nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒07‒11
twelve papers chosen by
Martin Berka
Massey University

  1. China's Current Account and Exchange Rate By Yin-Wong Cheung; Menzie D. Chinn; Eiji Fujii
  2. The High Cross-Country Correlations of Prices and Interest Rates By Espen Henriksen; Finn E. Kydland; Roman Sustek
  3. Productivity Differences Between and Within Countries By Daron Acemoglu; Melissa Dell
  4. Harrod, Balassa and Samuelson (Re)Visit Eastern Europe By Robert J. Sonora; Josip Tica
  5. Real Exchange Rate, Output and Oil: Case of Four Large Energy Producers By Korhonen, Iikka; Mehrotra, Aaron
  6. Trade Reforms and Market Selection: Evidence from Manufacturing Plants in Colombia By Eslava, Marcela; Haltiwanger, John C.; Kugler, Adriana; Kugler, Maurice
  7. Revisiting the Shocking Aspects of Asian Monetary Unification By Hans Genberg; Pierre L. Siklos
  8. Model misspecification, learning and the exchange rate disconnect puzzle By Vivien Lewis; Agnieszka Markiewicz
  9. Crises, Capital Controls, and Financial Integration By Eduardo Yeyati Levy
  10. A Multiple-Horizon Search for the Role of Trade and Financial Factors in Bilateral Real Exchange Rate Volatility By Yin-Wong Cheung; Kon S. Lai
  11. The Exchange Rate Effect of Multi-Currency Risk Arbitrage By Hau, Harald
  12. Transmission of International Commodity Prices to Domestic Prices in Bangladesh By M. Golam Mortaza

  1. By: Yin-Wong Cheung (University of California, Santa Cruz); Menzie D. Chinn (University of Wisconsin, Madison, NBER); Eiji Fujii (University of Tsukuba)
    Abstract: We examine whether the Chinese exchange rate is misaligned and how Chinese trade flows respond to the exchange rate and to economic activity. We find, first, that the Chinese currency, the renminbi (RMB), is substantially below the value predicted by estimates based upon a cross-country sample, when using the 2006 vintage of the World Development Indicators. The economic magnitude of the misalignment is substantial ¡V on the order of 50 percent in log terms. However, the misalignment is typically not statistically significant, in the sense of being more than two standard errors away from the conditional mean. However, this finding disappears completely when using the most recent 2008 vintage of data; then the estimated undervaluation is on the order of 10 percent. Second, we find that Chinese multilateral trade flows respond to relative prices ¡V as represented by a trade weighted exchange rate ¡V but the relationship is not always precisely estimated. In addition, the direction of the effects is sometimes different from what is expected a priori. For instance, Chinese ordinary imports actually rise in response to a RMB depreciation; however, Chinese exports appear to respond to RMB depreciation in the expected manner, as long as a supply variable is included. In that sense, Chinese trade is not exceptional. Furthermore, Chinese trade with the United States appears to behave in a standard manner ¡V especially after the expansion in the Chinese manufacturing capital stock is accounted for. Thus, the China-US trade balance should respond to real exchange rate and relative income movements in the anticipated manner. However, in neither the case of multilateral nor bilateral trade flows should one expect quantitatively large effects arising from exchange rate changes. And, of course, these results are not informative with regard to the question of how a change in the RMB/USD exchange rate would affect the overall US trade deficit. Finally, we stress the fact that considerable uncertainty surrounds both our estimates of RMB misalignment and the responsiveness of trade flows to movements in exchange rates and output levels. In particular, the results for trade elasticities are sensitive to econometric specification, accounting for supply effects, and for the inclusion of time trends.
    Date: 2009–04
  2. By: Espen Henriksen; Finn E. Kydland; Roman Sustek
    Abstract: We document that, at business cycle frequencies, fluctuations in nominal variables, such as aggregate price levels and nominal interest rates, are substantially more synchronized across countries than fluctuations in real output. To the extent that domestic nominal variables are determined by domestic monetary policy, and central banks generally attempt to keep the domestic nominal environment stable, this might seem surprising. We ask if a parsimonious international business cycle model can account for this aspect of cross-country aggregate fluctuations. It can. Due to spillovers of technology shocks across countries, expected future responses of national central banks to fluctuations in domestic output and inflation generate movements in current prices and interest rates that are synchronized across countries even when output is not. Even modest spillovers produce cross-country correlations such as those in the data.
    JEL: E31 E32 E43 F42
    Date: 2009–07
  3. By: Daron Acemoglu; Melissa Dell
    Abstract: We document substantial within-country (cross-municipality) differences in incomes for a large number of countries in the Americas. A significant fraction of the within-country differences cannot be explained by observed human capital. We conjecture that the sources of within-country and between-country differences are related. As a first step towards a united framework, we propose a simple model incorporating both differences in technological know-how across countries and differences in productive efficiency within countries.
    JEL: O18 O40 R11
    Date: 2009–07
  4. By: Robert J. Sonora (Department of Economics, School of Business Administration, Fort Lewis College); Josip Tica (Faculty of Economics and Business, University of Zagreb)
    Abstract: In this paper we investigate Harrod Balassa Samuelson (HBS) effect in 11 transition countries. A large number of empirical papers based on quite limited datasets has already been published on HBS in Eastern Europe. The major contribution of this paper is the fact that we estimate HBS with NACE6 quarterly national account data which enables us to divide data into tradable and nontradable sector as suggested by De Gregorio, Giovannini and Wolf (1994) without any unrealistic assumptions. Following Bergstrand (1991) together with relative productivity we also employ share of government consumption in GDP as an explanatory variable. Unlike in previous studies, results have indicated that it is possible to find univariate cointegrating vectors only in Bulgaria, Croatia and Lithuania, and panel cointegration test has indicated that it is possible to find strong evidence of cointegration in post 2000 sample. For the post 1995 period, rejection of the null hypothesis is dependent on the inclusion of government consumption as independent variable and methodology used (DOLS vs. OLS cointegration test).
    Keywords: Harrod Balassa Samuelson effect, Price convergence, Transition countries, panel cointegration tests
    JEL: F15 F21 F43
    Date: 2009–06–24
  5. By: Korhonen, Iikka (BOFIT); Mehrotra, Aaron (BOFIT)
    Abstract: We assess the effects of oil price shocks on real exchange rate and output in four large energy-producing countries: Iran, Kazakhstan, Venezuela, and Russia. We estimate four-variable structural vector autoregressive models using standard long-run restrictions. Not surprisingly, we find that higher real oil prices are associated with higher output. However, we also find that supply shocks are by far the most important driver of real output in all four countries, possibly due to ongoing transition and catching-up. Similarly, oil shocks do not account for a large share of movements in the real exchange rate, although they are clearly more significant for Iran and Venezuela than for the other countries.
    Keywords: structural VAR model; oil price; Iran; Kazakhstan; Russia; Venezuela
    JEL: E31 E32 F31
    Date: 2009–07–01
  6. By: Eslava, Marcela (Universidad de los Andes); Haltiwanger, John C. (University of Maryland); Kugler, Adriana (University of Houston); Kugler, Maurice (Wilfrid Laurier University)
    Abstract: We use plant output and input prices to decompose the profit margin into four parts: productivity, demand shocks, mark-ups and input costs. We find that each of these market fundamentals are important in explaining plant exit. We then use variation across sectors in tariff changes after the Colombian trade reform to assess whether the impact of market fundamentals on plant exit changed with in creased international competition. We find that greater international competition magnifies the impact of productivity, and other market fundamentals, on plant exit. A dynamic simulation that compares the distribution of productivity with and without the trade reform shows that improvements in market selection from trade reform help to weed out the least productive plants and increase average productivity. In addition, we find that trade liberalization increases productivity of incumbent plants and improves the allocation of activity within industries.
    Keywords: trade liberalization, plant exit, market selection
    JEL: F43 L25 O47
    Date: 2009–06
  7. By: Hans Genberg (Hong Kong Institute for Monetary Research, Hong Kong Monetary Authority); Pierre L. Siklos (Wilfrid Laurier University, Viessmann European Research Centre, Hong Kong Institute for Monetary Research)
    Abstract: This paper revisits the question whether economies in Asia are likely to be good candidates for pursuing similar exchange rate policies and ultimately joining together in a monetary union. A number of authors have investigated this question before typically using some variant of the methodology originally used by Bayoumi and Eichengreen (BE) to study the same question for countries that were potential candidates to form common currency area in Europe. It is the contention of this paper that this methodology is flawed because it fails to identify properly the aggregate demand and aggregate supply shocks in each economy and hence cannot adequately address one of the central issues in determining the suitability of two or more countries joining a monetary union. To remedy this deficiency in the existing literature we propose an alternative methodology to identify structural shocks. We will therefore be able to revisit the debate about monetary integration in Asia based on more solid empirical foundations. The results show that these modifications do matter for the cross-country correlation of these shocks. In particular, aggregate demand shocks among the relatively smaller economies of Asia appear to be more highly correlated with the larger or more advanced economies in the regions such as Korea, Hong Kong, Singapore, and Japan, than they are amongst themselves when we rely on the standard BE methodology. When an alternative approach is used we conclude, for example, that aggregate supply shocks remain most highly correlated between China, Hong Kong and the remainder of the economies in our sample while Japan and Singapore, most notably, seem more ¡¥disconnected¡¦ with the rest of the region. Taking explicit account of foreign shocks not only prevents them from erroneously being confounded with domestic shocks as in the conventional methodology, it also makes it possible to evaluate the desirability of a common monetary policy response to common external shocks. Our results show that this can have an important bearing on assessing the desirability of forming a monetary union among the economies in the region. With respect to the implications for monetary unification in Asia our results do not clearly identify a group of countries for which shocks are unambiguously highly correlated and which therefore would be able to perform well with a common monetary policy.
    Date: 2009–05
  8. By: Vivien Lewis (National Bank of Belgium, Research Department; Ghent University, Department of Financial Economics); Agnieszka Markiewicz (Erasmus University Rotterdam, Department of Economics)
    Abstract: Rational expectations models fail to explain the disconnect between the exchange rate and macroeconomic fundamentals. In line with survey evidence on the behaviour of foreign exchange traders, we introduce model misspecification and learning into a standard monetary model. Agents use simple forecasting rules based on a restricted information set. They learn about the parameters and performance of different models and can switch between forecasting rules. We compute the implied post-Bretton Woods US dollar-pound sterling exchange rate and show that the excess volatility of the exchange rate return can be reproduced with low values of the learning gain. Both assumptions, misspecification and learning, are necessary to generate this result. However, the implied correlations with the fundamentals are higher than in the data. Including more lags in the model tends to tip the balance of our findings slightly towards rational expectations and away from the learning hypothesis
    Keywords: exchange rate, disconnect, misspecification, learning
    JEL: F31 E37 E44
    Date: 2009–07
  9. By: Eduardo Yeyati Levy
    Abstract: This paper analyzes the effects of capital controls and crises on financial integration, using stocks from emerging economies that trade in both domestic and international markets. The cross market premium provides a valuable measure of how capital controls and crises affect international financial integration. The paper shows that capital controls affect cross market premium in a sustainable way. Controls on capital inflows put downward pressure on domestic markets relative to international ones, generating a negative premium. The opposite happens in case of capital outflows. Crises affect financial integration by generating more volatility in the premium and putting more downward pressure on domestic prices. [ADBI WP no.121]
    Keywords: crises; capital controls; financial integration; cross market premium; cross country capital movement; capital controls on inflows; capital controls on outflows; stock market crises; capital market integration
    Date: 2009
  10. By: Yin-Wong Cheung (University of California, Santa Cruz); Kon S. Lai (California State University, Los Angeles)
    Abstract: This study investigates the sources of bilateral real exchange rate (RER) volatility in industrial countries. Going beyond traditional macroeconomic determinants, we identify the role of both tradeand finance-related factors in explaining RER volatility at different time horizons. The results suggest that RER volatility tends to increase with financial openness and with transport costs but decrease with trade openness and with financial depth. Moreover, the time horizon matters. Financial factors (financial openness and financial depth) are found to influence RER volatility at primarily short horizons, while trade-related factors (trade openness and transport costs) contribute significantly also to RER volatility at much longer horizons. The relative importance of traditional macroeconomic fundamentals and these trade- and finance-related factors can vary considerably across horizons.
    Keywords: Exchange Rate Volatility, Time Horizons, Trade Openness, Financial Openness, Financial Depth
    JEL: F15 F31 F41
    Date: 2009–06
  11. By: Hau, Harald
    Abstract: This paper documents how currency speculators trade when international capital flows generate predictable exchange rate movements. The redefinition of the MSCI world equity index in December 2000 provides an ideal natural experiment identifying exogenous capital flows of index tracking equity funds. Currency speculators are shown to front-run international capital flows. Furthermore, they actively manage the portfolio risk of their speculative positions through hedging positions in correlated currencies. The exchange rate effect of separate risk hedging is economically significant and amounts to a return difference of 3.6 percent over a 5 day event window between currencies with high and low risk hedging value. The results of the classical event study analysis are confirmed by a new and more powerful spectral inference isolating the high frequency cospectrum of currency pairs. The evidence supports the idea that international currency arbitrage is limited by the speculators' risk aversion.
    Keywords: Cospectrum; Limited Arbitrage; Multi-Currency Risk Hedging; Spectral Inference; Speculative Trading
    JEL: F31 G11 G14 G15
    Date: 2009–06
  12. By: M. Golam Mortaza
    Abstract: In recent years, Bangladesh has experienced persistent price increases, especially of food items, in the domestic market in the backdrop of global increase in food prices. Such price developments in the international commodity markets have brought into forefront the effects of external price changes on domestic inflation, especially in the developing countries. This raises the issue of the existence and extent of import price pass-through to domestic prices. This paper analyzes the relationship between import and domestic prices in Bangladesh during 2000-2008. Using monthly data, the paper explores the relationship between domestic supply and passthrough elasticity and argues that commodities with higher share of domestic supply face a lower pass-through elasticity of import prices on domestic prices.[Bangladesh Bank WP NO 0807]
    Keywords: International Prices; Domestic Prices; Elasticity; Bangladesh
    Date: 2009

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