nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒03‒22
fifteen papers chosen by
Martin Berka
Massey University

  1. Valuation Effects and the Dynamics of Net External Assets By Michael B. Devereux; Alan Sutherland
  2. Consumption and Real Exchange Rates in Professional Forecasts By Michael B. Devereux; Gregor W. Smith; James Yetman
  3. Investment and trade patterns in a sticky-price, open-economy model By Enrique Martinez-Garcia; Jens Sondergaard
  4. Exchange rate pass-through in a competitive model of pricing-to-market By Raphael Auer; Thomas Chaney
  5. Monthly pass-through ratios By Marlene Amstad; Andreas M. Fischer
  6. International portfolios, capital accumulation and foreign assets dynamics By Nicolas Coeurdacier; Robert Kollmann; Philippe Martin
  7. Exchange Rate, Expected Profit, and Capital Stock Adjustment: Japanese Experience By Yoichi Matsubayashi
  8. Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement By Julian di Giovanni; Andrei A. Levchenko
  9. Global liquidity and exchange rates By Tobias Adrian; Erkko Etula; Hyun Song Shin
  10. 3-Regime symmetric STAR modeling and exchange rate reversion By Mario Cerrato; Hyunsok Kim; Ronald MacDonald
  11. Taxation, Corruption and the Exchange Rate Regime By Carsten Hefeker
  12. Where Do the Newest EU Member States Stand on the Road to Monetary Integration? By Elena Bojesteanu; Gabriel Bobeica
  13. The current account as a dynamic portfolio choice problem By Didier, Tatiana; Lowenkron, Alexandre
  14. Do China and oil exporters influence major currency configurations? By Marcel Fratzscher; Arnaud Mehl
  15. Structural and Cyclical Movements of the Current Account in the U.S. 1976-2007 By Yoichi Matsubayashi

  1. By: Michael B. Devereux; Alan Sutherland
    Abstract: The traditional current account can be an inaccurate measure of the change in the net foreign asset (NFA) position. Using gross asset and liability positions at the country level, a number of 'valuation effects' have been identified which contribute to changes in NFA but do not enter the reported current account. This paper uses new developments in the analysis of portfolio allocation in general equilibrium to investigate valuation effects in a two-country model. The model can be used to analyze both qualitatively and quantitatively the role of valuation effects. Broadly speaking, the valuation effects in the model correspond to those in the data, and have the effect of enhancing cross country risk sharing. But there is a key distinction between "unanticipated" and "anticipated" valuation effects. Unanticipated effects can be large, dominating the movement in NFA, but anticipated effects arise only at higher orders of approximation and are small for reasonable parameterisations. The paper also analyses the determinants of international portfolio positions, and their role in generating valuation effects from asset price and terms of trade changes.
    JEL: F32 F37 F41
    Date: 2009–03
  2. By: Michael B. Devereux; Gregor W. Smith; James Yetman
    Abstract: Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciation across countries. The striking lack of evidence for this link the consumption/real-exchange-rate anomaly or Backus-Smith puzzle - has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of 'hand-to-mouth' consumers may help to resolve the anomaly.
    JEL: F37 F41 F47
    Date: 2009–03
  3. By: Enrique Martinez-Garcia; Jens Sondergaard
    Abstract: This paper develops a tractable two-country DSGE model with sticky prices à la Calvo (1983) and local-currency pricing. We analyze the capital investment decision in the presence of adjustment costs of two types, the capital adjustment cost (CAC) specification and the investment adjustment cost (IAC) specification. We compare the investment and trade patterns with adjustment costs against those of a model without adjustment costs and with (quasi-) flexible prices. We show that having adjustment costs results into more volatile consumption and net exports, and less volatile investment. We document three important facts on U.S. trade: a) the S-shaped cross-correlation function between real GDP and the real net exports share, b) the J-curve between terms of trade and net exports, and c) the weak and S-shaped cross-correlation between real GDP and terms of trade. We find that adding adjustment costs tends to reduce the model's ability to match these stylized facts. Nominal rigidities cannot account for these features either.
    Keywords: Macroeconomics - Econometric models ; Capital investments ; International trade ; Foreign exchange
    Date: 2009
  4. By: Raphael Auer; Thomas Chaney
    Abstract: This paper extends the Mussa and Rosen (1978) model of quality-pricing under perfect competition. Exporters sell goods of different qualities to consumers who have heterogeneous preferences for quality. Production is subject to decreasing returns to scale and, therefore, supply and the toughness of competition react to cost changes brought about by exchange rate fluctuations. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low quality goods are more sensitive to exchange rate shocks than prices of high quality goods. Third, in response to an exchange rate appreciation, the composition of exports shifts towards higher quality and more expensive goods. We test these predictions using highly disaggregated price and quantity U.S. import data. We find evidence that in response to an exchange rate appreciation, the composition of exports shifts towards high unit price goods. Therefore, exchange rate passthrough rates that are measured using aggregate data will tend to overstate the actual extent of pass-through.
    Keywords: Foreign exchange rates ; Econometric models ; International trade
    Date: 2009
  5. By: Marlene Amstad; Andreas M. Fischer
    Abstract: This paper estimates monthly pass-through ratios from import prices to consumer prices in real time. Conventional time series methods impose restrictions to generate exogenous shocks on exchange rates or import prices when estimating pass-through coefficients. Instead, a natural experiment based on data releases defines our shock to foreign prices. Our estimation strategy follows an event-study approach based on monthly releases in import prices. Projections from a dynamic common factor model with daily panels before and after monthly releases of import prices define the shock. This information shock allows us to recover a monthly pass-through ratio. We apply our identification procedure to Swiss prices and find strong evidence that the monthly pass-through ratio is around 0.3. Our real-time estimates yield higher pass-through ratios than time series estimates.
    Keywords: Monetary policy ; Econometric models ; Foreign exchange rates ; Prices
    Date: 2009
  6. By: Nicolas Coeurdacier; Robert Kollmann; Philippe Martin
    Abstract: Despite the liberalization of capital flows among OECD countries, equity home bias remains sizable. We depart from the two familiar explanations of equity home bias: transaction costs that impede international diversification, and terms of trade responses to supply shocks that provide risk sharing, so that there is little incentive to hold diversified portfolios. We show that the interaction of the following ingredients generates a realistic equity home bias: capital accumulation, shocks to the efficiency of physical investment, as well as international trade in stocks and bonds. In our model, domestic stocks are used to hedge fluctuations in local wage income. Terms of trade risk is hedged using bonds denominated in local goods and in foreign goods. In contrast to related models, the low level of international diversification does not depend on strongly countercyclical terms of trade. The model also reproduces the cyclical dynamics of foreign asset positions and of international capital flows.
    Keywords: International finance ; Financial markets ; Capital movements
    Date: 2009
  7. By: Yoichi Matsubayashi (Graduate School of Economics, Kobe University)
    Abstract: This paper empirically investigates the impact of exchange rate shocks on corporate investment. An intertemporal optimization model is developed in which an individual corporation in an open economy adjusts its capital stock according to the Tobinfs q, which represents the future stream of the profit rate and changes by the real exchange rate. By explicitly considering the marginal q, the transmission mechanism from real exchange rate shocks to investment dynamics via expected profitability is examined based on the Vector Autoregressive model. Empirical evidence suggests that the depreciation of the Japanese yen increases the expected profitability of the firm and stimulates corporate investment, especially in the machinery sector. This characteristic basically corresponds to the structure of external exposure and offers an important finding from the viewpoint of Japanese macroeconomic fluctuations.
    Keywords: Intertemporal Optimization, Marginal q, Pass-Through, Export Exposure
    JEL: F40 E22 C32
    Date: 2009–03
  8. By: Julian di Giovanni (International Monetary Fund); Andrei A. Levchenko (University of Michigan)
    Abstract: A well established empirical result is that countries that trade more with each other exhibit higher business cycle correlation. This paper examines the mechanisms underlying this relationship using a large cross-country industry-level panel dataset of manufacturing production and trade. We show that higher bilateral trade in an individual sector increases both the co-movement within the sector between trading countries, as well as the comovement between that sector and the rest of the economy of the trading partner. We also demonstrate that vertical linkages in production are an important force behind the overall impact of trade on business cycle synchronization. The elasticity of comovement with respect to bilateral trade is significantly higher in industry pairs that use each other as intermediate inputs in production. Our estimates imply that vertical production linkages account for some 30% of the total impact of bilateral trade on business cycle correlation for our full country sample. Finally, the positive impact of trade on industry-level comovement is far more pronounced in the North-North country pairs compared to either the South-South or North-South country pairs. However, the relative contribution of vertical linkages to aggregate comovement is roughly three times greater for North-South trade than North-North trade.
    Keywords: trade, institutional change
    Date: 2008–09
  9. By: Tobias Adrian; Erkko Etula; Hyun Song Shin
    Abstract: We present evidence that fluctuations in the aggregate balance sheets of financial intermediaries forecast exchange rate returns - at weekly, monthly, and quarterly frequencies, both in and out of sample, and for a large set of countries. We estimate prices of risk using a cross-sectional, arbitrage-free asset pricing approach and show that balance sheets forecast exchange rates because of the latter's association with fluctuations in risk premia. We provide a rationale for an intertemporal equilibrium pricing theory in which intermediaries are subject to balance sheet constraints.
    Keywords: Intermediation (Finance) ; Asset pricing ; Foreign exchange rates ; International finance ; Financial institutions ; Investment banking
    Date: 2009
  10. By: Mario Cerrato; Hyunsok Kim; Ronald MacDonald
    Abstract: The breakdown of the Bretton Woods system and the adoption of generalised floating exchange rates ushered in a new era of exchange rate volatility and uncer­tainty. This increased volatility lead economists to search for economic models able to describe observed exchange rate behavior. In the present paper we propose more general STAR transition functions which encompass both threshold nonlinearity and asymmetric effects. Our framework allows for a gradual adjustment from one regime to another, and considers threshold effects by encompassing other existing models, such as TAR models. We apply our methodology to three different exchange rate data-sets, one for developing countries, and official nominal exchange rates, and the second for emerging market economies using black market exchange rates and the third for OECD economies.
    Keywords: unit root tests, threshold autoregressive models, purchasing power parity.
    JEL: C16 C22 F31
    Date: 2008–12
  11. By: Carsten Hefeker (University of Siegen, Department of Economics, Hoelderlinstrasse 3, 57068 Siegen, Germany)
    Abstract: The paper analyzes the relation between institutional quality, such as corruption, in a country and its monetary regime. It is shown that a credibly fixed exchange rate to a low inflation country, like a currency board, can reduce corruption and improve the fiscal system. A monetary union, however, has ambiguous effects. I find that that there is convergence between countries with regard to the level of corruption.
    Keywords: Exchange Rate Regime, Monetary Policy, Fiscal Policy, Seigniorage, Corruption, Developing and Transition Countries.
    JEL: D72 E63 F33
    Date: 2009
  12. By: Elena Bojesteanu (Academy of Economic Studies (Romania)); Gabriel Bobeica (Academy of Economic Studies (Romania))
    Abstract: The present study sheds light on important aspects of monetary integration in the European Union involving the newest member states. It assesses the degree to which they satisfy the business cycle correlation criteria. Our results demonstrate that there is a common business cycle in the Euro area and that most of the candidate countries exhibit convergence with this group, with the remarkable exception of Estonia, Lithuania, Slovakia and Romania. Bulgaria shows better achievements than Romania in terms of business cycle synchronization with the Euro zone.This paper was presented at the 18th International Conference of the International Trade and Finance Association meeting at Universidade Nova de Lisboa, Lisbon, Portugal, on May 23, 2008.
    Date: 2008–08–06
  13. By: Didier, Tatiana; Lowenkron, Alexandre
    Abstract: The current account can be understood as the outcome of investment decisions made by domestic and foreign investors. These decisions can be decomposed into a portfolio rebalancing and a portfolio growth component. This paper provides empirical evidence of the importance of portfolio rebalancing for the dynamics of the current account. The authors evaluate the predictions of a partial-equilibrium model of the current account with dynamic portfolio choices, in which portfolio rebalancing is driven by changes in investment opportunities. Using data for the United States and Japan, the authors find evidence supporting innovations in investment opportunities as an important mechanism to explain international capital flows.
    Keywords: Debt Markets,Emerging Markets,Economic Theory&Research,Currencies and Exchange Rates,Investment and Investment Climate
    Date: 2009–03–01
  14. By: Marcel Fratzscher; Arnaud Mehl
    Abstract: This paper analyses the impact of the shift away from a US dollar focus of systemically important emerging market economies (EMEs) on configurations between the US dollar, the euro and the yen. Given the difficulty that fixed or managed US dollar exchange rate regimes remain pervasive and reserve compositions mostly kept secret, the identification strategy of the paper is to analyse the market impact on major currency pairs of official statements made by EME policy-makers about their exchange rate regime and reserve composition. Developing a novel database for 18 EMEs, we find that such statements not only have a statistically but also an economically significant impact on the euro, and to a lesser extent the yen against the US dollar. The findings suggest that communication hinting at a weakening of EMEs' US dollar focus contributed substantially to the appreciation of the euro against the US dollar in recent years. Interestingly, EME policy-makers appear to have become more cautious in their communication more recently. Overall, the results underscore the growing systemic importance of EMEs for global exchange rate configurations.
    Keywords: Foreign exchange rates ; Monetary policy ; International finance ; Financial markets
    Date: 2009
  15. By: Yoichi Matsubayashi (Graduate School of Economics, Kobe University)
    Abstract: The purpose of this study is to analyze fluctuations in the current account of the U.S. by deconstructing structural and non-structural components with a new method. At the beginning of the 1980s, most components of the U.S. current account were structural. After the Plaza agreement in 1985, the U.S structural current account gradually improved. Since the end of the 1990s, the structural current account deficit increased to nearly 3% of GDP. These movements are generally associated with the structural components of private savings and residential investments. The upheaval in the US sub-prime home-loan market since 2007 sharply contracted housing investment and weakened consumption. Some simulations explored herein suggest a high possibility that these dynamics in domestic demand may considerably ameliorate the external imbalances of the U.S. and deteriorate of the dollar.
    Keywords: Structural current account, Intertemporal optimization, Permanent income, Housing Investment, Equilibrium exchange rate
    JEL: F32 F41
    Date: 2009–03

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