nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒05‒23
thirteen papers chosen by
Martin Berka
Massey University

  1. Transition to FDI openness By Ellen R. McGrattan
  2. Global Imbalances and Petrodollars By Rabah Arezki; Fuad Hasanov
  3. Household Heterogeneity and the Real Exchange Rate: Still a Puzzle By Kollmann, Robert
  4. Optimal Reserves in the Eastern Caribbean Currency Union By Wendell A. Samuel; Mario Dehesa; Emilio Pineda
  5. Exchange Rate Assessment for Oil Exporters By Klaus-Stefan Enders
  6. Real Exchange Rate Misalignments By Cristina Terra, Frederico Valladares
  7. Grants, Remittances, and the Equilibrium Real Exchange Rate in Sub-Saharan African Countries By Brett Rayner; Joannes Mongardini
  8. Remittances, financing constraints growth volatility : Do remittances dampen or magnify shocks ?. By Dramane Coulibaly
  9. Financial Stress, Downturns, and Recoveries By Selim Elekdag; Roberto Cardarelli; Subir Lall
  10. External influences on local institutions: spatial dependence and openness By Gerrit Faber; Michiel Gerritse
  11. Trickle-Down Effects of Changing Value of Euro on US Economy By Bhattacharya, Sulagna
  12. ECCU Business Cycles: Impact of the U.S. By Wendell A. Samuel; Yan Sun
  13. The Japan-U.S. Exchange Rate, Productivity, and the Competitiveness of Japanese Industries By Dekle, Robert; Fukao, Kyoji

  1. By: Ellen R. McGrattan
    Abstract: Empirical studies quantifying the benefits of increased foreign direct investment (FDI) have been unable to provide conclusive evidence of a positive impact on host country’s economic performance. I show that the lack of robust evidence is not inconsistent with theory, even if the eventual gains to FDI are large, if restrictions on FDI are lifted only gradually and part of FDI is intangible investment. Anticipation of future increases in FDI can result in large shifts in patterns of domestic investment and employment. Furthermore, since intangible investments are expensed, both gross domestic product (GDP) and gross national product (GNP) are low during periods of abnormally high FDI investment.
    Date: 2009
  2. By: Rabah Arezki; Fuad Hasanov
    Abstract: Oil exporters have run large current account surpluses. We explore oil exporters' role in our understanding and the resolution of global imbalances. Current account dynamics are estimated for oil-exporting countries and the rest of the world. We find that fiscal policy has a much stronger effect on current account of oil exporters than on current account of other countries. The current account adjustment of oil-exporting countries is also faster than that of other countries. We conclude that a change in fiscal policy of oil exporters can have significant and speedy impact on global imbalances.
    Keywords: Payments imbalances , Oil exporting countries , Oil prices , Oil revenues , Current account , Current account surpluses , Fiscal policy ,
    Date: 2009–04–23
  3. By: Kollmann, Robert
    Abstract: Kocherlakota and Pistaferri (EJ, 2007) [KP] develop a model of a world economy with private-information Pareto optimal (PIPO) risk sharing; in that model, the real exchange rate tracks relative domestic/foreign cross-sectional distributions of consumption. KP claim that the PIPO model fits the UK/US real exchange rate well. This paper shows that the PIPO model is inconsistent with the UK/US data. Minor specification changes overturn KP’s regression results. I also document that the relevant (relative) cross-sectional consumption moment is orders of magnitude more volatile than the real exchange rate, and less persistent. The link between the real exchange rage and consumption (heterogeneity) remains a puzzle.
    Keywords: heterogeneity; International risk sharing; real exchange rate
    JEL: F36 F41
    Date: 2009–05
  4. By: Wendell A. Samuel; Mario Dehesa; Emilio Pineda
    Abstract: Recent turbulence in global and Caribbean regional financial markets underscore the importance of reassessing the adequacy of international reserves held by the Eastern Caribbean Central Bank (ECCB). Using the Jeanne (2007) optimization framework, this paper finds that international reserves held by the ECCB are generally adequate for a variety of external current account and capital account shocks. However, the ECCB would be challenged in the event of moderate to severe deposit outflows.
    Keywords: Reserves , Eastern Caribbean Currency Union , Emerging markets , Monetary unions , Capital flows , Economic models ,
    Date: 2009–04–22
  5. By: Klaus-Stefan Enders
    Abstract: While the underlying methodologies continue to be widely debated and refined, there is little consensus on how to assess the equilibrium exchange rate of economies dominated by production of finite natural resources such as the oil economies of the Middle East. In part this is due to the importance of intertemporal aspects (as the real exchange rate may affect the optimal/equitable rate of transformation of finite resource wealth into financial assets), as well as risk considerations given the relatively high volatility of commodity prices. The paper illustrates some important peculiarities of the exchange rate assessment for such natural resource producers by working through a simple two-period model that captures certain key aspects of many resource economies.
    Keywords: Exchange rate assessments , Oil exporting countries , Middle East , Cooperation Council for the Arab States of the Gulf , Oil exports , Private consumption , Private savings , Economic models ,
    Date: 2009–04–22
  6. By: Cristina Terra, Frederico Valladares (Université de Cergy-Pontoise, Thema and EPGE/FGV, Tendências Consultoria Integrada)
    Abstract: This paper investigates episodes of real exchange rate appreciations and depreciations for a sample of 85 countries, from 1960 to 1998. The equilibrium real exchange rate series are constructed by estimating cointegration vectors with fundamentals, and departures from it are obtained. A Markov Switching Model is used to characterize the misalignments series as stochastic autoregressive processes governed by two states corresponding to different means and variances. Three are the main findings: first, some countries present no evidence of distinct regimes for misalignment; second, for some countries, there is no RER misalignment in one the regimes; and, third, for those countries with two misalignment regimes, the appreciated regime have higher persistence than the depreciated one.
    Keywords: real exchange rate misalignment, Markov switching model
    JEL: F31 F37
    Date: 2009
  7. By: Brett Rayner; Joannes Mongardini
    Abstract: This paper builds on the methodology developed by Chudik and Mongardini (2007) to estimate the relationship between grants and remittances and the equilibrium real exchange rate in Sub-Saharan African (SSA) countries using panel techniques. The results indicate that grants and remittances are not associated, in the long run, with an appreciation of the real effective exchange in SSA and are therefore not likely to give rise to Dutch disease effects. These findings suggest that grants and remittances may be serving to ease supply constraints or boost productivity in the non-tradable sector in the recipient economies.
    Keywords: Capital inflows , Sub-Saharan Africa , Low-income developing countries , Inward remittances , Real effective exchange rates , Development assistance , Millennium Development Goals , Economic models ,
    Date: 2009–04–22
  8. By: Dramane Coulibaly (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This paper studies empirically the link between remittances and growth volatility by examining the impact of remittances on the propagation of real and monetary shocks. This study is conducted by employing dynamic panel generalized method of moment (GMM) technique for a sample of 63 countries over the 1980-2004 period. The volatility of terms of trade and inflation is used to proxy for real and monetary volatility, respectively. The results show that the impact of remittances on the propagation of shocks depends on the nature of shock. Precisely, the results show that remittances dampen the effect of terms of trade volatility, but, magnify the effect of inflation volatility. The results also suggest that the dampening effect of remittances on propagation of terms of trade volatility is greater in country with high level of financial development.
    Keywords: Remittances, financing constraints, volatility.
    JEL: F22 F24 O11
    Date: 2009–03
  9. By: Selim Elekdag; Roberto Cardarelli; Subir Lall
    Abstract: This paper examines why some financial stress episodes lead to economic downturns. The paper identifies episodes of financial turmoil using a financial stress index (FSI), and proposes an analytical framework to assess the impact of financial stress-in particular banking distress-on the real economy. It concludes that financial turmoil characterized by banking distress is more likely to be associated with severe and protracted downturns than stress mainly in securities or foreign exchange markets. Economies with more arms-length financial systems appear to be particularly vulnerable to sharp contractions, due to the greater procyclicality of leverage in their banking systems.
    Keywords: Financial crisis , Financial systems , Banking sector , Exchange markets , Securities markets , Banking crisis , Economic recession , Economic recovery , Business cycles , Cross country analysis ,
    Date: 2009–05–13
  10. By: Gerrit Faber; Michiel Gerritse
    Abstract: There are both empirical and theoretical arguments for the thesis that external factors have an impact on domestic institutional quality. Consequently, external factors may have large effects on domestic income via local institutions. This paper investigates the role of external factors by estimating the impact of openness and the institutional environment of proximate countries on local institutions and local income. In a 107-country cross-section, we find that both openness (in trade, and especially FDI) and the institutional indicators of nearby countries have an independent impact on local institutional indicators. The effects on income levels are not symmetric, however. We estimate that trade openness plays a major role as a direct determinant of the income level, and a smaller role in determining local institutions. By contrast, institutions of nearby countries are a prime determinant of local institutions, but carry no direct effects on local income levels.
    Keywords: Economic institutions, Spatial spillovers, Economic openness, Income differences
    JEL: F43 H73 O11 O43
    Date: 2009–05
  11. By: Bhattacharya, Sulagna
    Abstract: Historically, the US Dollar had been accepted as the strongest currency and it had no competition at the regional or global level. But inception of Euro changed this unique stature and status enjoyed by USD. With introduction of Euro as the common currency, the European Union became USA’s closest competitor in terms of economic size, performance, indicators and political and economic clout. Over time, value of euro started appreciating and accordingly, Euro/USD exchange rate which is fully floating, started rising. A rising Euro affects the US economy in three ways: directly, indirectly and through a cascading effect caused by an interaction of these direct and indirect influences. This paper attempts to identify and explore the effects of an appreciating Euro on some select economic indicators of the US, both historically and projected. It also establishes the relationship between some of these indicators which are not directly cross-related, by analyzing the impact of the Euro on the economy’s most sensitive economic parameters. Section I briefly touches upon the scope and objective of this paper. Section II introduces the concept of exchange rate, different exchange rate regimes and determinants of exchange rates. Section III views the historical relationship between the Euro/USD exchange rate and the most important macroeconomic indictors of the US economy. Section IV explores the projected impact of potential future Euro/USD exchange rate on the same indictors and explains the linkages. Section V concludes.
    Keywords: Euro; Appreciation; US Economy; Trickle-Down;Exchange Rate;Currency
    JEL: F42 E27 E52 F31
    Date: 2009–05–17
  12. By: Wendell A. Samuel; Yan Sun
    Abstract: With a fixed peg to the U.S. dollar for more than three decades, the tourism-dependent Eastern Caribbean Currency Union (ECCU) countries share a close economic relationship with the U.S. This paper analyzes the impact of the United States on ECCU business cycles and identifies possible transmission channels. Using two different approaches (the common trends and common cycles approach of Vahid and Engle (1993) and the standard VAR analysis), it finds that the ECCU economies are very sensitive to both temporary and permanent movements in the U.S. economy and that such linkages have strengthened over time. There is, however, less clear-cut evidence on the transmission channels. United States monetary policy does not appear to be an important channel of influence, while tourism is important for only one ECCU country.
    Keywords: Business cycles , Eastern Caribbean Currency Union , United States , Spillovers , External shocks , Fiscal reforms , Fiscal consolidation , Debt reduction , Economic models ,
    Date: 2009–04–17
  13. By: Dekle, Robert; Fukao, Kyoji
    Abstract: In this paper, we focus on the movements of the yen on Japanese industries, and on the sectoral reallocation of Japanese employment. We show that the appreciation episodes of 1985 and 1995 have significantly hurt the ability of Japanese industries to compete with U.S. industries, by raising the relative production costs of Japanese industries. This relative cost gap with U.S. industries narrowed from 1995, owing to faster wage growth in the U.S., and especially to higher productivity growth in some Japanese industries. In fact, in these high productivity Japanese manufacturing industries such as chemicals and transport equipment, relative production costs were essentially back to pre-1985, pre-Plaza Accord levels by 2004. In contrast, the relative production costs of Japanese low productivity manufacturing industries such as textiles and wood products have remained high. Clearly, in the aggregate, the appreciation of the yen was not matched by an increase in Japanese productivity. What then is the appreciation of the aggregate real exchange rate consistent with these Japan-U.S. differences in industrial productivities? To answer this question, we build a three-sector (high productivity manufacturing, low productivity manufacturing, and services) equilibrium macroeconomic-trade model of Japan and the U.S. We find that while the yen was "undervalued" before 1985, it was significantly "overvalued" after 1985, and especially since 1995. In our model simulations, the Balassa-Samuelson effect is observed: the equilibrium real exchange rate is appreciating over time, owing to strong relative growth in the Japanese high productivity manufacturing sector, but very poor relative productivity growth in the Japanese services sector. Interestingly, the continued appreciation of the equilibrium real exchange rate meant that the actual real exchange rate was near its equilibrium value by 2003-2004, when the nominal yen dollar rate was about 120 yen to the dollar.
    Date: 2009–03

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