nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2008‒10‒21
fourteen papers chosen by
Martin Berka
Massey University

  1. Import Price Dynamics in Major Advanced Economies and Heterogeneity in Exchange Rate Pass-Through By Stephane Dees; Matthias Burgert; Nicolas Parent
  2. The Extensive Margin of Trade under Alternative Monetary Policy Regimes By Stéphane Auray; Aurélien Eyquem; Jean-Christophe Poutineau
  3. Vertical specialization and international business cycle synchronization By Costas Arkolakis; Ananth Ramanarayanan
  4. Optimal Pass-Through of Oil Prices in an Economy with Nominal Rigidities By Hafedh Bouakez; Nooman Rebei; Désiré Vencatachellum
  5. The Welfare Gains of Trade Integration in the European Monetary Union By Stéphane Auray; Aurélien Eyquem; Jean-Christophe Poutineau
  6. Real Exchange Rate Misalignment: An Application of Behavioral Equilibrium Exchange Rate (BEER) to Nigeria By Shehu Usman Rano, Aliyu
  7. Exchange Rate, Employment and Hours: What Firm-Level Data Say By Pozzolo, Alberto Franco; Nucci, Francesco
  8. Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration By Guillermo A. Calvo Author-X-Name_First: Guillermo A. Author-X-Name_Last: Calvo; Alejandro Izquierdo Author-X-Name_First: Alejandro Author-X-Name_Last: Izquierdo; Luis Fernando Mejía Author-X-Name_First: Luis Fernando Author-X-Name_Last: Mejía
  9. Purchasing Power Parity and Real Exchange Rate in Japan By Long, Dara
  10. Determinacy and Learnability of Monetary Policy Rules in Small Open Economies By Luis Gonzalo Llosa Author-X-Name_First: Luis Gonzalo Author-X-Name_Last: Llosa; Vicente Tuesta Author-X-Name_First: Vicente Author-X-Name_Last: Tuesta
  11. Local Costs of Distribution, International Trade Costs and Micro Evidence on the Law of One Price By Giri, Rahul
  12. Bankruptcy Costs, Liability Dollarization, and Vulnerability to Sudden Stops By Uluc Aysun; Adam Honig
  13. Trade and Sectoral Productivity By Harald Fadinger; Pablo Fleiss
  14. Do Tax Cuts Generate Twin Deficits? A Multi-Country Analysis By Martin Boileau; Michel Normandin

  1. By: Stephane Dees; Matthias Burgert; Nicolas Parent
    Abstract: This paper aims at showing heterogeneity in the degree of exchange rate pass-through to import prices in major advanced economies at three different levels: 1) across destination markets; 2) across types of exporters (distinguishing developed economy from emerging economy exporters); and 3) over time. Based on monthly data over the period 1991–2007, the results show first that large destination markets exhibit the lowest degrees of pass-through. The degree of pass-through for goods imported from emerging economies is also significantly lower than for those from developed economies. Regarding the evolution over time, no clear change in pricing behaviours can be identified and particular events, like large exchange rates depreciations during the Asian crisis, seem to influence the degree of pass-through related to imports from emerging economies.
    Keywords: Exchange rates; Inflation and prices
    JEL: E31 F3 F41
    Date: 2008
  2. By: Stéphane Auray (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE); Aurélien Eyquem (GATE, UMR 5824, Université de Lyon and Ecole Normale Supérieure Lettres et Sciences Humaines, France); Jean-Christophe Poutineau (CREM, UMR 6211, Université de Rennes 1 and Ecole Normale Supérieure de Cachan, France)
    Abstract: This paper investigates the impact of alternative monetary policy regimes on the creation of new varieties in open economies. Using a dynamic two-country model incorporating nominal rigidities, international trade and firm entries we compare an independent monetary policy regime to a monetary union regime. We find that a common monetary policy defined by a nominal interest rate rule reactive to inflation increases extensive margin of trade volatility. Simulations based on business cycle frequencies indicate that on average this increase reaches 3%. Although monetary policy interdependence is found to be a key ingredient in generating this effect, we stress that those parameters affecting international trade structures are crucial in determining its magnitude.
    Keywords: Extensive Margin, Variety Effect, Monetary Union, Monetary Policy
    JEL: E51 E58 F36 F41
    Date: 2008
  3. By: Costas Arkolakis; Ananth Ramanarayanan
    Abstract: We explore the impact of vertical specialization--trade in goods across multiple stages of production--on the relationship between trade and international business cycle synchronization. We develop a model in which the degree of vertical specialization is endogenously determined by comparative advantage across heterogeneous goods and varies with trade barriers between countries. We show analytically that fluctuations in measured productivity in our model are not linked across countries through trade, despite the greater transmission of technology shocks implied by higher degrees of vertical specialization. In numerical simulations, we find this transmission is insufficient in generating substantial dependence of business cycle synchronization on trade intensity.
    Keywords: Business cycles ; International trade
    Date: 2008
  4. By: Hafedh Bouakez; Nooman Rebei; Désiré Vencatachellum
    Abstract: In many developing and emerging market economies, governments intervene to limit the degree to which oil-price increases are passed through to domestic fuel prices. This paper investigates whether, and to what extent, this intervention is warranted in an oil-importing economy characterized by nominal rigidities in the goods and labor markets. Our results indicate that, to the extent that monetary policy is capable of stabilizing the economy, government intervention in the oil market must be avoided. On the other hand, when complete stabilization is not attainable as a result of sub-optimal monetary policy, the government can improve social welfare by limiting the degree of pass-through of oil prices. We find, however, that the welfare gain from pursuing such a policy is negligible.
    Keywords: Oil prices, pass-through, government, monetary policy, small open economy, welfare
    JEL: E3 E5 F3 F4
    Date: 2008
  5. By: Stéphane Auray (Université Lille 3 (GREMARS), Université de Sherbrooke (GREDI) and CIRPÉE); Aurélien Eyquem (GATE, UMR 5824, Université de Lyon and Ecole Normale Supérieure Lettres et Sciences Humaines, France); Jean-Christophe Poutineau (CREM, UMR 6211, Université de Rennes 1 and Ecole Normale Supérieure de Cachan, France)
    Abstract: This paper evaluates the welfare gains arising from a deeper trade integration in the European Monetary Union. To do this, the European Monetary Union is represented in a realistic way by an intertemporal general equilibrium model with incomplete financial markets, sticky prices and home bias in both private consumption and production. The model is estimated and not rejected by the data. Two main results emerge : (i) an increase in vertical (intermediate goods) trade implies welfare gains while (ii) an increase in horizontal (final goods) trade implies welfare losses.
    Keywords: trade integration, inflation differentials, welfare analysis, optimal currency areas
    JEL: F32 F41 F47
    Date: 2008
  6. By: Shehu Usman Rano, Aliyu
    Abstract: Abstract This paper seeks to estimate the long run behavioral equilibrium exchange rate in Nigeria. The empirical analysis builds on quarterly data from 1986Q1 to 2006Q4 and derives a Behavioral Equilibrium Exchange Rate (BEER) and a Permanent Equilibrium Exchange Rate (PEER). The econometric analysis starts by analyzing the stochastic properties of the data and found all the variables stationary at first level of differencing. Accordingly, the paper proceeds by estimating vector-error correction models. Regression results show that most of the long-run behavior of the real exchange rate could be explained by real net foreign assets, terms of trade, index of crude oil volatility, index of monetary policy performance and government fiscal stance. On the basis of these fundamentals, four episodes each of overvaluation and undervaluation were identified and the antecedents characterizing the episodes were equally traced to the archive of exchange rate management in the country within the review period. Among others for instance, large inflow of oil revenues into the country and stable macroeconomic performance were discovered to account for undervaluation of the real exchange rate between 2001Q1 and 2006Q4 in Nigeria. The results further suggest that deviations from the equilibrium path are eliminated within one to two years. The paper recommends the pursuance of sound monetary policy as an instrument for achieving real exchange rate cum macroeconomic stability in Nigeria.
    Keywords: Keywords: real exchange rate equilibrium; stationarity; cointegration; Hodrick-Prescott decomposition; BEER and PEER.
    JEL: F31 G0
    Date: 2008–09–07
  7. By: Pozzolo, Alberto Franco; Nucci, Francesco
    Abstract: Using a representative panel of manufacturing firms, we estimate the response of job and hours worked to currency swings, showing that it depends primarily on the firm's exposure to foreign sales and its reliance on imported inputs. Further, we show that, for given international orientation, the response to exchange rate fluctuations is magnified when firms exhibit a lower monopoly power and when they face foreign pressure in the domestic market through import penetration. The degree of substitutability between imported and other inputs and the distribution of workers by type introduce additional degrees of specificity in the employment sensitivity to exchange rate swings. Further, wage adjustments are also shown to provide a channel through which firms react to currency shocks. Finally, gross job flows within the firm are found to depend on exchange rate fluctuations, although the effect on job creation is predominant.
    Keywords: Employment, Exchange Rate, Firm's Foreign Exposure
    JEL: E24 F16 F31
    Date: 2008–10–13
  8. By: Guillermo A. Calvo Author-X-Name_First: Guillermo A. Author-X-Name_Last: Calvo; Alejandro Izquierdo Author-X-Name_First: Alejandro Author-X-Name_Last: Izquierdo; Luis Fernando Mejía Author-X-Name_First: Luis Fernando Author-X-Name_Last: Mejía
    Abstract: Using a sample of 110 developed and developing countries for the period 1990-2004, this paper analyzes the characteristics of systemic sudden stops (3S) in capital flows and the relevance of balance-sheet effects in the likelihood of their materialization. A small supply of tradable goods relative to their domestic absorption?a proxy for potential changes in the real exchange rate?and large foreign-exchange denominated debts towards the domestic banking system are claimed to be key determinants of the probability of 3S, producing a balancesheet effect with non-linear impacts on the probability of 3S. While financial integration is up to a point associated with a higher likelihood of 3S, beyond that point financial integration is associated with a lower likelihood of 3S.
    Date: 2008–07
  9. By: Long, Dara
    Abstract: This paper examines the validity of both the short-run and long-run purchasing power parity (PPP) hypotheses in Japan using two estimation methods, namely, a unit root test and an Autoregressive Distributed Lag (ARDL) cointegration test. Some important findings are obtained from our analysis. The first test reveals the mean reversion of real exchange rate (RER) in the long-run. On the other hand, from the second test, we found that there is a strongly robust long-run PPP relationship but no significant short-run PPP relationship. Furthermore, unlike the previous literature, this paper confirms the stability of the estimated results by CUSUM and CUSUMQ tests. Overall, the results suggest that PPP hypothesis in Japan strongly holds for the long-run while not for the short-run.
    Keywords: PPP; Real Exchange Rate; Unit Root; ARDL to cointegration
    JEL: C22 F41 F31
    Date: 2008–10
  10. By: Luis Gonzalo Llosa Author-X-Name_First: Luis Gonzalo Author-X-Name_Last: Llosa; Vicente Tuesta Author-X-Name_First: Vicente Author-X-Name_Last: Tuesta
    Abstract: This paper evaluates under which conditions different Taylor-type rules lead to determinacy and expectational stability (E-stability) of rational expectations equilibrium in a simple New Keynesian small open economy model, developed by Gali and Monacelli (2005). In particular, we extend the Bullard and Mitra (2002) results of determinacy and E-stability in a closed economy to this small open economy framework. Our results highlight an important link between the Taylor principle and both determinacy and learnability of equilibrium in small open economies. More importantly, the degree of openness coupled with the nature of the policy rule adopted by the monetary authorities might change this link in important ways. A key finding is that, contrary to Bullard and Mitra, expectations-based rules that involve the CPI and/or the nominal exchange rate limit the region of E-stability and the Taylor Principle does not guarantee E-stability. We also show that some forms of managed exchange rate rules can help to alleviate problems of both indeterminacy and expectational instability, yet these rules might not be desirable since they promote greater volatility in the economy.
    Date: 2006–12
  11. 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 F1
    Date: 2008–08–12
  12. By: Uluc Aysun (University of Connecticut); Adam Honig (Amherst College)
    Abstract: Emerging market countries that have improved institutions and attained intermediate levels of institutional quality have experienced severe financial crises following capital flow reversals. However, there is also evidence that countries with strong institutions and deep capital markets are less affected by external shocks. We reconcile these two observations using a calibrated DSGE model that extends the financial accelerator framework developed in Bernanke, Gertler, and Gilchrist (1999). The model captures financial market institutional quality with creditors. ability to recover assets from bankrupt firms. Bankruptcy costs affect vulnerability to sudden stops directly but also indirectly by affecting the degree of liability dollarization. Simulations reveal an inverted U-shaped relationship between bankruptcy recovery rates and the output loss following sudden stops. We provide empirical evidence that this non-linear relationship exists.
    Keywords: sudden stops, bankruptcy costs, financial accelerator, liability dollarization.
    JEL: E44 F31 F41
    Date: 2008–10
  13. By: Harald Fadinger; Pablo Fleiss
    Abstract: Even though differences in sectoral total factor productivity are at the heart of Ricardian trade theory and many models of growth and development, very little is known about their size and their form. In this paper we try to fill this gap by using a Hybrid-Ricardo-Heckscher-Ohlin trade model and bilateral sectoral trade data to overcome the data problem that has limited previous studies, which have used input and output data to back out productivities, to a small number of OECD economies. We provide a comparable set of sectoral productivities for 24 manufacturing sectors and more than sixty countries at all stages of development. Our results show that TFP differences in manufacturing sectors between rich and poor countries are substantial and far more pronounced in skill and R&D intensive sectors. We also apply our productivity estimates to test theories on development that have implications for the patterns of sectoral productivities across countries.
    Keywords: Sectoral Productivity Differences, Trade and Production Data, Ricardo, Heckscher-Ohlin, Comparative Advantage
    JEL: F11 F43 O11 O41 O47
    Date: 2008
  14. By: Martin Boileau; Michel Normandin
    Abstract: We study the effects of tax shocks on the budget and external deficits for 16 industrialized countries over the post-1975 period. Our structural approach is based on a tractable small open-economy model where a tax cut innovation generates a budget deficit. In turn, the budget deficit affects the external deficit by two distinct channels. The demographic channel works through the overlapping-generation structure of the model. The forecasting channel works through the dynamic structure of the model. Our empirical analysis documents that tax shocks generate significant positive comovements between the budget and external deficits. We also find that both the demographic and forecasting channels are important to explain the comovements.
    Keywords: Budget Deficit, External Deficit, Fiscal Policy, Overlapping Generations
    JEL: E62 F32 F41
    Date: 2008

This nep-opm issue is ©2008 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.