nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒09‒26
thirteen papers chosen by
Martin Berka
Massey University

  1. On Global Currencies By Frankel, Jeffrey
  2. Commodity prices, commodity currencies, and global economic developments By Jan J. J. Groen; Paolo A. Pesenti
  3. Globalization and Individual Gains from Trade By Kristian Behrens; Yasusada Murata
  4. Sources of exchange rate fluctuations: are they real or nominal? By Luciana Juvenal
  5. Exchange-Rate Pass Through, Openness, Inflation, and the Sacrifice Ratio By Joseph P. Daniels; David D. VanHoose
  6. Sticky Wages, Incomplete Pass-Through and Inflation Targeting: What is the Right Index to Target? By Salem M. Abo-Zaid
  7. Cross-Country Causes and Consequences of the 2008 Crisis: International Linkages and American Exposure By Andrew K. Rose; Mark M. Spiegel
  8. A Century of Purchasing Power Parity Confirmed: The Role of Nonlinearity By Kim, Hyeongwoo; Moh, Young-Kyu
  9. Imports, Pass-Through, and the Structure of Retail Markets By Horst Raff; Nicolas Schmitt
  10. Modelling International Linkages for Large Open Economies: US and Euro Area By Mardi Dungey; Denise R Osborn
  11. What Makes Currencies Volatile? An Empirical Investigation By Michael Bleaney; Manuela Francisco
  12. Modelling Global Trade Flows: Results from a GVAR Model. By Matthieu Bussière; Alexander Chudik; Giulia Sestieri
  13. Bubbles, External Imbalances & Demand for International Liquidity in the Bretton Woods II System By Andrea Ricci

  1. By: Frankel, Jeffrey (Harvard University)
    Abstract: I approach the state of global currency issues by identifying eight concepts that I see as having recently "peaked" and eight more that I see as currently rising in relevance. Those that I see as having already seen their best days are: the G-7, global savings glut, corners hypothesis, proliferating currency unions, inflation targeting (narrowly defined), exorbitant privilege, Bretton Woods II, and currency manipulation. Those that I see as receiving increased emphasis in the future are: the G-20, the IMF, SDR, credit cycle, reserves, intermediate exchange rate regimes, commodity currencies, and multiple international currency system.
    Date: 2009–09
  2. By: Jan J. J. Groen; Paolo A. Pesenti
    Abstract: In this paper, we seek to produce forecasts of commodity price movements that can systematically improve on naive statistical benchmarks. We revisit how well changes in commodity currencies perform as potential efficient predictors of commodity prices, a view emphasized in the recent literature. In addition, we consider different types of factor-augmented models that use information from a large data set containing a variety of indicators of supply and demand conditions across major developed and developing countries. These factor-augmented models use either standard principal components or the more novel partial least squares (PLS) regression to extract dynamic factors from the data set. Our forecasting analysis considers ten alternative indices and sub-indices of spot prices for three different commodity classes across different periods. We find that, of all the approaches, the exchange-rate-based model and the PLS factor-augmented model are more likely to outperform the naive statistical benchmarks, although PLS factor-augmented models usually have a slight edge over the exchange-rate-based approach. However, across our range of commodity price indices we are not able to generate out-of-sample forecasts that, on average, are systematically more accurate than predictions based on a random walk or autoregressive specifications.
    Keywords: Commodity exchanges ; Foreign exchange rates ; Commodity futures ; Regression analysis ; Forecasting
    Date: 2009
  3. By: Kristian Behrens; Yasusada Murata
    Abstract: We analyze the impact of globalization on individual gains from trade in a general equilibrium model of monopolistic competition featuring product diversity, pro-competitive effects and income heterogeneity between and within countries. We show that, although trade reduces markups in both countries, its impact on variety depends on their relative position in the world income distribution: product diversity in the lower income country always expands, while that in the higher income country may shrink. When the latter occurs, the richer consumers in the higher income country may lose from trade because the relative importance of variety versus quantity increases with income. We illustrate this effect using data on GDP per capita and population for 186 countries, as well as parameter estimates for domestic income distributions. Our results suggest that U.S. trade with countries of similar GDP per capita makes all agents in both countries better off, whereas trade with countries having lower GDP per capita may adversely affect up to 11% of the U.S. population.
    Keywords: Income heterogeneity, product diversity, pro-competitive effects, general equilibrium, monopolistic competition
    JEL: D43 F12 F15
    Date: 2009
  4. 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
  5. By: Joseph P. Daniels (Center for Global and Economic Studies, Marquette University); David D. VanHoose (Hanmaker School of Business, Baylor University)
    Abstract: Considerable recent work has reached mixed conclusions about whether and how globalization affects the inflation-output trade-off and realized inflation rates. In this paper, we utilize cross-country data to provide evidence of interacting effects between a greater extent of exchange-rate pass through and openness to international trade as factors that we find both contribute to lower inflation. The interplay between the inflation effects of pass through and openness suggest that both factors may influence the terms of the output-inflation trade-off. We develop a simple theoretical model showing how both pass through and openness can interact to influence the sacrifice ratio, and we empirically explore the nature of the interplay between the two variables as factors influencing the sacrifice ratio. Our results indicate that a greater extent of pass through depresses the sacrifice ratio and that once the extent of pass through is taken into account alongside other factors that affect the sacrifice ratio, the degree of openness to international trade exerts an empirically ambiguous effect on the sacrifice ratio.
    Keywords: Pass Through, Openness, Sacrifice Ratio
    JEL: F40 F41 F43
    Date: 2009–09
  6. By: Salem M. Abo-Zaid
    Abstract: This paper studies monetary policy rules in a small open economy with Inflation Targeting, incomplete pass-through and rigid nominal wages. The paper shows that, when nominal wages are fully flexible and pass-through is low to moderate, the monetary authority should target the consumer price index (CPI) rather than the Domestic Price Index (DPI). When pass-through is high, an economy with high degrees of nominal wage rigidity and wage indexation should either target the CPI or fully stabilize nominal wages. The results of the paper suggest that, by committing to a common monetary policy in a common-currency area, some countries may not be following the right monetary policy rules.
    Keywords: Monetary policy rules; Inflation Targeting ; Consumer Price Index; Domestic Price Index; Exchange rate pass-through; Nominal wage rigidity; Open economy.
    JEL: E31 E52 E58 E61 F31
    Date: 2009–09–23
  7. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a cross-section of 85 countries; we focus on international linkages that may have allowed the crisis to spread across countries. Our model of the cross-country incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. The causes we consider are both national (such as equity market run-ups that preceded the crisis) and, critically, international financial and real linkages between countries and the epicenter of the crisis. We consider the United States to be the most natural origin of the 2008 crisis, though we also consider six alternative sources of the crisis. A country holding American securities that deteriorate in value is exposed to an American crisis through a financial channel. Similarly, a country which exports to the United States is exposed to an American downturn through a real channel. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to find strong evidence that international linkages can be clearly associated with the incidence of the crisis. In particular, countries heavily exposed to either American assets or trade seem to behave little differently than other countries; if anything, countries seem to have benefited slightly from American exposure.
    JEL: E65 F30
    Date: 2009–09
  8. By: Kim, Hyeongwoo; Moh, Young-Kyu
    Abstract: Taylor (2002) claims that Purchasing Power Parity (PPP) has held over the 20th century based on strong evidence of stationarity for century-long real exchange rates for 20 countries. Lopez et al. (2005), however, found much weaker evidence of PPP with alternative lag selection methods. We reevaluate Taylor’s claim by implementing a recently developed nonlinear unit root test by Park and Shintani (2005). We find strong evidence of nonlinear mean-reversion in real exchange rates that confirms Taylor’s claim. We also find a possible misspecification problem in using the ESTAR model that may not be detected with Taylor-approximation based tests.
    Keywords: Purchasing Power Parity; Transition Autoregressive Process; inf-t Unit Root Test
    JEL: C22 F31
    Date: 2009–01
  9. By: Horst Raff; Nicolas Schmitt
    Abstract: We construct a model of trade with heterogeneous retailers to examine the effects of trade liberalization on retail market structure, imports and social welfare. We are especially interested in studying the degree of pass-through of import into retail prices and the effects of retail market regulation. The paper shows that the degree of pass-through may be large when market structure effects are taken into account, and that restrictions on retailing may have significant effects on imports and the degree of pass-through. The paper helps explain the apparent discrepancy between the low observed degree of pass-through and the large benefit that consumers seem to derive from trade liberalization
    Keywords: international trade, retailing, pass-through, firmheterogeneity
    JEL: F12 L11
    Date: 2009–09
  10. By: Mardi Dungey; Denise R Osborn
    Abstract: Empirical modelling of the international linkages between the Euro Area and the US requires an open economy specification. This paper proposes and implements a structural VECM framework which imposes long run and short run cross-economy restrictions based on theoretically motivated restrictions and empirically supported dominance assumptions. The SVECM distinguishes between permanent and temporary shocks in a system where one cross-economy cointegrating relationship links output levels. In addition, the short run dynamics incorporate both contemporaneous interactions and feedbacks between the two economies. Importantly, greater empirical coherence is obtained by allowing for more direct inflationary effects between the two economies than considered in other recent analyses. Estimated using data from 1983Q1 to 2007Q4, the results demonstrate the cross-country impact of shocks. Although US shocks generally produce stronger effects, nevertheless some shocks originating in the Euro Area have significant effects on the US, particularly for inflation and interest rates.
    Date: 2009
  11. By: Michael Bleaney (School of Economics, University of Nottingham, Nottingham); Manuela Francisco (Universidade do Minho - NIPE)
    Abstract: Real effective exchange rate volatility is examined for 90 countries using monthly data from January 1990 to June 2006. Volatility decreases with openness to international trade and per capita GDP, and increases with inflation, particularly under a horizontal peg or band, and with terms - of - trade volatility. The choice of exchange rate regime matters. After controlling for these effects, and independent float adds at least 45% to the standard deviation of the real effective exchange rate, relative to a conventional peg, but must other regimes make little difference. The results are robust to alternative volatility measures and to sample selection bias.
    Keywords: Exchange rate regimes; Inflation; Volatility
    JEL: F31
    Date: 2009
  12. By: Matthieu Bussière (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alexander Chudik (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Giulia Sestieri (University of Rome Tor Vergata, Via Columbia, 2, 00133 Roma, Italy.)
    Abstract: This paper uses a Global Vector Auto-Regression (GVAR) model in a panel of 21 emerging market and advanced economies to investigate the factors behind the dynamics of global trade flows, with a particular view on the issue of global trade imbalances and on the conditions of their unwinding. The GVAR approach enables us to make two key contributions: first, to model international linkages among a large number of countries, which is a key asset given the diversity of countries and regions involved in global imbalances, and second, to model exports and imports jointly. The latter proves to be very important due to the internationalisation of production and the high import content of exports. The model can be used to gauge the effect on trade flows of various scenarios, such as an output shock in the United States, a shock to the US real effective exchange rate and shocks to foreign (German and Chinese)variables. Results indicate in particular that world exports respond much more to a (normalised) shock to US output than to a real effective depreciation of the dollar. In addition, the model can be used to monitor trade developments, such as the sharp contraction in world trade that took place in the wake of the financial crisis. While the fall in imports seems well accounted for by the model,the fall in exports of several countries remains partly unexplained, suggesting perhaps that specific factors might have been at play during the crisis. JEL Classification: F10, F17, F32, C33.
    Keywords: International trade, global imbalances, global VAR, exchange rates, trade elasticities.
    Date: 2009–09
  13. By: Andrea Ricci (Dipartimento di Economia e Metodi Quantitativi, Università di Urbino (Italy))
    Abstract: Global structural factors both monetary and real played a prominent role in the burst of subprime crisis: 1) the Bretton Woods II international monetary system; 2) the reduction of US real investment return compared with competing countries. We develop a theoretical model to analyze the impact of these factors and macroeconomic policies on US current account and asset prices. The excess saving of U.S. nonfinancial corporations from 2000-2001 has undermined the stability of the Bretton Woods II system. Accommodative US monetary and fiscal policies have mitigated the imbalances but in the long term structural factors have prevailed. Only a recovery of US real capital profitability can ensure long run coexistence between present model of global development and current international monetary system.
    Keywords: Current Account, Bretton Woods II, External imbalances, Saving Investment, International Liquidity, Asset Prices.
    JEL: F41 F32 E41 E42
    Date: 2009

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