nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒02‒22
six papers chosen by
Martin Berka
Massey University

  1. Commodity Price Volatility and World Market Integration since 1700 By David S. Jacks; Kevin H. O'Rourke; Jeffrey G. Williamson
  2. Bretton Woods II Still Defines the International Monetary System By Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
  3. International Portfolio Allocation under Model Uncertainty By Pierpaolo Benigno; Salvatore Nisticò
  4. Financial Integration and Aggregate Stability By Yunfang Hu; Kazuo Mino
  5. The Structure of inflation, information and labour markets: Implications for monetary policy By Ashima Goyal
  6. Impact of imported intermediate and capital goods on economic growth: A Cross country analysis By C. Veeramani

  1. By: David S. Jacks; Kevin H. O'Rourke; Jeffrey G. Williamson
    Abstract: Poor countries are more volatile than rich countries, and we know this volatility impedes their growth. We also know that commodity price volatility is a key source of those shocks. This paper explores commodity and manufactures price over the past three centuries to answer three questions: Has commodity price volatility increased over time? The answer is no: there is little evidence of trend since 1700. Have commodities always shown greater price volatility than manufactures? The answer is yes. Higher commodity price volatility is not the modern product of asymmetric industrial organizations - oligopolistic manufacturing versus competitive commodity markets - that only appeared with the industrial revolution. It was a fact of life deep into the 18th century. Does world market integration breed more or less commodity price volatility? The answer is less. Three centuries of history shows unambiguously that economic isolation caused by war or autarkic policy has been associated with much greater commodity price volatility, while world market integration associated with peace and pro-global policy has been associated with less commodity price volatility. Given specialization and comparative advantage, globalization has been good for growth in poor countries at least by diminishing price volatility. But comparative advantage has never been constant. Globalization increased poor country specialization in commodities when the world went open after the early 19th century; but it did not do so after the 1970s as the Third orld shifted to labor-intensive manufactures. Whether price volatility or specialization dominates terms of trade and thus aggregate volatility in poor countries is thus onditional on the century.
    JEL: F14 N7 O19
    Date: 2009–02
  2. By: Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
    Abstract: In this paper we argue that net capital inflows to the United States did not cause the financial crisis that now engulfs the world economy. A crisis caused by such flows has been widely predicted but that crisis has not occurred. Indeed, the international monetary system still operates in the way described by the Bretton Woods II framework and is likely to continue to do so. Failure to properly identify the causes of the current crisis risks a rise in protectionism that could intensify and prolong the decline in economic activity around the world.
    JEL: F02 F32 F33
    Date: 2009–02
  3. By: Pierpaolo Benigno; Salvatore Nisticò
    Abstract: In a rational-expectation model of international portfolio and consumption decisions, international home bias in equities depends on the correlation between non-diversifiable labor income risk and the cross-country equity returns, when agents have log utility in consumption. We show that there is weak empirical evidence for this channel. Moreover standard preferences fail to account for other empirical evidence on international asset prices. We propose an alternative environment with model uncertainty populated by the sophisticated agents of the robust-control theory of Hansen and Sargent (2005). Maintaining the assumption of unitary intertemporal elasticity of substitution, we show that home bias in equity can also depend on the correlation between equity returns and the real exchange rate and its weight depends on a measure of the distrust that the agent has with respect to the objective probability distribution. This hedging component, which mainly refers to long-run risk in real exchange rate, is more relevant from an empirical point of view. The proposed model is successful along other dimensions, where instead the standard rational-expectation model fails.
    JEL: F3 G11 G15
    Date: 2009–02
  4. By: Yunfang Hu (Graduate School of International Cultural Studies, Tohoku University); Kazuo Mino (Graduate School of Economics, Osaka University)
    Abstract: This paper explores a two-country model of capital accumulation with country-specific production externalities. The main concern of our discussion is to investigate equilibrium determinacy (aggregate stability) conditions in a financially integrated world economy. We show that the well-established equilibrium determinacy conditions for the case of small-open economy are still valid if heterogeneity between two countries is small enough. As the technological difference between the countries increases, the equilibrium determinacy conditions may diverge from those for the small country setting.
    Keywords: financial integration, two-country model, equilibrium determinacy, social constant returns
    JEL: F43 O41
    Date: 2009–01
  5. By: Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: The paper gives a simplified version of a typical dynamic stochastic open economy general equilibrium models used to analyze optimal monetary policy. Then it outlines the chief modifications when dualism in labour and in consumption is introduced to adapt the model to a small open emerging market such as India. The implications of specific labour markets, and the structure of Indian inflation and its measurement are examined. Simulations give the welfare effects of different types of inflation targeting. Flexible CPI inflation targeting (CIT) without lags works best, especially if the economy is more open. But volatile terms of trade make the supply curve even steeper than in a small open economy despite specific labour markets and higher labour supply elasticity. Exchange rate intervention limits the volatility of the terms of trade and improves outcomes, making the supply curve flatter. As long as such intervention is required, domestic inflation targeting (DIT) continues to be more robust and effective. The welfare losses from the lags in CPI, which prevent the implementation of CIT, are low as long as the dualistic structure dominates. As the economy becomes more open, however, the loss from not being able to use CIT rises. The lags in CPI therefore need to be reduced, making its future use possible.
    Keywords: small open emerging market, optimal monetary policy, dualistic labour markets, inflation, measurement lags, specific labour markets
    JEL: E52 F41
    Date: 2008–05
  6. By: C. Veeramani (Indira Gandhi Institute of Development Research; Indira Gandhi Institute of Development Research)
    Abstract: Knowledge accumulation in the richer countries provides them with comparative advantages in higher productivity products. The countries that import the higher productivity intermediate products and capital equipments produced in the richer countries, however, derive benefits from knowledge spillovers. The empirical analysis in this paper shows that what type of intermediate goods and capital equipments a country imports and from where it imports indeed matters for its long-run growth. Using highly disaggregated trade data for a large number of countries, we construct an index (denoted as IMPY) that measures the productivity level associated with a country's imports. Using instrumental variable method (to address the endogeneity problems), we find that a higher initial value of the IMPY index (for the year 1995) leads to a faster growth rate of income per capita in the subsequent years (during 1995-2005) and vice versa. The results imply that a 10 increase in IMPY increases growth by about 1.3 to 1.9 percentage points, which is quite large.
    Keywords: Imports, Intermediate and Capital Goods, Economic Growth, Productivity
    JEL: F10 F43 O40 O47
    Date: 2008–12

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