|
on Open MacroEconomics |
| By: | Eswar S. Prasad |
| Abstract: | In this paper, the author analyzes India’s approach to capital account liberalization through the lens of the new literature on financial globalization. India’s authorities have taken a cautious and calibrated path to capital account opening, which has served the economy well in terms of reducing its vulnerability to crises. By now, the capital account has become quite open and reversing this is not a viable option. Moreover, the remaining capital controls are rapidly becoming ineffective, making the debate about capital controls rather moot. Managing de facto financial integration into international capital markets and aligning domestic macroeconomic policies in a manner that maximizes the indirect benefits and reduces the risks is the key challenge now facing India’s policymakers on this front.[IZA DP No. 3927] |
| Keywords: | India, international financial integration, capital flows, capital controls |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2043&r=opm |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | A striking and unexpected feature of the financial crisis has been the sharp appreciation of the US dollar against virtually all currencies globally. The paper finds that negative US-specific macroeconomic shocks during the crisis have triggered a significant strengthening of the US dollar, rather than a weakening. Macroeconomic fundamentals and financial exposure of individual countries are found to have played a key role in the transmission process of US shocks: in particular countries with low FX reserves, weak current account positions and high direct financial exposure vis-à-vis the United States have experienced substantially larger currency depreciations during the crisis overall, and to US shocks in particular. JEL Classification: F31, F4, G1. |
| Keywords: | Financial crisis, exchange rates, global imbalances, shocks, United States, US dollar, transmission channels. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901060&r=opm |
| By: | Giancarlo Corsetti; Luca Dedola; Sylvain Leduc |
| Abstract: | Identifying productivity and real demand shocks in the US with sign restrictions based on standard theory, we provide evidence on real and financial channels of their international propagation. Productivity gains in US manufacturing have substantial macroeconomic effects, raising US consumption, investment and the terms of trade, relative to the rest of the world, while lowering US net exports. Significant international nancial adjustment occurs via a rise in the global value of the US stock market, portfolio shifts in US foreign assets and liabilities, and especially real dollar appreciation. Positive demand shocks to US manufacturing also lead to real appreciation and raise investment, but have otherwise limited effects on trade flows. This evidence suggests a fundamental role of cross-country endogenous demand and wealth movements in shaping international macroeconomic interdependence. |
| Keywords: | Productivity ; Trade ; Foreign exchange rates |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2009-09&r=opm |
| By: | James Feyrer; Jay C. Shambaugh |
| Abstract: | This paper examines the effect of exogenous shocks to savings on world capital markets. Using the exogenous shocks to US tax policy identified by Romer & Romer, we trace the impact of an exogenous shock to savings through the income accounting identities of the US and the rest of the world. We find that exogenous tax increases are only partially offset by changes in private savings (Ricardian equivalence is not complete). We also find that only a small amount of the resulting change in US saving is absorbed by increased domestic investment (contrary to Feldstein & Horioka). Almost half of the fiscal shock is transmitted abroad as an increase in the US current account. Positive shocks to US savings generate current account deficits and increases in investment in other countries in the world. We cannot reject that the shock is uniformly transmitted across countries with different currency regimes and different levels of development. The results suggest highly integrated world capital markets with rapid adjustment. In short we find that the US acts like a large open economy and the world acts like a closed economy. |
| JEL: | E2 E21 E22 F15 F32 F36 F41 F42 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:15113&r=opm |
| By: | David Peel; Ivan Paya; E Pavlidis |
| Abstract: | Previous empirical work on the Purchasing Power Parity does not explicitly account for time-varying trade costs. Motivated by the recent gravity literature we incorporate a microfounded measure of trade costs into two nonlinear regression models for the real exchange rate. Using data for the dollar-sterling real exchange rate from 1830 to 2005, we provide significant evidence in favor of a positive relation between the level of trade costs and the degree of persistence of the real exchange rate. |
| Keywords: | Real Exchange Rates, Time-Varying Trade Costs, Smooth Transition Nonlinearity, Persistence, Simulation Methods |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:lan:wpaper:006028&r=opm |
| By: | Jahan-Parvar, Mohammad R.; Liu, Xuan; Rothman, Philip |
| Abstract: | This is the first paper in the literature to match key business cycle moments and long-run equity returns in a small open economy with production. These results are achieved by introducing three modications to a standard real business cycle model: (1) borrowing and lending costs are imposed to increase the volatility of the intertemporal marginal rate of substitution; (2) investment adjustment costs are assumed to make equity returns more volatile; and (3) GHH preferences are employed to smooth consumption. We also decompose the contributions of productivity, the world interest rate, and government expenditure shocks to the equity premium. Our results are based on data from Argentina, Brazil, and Chile. |
| Keywords: | Asset Pricing; Equity Returns; Dynamic Stochastic General Equilibrium Model; Real Business Cycle; Small Open Economy. |
| JEL: | G12 E32 G15 E44 F41 |
| Date: | 2009–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:15915&r=opm |
| By: | Kalemli-Ozcan, Sebnem; Papaioannou, Elias; Peydró-Alcalde, José Luis |
| 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. |
| Keywords: | euro; exchange rate; financial integration; legislation; regulation; trade |
| JEL: | F10 F15 F30 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7314&r=opm |
| By: | HOLLAND, Márcio; LUIZ CARLOS, BRESSER-PEREIRA |
| Abstract: | Latin America has a long history of attempts to achieve regional integration, yet success has been modest. This paper contends that this is essentially due not so much to protectionist practices in the various countries, but to the lack of a common currency, or, at least, of a tightly managed exchange rate band. We reviewed the optimum currency area criteria that indicate it is prudent to increase economic integration before attempting to establish exchange rates coordination. Yet, we show that in the Mercosul there are already the minimal requirements to work on this direction. Diminishing exchange rate instability could encourage trade and investment flows across Latin American economies. We also performed a simplified exercise to understand how feasible would be the efforts to achieve exchange rate parity stability in the two larger economies in the region (Brazil and Argentina) and step forward toward adopting a common currency. |
| Date: | 2009–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:190&r=opm |
| By: | Alessandro Galesi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Marco J. Lombardi (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | Amid the recent commodity price gyrations, policy makers have become increasingly concerned in assessing to what extent oil and food price shocks transmit to the inflationary outlook and the real economy. In this paper, we try to tackle this issue by means of a Global Vector Autoregressive (GVAR) model. We first examine the short-run inflationary effects of oil and food price shocks on a given set of countries. Secondly, we assess the importance of inflation linkages among countries, by dis-entangling the geographical sources of inflationary pressures for each region. Generalized impulse response functions reveal that the direct inflationary effects of oil price shocks affect mostly developed countries while less sizeable effects are observed for emerging economies. Food price increases also have significative inflationary direct effects, but especially for emerging economies. Moreover, significant second-round effects are observed in some countries. Generalized forecast error variance decompositions indicate that considerable linkages through which inflationary pressures spill over exist among regions. In addition, a considerable part of the observed headline inflation rises is attributable to foreign sources for the vast majority of the regions. JEL Classification: C32, E31. |
| Keywords: | oil shock, commodity prices, inflation, second-round effects, Global VAR. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:200901062&r=opm |
| By: | Kuralbayeva, Karlygash; Vines, David |
| Abstract: | This paper extends the analysis of the forthcoming fall in the dollar by Blanchard, Giavazzi and Sà 2005), using a model which incorporates forward-looking consumers. It provides additional underpinnings for the idea of a rapid adjustment in the value of the dollar. We analyze what will happen to the dollar value when forward-looking consumers, in anticipation of the reduction in the current account deficit, cut their consumption. We show that the real interest rate must fall as a result, and that this causes the exchange rate to fall more initially. However we also show that the interest rate does not fall greatly initially, and so that these effects are not large. But they add to pressures causing a rapid fall in the dollar. |
| Keywords: | imperfect substitutability; Net foreign assets; valuation effects |
| JEL: | F32 F41 G15 |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7325&r=opm |