nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒06‒17
six papers chosen by
Martin Berka
Massey University

  1. Capital Flows and Asset Prices By Kosuke Aoki; Gianluca Benigno; Nobuhiro Kiyotaki
  2. Labor Market Frictions and the International Propagation Mechanism By Lise Patureau
  3. The Volatility of the Tradeable and Nontradeable Sectors: Theory and Evidence By Povoledo, Laura
  4. Country Size, Currency Unions, and International Asset Returns. By Tarek A. Hassan
  5. What Lies Beneath the Euro's Effect on Financial Integration: Currency Risk, Legal Harmonization, or Trade? By Sebnem Kalemli-Ozcan; Elias Papaioannou; José-Luis Peydró
  6. Monetary Policy Under Alterative Asset Market Structures: the Case of a Small Open Economy By Bianca De Paoli

  1. By: Kosuke Aoki; Gianluca Benigno; Nobuhiro Kiyotaki
    Abstract: After liberalizing international transactions of financial assets, many countries experiencelarge swings in asset prices, capital flows, and aggregate production. This paper studies howthe adjustment to capital account liberalization depends upon the degree of development of adomestic financial system, and why the economy with an underdeveloped financial systemmay be vulnerable to shocks to the domestic and foreign finance. We construct a model of asmall open economy in which it is difficult to enforce debtors to repay their debts unless thedebts are secured by collateral, and assets usable as collateral for international borrowing aremore restricted than domestic borrowing.
    Keywords: capital flows, asset prices, domestic and international borrowing constraints
    JEL: F32 F37 F41
    Date: 2009–04
  2. By: Lise Patureau (Université de Cergy-Pontoise, THEMA, F-95000 Cergy-Pontoise)
    Abstract: The paper investigates the determinants of international business cycle comovement in a two-country Dynamic Stochastic General Equilibrium (DSGE) model featured by monopolistic competition and nominal price rigidity, following so the New Open Economy Macroeconomy (NOEM) literature. Within this framework, we assess the role of labor market search and matching frictions in the international propagation of supply and monetary shocks. Our results show that labor market frictions improve the ability of the New Open Economy Macroeconomy framework to account for international business cycles comovement. In particular, the NOEM model with labor market search is consistent with the international propagation mechanism of monetary shocks identified in the data. Through their impact on labor market dynamics, labor market institutions affect the magnitude of international comovement. Business cycle synchronization is thus found to increase with the generosity of the unemployment benefits system, whereas it decreases with the strictness of employment protection.
    Keywords: International business cycles, Search, Labor market institutions, Wage bargaining, International transmission of shocks
    JEL: E24 E32 F41
    Date: 2009
  3. By: Povoledo, Laura
    Abstract: This paper investigates the business cycle fluctuations of the tradeable and nontradeable sectors of the US economy. Then, it evaluates whether a "New Open Economy" model having prices sticky in the producer's currency can reproduce the observed fluctuations qualitatively. The answer is positive: both in the model and in the data the standard deviations of tradeable inflation, output and employment are significantly higher than the standard deviations of the corresponding nontradeable sector variables. A key role in generating this result is played by the greater responsiveness of tradeable sector variables to monetary shocks.
    Keywords: New Open Economy Macroeconomics; Tradeable and Nontradeable Sectors; Business Cycles.
    JEL: F41 E32
    Date: 2009–02
  4. By: Tarek A. Hassan (Harvard University, Department of Economics; Postal Address: Littauer Center G4, 1875 Cambridge Street, Cambridge MA 02138, USA,)
    Abstract: The fact that economies differ in size has important implications for international asset returns. I solve for the spread on international bonds and stocks in an endowment economy with complete asset markets and non-traded goods. The model predicts that larger countries have lower real interest rates because their bonds provide insurance against shocks that affect a larger fraction of the world economy. Larger countries' bonds must therefore pay lower excess returns in equilibrium and uncovered interest parity fails. By a similar logic, stocks in the non-traded sector of larger countries also tend to pay lower excess returns. If asset markets are segmented, the introduction of a currency union lowers real interest rates and expected returns on stocks in the non-traded sector of participating countries. I test the predictions of the model for a panel of OECD countries and show that they are strongly supported by the data: Investors earn lower excess returns on bonds and stocks in the non-traded sector of larger countries. Similarly, excess returns on EMU member countries'bonds and stocks in the non-traded sector fell after European monetary integration.
    Keywords: International return differentials, country size, currency unions, uncovered interest parity, market segmentation.
    JEL: F3 G0
    Date: 2009–05–14
  5. By: Sebnem Kalemli-Ozcan; Elias Papaioannou; José-Luis Peydró
    Abstract: Although recent research shows that the euro has spurred cross-border financial integration, the exact mechanisms remain unknown. We investigate the underlying channels of the euro's effect on financial integration using data on bilateral banking linkages among twenty industrial countries in the past thirty years. We also construct a dataset that records the timing of legislative-regulatory harmonization policies in financial services across the European Union. We find that the euro's impact on financial integration is primarily driven by eliminating the currency risk. Legislative-regulatory convergence explains part of the total effect, whereas trade has no role in explaining the euro's positive effect on integration.
    JEL: F10 F15 F30
    Date: 2009–06
  6. By: Bianca De Paoli
    Abstract: Can the structure of asset markets change the way monetary policy should be conducted?Following a linear-quadratic approach, the present paper addresses this question in a NewKeynesian small open economy framework. Our results reveal that the configuration of assetmarkets significantly affects optimal monetary policy and the performance of standard policyrules. In particular, when comparing complete and incomplete markets, the ranking of policyrules is entirely reversed, and so are the policy prescriptions regarding the optimal level ofexchange rate volatility.
    Keywords: Welfare, Optimal Monetary Policy, Asset Markets, Small Open Economy
    JEL: F41 G15 E52 E61
    Date: 2009–04

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