nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒08‒02
eleven papers chosen by
Martin Berka
Massey University

  1. Capital account liberalization, financial development and industry growth: a synthetic view By Eichengreen, Barry; Gullapalli, Rachita; Panizza, Ugo
  2. International Comovements, Business Cycle and Inflation: a Historical Perspective By Haroon Mumtaz; Saverio Simonelli; Paolo Surico
  3. Business cycle implications of internal consumption habit for new Keynesian models By Takashi Kano; James M. Nason
  4. Can Parameter Instability Explain the Meese-Rogoff Puzzle? By Philippe Bacchetta; Eric van Wincoop; Toni Beutler
  5. Rebalancing Growth in Asia By Prasad, Eswar
  6. Globalized banks: lending to emerging markets in the crisis By Nicola Cetorelli; Linda S. Goldberg
  7. Sources of Current Account Fluctuations in Industrialized Countries By Aikaterini Karadimitropoulou; Miguel A. León-Ledesma
  8. Euro membership as a U.K. monetary policy option: results from a structural model By Riccardo DiCecio; Edward Nelson
  9. Capital inflows and exchange rate in LDC: The Dutch disease problem revisited By Mouhamadou Sy; Hamidreza Tabarraei
  10. Evaluating a monetary business cycle model with unemployment for the euro area By Nicolas Groshenny
  11. On causal Relationships Between Exchange Rates and Fundamentals: Better Than You Think By Dimitris Christopoulos; Miguel A. León-Ledesma

  1. By: Eichengreen, Barry; Gullapalli, Rachita; Panizza, Ugo
    Abstract: This paper synthesizes previous studies analyzing the effects of capital account liberalization on industry growth while controlling for financial crises, domestic financial development and the strength of institutions. We find reasonably strong evidence that financial openness has positive effects on the growth of financially-dependent industries, although these growth-enhancing effects evaporate during financial crises. Further analysis indicates that the positive effects of capital account liberalization are limited to countries with relatively well-developed financial systems, good accounting standards, strong creditor rights and rule of law. It suggests that countries must reach a certain threshold in terms of institutional and economic development before they can expect to benefit from capital account liberalization.
    Keywords: Capital account liberalization, Financial development, External dependence
    JEL: F34 F36
    Date: 2009–06
  2. By: Haroon Mumtaz (Center for Central Banking Studies, Bank of England); Saverio Simonelli (Università di Napoli Federico II, EUI and CSEF); Paolo Surico (External MPC unit, Bank of England)
    Abstract: Using a dynamic factor model, we uncover four main empirical regularities on international comovements in a long-run panel of real and nominal variables. First, the contribution of world comovements to domestic output growth has decreased over the post-WWII period. The contribution of regional comovements, however, has increased significantly. Second, the share of inflation variation due to a global factor has become larger since 1985. Third, over most of the post-WWII period, international comovements within regions have accounted for the bulk of fluctuations in business cycle and inflation. Fourth, prices have become significantly less countercyclical during the post-1984 sample, with the largest contribution due to external developments.
    Keywords: output growth, in.ation, geographic identi.cation, dynamic factor model
    JEL: E30 F40 N10
    Date: 2009–07–10
  3. By: Takashi Kano; James M. Nason
    Abstract: This paper studies the implications of internal consumption habit for propagation and monetary transmission in New Keynesian dynamic stochastic general equilibrium (NKDSGE) models. We use Bayesian methods to evaluate the role of internal consumption habit in NKDSGE model propagation and monetary transmission. Simulation experiments show that internal consumption habit often improves NKDSGE model fit to output and consumption growth spectra by dampening business cycle periodicity. Nonetheless, habit NKDSGE model fit is vulnerable to nominal rigidity, the choice of monetary policy rule, the frequencies used for evaluation, and spectra identified by permanent productivity shocks.
    Date: 2009
  4. By: Philippe Bacchetta; Eric van Wincoop; Toni Beutler
    Abstract: The empirical literature on nominal exchange rates shows that the current exchange rate is often a better predictor of future exchange rates than a linear combination of macroeconomic fundamentals. This result is behind the famous Meese-Rogoff puzzle. In this paper we evaluate whether parameter instability can account for this puzzle. We consider a theoretical reduced-form relationship between the exchange rate and fundamentals in which parameters are either constant or time varying. We calibrate the model to data for exchange rates and fundamentals and conduct the exact same Meese-Rogoff exercise with data generated by the model. Our main finding is that the impact of time-varying parameters on the prediction performance is either very small or goes in the wrong direction. To help interpret the findings, we derive theoretical results on the impact of time-varying parameters on the out-of-sample forecasting performance of the model. We conclude that it is not time-varying parameters, but rather small sample estimation bias, that explains the Meese-Rogoff puzzle.
    Keywords: exchange rate forecasting; time-varying coefficients
    JEL: F31 F37 F41
    Date: 2009–07
  5. By: Prasad, Eswar (Cornell University)
    Abstract: Rebalancing growth patterns of Asian economies is an important component of the overall rebalancing effort that will be required in the world economy. In this paper, I provide an empirical characterization of the composition of GDP levels and growth rates for the key emerging markets and other developing economies in Asia. China has by far the lowest share of private consumption to GDP in Asia and, during this decade, has recorded the lowest rate of employment growth relative to GDP growth. Investment growth has dominated GDP growth in China during this decade but is also important in the cases of India and Vietnam. To examine the global implications of domestic growth patterns in Asia, I analyze saving-investment balances, the composition of national savings, and the determinants of the evolution of household saving rates. During 2000-08, household saving rates (relative to household income) have risen gradually in China and India but fallen sharply in Korea. Corporate savings have surged across Asia during this period, becoming the main component of gross national savings in the region. In terms of sheer magnitudes, China's national savings and current account surpluses dominate the region's saving-investment balances. China accounts for just under half of GDP in Asia ex-Japan, but accounts for 60 percent of total gross national savings and nearly 90 percent of the current account surplus of the region. Finally, I discuss some policy implications that come out of the analysis on how to shift the patterns of growth, especially in China, from a welfare-enhancing perspective.
    Keywords: growth contributions, national savings and investment, current account balance, welfare consequences of growth
    JEL: E2 F3 F4
    Date: 2009–07
  6. By: Nicola Cetorelli; Linda S. Goldberg
    Abstract: As banking has become more globalized, so too have the consequences of shocks originating in home and host markets. Global banks can provide liquidity and risk-sharing opportunities to the host market in the event of adverse host-country shocks, but they can also have profound effects across international markets. Indeed, global banks played a significant role in the transmission of the current crisis to emerging-market economies. Flows between global banks and emerging markets include both cross-border lending, which has long been recognized as responding significantly to shocks at home or abroad, and internal capital-market lending, which is the internal flow of funds within a banking organization (such as between a headquarters and its offices in foreign locations). Adverse liquidity shocks to developed-country banking, such as those that occurred in the United States in 2007 and 2008, have reduced lending in local markets through contractions in cross-border lending to banks and private agents and also through contractions in parent banks' support of foreign affiliates. Because all these forms of transmission impinge on the lending channel in recipient markets, the ownership structure of emerging-market banks does not by itself provide sufficient basis for identifying the degree of shock transmission from abroad.
    Keywords: Globalization ; Banks and banking, International ; Emerging markets ; Liquidity (Economics)
    Date: 2009
  7. By: Aikaterini Karadimitropoulou; Miguel A. León-Ledesma
    Abstract: We analyze the sources of current account fluctuations for the G6 economies. Based on Bergin and Sheffrin’s (2000) two-goods inter-temporal framework, we build a SVAR model including the world real interest rate, net output, real exchange rate, and the current account. The theory model allows for the identification of structural shocks in the SVAR using longrun restrictions. Our results suggest three main conclusions: i) we find evidence in favour of the present-value model of the CA for all countries except France; ii) there is substantial support for the two-good intertemporal model, since both external supply and preferences shocks account for an important proportion of CA fluctuations; iii) temporary domestic shocks account for a large proportion of CA fluctuations, but the excess response of the CA is less pronounced than in previous studies.
    Keywords: Current account; real exchange rate; two-good intertemporal model; SVAR
    JEL: F32 F41
    Date: 2009–07
  8. By: Riccardo DiCecio; Edward Nelson
    Abstract: Developments in open-economy modeling, and the accumulation of experience with the monetary policy regimes prevailing in the United Kingdom and the euro area, have increased our ability to evaluate the effects that joining monetary union would have on the U.K. economy. This paper considers the debate on the United Kingdom's monetary policy options using a structural open-economy model. We use the Erceg, Gust, and Lopez-Salido (EGL) (2007) model to explore both the existing U.K. regime (CPI inflation targeting combined with a floating exchange rate), and adoption of the euro, as monetary policy options for the United Kingdom. Experiments with a baseline estimated version of the model suggest that there is improved stability for the U.K. economy with monetary union. Once large differences in the degree of nominal rigidity across economies are considered, the balance tilts toward the existing U.K. monetary policy regime. The improvement in U.K. economic stability under monetary union also diminishes if imports from the euro area are modeled as primarily intermediates instead of finished goods; or if we assume that the pressures reflected in foreign exchange market shocks, instead of vanishing with monetary union, are now manifested as an additional source of disturbances to domestic aggregate spending.
    Keywords: Monetary policy - European Union countries ; Monetary policy - Great Britain ; Great Britain
    Date: 2009
  9. By: Mouhamadou Sy; Hamidreza Tabarraei
    Abstract: In this paper, the link between capital inflows and real exchange rate movements in LDC is revisited theoretically and empirically. Theoretically by representing a simple model to show that the real exchange rate depends mainly on real fundamentals as the term of trade or gross domestic product per capita and empirically by taking into account the heterogeneity of the sample, the dynamic of the RER and the non stationary nature of the data. Capital inflows can be the oil revenues, foreign aid or FDI. Empirically, it is also shown that these real fundamentals are the main driving forces of real exchange movements in these countries comparing to capital inflows. The TOT by itself account for 40% of the RER variations while capital inflows account only for 12% of RER variations. The Dutch disease theory is not rejected but its size on RER movements in LDC is not very big.
    Date: 2009
  10. By: Nicolas Groshenny (Reserve Bank of New Zealand, Economics department)
    Abstract: This paper estimates a medium-scale DSGE model with search unemployment by matching model and data spectra. Price mark-up shocks emerge as the main source of business-cycle fluctuations in the euro area. Key factors in the propagation of these disturbances are a high degree of inflation indexation and a persistent response of monetary policy to deviations from the inflation target
    Keywords: DSGE models, business cycles, frequency-domain analysis
    JEL: E32 C51 C52
    Date: 2009–07
  11. By: Dimitris Christopoulos; Miguel A. León-Ledesma
    Abstract: This note revisits the temporal causality between exchange rates and fundamentals put forward by Engel and West (2005). We analyze the causal link within multivariate VARs by making use of the concept of multi-step causality. Our results show that, considering information content beyond one-period ahead, the causal link between exchange rates and fundamentals is stronger than previously reported. We find Granger-causality running from exchange rates to fundamentals at some horizon in 49% of our tests and running from fundamentals to exchange rates in 59% of them.
    Keywords: Granger-causality; multi-step; exchange rates; fundamentals
    JEL: F31 F37 C32
    Date: 2009–07

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