nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒03‒14
eleven papers chosen by
Martin Berka
Massey University

  1. Financial Globalization and Economic Policies By Kose, M. Ayhan; Prasad, Eswar; Rogoff, Kenneth; Wei, Shang-Jin
  2. Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy By Wang, Wen-Yao; Hernandez-Verme, Paula
  3. Monetary policy transparency and inflation persistence in a small open economy By Dai, Meixing; Sidiropoulos, Moïse; Spyromitros, Eleftherios
  4. International Financial Integration and Real Exchange Rate Long-Run Dynamics in Emerging Countries: Some Panel Evidence By Caporale, Guglielmo Maria; Hadj Amor, Thouraya; Rault, Christophe
  5. How Persistent are International Capital Flows? By Galstyan, Vahagn
  6. Global Slack and Domestic Inflation Rates: A Structural Investigation for G-7 Countries By Fabio Milani
  7. Real exchange rates and real interest rate differentials: a present value interpretation By Mathias Hoffmann; Ronald MacDonald
  8. Turkey's Recent Trade and Foreign Direct Investment Performance By Kamil Yilmaz; Umit Izmen
  9. A New Evidence for Exchange Rate Pass-through: Disaggregated Trade Data from Local Ports By Yushi Yoshida
  10. The effect of a collective exchange rate adjustment on East Asian exports By Rahman, Mizanur; Kalirajan, Kaliappa
  11. Two speed Europe and business cycle synchronization in the European Union: The effect of the common currency By Gogas, Periklis; Kothroulas, George

  1. By: Kose, M. Ayhan (International Monetary Fund); Prasad, Eswar (Cornell University); Rogoff, Kenneth (Harvard University); Wei, Shang-Jin (Columbia University)
    Abstract: We review the large literature on various economic policies that could help developing economies effectively manage the process of financial globalization. Our central findings indicate that policies promoting financial sector development, institutional quality and trade openness appear to help developing countries derive the benefits of globalization. Similarly, sound macroeconomic policies are an important prerequisite for ensuring that financial integration is beneficial. However, our analysis also suggests that the relationship between financial integration and economic policies is a complex one and that there are unavoidable tensions inherent in evaluating the risks and benefits associated with financial globalization. In light of these tensions, structural and macroeconomic policies often need to be tailored to take into account country specific circumstances to improve the risk-benefit tradeoffs of financial integration. Ultimately, it is essential to see financial integration not just as an isolated policy goal but as part of a broader package of reforms and supportive macroeconomic policies.
    Keywords: emerging markets, capital flows, capital account liberalization, financial globalization
    JEL: F02 F21 F36 F4
    Date: 2009–02
  2. By: Wang, Wen-Yao; Hernandez-Verme, Paula
    Abstract: We model a typical Asian-crisis-economy using dynamic general equilibrium techniques. Meaningful exchange rates obtain from nontrivial demands for fiat currencies. Sudden stops/bank-panics are possible, and key for evaluating the relative merits of alternative exchange rate regimes in promoting stability. Strategic complementarities contribute to the severe indeterminacy of the continuum of equilibria; there is a strong association between the scope for existence and indeterminacy of equilibria, the properties along dynamic paths and the underlying policy regime. Binding multiple reserve requirements reduce the scope for financial fragility and panic equilibria; backing the money supply acts as a stabilizer only in fixed regimes.
    Keywords: Sudden stops; Exchange rate regimes; Multiple reserve requirements
    JEL: E31 E44 F41
    Date: 2009–03–05
  3. By: Dai, Meixing; Sidiropoulos, Moïse; Spyromitros, Eleftherios
    Abstract: Using a New Keynesian small open economy model, we examine the effects of central bank transparency on inflation persistence. We have found that more opacity could reinforce the effect of persistent shocks on the level and variability of endogenous variables if the difference between the interest elasticity of domestic goods demand and the degree of trade openness is sufficient large or sufficiently low, judging on structural parameters characterising the economy, the central bank preference and its initial degree of opacity. Our result implies that, under perfect capital mobility, a high degree of domestic financial development is a good reason for increasing the transparency.
    Keywords: Central bank’s transparency; open economy; inflation persistence; real exchange rate persistence.
    JEL: E58 E52 F41
    Date: 2008–12
  4. By: Caporale, Guglielmo Maria (Brunel University); Hadj Amor, Thouraya (University of Nice Sophia-Antipolis); Rault, Christophe (University of Orléans)
    Abstract: The aim of this paper is to provide new empirical evidence on the impact of international financial integration on the long-run Real Exchange Rate (RER) in 39 developing countries belonging to three different geographical regions (Latin America, Asia and MENA). It covers the period 1979-2004, and carries out “second-generation” tests for non-stationary panels. Several factors, including international financial integration, are shown to drive the long-run RER in emerging countries. It is found that the new financial environment characterised by international financial integration leads to a depreciation of the RER in the long run. Further, RER misalignments take the form of an under-valuation in most MENA countries and an over-valuation in most Latin American and Asian countries.
    Keywords: emerging economies, real exchange rate, financial integration, misalignment, second-generation panel unit root and cointegration tests
    JEL: E31 F0 F31 C15
    Date: 2009–02
  5. By: Galstyan, Vahagn
    Abstract: This paper documents the dynamic properties of the current account, trade balance and international capital flows. For this purpose, two approaches are taken: probit and a nonparametric estimation. The probabilistic approach shows that, in general, deficits and net inflows tend to be more persistent than surpluses and net outflows. This result is robust to either specification of pooled and country-specific probits. The results of non-parametric estimation are in line with the results obtained from the probit.
    Keywords: Capital flows, persistence
    JEL: F00 F30
    Date: 2009
  6. By: Fabio Milani (Department of Economics, University of California-Irvine)
    Abstract: Recent papers have argued that one implication of globalization is that domestic inflation rates may have now become more a function of ``global", rather than domestic, economic conditions, as postulated by closed-economy Phillips curves. This paper aims to assess the empirical importance of global output in determining domestic inflation rates by estimating a structural model for a sample of G-7 economies. The model can capture the potential effects of global output fluctuations on both the aggregate supply and the aggregate demand relations in the economy and it is estimated using full-information Bayesian methods. The empirical results reveal a significant effect of global output on aggregate demand in most countries. Through this channel, global economic conditions can indirectly affect inflation. The results, instead, do not seem to provide evidence in favor of altering domestic Phillips curves to include global slack as an additional driving variable for inflation.
    Keywords: Globalization; Global Slack; Inflation Dynamics; Phillips Curve; Bayesian Estimation
    JEL: E31 E50 E52 E58 F41
    Date: 2009–02
  7. By: Mathias Hoffmann; Ronald MacDonald
    Abstract: Although the real exchange rate - real interest rate (RERI) relationship is central to most open economy macroeconomic models, empirical support for the relationship is generally found to be rather weak. In this paper we re-investigate the RERI relationship using bilateral U.S. real exchange rate data spanning the period 1978 to 2007. Instead of testing one particular model, we build on Campbell and Shiller (1987) to propose a metric of the economic significance of the relationship. Our empirical results provide robust evidence that the RERI link is economically significant and that the real interest rate differential is a reasonable approximation of the expected rate of depreciation over longer horizons.
    Keywords: Real Exchange Rates, Real Interest Rates, Present Value Model.
    JEL: E43 F31 F41
    Date: 2009–02
  8. By: Kamil Yilmaz (Koc University); Umit Izmen
    Abstract: This paper analyzes the changes in the structure of trade as well as the developments in the capital account of Turkey since mid-1990s and discusses the possible composition of trade flows and Turkey’s attractiveness for international capital inflows in the near future. Analysis of the long-term performance of Turkish exports and imports reveals that the efforts to increase exports were successful only to a certain degree. The country’s large trade deficit with the rest of the world accumulates over time and frequently ends up with a crisis which automatically reduces the trade deficit by reducing the imports. Since 2001 the transformation of exports from the low-tech products to medium-tech and to a certain degree high-tech products has taken place. While this transformation helped bring the trade deficit with the EU down, it contributed to the widening of trade deficit vis-à-vis the Asian countries and oil exporters. The initiation of the EU accession talks in 2005 invigorated the expectations for a more rapid and consistent implementation of the rules and regulations that ensure a level playing field for all companies, domestic and foreign, alike. The EU accession process enabled Turkey to attract record levels of FDI inflows. Almost all of the FDI inflows over the last four years have been composed of mergers and acquisitions, and directed mostly to service sectors and the real estate. From a longer term growth perspective Turkey needs to attract greenfield investments, especially in the manufacturing industries. In order to put Turkey in international producers’ networks the current investment environment should further be improved by the implementation of long-delayed microeconomic structural reforms as well as judicial and legal reforms.
    Keywords: Turkey, European Union, Foreign Trade, Current Account, Capital Account
    JEL: F4 F14
    Date: 2009–03
  9. By: Yushi Yoshida (Faculty of Economics, Kyushu Sangyo University)
    Abstract: For the estimation of exchange rate pass-through (henceforth ERPT), except for few evidences based on firm-level data, even the most disaggregated level of national export data is still biased with aggregation over sub-regions within an exporting country. We investigate to what extent this aggregation within product category is biased by comparing ERPT estimates across local ports. We use monthly exports at the HS 9-digit level from January 1988 to December 2005 for five major Japanese ports. In a panel data regression framework we control for exporting industry and importing country. Statistical tests provide strong evidence that export prices are set at different levels across local ports and that they correspond differently with respect to fluctuations of exchange rates.
    Keywords: Exchange rate pass-through; Firm heterogeneity; Japanese trade; Port-level trade; pricing-to-market
    JEL: F14 F31 F41
    Date: 2008–07
  10. By: Rahman, Mizanur; Kalirajan, Kaliappa
    Abstract: This paper estimates long-run effects of a collective exchange rate adjustment on multilateral exports from China, Japan, South Korea, and Taiwan. The findings show that a 1 percent generalized appreciation of all East Asian exchange rates would reduce East Asian exports by about 3 percent.
    Keywords: Global imbalance; exchange rate appreciation; collective adjustment; production networks; East Asia.
    JEL: F42 F32 F12 F14 C33
    Date: 2008–03–27
  11. By: Gogas, Periklis; Kothroulas, George
    Abstract: The purpose of this paper is to examine the effectiveness of the policies and procedures towards economic convergence between the countries that participated in the European Exchange Mechanism I and which are now members states of the Eurozone. The question is whether the introduction of the common currency has led to more synchronisation of the business cycles of member states or it has acted as the monetary ground for the creation of a multi-speed Europe that includes economies that bear little resemblance in terms of their basic economic features and figures and especially with respect to the fluctuations in their Gross Domestic Product. The empirical analysis is done through the use of linear regressions, the estimation of the correlation coefficient, and also a proposed sign concordance index (SCI). The results provide evidence that the synchronisation of the cycles seem to become weaker since the adoption of the new currency. Especially for G6, the group of the smaller regional economies, the results are consistent throughout all three methodologies used and for both groups of countries’ cycles used as a comparison base, the broad EU15 and the narrow G3.
    Keywords: Business Cycle; Synchronization; Eurozone.
    JEL: E32 E42 E52
    Date: 2009–02

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