nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2008‒11‒18
eleven papers chosen by
Martin Berka
Massey University

  1. Inequality and Unemployment in a Global Economy By Elhanan Helpman; Oleg Itskhoki; Stephen Redding
  2. Productivity, Preferences and UIP deviations in an Open Economy Business Cycle Model By Arnab Bhattacharjee; Jagjit S. Chadha; Qi Sun
  3. Current Account Adjustment and Financial Integration By Pascal Towbin
  4. Structural Breaks in the Real Exchange Rate and Real Interest Rate Relationship By Joseph P. Byrne; Jun Nagayasu
  5. Common and idiosyncratic factors of the exchange risk premium in emerging European markets By Joseph P. Byrne; Jun Nagayasu
  6. Is FDI into China Crowding Out FDI into the European Union? By Resmini, Laura; Siedschlag, Iulia
  7. The Liberalization of Capital Outflows in CIBS: What Opportunities for Other Developing Countries? By Gottschalk, Ricardo; Azevedo Sodre, Cecilia
  8. Crises, capital controls, and financial integration By Yeyati, Eduardo Levy; Schmukler, Sergio L.; Van Horen, Neeltje
  9. Developing Country Trade: Implications of China€ٳ Changing Trade and Competitiveness in Intensive and Extensive Margin Goods By Somwaru, Agapi; Tuan, Francis; Gehlhar, Mark; Diao, Xinshen; Hansen, Jim
  10. Changing Patterns of InternationalIntegration: Germany and Italy in the Countries of EU Enlargement By Altomonte, Carlo; Rungi, Armando
  11. The Environmental Consequences of Globalization: A Country-Specific Time-Series Analysis By Baek, Jungho; Cho, Yong S.; Koo, Won W.

  1. By: Elhanan Helpman; Oleg Itskhoki; Stephen Redding
    Abstract: This paper develops a new framework for examining the distributional consequences of trade liberalization that is consistent with increasing inequality in every country, growth in residual wage inequality, rising unemployment, and reallocation within and between industries. While the opening of trade yields welfare gains, unemployment and inequality within sectors are higher in the trade equilibrium than in the closed economy. In the open economy changes in trade openness have nonmonotonic effects on unemployment and inequality within sectors. As aggregate unemployment and inequality have within- and between-sector components, changes in sector composition following the opening of trade complicate its impact on aggregate unemployment and inequality. However, when countries are nearly symmetric, the sectoral composition effects reinforce the within-sector effects, and both aggregate inequality and aggregate unemployment rise with trade liberalization.
    JEL: D31 F12 J31 J41 J64
    Date: 2008–11
  2. By: Arnab Bhattacharjee; Jagjit S. Chadha; Qi Sun
    Abstract: We show that a ‡ex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (i) traded and non-traded sectors; (ii) financial market incompleteness; (iii) preference shocks; (iv) deviations from UIP condition for the exchange rates; and (v) creditor status in net foreign assets. We find that there is a good case for both traded and non-traded productivity shocks as well as UIP deviations in explaining the puzzles.
    Keywords: Current account dynamics, real exchange rates, incomplete markets, financial frictions.
    JEL: E32 F32 F41
    Date: 2008–11
  3. By: Pascal Towbin (IUHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: The paper investigates whether higher financial integration leads in general to slower current account adjustments. The study estimates theoretically founded trade balance reaction functions for a panel of seventy countries from 1970-2004. The empirical analysis finds that adjustment in integrated economies is slower. Consistent with the presented theory the trade balance of integrated economies is more persistent, responds less strongly to net foreign assets, and is more sensitive to fluctuations in net output. A sufficiently strong response to net foreign assets is also a condition for external sustainability. Under high integration countries appear to stay close to the sustainability limit.
    Keywords: current account adjustment, reaction function, financial integration, capital mobility
    JEL: F32 F36 F41
    Date: 2008–11
  4. By: Joseph P. Byrne; Jun Nagayasu
    Abstract: In this paper we empirically examine the relationship between the real exchange rate and real interest rate differentials using recent econometric methods robust to potential structural breaks. Generally, our study provides evidence of this relationship in the long-run context. More specifically, we first focus on the UK-US relationship, and interestingly find limited evidence of this long-run relationship using traditional methods. But when an approach robust to endogenously determined structural breaks is employed, we find evidence that the real interest rate differential is an important determinant of the real exchange rate. Secondly, in order to investigate the relevance of structural shifts in a more global context, we carry out multiple country analysis. While providing evidence of this long-run relationship, European data suggest that the presence of structural breaks is not very common across countries and is indeed country-specific.
    Keywords: Real exchange rate; real interest rate differential; nonstationarity; endogenously determined structural breaks; trace tests
    JEL: F31
    Date: 2008–10
  5. By: Joseph P. Byrne; Jun Nagayasu
    Abstract: Existing empirical evidence suggests that the Uncovered Interest Rate Parity (UIRP) condition may not hold due to an exchange risk premium. For a panel data set of eleven emerging European economies we decompose this exchange risk premium into an idiosyncratic (country-specific) elements and a common factor using a principal components approach. We present evidence of a stationary idiosyncratic component and nonstationary common factor. This result leads to the conclusion of a nonstationary risk premium for these countries and a violation of the UIRP in the long-run, which is in contrast to previous studies often documenting a stationary premium in developed countries. Furthermore, we report that the variation in the premium is largely attributable to a common factor influenced by economic developments in the United States.
    Keywords: Uncovered Interest Rate Parity, Emerging Economies, Exchange Risk Premiums, Common Factors
    JEL: F41
    Date: 2008–09
  6. By: Resmini, Laura; Siedschlag, Iulia (Economic and Social Research Institute (ESRI))
    Abstract: We estimate an augmented gravity panel model to analyse the effects of FDI into China originating in OECD countries on FDI into EU and other countries over the period 1990-2004. Our results suggest that on average, ceteris paribus, over the analysed period, FDI inflows into China have been complementary to FDI inflows into EU15 countries but they have substituted FDI into the new EU countries in Central and Eastern Europe. In particular, small economies such as Bulgaria and the Baltic countries have been affected negatively by the surge in the FDI into China. This FDI diversion appears in the case of efficiency-seeking FDI.
    Keywords: DYNREG, Foreign direct investment, China, European Union
    JEL: F15 F36 F41
    Date: 2008
  7. By: Gottschalk, Ricardo; Azevedo Sodre, Cecilia
    Abstract: This paper examines the implications of the liberalization of capital outflows in China, India, Brazil, and South Africa (CIBS) for other developing countries. It focuses on their prospects of attracting not only foreign direct investment (FDI), but also portfolio capital flows Date CIBS. To inform the discussion, two steps are taken: first, in order -Date identify the type of capital flows that might come Date CIBS, the paper briefly describes capital account liberalization measures undertaken by CIBS -Date date and future intended liberalization. Second, it maps geographic distribution of outward FDI and foreign portfolio investment in the recent past, which are taken as possible predic-Daters of future flows. The paper shows that portfolio investment goes mainly -Date OECD countries and offshore financial centres, and only a small share -Date developing countries. But, within developing countries, CIBS? neighbouring countries have shown a greater ability -Date attract this type of investment, compared with other developing countries.
    Keywords: capital account liberalization, FDI, portfolio capital flows, south?south capital flows, developing countries
    Date: 2008
  8. By: Yeyati, Eduardo Levy; Schmukler, Sergio L.; Van Horen, Neeltje
    Abstract: This paper analyzes the effects of capital controls and crises on international financial integration, using data on stocks from emerging economies that trade in domestic and international markets. The cross-market premium (the ratio between the domestic and international market price of cross-listed stocks) provides a valuable measure of how capital controls and crises affect integration. The paper shows that, contrary to the common perception that capital controls can be easily evaded, they do affect the cross-market premium. Controls on capital inflows put downward pressure on domestic markets relative to international ones, generating a negative premium. The opposite happens with controls on capital outflows. This signals the inability of market participants to engage in perfect arbitrage, due to the segmentation of domestic markets from international ones induced by capital controls. Crises affect financial integration by generating more volatility in the cross-market premium and putting more downward pressure on domestic prices.
    Date: 2008–11–01
  9. By: Somwaru, Agapi; Tuan, Francis; Gehlhar, Mark; Diao, Xinshen; Hansen, Jim
    Abstract: This paper delves into China€ٳ differential growths in trade flows with high income and developing countries by focusing on bilateral content of trade data over the time period 1978-2005. Unlike other studies, we account for end use of traded goods ranging from primary, intermediate, and finished goods because China€ٳ policies impact all segments China€ٳ trade flows. In the last 28 years, China has specialized in deficits in the upstream production segments (parts and components) and rapid diversification in consumption goods (extensive margin). While in the late 1970s China€ٳ export and import growth on all goods with major high income countries is outstanding in the most recent years China€ٳ trade growth with developing countries has taken the lead while China is gaining in extensive margins goods trade. This general pattern evolving is in agreement with some of the new trade theory that gives a dominant role to an expansion of the number of export varieties (the extensive margin), which provides an additional channel for welfare gains from trade.
    Keywords: China, international trade, growth, intensive, extensive margins, developing countries, International Relations/Trade,
    Date: 2008
  10. By: Altomonte, Carlo; Rungi, Armando
    Abstract: offshoring undertaken in the new members of EU in the period 1998-2006. Recent empirical evidence (Danninger, Joutz 2007 – IMF) shows that dominant factors explaining the increase in German market shares are trade relationships with fast growing countries and regionalized production in the export sector. According to the empirical evidence available for Italy (Di Maio, Tamagni 2006), the productivity/income content of trade specialization has decreased in the last decade. After an in-depth analysis of bilateral trade flows by final goods and intermediate goods categories, trade data are linked to the firm-level productivity analysis of Italian and German presence in the new member states of European Union. The domestic value added content and the imported intermediates content of exports from both countries to new members are disentangled following Hummels, Ishii and Yi (2001), whereas a sample of 38270 firms, located in new member states but owned by residents in old members, allows not only to measure relative firm-level productivity, but also to control for pure ownership effect, vertical versus horizontal FDI strategy and corporate governance characteristics. Data come from different sources: Eurostat-ComExt for trade, national statistics offices for input output tables, AMADEUS for firm-level data.
    Keywords: DYNREG
    Date: 2008
  11. By: Baek, Jungho; Cho, Yong S.; Koo, Won W.
    Abstract: The dynamic relationships among trade, income and the environment for developed and developing countries are examined using a cointegration analysis. Results suggest that trade and income growth tend to increase environmental quality in developed countries, whereas they have detrimental effects on environmental quality in most developing countries. It is also found that for developed countries the causal relationship appears to run from trade and income to the environment - a change in trade and income growth causes a consequent change in environmental quality, and the opposite relationship holds for developing countries.
    Keywords: Developed countries, Developing countries, Environmental quality, Globalization, Time-series analysis, Trade, Environmental Economics and Policy, International Relations/Trade,
    Date: 2008

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