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on Open MacroEconomics |
| By: | Maurice Obstfeld |
| Abstract: | This paper explores the links between macroeconomic developments, especially monetary policy, and the exchange rate during the period of Japan's bubble economy and subsequent stagnation. The yen experienced epic gyrations over that period, starting with its rapid ascent after the March 1985 Plaza Accord of major industrial countries. Two distinct periods of endaka fukyo, or recession induced by a strong yen, occurred in the late 1980s and the early 1990s at critical phases of the monetary policy cycle. My approach emphasizes the interaction of short-term developments driven by monetary factors (as they affect international real interest rate differentials) and the long-term determinants of the real exchange rate's equilibrium path. Chief among those long-run determinants are relative sectoral productivity levels and the terms of trade, including the price of oil. Since the mid-1990s, the yen's real exchange rate has generally followed a depreciating trend and Japan's comprehensive terms of trade have deteriorated. |
| JEL: | F14 F41 F42 F51 N15 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14816&r=opm |
| By: | Charles Engel |
| Abstract: | This paper examines optimal monetary policy in an open-economy two-country model with sticky prices. We show that currency misalignments are inefficient and lower world welfare. We find that optimal policy must target not only inflation and the output gap, but also the currency misalignment. However the interest rate reaction function that supports this targeting rule may involve only the CPI inflation rate. This result illustrates how examination of "instrument rules" may hide important trade-offs facing policymakers that are incorporated in "targeting rules". The model is a modified version of Clarida, Gali, and Gertler's (JME, 2002). The key change is that we allow pricing to market or local-currency pricing and consider the policy implications of currency misalignments. Besides highlighting the importance of the currency misalignment, our model also gives a rationale for targeting CPI, rather than PPI, inflation. |
| JEL: | E52 F41 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14829&r=opm |
| By: | Mario J. Crucini; Hakan Yilmazkuday |
| Abstract: | We develop a model of cities each inhabited by two agents, one specializing in manufacturing, the other in distribution. The distribution sector represents the physical transformation of all internationally traded goods from the factory gate to the final consumer. Using a panel of micro-prices at the city level, we decompose the long-run variance of LOP deviations into the fraction due to distribution costs, trade costs and a residual. For the median good, trade costs account for 50 percent of the variance, distribution costs account for 10 percent with 40 percent of the variance unexplained. Since the sample of items in the data are heavily skewed toward traded goods, we also decompose the variance based on the median good on an expenditure-weighted basis. Now the tables turn, with distribution costs accounting for 43 percent, trade costs 36 percent and 21 percent of the variance unexplained. |
| JEL: | F0 F15 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14834&r=opm |
| By: | Sven Blank |
| Abstract: | Perfect consumption risk sharing requires both, frictionless goods as well as frictionless financial market integration. This project aims at analyzing the consequences of both type of frictions for the allocation of risk across countries in a unified framework. To this end, the theoretical model by Ghironi and Melitz (2005) is extended to allow for trade in international equities. This setup incorporates impediments to international trade in goods and assets. Preliminary results indicate that both type of frictions matter for international consumption risk sharing. |
| Keywords: | International portfolio choice, consumption risk sharing, trade frictions, financial market frictions |
| JEL: | F32 F42 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwfin:diwfin4020&r=opm |
| By: | Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga |
| Abstract: | We examine the role of nominal price rigidities in explaining the deviations from the Law of One Price (LOP) across cities in Japan. Focusing on intra-national relative prices isolates the border effect and thus enables us to extract the pure effect of sticky prices. A two-city model with nominal rigidities and transportation costs predicts that the variation of LOP deviations is lower for goods with less frequent price adjustment after controlling for the distance separating the cities. Using retail price data for individual goods and services collected in Japanese cities, we find strong evidence supporting this prediction. Adapting the Engel and Rogers (1996) regression framework to our theoretical setting, we quantify the separate roles of nominal rigidities and trade costs (proxied by distance) in generating LOP variability. Our estimates suggest that the distance equivalent of nominal rigidities can be as large as the `width' of the border typically found in the literature on international LOP deviations. The findings point to both the utility of the regression framework in identifying qualitative effects (i.e., sign of a coefficient) and the challenges interpreting their quantitative implications. |
| JEL: | D4 F40 F41 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14835&r=opm |
| By: | Eleonora Cavallaro; Marcella Mulino |
| Abstract: | We consider a technologically backward country and analyse the implications on competitiveness and long-run growth of the quality content of traded goods. We build an endogenous growth model where quality improvements stem from research activity taking place in the R&D sector, and where the relative quality content of goods matter for export and import demand functions. We show that the possibility of an optimal growth with a balanced current account and no adverse terms-of-trade effects is closely related to the evolution of the country’s technological distance with respect to the trade partner: with an unfavourable quality-dynamics the country cannot engage successfully in “non-price” competition. Thus, long-run growth is coupled with an adverse export to import ratio, and a balanced trade requires a continuous offsetting fall in relative prices, either through devaluations or wage deflations. We then allow for international knowledge spillovers that increase the productivity of labour resources devoted to research in a way which is proportional to the technological distance between the countries. We show that the greater the country’s ability to absorb foreign knowledge and improve upon foreign technologies, the greater the gains in competitiveness, and the benefits to long-run growth. A numerical simulation confirms our findings. |
| Keywords: | Vertical innovation; Technological change and catching up; Economic growth of open economies |
| JEL: | O33 F43 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:sap:wpaper:117&r=opm |
| By: | P. JACOB; G. PEERSMAN |
| Abstract: | This paper presents empirical evidence on the stochastic driving forces of the US trade balance. In an estimated two-country DSGE model, we .find that investment- specific technology shocks have the strongest impact on the volatility of cyclical trade balance .fluctuations, especially when the shocks are domestic and considered over longer forecast-horizons. At shorter horizons, US and foreign inter-temporal shocks that generate co-movement between consumption and investment, have an impact com- parable to that of the investment-specific technology shocks. In contrast, shocks to US public spending and neutral technology - both forces traditionally used to explain trade balance fluctuations - hardly explain the volatility |
| Keywords: | US Trade Balance, New Open Economy Macroeconomics, Bayesian Inference, DSGE Estimation |
| JEL: | C11 F41 |
| Date: | 2008–11 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:08/544&r=opm |
| By: | Jan Bruha; Jiri Podpiera |
| Abstract: | In this paper we study the endogenous response of unequally developed regions to a drop in investment and trade costs in a general equilibrium model. The response is characterized by a rise in foreign direct investment in the underdeveloped region and increased consumption in the developed one, leading to trade imbalances between the regions. We hereby propose that declining investment and trade costs could have caused this century’s global imbalances. |
| Keywords: | Economic development, foreign direct investment, global imbalances, multi-country general-equilibrium model. |
| JEL: | F12 F21 F34 F36 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2008/7&r=opm |
| By: | Jean-Pierre Allegret (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Alain Sand-Zantman (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines) |
| Abstract: | This paper analyses the monetary consequences of the Latin-American trade integration process. We consider a sample of five countries -Argentina, Brazil, Chile, Mexico and Uruguay- spanning the period 1991-2007. The main question raised pertains to the feasibility of a monetary union between L.A. economies. To this end, we study whether this set of countries is characterized by business cycle synchronization with the occurrence of common shocks, a strong similarity in the adjustment process and the convergence of policy responses. We focus especially our attention on two points. First, we tryto determine to what extent international disturbances influence the domestic business cycles through trade and/or financial channels. Second, we analyze the impact of the adoption of different exchange rate regimes on the countries' responses to shocks. All these features are the main issues in the literature relative to regional integration and OCA process. |
| Keywords: | bayesian VAR ; business cycles ; Latin American countries ; optimum currency area |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00371069_v1&r=opm |
| By: | Joseph E. Gagnon |
| Abstract: | Sharp exchange rate depreciations, or currency crashes, are associated with poor economic outcomes in industrial countries only when they are caused by inflationary macroeconomic policies. Moreover, the poor outcomes are attributable to inflationary policies in general and not the currency crashes in particular. On the other hand, crashes caused by rising unemployment or external deficits have always had good economic consequences with stable or falling inflation rates. |
| Keywords: | Foreign exchange rates; Exchange rate, depreciation, inflation, unemployment, current account CL HG136 A54 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:966&r=opm |
| By: | Sean Holly; Mehdi Raissi |
| Abstract: | This paper investigates the macroeconomic benefits of international financial integration and domestic financial sector development for the European Union. The sample consists of 26 European countries with annual data during the period 1970.2004. We attempt to exploit more fully the temporal dimension in the data by making use of the common correlated effects (CCE) estimator. We also account for the nonstationarity of time series by employing the cross-section augmented panel unit root test of Pesaran (2007) and recently developed panel cointegration techniques. We check the robustness of these results by using the fully modified OLS method of Pedroni (2000). Our empirical results suggest a relationship between domestic financial sector development and labour productivity. We report evidence that real GDP per worker is positively linked to a measure of international financial integration (stock of international financial assets and liabilities expressed as a ratio to GDP). We also try to disentangle the effects on real GDP per worker of di¤erent types of capital flows (FDI, Portfolio equity, Debt) and are able to identify a significant positive effect on GDP per worker of debt inflows which we could attribute to the institutional environment that has been fostered by the European Union. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwfin:diwfin1040&r=opm |
| By: | Erling Røed Larsen (Statistics Norway) |
| Abstract: | Standard practice of estimating purchasing power parities (PPP) involves using prices, in domestic currencies, of a common basket of goods and services, then calculating the price-equalizing exchange rate. In this article, I substitute observed consumer behavior for price data. On the assumption that an Engel curve for food reflects material standard of living, I estimate Engel curves for food for the United States and Norway. This allows us to calculate the exchange rate required for re-aligning the two curves, i.e. the incomes needed in the two countries to purchase the same standard of living. Since different relative prices or preferences for food can affect the position and slope of the curves, I also estimate the Engel curves of non-food, for which the effect is opposite. Not only does this provide a band of upper and lower bounds of PPP, it also improves upon the assumption of preference homogeneity underlying conventional PPP-computations. Using Consumer Expenditure (CES) data for 2001, I obtain estimated PPP-levels for the rate of the Norwegian krone (NOK) versus the U.S. dollar (USD) in the 5.38-7.90 range. The average rate 1977-2007 was 6.81 NOK per USD. The conventional estimates of PPP from the World Bank and OECD are 8.84 and 9.18 NOK per USD, respectively. |
| Keywords: | Engel curve; exchange rate; material standard of living; purchasing power parity |
| JEL: | C20 D10 E30 F31 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:580&r=opm |