nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒06‒10
eight papers chosen by
Martin Berka
Massey University

  1. Heterogeneous Beliefs and Housing-Market Boom-Bust Cycles in a Small Open Economy By Hajime Tomura
  2. Accounting for Global Dispersion of Current Accounts. By Yongsung Chang; Sun-Bin Kim; Jaewoo Lee
  3. Emerging Floaters : Pass-Throughs and (Some) New Commodity Currencies By Kohlscheen, E
  4. Purchasing Power Parity and Breaking Trend Functions in the Real Exchange Rate By Jair Ojeda Joya
  5. The Exchange Rate-Investment Nexus and Exchange Rate Instability: Another Reason for ‘Fear of Floating’ By Habib Ahmed; C. Paul Hallwood; Stephen M. Miller
  6. Banks, Financial Markets and International Consumption Risk Sharing By Markus Leibrecht; Johann Scharler
  7. Foreign Direct Investment, Non-traded Goods and Real Wages By Reza Oladi; John Gilbert; Hamid Beladi
  8. Labour Market Institutions and Structural Reforms: A Source for Business Cycle Synchronisation? By Sachs, Andreas; Schleer, Frauke

  1. By: Hajime Tomura
    Abstract: This paper introduces heterogeneous beliefs among households in a small open economy model for the Canadian economy. The model suggests that simultaneous boom-bust cycles in house prices, output, investment, consumption and hours worked emerge when credit-constrained mortgage borrowers expect that future house prices will rise and this expectation is neither shared by savers nor realized ex-post. With sticky prices and a standard monetary policy rule, the model shows that the nominal policy interest rate and the CPI inflation rate decline during housing booms and rise as house prices fall. These results replicate the stylized features of housing-market boom-bust cycles in industrialized countries. Policy experiments demonstrate that stronger policy responses to inflation amplify housing-market boom-bust cycles. Also, higher loan-to-value ratios amplify housing-market boom-bust cycles by encouraging speculative housing investments by mortgage borrowers during housing booms and increasing liquidation of housing collateral during housing busts.
    Keywords: Credit and credit aggregates; Financial stability; Inflation targets
    JEL: E44 E52
    Date: 2009
  2. By: Yongsung Chang (University of Rochester); Sun-Bin Kim (Department of Economics, Korea University); Jaewoo Lee (International Monetary Fund)
    Abstract: We undertake a quantitative analysis of the dispersion of current accounts in an open economy version of incomplete insurance model, incorporating important market frictions in trade and financial flows. Calibrated with conventional parameter values, the stochastic stationary equilibrium of the model with limited borrowing can account for about two-thirds of the global dispersion of current accounts. The easing of financial frictions can explain nearly all changes in the current account dispersion in the past four decades whereas the easing of trade frictions has almost no impact on the current account dispersion.
    Keywords: Distribution of Current Account, Incomplete Markets, Frictions.
    JEL: F3 F4
    Date: 2009–05
  3. By: Kohlscheen, E (Economics Department, University of Warwick.)
    Abstract: In spite of early skepticism on the merits of floating exchange rate regimes in emerging markets, 8 of the 25 largest countries in this group have now had a floating exchange rate regime for more than a decade. Using parsimonious VAR specifications covering the period of floating exchange rates, this study computes the dynamics of exchange rate pass-throughs to consumer price indices. We find that pass-throughs have typically been moderate even though emerging floaters have seen considerable nominal and real exchange rate volatilities. Previous studies that set out to estimate exchange rate pass-throughs ignored changes in policy regimes, making them vulnerable to the Lucas critique. We find that, within the group of emerging floaters, estimated pass-throughs are higher for countries with greater nominal exchange rate volatilities and that trade more homogeneous goods. These findings are consistent with the pass-through model of Floden and Wilander (2006) and earlier findings by Campa and Goldberg (2005), respectively. Furthermore, we find that the Indonesian Rupiah, the Thai Baht and possibly the Mexican Peso are commodity currencies, in the sense that their real exchange rates are cointegrated with international commodity prices.
    Date: 2009
  4. By: Jair Ojeda Joya
    Abstract: This paper provides evidence of long run purchasing power parity by performing a recently developed method to test for unit roots in the presence of structural breaks. Data consist of real exchange rate series for 20 countries including developed and developing economies. Structural breaks are detected in 18 countries and real exchange rates are found to be stationary in all countries except Japan. Estimated linear trends are the result of cross-country total factor productivity differentials between tradable and nontradable sectors. Estimated breaks correspond to large and permanent total factor productivity shocks associated with historical events like wars, structural reforms or deep economic recessions. An exercise with total factor productivity data shows that the Balassa-Samuelson effect explains the estimated long run trends in most countries.
    Keywords: Purchasing power parity, unit root test, structural change, Balassa-Samuelson effect, real exchange rate. Classification JEL: C22, F31, F40, N70
  5. By: Habib Ahmed (Institute of Middle Eastern and Islamic Studies, Durham University); C. Paul Hallwood (Department of Economics, University of Connecticut); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas)
    Abstract: We show that expansionary monetary policy causes exchange rate overshooting due to the secondary repercussion comes through the reaction of firms to changed asset prices and the firms’ decisions to invest in real capital. This overshooting effect adds to any overshooting that occurs through the traditional Dornbusch (1976) channel, since our model with its market clearing in the short run excludes any Dornbusch overshooting. The model sheds further light on the volatility of real and nominal exchange rates. It suggests that changes in corporate sector profitability may affect exchange rates through international portfolio diversification in corporate securities, and it offers an additional reason for ‘fear of floating’.
    Keywords: exchange rates, open economy macroeconomics, monetary policy, exchange rate overshooting
    JEL: F31 F32
    Date: 2009–03
  6. By: Markus Leibrecht (Department of Economics, Vienna University of Economics & B.A.); Johann Scharler (Department of Economics, University of Linz)
    Abstract: In this paper we empirically explore how characteristics of the domestic financial system influence the international allocation of consumption risk using a sample of OECD countries. Our results show that the extent of risk sharing achieved does not depend on the overall development of the domestic financial system per se. Rather, it depends on how the financial system is organized. Specifically, we find that countries characterized by developed financial markets are less exposed to idiosyncratic risk, whereas the development of the banking sector contributes little to the international diversification of consumption risk. We also find that countries with market-based financial systems manage to share a significantly larger fraction of their country-specific risk than bank-based economies.
    JEL: F36 F41
    Date: 2009–05
  7. By: Reza Oladi (Department of Applied Economics, Utah State University); John Gilbert (Department of Economics and Finance, Utah State University); Hamid Beladi (Department of Economics, University of Texas - San Antonio)
    Abstract: Using a three-sector general equilibrium model with non-traded goods, we investigate the impact of foreign direct investment on the real wages of skilled and unskilled workers. We show that foreign direct investment increases the real wages of skilled and unskilled workers, but widens the gap between the two under plausible conditions.
    Keywords: Real wages, foreign direct investment, non-traded goods
    JEL: F10 F11 F21
    Date: 2008–12–23
  8. By: Sachs, Andreas; Schleer, Frauke
    Abstract: We focus on the influence of institutional variables on business cycle synchronisation for 20 OECD countries from 1979 to 2003. More precisely, this paper derives measures for similarity of institutions and structural reforms, and investigates direct and delayed reform effects on synchronisation by applying robustness tests to a panel data framework with bilateral data. Our findings indicate a strong instantaneous relationship between both similarity of institutions as well as common structural reforms and business cycle correlation.
    Keywords: Business cycle synchronisation, Institutions, Structural reforms, Robustness test
    JEL: E32 F42
    Date: 2009

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