nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒07‒28
four papers chosen by
Martin Berka
Massey University

  1. The Real Exchange Rate as an Instrument of Development Policy By Arslan Razmi; Martin Rapetti; Peter Skott
  2. Policy Responses to Exchange-Rate Movements By Laurence M. Ball
  3. The Endogeneity of Transpacific Trade Imbalances By Freitag, Stephan
  4. Oil and the Euro Area Economy By G. PEERSMAN; I. VAN ROBAYS

  1. By: Arslan Razmi (University of Massachusetts Amherst); Martin Rapetti (University of Massachusetts Amherst); Peter Skott (University of Massachusetts Amherst)
    Abstract: Growth is endogenous in small open economies with substantial hidden or open unemployment, even under constant returns to scale. Growth promoting policies, however, have implications for the balance of trade, and two instruments are needed in order to achieve targets for both the growth rate and the balance of trade. The real exchange rate can serve as one of those instruments. Distributional conflict imposes constraints on real exchange rate policies, but in LDCs the main exchange-rate related distributional conflict may be over the sectoral distribution of profits, rather than the real wage. This paper develops a model along these lines and presents empirical support for the hypothesis that real exchange rate undervaluations are a useful instrument for the pursuit of accumulation and growth in low income countries. JEL Categories: F43, O11, O41
    Keywords: Real exchange rates, underemployment, capital accumulation, investment, growth.
    Date: 2009–07
  2. By: Laurence M. Ball
    Abstract: This paper examines policy responses to exchange-rate movements in a simple model of an open economy. The optimal response of monetary policy to an exchange-rate change depends on the source of the change: on whether the underlying shock is a shift in capital flows, manufactured exports, or commodity prices. The paper compares the model’s prescriptions to the policies of an actual central bank, the Bank of Canada. Finally, the paper considers the role of fiscal policy in an open economy. Coordinated fiscal and monetary responses to exchange-rate movements stabilize output at the sectoral as well as aggregate level.
    JEL: E52 F41
    Date: 2009–07
  3. By: Freitag, Stephan
    Abstract: The growing trade imbalances between the United States and East Asia have triggered controversial debates on the global imbalances since the new millenium. Previous contributions have explained the trade imbalances as uni-directional causalities running either from East Asia to the United States or vice versa. This paper proposes reverse causality and mutual interest rather than uni-directional exogeneity as explanations for the transpacific trade imbalances. Applying panel GMM estimators this study finds econometric evidence for an endogeneity of the transpacific trade imbalances. The specific roles of ten East Asian countries within the transpacific imbalance dynamics are identified by asymmetric interaction terms. The estimations reveal a significant impact of U.S. macro policies and East Asian interventions in the foreign exchange markets on the transpacific trade imbalances.
    Keywords: Transpacific Trade Imbalances; Macro Policies; Dynamic Panel Estimations
    JEL: F32 E63 C33
    Date: 2009
    Abstract: We examine the macroeconomic effects of different types of oil shocks and the oil transmission mechanism in the Euro area. A comparison is made with the US and across individual member countries. First, we find that the underlying source of the oil price shift is crucial to determine the repercussions on the economy and the appropriate monetary policyreaction. Second, the transmission mechanism is considerably different compared to the US. In particular, inflationary effects in the US are mainly driven by a strong direct passthrough of rising energy prices and indirect effects of higher production costs. In contrast, Euro area inflation reacts sluggishly and is much more driven by second-round effects of increasing wages. Third, there are also substantial asymmetries across member countries. These differences are due to different labour market dynamics which are further aggravated by a common monetary policy stance which does not fit all.
    Date: 2009–04

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