nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒03‒07
eleven papers chosen by
Martin Berka
Massey University

  1. Further evidence on the PPP analysis of the Australian dollar: non-linearities, fractional integration and structural changes By Juan Carlos Cuestas; Luís A. Gil-Alana
  2. Fiscal Shocks and The Real Exchange Rate By Agustín S. Bénétrix and Philip R. Lane
  3. Commodity Price Volatility and World Market Integration since 1700 By David S. Jacks, Kevin H. O'Rourke and Jeffrey G. Williamson
  4. Financial crash, commodity prices and global imbalances: A comment By Reinhart, Carmen
  5. On the impact of trade on industrial structures: The role of entry cost heterogeneity By Daisuke Oyama; Yasuhiro Sato; Takatoshi Tabuchi; Jacques-François Thisse
  6. Inventories and Real Rigidities in New Keynesian Business Cycle Models By Oleksiy Kryvtsov; Virgiliu Midrigan
  7. Can Open Capital Markets Help Avoid Currency Crises? By Gus Garita; Chen Zhou
  8. Business Cycle Evidence on Firm Entry By V. LEWIS
  9. Asset prices and exchange rates: a time dependent approach By Giulia PICCILLO
  10. The comovement between household loans and real activity By Wouter den Haan; Vincent Sterk
  11. Indian Capital Control Liberalization: Evidence from NDF Markets By Hutchison, Michael; Kendall, Jake; Pasricha, Gurnain Kaur; Singh , Nirvikar

  1. By: Juan Carlos Cuestas; Luís A. Gil-Alana
    Abstract: The aim of this paper is to analyse the empirical fulfilment of the Purchasing Power Parity (PPP) theory for the Australian dollar. In order to do so we have applied recently developed unit root tests that account for asymmetric adjustment towards the equilibrium (Kapetanios et al., 2003) and fractional integration in the context of structural changes (Robinson, 1994, and Gil-Alana, 2008). Although our results point to the rejection of the PPP hypothesis, we find that the degree of persistence of shocks to the Australian dollar decreases after the 1985 currency crisis.
    Keywords: PPP, Real Exchange Rate, Unit Roots, Non-linearities, Fractional integration
    JEL: C32 F15
    Date: 2009–02
  2. By: Agustín S. Bénétrix and Philip R. Lane
    Abstract: We estimate the impact of shocks to government spending on the real exchange rate for a panel of EMU member countries. Our key finding is that the impact differs across different types of government spending, with shocks to public investment generating a larger and more persistent impact on the real exchange rate than shocks to government consumption. Within the latter category, we also show that the impact of shocks to the wage component of government consumption is larger than for shocks to the non-wage component.
    Date: 2009–03–03
  3. By: David S. Jacks, Kevin H. O'Rourke and 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 World shifted to labor-intensive manufactures. Whether price volatility or specialization dominates terms of trade and thus aggregate volatility in poor countries is thus conditional on the century.
    Date: 2009–02–26
  4. By: Reinhart, Carmen
    Abstract: I appreciate the opportunity to discuss this paper by Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas. This paper was described to me as a mix of theoretical and empirical work that attempts a hat trick: explaining the joint combination of global imbalances, the deflation of the housing price bubble that created the subprime crisis, and volatile oil prices.
    Keywords: oil prices volatility saving global imbalances
    JEL: E2
    Date: 2009
  5. By: Daisuke Oyama; Yasuhiro Sato; Takatoshi Tabuchi; Jacques-François Thisse
    Abstract: This paper investigates the impacts of progressive trade openness, technological externalities, and heterogeneity of individuals on the formation of entrepreneurship in a two-country occupation choice model. We show that trade opening gives rise to a non-monotonic process of international specialization, in which the share of entrepreneurial firms in the large (small) country first increases (decreases) and then decreases (increases), with the global economy exhibiting first de-industrialization and then re-industrialization. When countries have the same size, we also show that strong technological externalities make the symmetric equilibrium unstable, generating equilibrium multiplicity, while sufficient heterogeneity of individuals leads to the stability and uniqueness of the symmetric equilibrium.
    Date: 2009
  6. By: Oleksiy Kryvtsov; Virgiliu Midrigan
    Abstract: Kryvtsov and Midrigan (2008) study the behavior of inventories in an economy with menu costs, fixed ordering costs and the possibility of stock-outs. This paper extends their analysis to a richer setting that is capable of more closely accounting for the dynamics of the US business cycle. We find that the original conclusion survives in this setting: namely, the model requires an elasticity of real marginal cost to output approximately equal to the inverse intertemporal elasticity of substitution in consumption in order to account for the countercyclicality of the aggregate inventory-to-sales ratio in the data.
    Keywords: Business fluctuations and cycles; Transmission of monetary policy
    JEL: E31 F12
    Date: 2009
  7. By: Gus Garita; Chen Zhou
    Abstract: By proposing a measure for cross-market rebalancing effects, we provide new insights into the different sources of currency crises. We address three interrelated questions: (i) How can we best capture contagion; (ii) Is the contagion of currency crisis a regional or global phenomenon?; and (iii) By controlling for “cross-market rebalancing” do other mechanisms like "financial openness" increase the probability of a currency crisis? We introduce the concept of conditional probability of joint failure (CPJF) to measure the linkages of currency crisis intra- and inter-regionally. From estimating this measure, we test for contagion and conclude that contagion only exists regionally. Furthermore, we construct a “cross-market rebalancing” variable based on the regional CPJF. By employing a probit model to compare our new variable with a regular contagion variable often used in literature, we conclude that our new variable captures contagion better; moreover, it also captures cross-market rebalancing effects. When we properly account for these effects, then financial openness helps to diminish the probability of a currency crisis even after controlling for the onset of a banking crisis. We also show that monetary policy geared towards price stability reduces the probability of a currency crisis.
    Keywords: Crisis; Contagion; Cross-Market Rebalancing; Exchange Market Pressure; Extreme Value Theory; Financial Integration.
    JEL: C10 E44 F15 F36 F37
    Date: 2009–02
  8. By: V. LEWIS
    Abstract: Business cycle models with sticky prices and endogenous firm entry make novel predictions on the transmission of shocks through the extensive margin of investment. I test some of these predictions using a vector autoregression with model-based sign restrictions. I find a positive and significant response of firm entry to expansionary shocks to productivity, aggregate spending, monetary policy and entry costs. The estimated response to a monetary expansion does not support the monetary policy transmission mechanism proposed by the model. Insofar as firm startups require labour services, wage stickiness is needed to make the signs of the model responses consistent with the estimated ones. The shapes of the empirical responses suggest that congestion effects in entry make it harder for new .firms to survive when the number of startups rises.
    Keywords: firm entry, business cycles, VAR
    Date: 2008–10
  9. By: Giulia PICCILLO
    Abstract: The paper studies the relationship between exchange rates and asset prices. It takes the approach of order ows to exchange rates. Specifically, it focuses on the effect of time-dependent risk aversion. The switch in the parameter causes the equilibrium of the system to alternate between two regimes: an optimistic and a pessimistic one. The paper is complete of a wide empirical section where the two equilibria are identified and specified for three of the main world markets. The regimes appear to be persistent and consistent with the existing literature on risk aversion. This also includes recent events of the financial crisis. The analysis uncovers a new development for exchange rate microstructure models. 3 of the 4 markets studied are consistent with both the order flow and the Markov switching models. The markets analyzed are the UK, Switzerland, Germany and Japan.
    Keywords: Exchange rates, Microstructure, Markov chains
    JEL: C2 F3 G1
    Date: 2008–12
  10. By: Wouter den Haan; Vincent Sterk
    Abstract: In this paper, we analyze the business cycle behavior of home mortgages and consumer credit and investigate whether the observed changes. and in particular observed changes in the comovement between the loan variables and real activity. are likely to be caused by changes in financial markets. We find that there may have been such a role for changes in markets for consumer credit, but even before the financial crisis hit, the data do not support the hypothesis that changes in mortgage markets reduced the impact of economic shocks on real activity.
    JEL: C10 E44 F15 F36 F37
    Date: 2009–02
  11. By: Hutchison, Michael; Kendall, Jake; Pasricha, Gurnain Kaur; Singh , Nirvikar
    Abstract: The Indian government has taken a number of incremental measures to liberalize legal and administrative impediments to international capital movements in recent years. This paper analyzes the extent to which the effectiveness of capital controls in India, measured by the domestic less net foreign interest rate differential (deviations from covered interest rate parity) have changed over time. We utilize the 3-month offshore non-deliverable forward (NDF) market to measure the effective foreign interest rate (implied NDF yield). Using the self exciting threshold autoregression (SETAR) methodology, we estimate a no-arbitrage band width whose boundaries are determined by transactions costs and capital controls. Inside of the bands, small deviations from CIP follow a random walk process. Outside the bands, profitable arbitrage opportunities exist and we estimate an adjustment process back towards the boundaries. We allow for asymmetric boundaries and asymmetric speeds of adjustment (above and below the band thresholds), which may vary depending on how arbitrage activity is constrained by capital controls. We test for structural breaks, identify three distinct periods, and estimate these parameters over each sub-sample in order to capture the de facto effect of changes in capital controls over time. We find that de facto capital control barriers: (1) are asymmetric over inflows and outflows, (2) have changed over time from primarily restricting outflows to effectively restricting inflows (measured by band widths and positions); (3) arbitrage activity closes deviations from CIP when the threshold boundaries are exceeded in all sub-samples. In recent years, capital controls have been more symmetric over capital inflows and outflows and the deviations from CIP outside the boundaries are closed more quickly.
    Keywords: capital controls; non-deliverable forward markets; India; economic reform; liberalization
    JEL: G15 F31 F36
    Date: 2009–01–17

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