nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒09‒11
nine papers chosen by
Martin Berka
Massey University

  1. International Consumption Risk Sharing with Incomplete Goods and Asset Markets By Sven Blank
  2. On the Unstable Relationship between Exchange Rates and Macroeconomic Fundamentals By Philippe Bacchetta; Eric van Wincoop
  3. Macroeconomic Volatility and Exchange Rate Pass-through under Internationalized Production By Aurélien Eyquem; Gunes Kamber
  4. The Real and Financial Implications of the Global Saving Glut: A Three-Country Model By Jean-Baptiste Gossé
  5. Sources of exchange rate fluctuations: are they real or nominal? By Luciana Juvenal
  6. The Macroeconomic Effects of European Financial Development: A Heterogenous Panel Analysis By Sean Holly; Mehdi Raissi
  7. Structural Change and Counterfactual Inflation-Targeting in Hong Kong By Paul D. McNelis
  8. The impact of the global financial crisis on business cycles in Asian emerging economies By Korhonen, Iikka; Fidrmuc , Jarko
  9. Vulnerabilities in Central and Eastern European countries: Dynamics of asymmetric shocks By Aleksandra Zdzienicka-Durand

  1. By: Sven Blank
    Abstract: Perfect consumption risk sharing requires both, frictionless goods as well as frictionless financial market integration. This project aims at analyzing the consequences of both type of frictions for the allocation of risk across countries in a unified framework. To this end, the theoretical model by Ghironi and Melitz (2005) is extended to allow for trade in international equities. This setup incorporates impediments to international trade in goods and assets. Preliminary results indicate that both type of frictions matter for international consumption risk sharing.
    Keywords: International portfolio choice, consumption risk sharing, trade frictions, financial market frictions
    JEL: F32 F42
    Date: 2009
  2. By: Philippe Bacchetta (University of Lausanne, Centre for Economic Policy Research, Hong Kong Institute for Monetary Research); Eric van Wincoop (University of Virginia, National Bureau of Economic Research, Hong Kong Institute for Monetary Research)
    Abstract: It is well known from anecdotal, survey and econometric evidence that the relationship between the exchange rate and macro fundamentals is highly unstable. This could be explained when structural parameters are known and very volatile, neither of which seems plausible. Instead we argue that large and frequent variations in the relationship between the exchange rate and macro fundamentals naturally develop when structural parameters in the economy are unknown and change very slowly. We show that the reduced form relationship between exchange rates and fundamentals is driven not by the structural parameters themselves, but rather by expectations of these parameters. These expectations can be highly unstable as a result of perfectly rational "scapegoat" effects. This happens when parameters can potentially change much more in the long run than the short run. This generates substantial uncertainty about the level of parameters, even though monthly or annual changes are small. This mechanism can also be relevant in other contexts of forward looking variables and could explain the widespread evidence of parameter instability found in macroeconomic and financial data. Finally, we show that parameter instability has remarkably little effect on the volatility of exchange rates, the in-sample explanatory power of macro fundamentals and the ability to forecast out of sample.
    Date: 2009–08
  3. By: Aurélien Eyquem (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Gunes Kamber (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, C - centre d'Etudes des Politiques Economiques de l'université d'Evry - Université d'Evry-Val d'Essonne)
    Abstract: This paper shows that internationalized production, modelled as trade in intermediate goods, challenges the standard result according to which exchange rate volatility insulates small open economies from external shocks. Movements of relative prices affect the economy through an additional channel, denoted as the cost channel. We show that this channel also acts as an automatic stabilizer and that macroeconomic volatility is dramatically reduced when trade in intermediate goods is taken into account. Finally, trade in intermediate goods affects the exchange rate pass-through to consumption prices and may contribute explaining the puzzle described by McCallum & Nelson (2000).
    Keywords: Small open economy ; internationalized production ; macroeconomic volatility ; exchange rate pass-through
    Date: 2009
  4. By: Jean-Baptiste Gossé (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: The model presented in this paper has two objectives. First, it models global imbalances in a simple way while conserving real and - nancial approaches. This double approach is necessary because Global Imbalances are due to the conjunction of nancial and real phenomena: the increase in the price of commodities, the accumulation of foreign reserves by the Asian central banks, the limited absorption capacity of the OPEC countries, the insucient development of the Asian nancial system and the perception of better returns in the US. The second objective is to model the global saving glut hypothesis and to show its implications. We start with a model which consists of three identical countries and then we replicate the current pattern of global imbalances in introducing three asymmetries: a xed exchange rate between Asia and the United States, a limited absorption capacity in Asia and endogenous propensity to spend in the United States. In order to avoid the recession linked to the increase of their propensity to import, the United States increase their propensity to spend. This adjustment has a cost: (i) the Global Imbalances grow quickly with an increase of current account imbalances and net foreign assets in both the US and Asia ; (ii) the euro area supports an appreciation of its exchange rate which put it in a long depression.
    Keywords: International Macroeconomics, Global Imbalances, Balance of Payments, International Finance , Simulation and Forecast
    Date: 2009–08–26
  5. By: Luciana Juvenal
    Abstract: I analyze the role of real and monetary shocks on the exchange rate behavior using a structural vector autoregressive model of the US vis-à-vis the rest of the world. The shocks are identified using sign restrictions on the responses of the variables to orthogonal disturbances. These restrictions are derived from the predictions of a two-country DSGE model. I find that monetary shocks are unimportant in explaining exchange rate fluctuations. By contrast, demand shocks explain between 23% and 38% of exchange rate variance at 4-quarter and 20-quarter horizons, respectively. The contribution of demand shocks plays an important role but not of the order of magnitude sometimes found in earlier studies. My results, however, support the recent focus of the literature on real shocks to match the empirical properties of real exchange rates.
    Keywords: Foreign exchange rates ; Vector autoregression
    Date: 2009
  6. By: Sean Holly; Mehdi Raissi
    Abstract: This paper investigates the macroeconomic benefits of international financial integration and domestic financial sector development for the European Union. The sample consists of 26 European countries with annual data during the period 1970.2004. We attempt to exploit more fully the temporal dimension in the data by making use of the common correlated effects (CCE) estimator. We also account for the nonstationarity of time series by employing the cross-section augmented panel unit root test of Pesaran (2007) and recently developed panel cointegration techniques. We check the robustness of these results by using the fully modified OLS method of Pedroni (2000). Our empirical results suggest a relationship between domestic financial sector development and labour productivity. We report evidence that real GDP per worker is positively linked to a measure of international financial integration (stock of international financial assets and liabilities expressed as a ratio to GDP). We also try to disentangle the effects on real GDP per worker of di¤erent types of capital flows (FDI, Portfolio equity, Debt) and are able to identify a significant positive effect on GDP per worker of debt inflows which we could attribute to the institutional environment that has been fostered by the European Union.
    Date: 2009
  7. By: Paul D. McNelis (Hong Kong Institute for Monetary Research, Fordham University)
    Abstract: This paper evaluates structural change and adjustment in Hong Kong with Bayesian estimation of a small open economy with a fixed exchange rate show little or no change in the structural parameters or volatility estimates of the structural shocks before and after the Asian crisis and the experience of deflation. Terms of trade shocks are the most important sources of volatility for inflation in both periods. A counterfactual simulation shows that the dispersion of consumption and inflation volatility may have slightly decreased with an inflation-targeting regime with no uncertainty, but interest-rate volatility would have increased by factors of 50 to 100 percent.
    Keywords: Bayesian Estimation, Structural Change, Inflation Targeting
    JEL: E62 F41
    Date: 2009–07
  8. By: Korhonen, Iikka (BOFIT); Fidrmuc , Jarko (BOFIT)
    Abstract: We analyze the transmission of global financial crisis to business cycles in China and India. The pattern of business cycles in emerging Asian economies generally displays a low degree of synchronization with the OECD countries, which is consistent with the decoupling hypothesis. By contrast, however, the current financial crisis has had a significant effect on economic developments in emerging Asian economies. Applying dynamic correlations, we find wide differences for different frequencies of cyclical development. More specifically, at business cycle frequencies, dynamic correlations are typically low or negative, but they are also influenced most by the global financial crisis. Finally, we find a significant link between trade ties and dynamic correlations of GDP growth rates in emerging Asian countries and OECD countries.
    Keywords: financial crisis; business cycles; decoupling; trade; dynamic correlation
    JEL: E32 F15 F41
    Date: 2009–08–04
  9. By: Aleksandra Zdzienicka-Durand (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: In this work, we use the VAR and space-state methodology to analyze how the recent developments in 20 European countries have modified the dynamics of structural shocks. Our results confirm a visible progress in (predominated output fluctuations) supply shocks convergence between the CEECs and the euro zone, but also corroborate a positive initial impact of EMU creation and EU enlargement supply shocks correlation. In particular, we find that Croatia, Poland, Slovakia and Slovenia are good candidates to the euro adoption under condition of greater fiscal policy alignment.
    Keywords: Structural Shocks; CEECs; VAR model; Kalman filter; Euro Adoption
    Date: 2009

This nep-opm issue is ©2009 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.