nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒02‒14
eleven papers chosen by
Martin Berka
Massey University

  1. Exchange Rate, Employment and Hours: What Firm-Level Data Say By Francesco Nucci; Alberto Franco Pozzolo
  2. On the International Dimension of Fiscal Policy By Gianluca Benigno; Bianca De Paoli
  3. Financial Reforms and Capital Flows to Emerging Europe By Martin Schmitz
  4. Commodity Price Shocks and the Australian Economy since Federation By Sambit Bhattacharyya; Jeffrey G Williamson
  5. Growth and Inequality Tradeoffs in a Small Open Economy By Yu-chin Chen; Stephen J. Turnovsky
  6. Sovereign external assets and the resilience of global imbalances By Gabriel Enrique Alberola; José María Serena
  7. The process of convergence towards the euro for the Visegrad-4 countries By Giuliana Passamani
  8. Canada and the IMF: Trailblazer or Prodigal Son? By Michael Bordo; Tamara Gomes; Lawrence Schembri
  9. Collateral Constraints and Macroeconomic Adjustment in an Open Economy By Philip Brock
  10. Can Demand from China Shield East Asian Economies from Global Slowdown? By Zhiwei Zhang
  11. Output Collapses and Productivity Destruction By Juan Blyde; Christian Daude; Eduardo Fernandez-Arias

  1. By: Francesco Nucci (Universit… di Roma "La Sapienza"); Alberto Franco Pozzolo (Universit… degli Studi del Moliste)
    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 specilcity 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 ;ows 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: 2009–01
  2. By: Gianluca Benigno; Bianca De Paoli
    Abstract: This paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non-state-contingent debt. The main finding of the paper is that, once the open economy aspect of the policy problem is considered, it is not optimal to smooth taxes following idiosyncratic shocks. Even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium, the presence of a terms of trade externality lead to movements in the tax rate. Also in contrast with the closed economy, the introduction of sticky prices can reduce the optimal volatility of taxes.
    Keywords: optimal policy, fiscal policy, small open economy
    JEL: E62 E63 F41
    Date: 2009–01
  3. By: Martin Schmitz
    Abstract: Analysis of 21 emerging European economies reveals a substantial role for domestic financial reforms in attracting net capital flows. Controlling for standard determinants of capital flows, we find in particular banking sector reforms to be consistent with larger current account deficits and net financial inflows, whereas opposite or no effects are found for security market reforms as well as for indicators of financial depth. Additional net inflows are reaped by the EU accession countries. Banking reforms are found to have a significant impact on FDI and “other” investment net inflows; they have a significant effect on gross financial inflows, but not on outflows.
    Date: 2009–01–30
  4. By: Sambit Bhattacharyya; Jeffrey G Williamson
    Abstract: Even though Australia has experienced frequent and large commodity export price shocks like the Third World, it seems to have dealt with the volatility better. Why? This paper explores Australian terms of trade volatility since 1901. It identifies two major price shock episodes before the recent mining-led boom and bust. It assesses their relative magnitude, their de-industrialization and distributional impact, and policy responses. In what way has Australia been different from other commodity exporters experiencing volatile prices?
    Keywords: Commodity exports, price shocks, Australian economy
    JEL: F14 F43 N17 O56
    Date: 2009
  5. By: Yu-chin Chen (University of Washington); Stephen J. Turnovsky (University of Washington)
    Abstract: This paper analyzes the growth and inequality tradeoff for a small open economy where agents differ in their initial endowments of capital stock and international bond-holdings. Our analysis focuses on the distributional impacts of different structural shocks through their effects on agents’ relative wealth and their labor supply decisions. Supplementing the theoretical analysis with numerical simulations, we demonstrate that openness – access to an international capital market – has important consequences on the growth-inequality tradeoff. Specifically, the growth and distributional consequences of structural shocks depend crucially on whether the underlying heterogeneity originates with the initial endowment of domestic capital or foreign bonds.
    Date: 2008–09
  6. By: Gabriel Enrique Alberola (Banco de España); José María Serena (Banco de España)
    Abstract: Sovereign external assets (SEAs) comprise foreign exchange reserves and sovereign wealth funds (SWFs). The global stock of reserves reached 7 $trn in the second quarter of 2008, but data on SWF are rather elusive. Our estimation puts the SWFs at around 2,5 $trn dollars by 2007 and in the last years they have grown at a high pace, fostered by high commodity prices. Therefore, SEAs have surpassed the 10 $trn mark (around 5% of global assets and 15% of global GDP). This paper argues that reserves and SWF assets should be jointly considered for the assessment of global imbalances. Both are official capital outflows from developing to developed countries, both hinder internal adjustment in current account surplus countries, both help to cover the financing needs of deficit countries, in particular in the US, and, therefore, both contribute to sustain global imbalances. The importance of SEAs in financing the external imbalances of the US has been widely recognised but scantly measured. Our rule-of-thumb calculations suggests that they have greatly increased their importance in the last years, having surpassed the US$ trillion increase in 2007; relative to US financing needs, this amount represents around a 135% and 50% of net and gross needs, respectively, in 2007. Reserves have in the last years contributed 80% and SWFs 20%.Looking ahead, two main conclusions can be put forward: 1) the relative importance SWFs in the financing of the US deficits and global imbalances is set to increase (also relative to reserves), but this is conditional to commodity prices remaining at high levels. On the one hand, the economic motivation of SWFs -intertemporal smoothing- is more palatable than that of reserves (exchange rate management), despite political concerns on SWFs; on the other hand, SWFs do not have significant internal costs, contrary to reserves, whose monetary and fiscal costs are increasing in the margin; 2) SEAs can well buttress US financial needs in the years ahead, providing resilience to the global imbalances. Dramatic shifts in the pace of SEAs accumulation -due for instance to an adjustment of commodity prices- or in the investment allocation would jeopardise these prospects.
    Keywords: international reserves, sovereign wealth funds, global imbalances, exchange rates
    JEL: E58 F21 F36 G15
    Date: 2009–01
  7. By: Giuliana Passamani
    Abstract: The aim of the paper is to analyze the foreign transmission mechanism between each of the Visegrad-4 countries and the eurozone, through an empirical analysis of the basic international parity conditions linking Czech, Hungarian, Polish and Slovakian inflations and interest rates with the ones of the current euro area members. The focus of the analysis is to show the differences among these catching-up economies, with particular attention to their process of convergence towards the eurozone economy. For reasons due to the availability of data, the sample covers the last decade. We use the cointegrated VAR model to define longrun stationary relations as well as common stochastic trends. The methodology adopted is properly apt to uncover the dynamic structure underlying the stochastic behaviour of prices, interest rates and exchange rate. Of particular interest is the empirical finding that the parities do not hold on their own, as expected, but that weaker form of the same parities, or linear combinations of them, hold in our data set, with some differences for each country. Also the process of convergence is different: the Czech Republic seems to have reached a relative convergence, while for the other countries we have that the process show a tendency towards convergence.
    Keywords: Visegrad_4 countries, PPP, UIP, RIP, Cointegrated VAR, Convergence
    JEL: E31 E43 F31
    Date: 2008
  8. By: Michael Bordo; Tamara Gomes; Lawrence Schembri
    Abstract: Canada played an important role in the postwar establishment of the International Monetary Fund (IMF), yet it was also the first major member to challenge the orthodoxy of the BrettonWoods par value system by abandoning it in 1950 in favour of a floating, market-determined exchange rate. Although the IMF heavily criticized this decision, Canada's trail-blazing experience demonstrated that a flexible exchange rate could operate in a stable and effective manner under a high degree of capital mobility. Equally important, it showed that monetary policy needs to be conducted differently under a flexible exchange rate and capital mobility. The remarkable stability of the dollar during the 1950s contradicted previous wisdom on floating exchange rates, which had predicted significant volatility. In May of 1962, Canada returned to the BrettonWoods system as a "prodigal son" after a period of controversial monetary policy and a failed attempt to depreciate the value of the Canadian dollar. The authors critically analyze the interaction between Canadian and IMF officials regarding Canada's exchange rate policy in view of the economic circumstances and the prevailing wisdom at the time. They also examine the impact on IMF research and policy, because the Canadian experience influenced the work of Rudolf Rhomberg as well as Robert Mundell and Marcus Fleming, resulting in the development of the Mundell–Fleming model. Thus, the Canadian experience with a floating exchange rate not only had important implications for the IMF and the BrettonWoods system, but also for macroeconomic theory and policy in open economies.
    Keywords: Exchange rate regimes; Exchange rates; Monetary policy framework
    JEL: F41 N72 E52 E58
    Date: 2009
  9. By: Philip Brock (University of Washington)
    Date: 2009–01
  10. By: Zhiwei Zhang (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper quantifies how much of exports from eight East Asian economies were consumed by consumers in China, US, Japan, other developed economies, and the rest of the world. We control for the indirect exports through China, i.e., the parts and components that East Asian economies exported to China and subsequently re-exported to other countries. A unique firm-level database is utilised to get an accurate measure for such indirect exports. The main findings are: (i) US consumers still account for more exports from East Asian economies than Chinese consumers do, and the total gross exports from East Asian economies to China overstate the importance of final demand from China; and (ii) the share of exports from East Asia that were consumed by the US, Japan, other OECD countries, and China did not change drastically from 2000 to 2006. Chinese consumers did become more important, noticeably for Japan and Korea, but even in these two countries, the magnitude of change is only about 5-6 percentage of their total exports. These findings indicate that the final demand side of trade in East Asia has changed only moderately since 2002.
    Keywords: vertical integration; intra-Asia trade
    JEL: F13 F43 O24 O11
    Date: 2008–12
  11. By: Juan Blyde; Christian Daude; Eduardo Fernandez-Arias
    Abstract: This paper analyzes the long-run relationship between output collapses—defined defined as GDP falling substantially below trend—and total factor productivity (TFP), using a panel of 71 developed and developing countries during the period 1960-2003 to identify episodes of output collapse and estimate counterfactual post-collapse TFP trends. Collapses are concentrated in developing countries, especially African and Latin American, and were particularly widespread in the 1980s in Latin America. Overall, output collapses are systematically associated with long-lasting declines in TFP. The paper explores the conditions under which collapses are least or most damaging, as well as the type of shocks that make collapses more likely or severe, and additionally quantifies the welfare cost associated with output collapses.
    Keywords: Growth, recessions, productivity, recovery
    JEL: F43 O40
    Date: 2009–01

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