nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒08‒30
ten papers chosen by
Martin Berka
Massey University

  1. Productivity, the Terms of Trade, and the Real Exchange Rate: The Balassa-Samuelson Hypothesis Revisited By Ehsan U. Choudhri; Lawrence L. Schembri
  2. Exchange Rates, Oil Price Shocks, and Monetary Policy in an Economy with Traded and Non-Traded Goods. By Micheal Plante
  3. The Cyclical Properties of Disaggregated Capital Flows By Silvio Contessi; Pierangelo De Pace; Johanna Francis
  4. International Portfolio Balance – Modeling the External Adjustment Process By Holinski Nils; Kool Clemens; Muysken Joan
  5. Optimal Exchange-Rate Targeting with Large Labor Unions By Vincenzo Cuciniello; Luisa Lambertini
  6. The pass-through effect: a twofold analysis By Antonio Forte
  7. On the solvency of nations: are global imbalances consistent with intertemporal budget constraints? By Ceyhun Bora Durdu; Enrique G. Mendoza; Marco E. Terrones
  8. Housing market heterogeneity in a monetary union By Margarita Rubio
  9. Forecasting the Real Exchange Rate using a Long Span of Data. A Rematch: Linear vs Nonlinear By David Peel; Ivan Paya; E Pavlidis
  10. Understanding forecast failure of ESTAR models of real exchange rates By Daniel Buncic

  1. By: Ehsan U. Choudhri; Lawrence L. Schembri
    Abstract: The paper examines how the Balassa-Samuelson hypothesis is affected by a modern variation of the standard model that allows product differentiation (within the traded and nontraded goods sectors) with the number of firms determined exogenously or endogenously. The hypothesis is found to be fragile in the modified framework. Small variations in the elasticity of substitution between home and foreign traded goods (within the range of estimates suggested in the literature), for example, can make the effect of a traded-goods productivity improvement on the real exchange rate negative or positive, as well as small or large. This result provides a potential explanation of the mixed empirical results that have been obtained on the relationship between productivity and the real exchange rate.
    Keywords: Exchange rates; Productivity
    JEL: F41 F31
    Date: 2009
  2. By: Micheal Plante (Indiana University, Ball State University)
    Abstract: This paper examines monetary policy responses to oil price shocks in a small open economy that produces traded and non-traded goods. When only labor and oil are used in production and prices are sticky in the non-traded sector the behavior of ination, the nominal exchange rate, and the relative price of the non-traded good depends crucially upon whether the ratio of the cost share of oil to the cost share of labor is higher for the traded or non-traded sector. If the ratio is smaller (higher) for the traded sector then a policy that fully stabilizes non-traded ination causes the nominal exchange rate to appreciate (depreciate) and the relative price of the non-traded good to rise (fall) when there is a surprise rise in the price of oil. Similar results can hold for a policy that stabilizes CPI ination. Under a policy that xes the nominal exchange rate, non-traded ination rises (falls) if the ratio is smaller (larger) for the traded sector. Analytical results show that a policy of xing the exchange rate always produces a unique solution and that a policy of stabilizing non-traded ination produces a unique solution so long as the nominal interest rate is raised more than one-for-one with rises in non-traded ination. A policy that stabilizes CPI ination, however, produces multiple equilibria for a wide range of calibrations of the policy rule.
    Date: 2009–08
  3. By: Silvio Contessi (Federal Reserve Bank of St. Louis); Pierangelo De Pace (Johns Hopkins University); Johanna Francis (Fordham University, Department of Economics)
    Abstract: We describe the second-moment properties of the components of international capital flows and their relationship to business cycle variables for 22 industrial and emerging countries. Inward flows are procyclical. Outward and net flows are countercyclical for most industrial and emerging countries, except for the G7. Results for individual flows are ambiguous except for inward FDI flows that are procyclical in industrial countries, but countercyclical in emerging countries. Using formal statistical tests, we find mixed evidence of changes in the covariance and correlation of capital flows with a set of macroeconomic variables in the G7 countries. We detect significant increases in the variance of all flows.
    Keywords: Capital Flows, International Business Cycles, Second Moments
    JEL: E32 F21 F32 F36
    Date: 2009
  4. By: Holinski Nils; Kool Clemens; Muysken Joan (METEOR)
    Abstract: Unprecedented growth in private cross-border asset trade and asymmetric internationalbalance sheets are well-documented stylized facts of financial integration. Moreover, weobserve that current accounts are no longer the number one determinant of external balances. Advancing the work of Blanchard et al. (2005), this paper develops a portfolio-balance model that recognizes these stylized facts and shows how they influence the joint dynamics of the current account, the exchange rate and relative asset prices. Calibrating the model to the external adjustment process of the US, the model produces results that are broadly consistent with recent empirical trends. In particular, we find that the composition of its international balance sheet helps the US to better cope with external shocks.
    Keywords: international economics and trade ;
    Date: 2009
  5. By: Vincenzo Cuciniello (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland); Luisa Lambertini (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland)
    Abstract: We study whether monetary policy should target the exchange rate in a two-country model with non-atomistic wage setters, non-traded goods and different degrees of exchange-rate pass through. Commitment to an exchange rate target reduces the labor market distortion. Large labor unions anticipate that higher wages depreciate the exchange rate, which triggers an increase in the interest rate and restrain wage demands. However, reduced exchange rate flexibility worsens the distortion stemming from preset pricing. Targeting the nominal exchange rate will be optimal when the labor market distortion is larger than the preset-pricing one. This result arises with cooperation both under producer and local currency pricing, even though the optimal degree of exchange-rate targeting is higher under local currency pricing. In the Nash equilibrium, the terms-of-trade effect raises optimal wage mark-ups thereby reducing the optimal weight on the exchange rate target. The terms-of-trade effect is stronger as openness and substitutability among Home and Foreign goods increase.
    Keywords: Monetary policy, International Finance, Open-Economy Macroeconomics
    JEL: F3 F41 E52
    Date: 2009–05
  6. By: Antonio Forte
    Abstract: In this paper I analyse the pass-through effect in four big areas using different approaches. On the one hand, I inspect this issue comparing the REER (real effective exchange rate) with the WARP (weighted average relative price) in the US, the UK, Japan and the Euro area. On the other hand, I try to support the findings of the first part with a double econometric analysis: I employ single equation and Var approaches in order to provide wide and robust results. The global conclusion is that in the major economies of the world the pass-through effect has been very light from January 1999 onward and that, especially in the Euro area, this result is linked with the firms behaviour.
    Keywords: Real effective exchange rate, weighted average relative price, WARP, REER, double econometric analysis.
    JEL: F30 F31
    Date: 2009–08–08
  7. By: Ceyhun Bora Durdu; Enrique G. Mendoza; Marco E. Terrones
    Abstract: Theory predicts that a nation's stochastic intertemporal budget constraint is satisfied if net foreign assets (NFA) are integrated of any finite order, or if net exports (NX) and NFA satisfy an error-correction specification with a residual integrated of any finite order. We test these conditions using data for 21 industrial and 29 emerging economies for the 1970-2004 period. The results show that, despite the large global imbalances of recent years, NFA and NX positions are consistent with external solvency. Country-specific unit root tests on NFA-GDP ratios suggest that nearly all of them are integrated of order 1. Pooled Mean Group error-correction estimation yields evidence of a statistically significant, negative response of the NX-GDP ratio to the NFA-GDP ratio that is largely homogeneous across countries.
    Date: 2009
  8. By: Margarita Rubio (Banco de España)
    Abstract: This paper studies the implications of cross-country housing market heterogeneity for a monetary union, also comparing the results with a flexible exchange rate and independent monetary policy setting. I develop a two-country new Keynesian general equilibrium model with housing and collateral constraints to explore this issue. Results show that in a monetary union, consumption reacts more strongly to monetary policy shocks in countries with high loan-to-value ratios (LTVs), a high proportion of borrowers or variable-rate mortgages. As for asymmetric technology shocks, output and house prices increase by more in the country receiving the shock if it can conduct monetary policy independently. I also fi nd that after country-specific housing price shocks consumption does not only increase in the country where the shock takes place, there is an international transmission. From a normative perspective, I conclude that housing-market homogenization in a monetary union is not beneficial per se, only when it is towards low LTVs or predominantly fixed-rate mortgages. Furthermore, I show that when there are asymmetric shocks but identical housing markets, it is beneficial to form a monetary union with respect to having a flexible exchange rate regime. However, for the examples I consider, net benefits decrease substantially if there is LTV heterogeneity and are negative under different mortgage contracts.
    Keywords: Housing market, collateral constraint, monetary policy, monetary union
    JEL: E32 E44 F36
    Date: 2009–08
  9. By: David Peel; Ivan Paya; E Pavlidis
    Abstract: This paper deals with the nonlinear modeling and forecasting of the dollar-sterling real exchange rate using a long span of data. Our contribution is threefold. First, we provide significant evidence of smooth transition dynamics in the series by employing a battery of recently developed in-sample statistical tests. Second, we investigate the small sample properties of several evaluation measures for comparing recursive forecasts when one of the competing models is nonlinear. Finally, we run a forecasting race for the post-Bretton Woods era between the nonlinear real exchange rate model, the random walk, and the linear autoregressive model. The winner turns out to be the nonlinear model, against the odds.
    Keywords: Real Exchange Rate, Nonlinearity, Robust Linearity Tests, Forecast Evaluation, Bootstrapping.
    Date: 2009
  10. By: Daniel Buncic
    Abstract: The forecast performance of the empirical ESTAR model of Taylor, Peel and Sarno (2001) is examined for 4 bilateral real exchange rate series over an out-of-sample eval-uation period of nearly 12 years. Point as well as density forecasts are constructed, considering forecast horizons of 1 to 22 steps head. The study finds that no forecast gains over a simple AR(1) specification exist at any of the forecast horizons that are considered, regardless of whether point or density forecasts are utilised in the evaluation. Non-parametric methods are used in conjunction with simulation techniques to learn about the models and their forecasts. It is shown graphically that the nonlinearity in the point forecasts of the ESTAR model decreases as the forecast horizon increases. The non-parametric methods show also that the multiple steps ahead forecast densities are normal looking with no signs of bi-modality, skewness or kurtosis. Overall, there seems little to be gained from using an ESTAR specification over a sim¬ple AR(1) model.
    Keywords: Purchasing power parity, regime modelling, non-linear real exchange rate models, ESTAR, forecast evaluation, density forecasts, non-parametric methods.
    JEL: C22 C52 C53 F31 F47
    Date: 2009–08–18

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