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on Open MacroEconomics |
| By: | Dimitris K. Christopoulos (Panteion University); Karine Gente (University of Aix-Marseilles); Miguel A. Leon-Ledesma (University of Kent) |
| Abstract: | Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an exogenous 2-sector growth model in which RER determination depends on the country's capacity to borrow from international capital markets. The country faces a constraint on capital inflows. With high domestic savings, the country converges to the world per capita income and RER only depends on productivity spread between sectors (Balassa-Samuelson effect). If the constraint is too tight and/or domestic savings too low, RER depends on both net foreign assets (transfer effect) and productivity. We then analyze the empirical implications of the model and find that, in accordance with the theory, RER is mainly driven by productivity and net foreign assets in constrained countries and exclusively by productivity in unconstrained countries. |
| Keywords: | Real exchange rate; capital inflows constraint; overlapping generations |
| JEL: | E39 F32 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2008-17&r=opm |
| By: | Alexander Mihailov (School of Economics, University of Reading); Fabio Rumler (Economic Analysis Division, Oesterreichische Nationalbank); Johann Scharler (Department of Economics, University of Linz) |
| Abstract: | This paper applies GMM estimation to assess empirically the small open-economy New Keynesian Phillips Curve derived in Galí and Monacelli (2005). We obtain a testable specification where fluctuations in the terms of trade enter explicitly, thus allowing a comparison of the relevance of domestic versus external determinants of CPI inflation dynamics. For most countries in our sample the expected relative change in the terms of trade emerges as a more relevant inflation driver than the contemporaneous domestic output gap. Overall, our results indicate some, albeit moderate, support for the tested relationship based on data from ten OECD countries typically classified as open economies. |
| Keywords: | New Keynesian Phillips Curve, small open economies, terms of trade fluctuations, inflation dynamics, GMM estimation |
| JEL: | C32 C52 E31 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:rdg:emxxdp:em-dp2008-63&r=opm |
| By: | Roman Frydman; Michael D. Goldberg; Søren Johansen; Katarina Juselius (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | Asset prices undergo long swings that revolve around benchmark levels. In currency markets, fluctuations involve real exchange rates that are highly persistent and that move in near-parallel fashion with nominal rates. The inability to explain these two regularities with one model has been called the "purchasing power parity puzzle." In this paper, we trace the puzzle to exchange rate modelers' use of the "Rational Expectations Hypothesis." We show that once imperfect knowledge is recognized, a monetary model is able to account for the puzzle, as well as other salient features of the data, including the long-swings behavior of exchange rates. |
| Keywords: | PPP puzzle, long swings, imperfect knowledge, rational expectations hypothesis |
| JEL: | F31 F41 G15 |
| Date: | 2009–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-01&r=opm |
| By: | Indrit Hoxha; Sebnem Kalemli-Ozcan; Dietrich Vollrath |
| Abstract: | We compare welfare in a calibrated neoclassical model of consumption under autarky to welfare under financial integration. The estimated welfare gains of integration depend intimately on the assumed speed of convergence between domestic and world rates of return. Using observed data from 1960-2000 to derive the initial fundamental characteristics for each of 92 countries, we parameterize the convergence process and calculate welfare under different assumptions regarding rates of convergence. Allowing for realistic rates, we calculate that welfare is nearly six times larger than previously found. Expanding our analysis to include the productivity gains from the inflow of FDI implies welfare gains twelve times larger than found before. Our results indicate substantial gains from international financial integration arising from persistent differences in fundamentals across nations. |
| JEL: | F36 F41 F43 O4 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14636&r=opm |
| By: | Kari E. O. Alho (ETLA and University of Helsinki); Ville Kaitila (ETLA); Mika Widgrén (Department of Economics, Turku School of Economics, and ETLA, CEPR, CESifo and Public Choice Research Centre (PCRC)) |
| 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: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:tkk:dpaper:dp41&r=opm |
| By: | Tobias Broer |
| Abstract: | Wealthier people generally hold a larger part of their savings in risky assets. Using the US Survey of Consumer Finances, I show that wealthier households also have a higher portfolio share of foreign assets. This relative home bias of the poor does not seem to be explained by fixed participation costs alone, as the portfolio share of foreign assets increases with financial wealth even among participants in foreign asset markets. This paper shows how both biases of poorer agents' portfolios, towards safe and home assets, can arise in a simple 2 country economy with income and portfolio heterogeneity. Poor investors are naturally biased against domestic equity when wages and capital returns are positively correlated, making equity a bad hedge against fluctuations in labour income relative to bonds. Moreover poor investors prefer home to foreign bonds if equilibrium terms of trade movements systematically lead to a fall in the purchasing power of domestic assets in periods of high wages. I show that this is likely to be the case if aggregate supply shocks at home are more important than abroad. Finally, the model shows that aggregate home bias in the country portfolio implies relative home bias of the poor and vice versa. |
| Keywords: | Heterogeneous Agents, Home Bias, Inequality, International Asset Diversification, Portfolio Choice |
| JEL: | F36 G11 E21 D11 D31 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2008/28&r=opm |
| By: | Gabor Pula (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Tuomas A. Peltonen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Due to the emergence of global production networks, trade statistics have became less accurate in describing the dependence of emerging Asia on external demand. This paper analyses, using an update of the Asian International Input-Output (AIO) table, the interdependence of emerging Asian countries, the United States, the EU15, and Japan via trade and production linkages. According to the results, we do not find evidence of the decoupling of emerging Asia from the rest of the world. On the contrary, we find evidence on increasing trade integration, both globally and regionally. Nonetheless, our analysis indicates that emerging Asia’s dependence on exports is only about one-third of its GDP, i.e. well below the 50% exposure suggested by trade data. This finding can be explained by the high import content of exports in these economies, which is a result of the increasing segmentation of production across the region. JEL Classification: F14, C67, E23. |
| Keywords: | Emerging Asia, Asian International Input-Output table, real linkages, decoupling, resilience. |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20090993&r=opm |
| By: | Julien Martin; Isabelle Mejean |
| Abstract: | This paper describes the impact of the Euro on i) the level, ii) the evolution and iii) the dispersion of trade prices. This empirical analysis relies on firm level data about French exports over the period 1995-2005. We find that the elimination of exchange rate fluctuations reduces the pricing to market behavior of French exporters. At the beginning of the EMU, we also observe an increase in aggregate prices for sales in the Euro zone. This price increase does not compensate for the aggregate price gap between cheaper EMU markets and more expensive non-EMU countries. Last we find that the Euro has affected firms’ pricing strategies leading to a reduction of the price dispersion inside the Euro zone. |
| Keywords: | International trade prices; european monetary integration |
| JEL: | F12 F15 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2008-29&r=opm |
| By: | Esteban Jaimovich (Collegio Carlo Alberto); Vincenzo Merella (Department of Economics, City University, London) |
| Abstract: | The literature on North-South trade has explored conditions under which international trade might be a factor magnifying income disparities between the advanced North and the backward South. Little attention has yet been placed on the e¤ect of trade on countries that do not display substantial dissimilarities concerning capital endowments. We show that even when no single country is technologically more advanced than any other one and productivity changes are uniform and identical in all countries, international trade may still be a source of income divergence. Income divergence will be experienced when comparative advantages induce patterns of specialisation that, although optimal for each country at some initial point in time, do not o¤er the same scope for improvements in terms of subsequent quality upgrading of ?nal products |
| Keywords: | International Trade, Quality Ladders, Nonhomothetic Preferences |
| JEL: | F11 F43 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:0901&r=opm |
| By: | Thomas J. Flavin (Economics, National University of Ireland, Maynooth); Ekaterini Panopoulou; Deren Unalmis (Economics, National University of Ireland, Maynooth) |
| Abstract: | We analyze the stability of domestic financial linkages between periods of calm and turbulent market conditions. Our model develops a simultaneous test of shift contagion and bi-directional pure contagion, which is applied to the equity and currency markets of a group of East Asian emerging economies. Our results show a great deal of instability in these markets with widespread evidence of pure contagion in both directions. There is less evidence of shift contagion with the transmission of common shocks unchanged between regimes for the majority of countries. |
| Keywords: | Shift contagion; Pure contagion; Financial market crises; Regime switching |
| JEL: | F42 G15 C32 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:may:mayecw:n1981108.pdf&r=opm |