, Thierry; Wunnava, Phanindra V.; Janicki, Hubert
  9. Migrant networks: Empirical Implications for the Italian Bilateral Trade By Marina Murat; Barbara Pistoresi
  10. Examining Exchange Rates Exposure, J-Curve and the Marshall-Lerner Condition for High Frequency Trade Series between China and Malaysia By Hooy, Chee-Wooi; Chan, Tze-Haw
  11. Offshoring, Relocation and the Speed of Convergence in the Enlarged European Union By Kari E.O. Alho; Ville Kaitila; Mika Widgrén

  1. By: Timothy J. Kehoe; Kim J. Ruhl
    Abstract: A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994-95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the decreases in GDP and TFP. Extending the model to include labor frictions and variable capital utilization, we still find that it cannot quantitatively account for the dynamics of output and productivity without losing the ability to account for the movements of other variables.
    JEL: E13 F34 F41
    Date: 2008–10
  2. By: Henriksen, Espen; Kydland, Finn; Sustek, Roman
    Abstract: We document that, at business cycle frequencies, fluctuations in nominal variables, such as aggregate price levels and nominal interest rates, are substantially more synchronized across countries than fluctuations in real output. To the extent that domestic nominal variables are determined by domestic monetary policy, and central banks generally attempt to keep the domestic nominal environment stable, this might seem surprising. We ask if a parsimonious international business cycle model can account for this aspect of cross-country aggregate fluctuations. It can. Due to spillovers of technology shocks across countries, expected future responses of national central banks to fluctuations in domestic output and inflation generate movements in current prices and interest rates that are synchronized across countries even when output is not. Even modest spillovers produce cross-country correlations such as those in the data.
    Keywords: International business cycles; prices; interest rates.
    JEL: E43 F42 E32 E31
    Date: 2008–09–12
  3. By: Michael Dotsey; Margarida Duarte
    Abstract: Empirical evidence suggests that movements in international relative prices are large and persistent. Nontraded goods, both in the form of final consumption goods and as an input into the production of final tradable goods, are an important aspect driving international relative price movements. In this paper we show that nontraded goods play an important role in the context of an otherwise standard open-economy macromodel. Our quantitative study with nontraded goods generates implications along several dimensions that are more closely in line with the data relative to the model that abstracts from nontraded goods. In addition, contrary to a large literature, standard alternative assumptions about the currency in which firms price their goods are virtually inconsequential for the properties of aggregate variables in our model, other than the terms of trade.
    Keywords: exchange rates; nontraded goods; distribution services; incomplete asset markets.
    JEL: F3 F41
    Date: 2008–10–01
  4. By: Alon Binyamini; Assaf Razin
    Abstract: The paper provides an integrated analysis of globalization effects on the inflation-output tradeoff and monetary policy in the New-Keynesian framework. The prediction of the analysis is threefold. First, labor, goods, and capital mobility flatten the Phillips curve, the tradeoff between inflation and activity. Second, the same globalization forces lead the welfare-based monetary policy to be more aggressive with regard to inflation fluctuations, and at the same time, more benign with respect to the output-gap fluctuations. Third, the equilibrium response of inflation to supply and demand shocks is more moderate, and the response of the output gap to these shocks is more pronounced, when the economy opens up; under such welfare-based monetary policy.
    JEL: E3 E4 E5 F37 F4 F41
    Date: 2008–10
  5. By: Robert A. Ritz
    Abstract: The rate of cost pass-through exceeds 50% under strategic delegation of decision-making to managers with sales revenue contracts - regardless of the number of firms in the industry and demand curvature. This contrasts sharply with profit-maximization, for which cost pass-through can take on any positive value. The key intuition is that firms under delegation act as if they faced more rivals than they actually do, thus pushing cost pass-through towards 100%. Cost pass-through with market share contracts is similarly bounded below, and this note also generalizes existing results on equilibrium characterization for this case.
    Keywords: Cost Pass-Through, Excise Taxation, Executive Compensation, Market Share, Strategic Delegation
    JEL: D43 H20
    Date: 2008
  6. By: Michael Artis (Institute for Political and Economic Governance, Manchester University); Toshihiro Okubo (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: This paper studies the intranational business cycle - that is the set of regional (prefecture) business cycles - in Japan. One reason for choosing to examine the Japanese case is that long time series and relatively detailed data are available. A Hodrick-Prescott filter is applied to identify the cycles in annual data from 1955 to 1995 and bilateral cross-correlation coefficients are calculated for all the pairs of prefectures. Comparisons are made with similar sets of bilateral cross correlation coefficients calculated for the States of the US and for the member countries of a "synthetic Euro Area". The paper then turns to an econometric explanation of the cross-correlation coefficients (using Fisher's z-transform), in a panel data GMM estimation framework. An augmented gravity model provides the basic model for the investigation, whilst the richness of the data base also allows for additional models to be represented.
    Keywords: Intranational business cycle, Hodrick-Prescott filter, Optimal Currency Area, Gravity Model, Market potential, Heckscher Ohlin theorem
    JEL: E32 F41 R11
    Date: 2008–01
  7. By: Yilmaz Akyuz (Third World Network)
    Date: 2008
  8. By: Warin, Thierry (Middlebury College); Wunnava, Phanindra V. (Middlebury College); Janicki, Hubert (Arizona State University)
    Abstract: This paper presents an empirical assessment of the endogenous optimum currency area theory. Frankel and Rose (1998) study the endogeneity of a currency union through the lens of international trade flows. Our study extends Frankel and Rose's model by using FDI flows to test the original theory developed by Mundell in 1973. A gravity model is used to empirically assess the effectiveness of the convergence criteria by examining location specific advantages that guide multinational investment within the European Union. A fixed effects model based on a panel data of foreign direct investment (FDI) flows within the EU-15 shows that horizontal investment promotes the diffusion of the production process across the national border. Specifically, our results suggest that economic convergence ensured by belonging to the common currency area helps double FDI flows.
    Keywords: economic integration, gravity model, endogenous optimum currency area
    JEL: C23 C52 F15
    Date: 2008–09
  9. By: Marina Murat; Barbara Pistoresi
    Abstract: A significant number of empirical studies, focusing on different countries, have found a positive link between migration and trade. This paper studies the relationship between emigration, immigration and trade using Italian data. The sample regards 51 foreign trading partners and spans from 1990 to 2005. The results suggest that: networks of Italian emigrants in foreign countries boost bilateral trade. The effects of immigrants are weak, on exports, or negative, on imports. Results do not change when the cultural and institutional dissimilarities between countries are considered.
    Keywords: International Migration, Italian Bilateral Trade
    JEL: F10 F22 F23
    Date: 2007–09
  10. By: Hooy, Chee-Wooi; Chan, Tze-Haw
    Abstract: Over the last decade, China and Malaysia have committed to export-led growth policy based on maintenance of their undervalued currencies. Both nations had succumbed to pressure of revaluation to de-peg their currency against the USD, the same day in July 2005. This unique scenario motivated us to examine the dynamic nexus of exchange rate impact on bilateral export and import flows between China and Malaysia. Our analysis contributed in using high frequency monthly data for the recent period from January 1990 to January 2008, based on the Autoregressive Distributed Lag (ARDL) bound testing procedure and generalised impulse response analysis. Our empirical findings reveal that the Marshall-Lerner condition holds that real depreciation accelerates trade expansion in the long run but only the short run import demands adhere to the potential J-curve pattern. Domestic and foreign incomes are significant and correctly signed, suggesting that the China-Malaysia exports and imports are determined by demand side effects. In brief, the study supports for the complementary role of China instead of conflicting (competing) features in the China-Malaysia bilateral trading
    Keywords: Exchange rates; Trade; J-curve; Marshall-Lerner Condition; ARDL Bounds test
    JEL: F10 F41 C01
    Date: 2008–08–31
  11. By: Kari E.O. Alho; Ville Kaitila; Mika Widgrén
    Abstract: ABSTRACT : Economic convergence of the new member states (NMS) of the EU towards the old EU countries (EU-15), not only in terms of real income, but also in nominal terms, is of paramount importance for the whole of the EU. We build a dynamic CGE model, starting from the Balassa-Samuelson two-sector framework, but modify and enlarge it with forward-looking investment, consumption, and labour mobility behaviour to address several other issues like welfare and sustainability in terms of foreign indebtedness. At the same time we evaluate the impact of convergence on the EU-15 countries also, by endogenising offshoring and the related FDI flows from them to the NMS. Thereby we identify various effects of relocation and globalisation on the EU-15 enlarging the standard set of effects of globalisation and demonstrate the key role of their dynamic nature in the process of convergence. We find that in a general equilibrium setting fears of large adverse effects of a relocation of EU-15 manufacturing to the NMS are not well founded. In contrast, offshoring appears to be a win-win case for both the EU-15 and the NMS in terms of real income. The convergence of the NMS is fairly rapid, but will involve a persistent rapid inflation rate.
    Keywords: convergence, relocation, new member states, EU-15
    JEL: F15 F21 F43
    Date: 2008–10–03

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