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on Open MacroEconomics |
| By: | Charles Engel; Akito Matsumoto |
| Abstract: | Well-known empirical puzzles in international macroeconomics concern the large divergence of equilibrium outcomes for consumption across countries from the predictions of models with full risk sharing. It is commonly believed that these risk-sharing puzzles are related to another empirical puzzle-the home-bias in equity puzzle. However, we show in a series of dynamic models that the full risk sharing equilibrium may not require much diversification of equity portfolios when there is price stickiness of the degree typically calibrated in macroeconomic models. This conclusion holds under a range of assumptions about home bias in preferences, price setting as PCP or LCP, and with or without nominal wage stickiness as long as there is some price rigidity. |
| Keywords: | Asset prices , Bonds , Consumer goods , Domestic investment , Economic models , Exchange rates , Financial risk , Flexible pricing policy , Foreign exchange , Hedge funds , Price elasticity , Prices , Private investment , Stock prices , |
| Date: | 2009–07–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/138&r=opm |
| By: | Adolfson, Malin (Monetary Policy Department, Central Bank of Sweden); Laseén, Stefan (Monetary Policy Department, Central Bank of Sweden); Lindé, Jesper (Division of International Finance); Svensson, Lars E.O. (Executive Board) |
| Abstract: | This paper studies the transmission of shocks and the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank’s empirical dynamic stochastic general equilibrium (DSGE) model of a small open economy. The main results are, first, that the transmission of shocks depends substantially on the conduct of monetary policy, and second, that the trade-off between stabilizing CPI inflation and the output gap strongly depends on which concept of potential output in the output gap between output and potential output is used in the loss function. If potential output is defined as a smooth trend this trade-off is much more pronounced compared to the case when potential output is defined as the output level that would prevail if prices and wages were flexible. |
| Keywords: | Optimal monetary policy; instrument rules; open-economy DSGE models; propagation of shocks; impulse responses; output gap; potential output |
| JEL: | E52 E58 |
| Date: | 2009–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0232&r=opm |
| By: | Rickne, Johanna (Research Institute of Industrial Economics (IFN)) |
| Abstract: | Institutional and political characteristics affect the extent to which the real exchange rates of oil-exporting countries co-move with the oil price. In a simple theoretical model, good governance insulates real exchange rates from price volatility by generating a smoother pattern of fiscal spending over the resource price cycle. Empirical tests on a panel of 33 oil-exporting countries provide evidence that countries with high bureaucratic quality, strong and impartial legal systems, democratic governing systems, and more equal income distributions have real exchange rates which co-move less with the oil price. |
| Keywords: | Real Exchange Rate; Commodity Price; Governance; Cross-country Regression; Development |
| JEL: | F31 H11 Q48 |
| Date: | 2009–09–23 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0810&r=opm |
| By: | Olivier Cardi (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Panthéon-Assas - Paris II, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | An open economy version of the Baxter and King's [1993] model is constructed with habit formation to investigate the dynamic and steady-state effects of an expansionary budget policy. In line with empirical evidence, consumption is weakly responsive, investment is crowded out, the drop in savings drives the current account into deficit and government spending multipliers display small values. The sensitivity analysis shows that the effectiveness of the fiscal policy (1) decreases as habit persistence gets stronger, (2) increases with labor supply responsiveness, (3) falls with trade integration. Finally, we find that habit persistence weakens the connection between government spending multipliers and both the elasticity of labor supply and exports-to-GDP ratio. |
| Keywords: | Investment; Current Account; Habit Formation; Expenditure Multiplier. |
| Date: | 2009–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00420138_v1&r=opm |
| By: | David Hofman; Ruben Atoyan; Mauro Mecagni |
| Abstract: | This study contributes to the literature on capital account crises in two ways. First, our analysis of crisis episodes between 1994 and 2002 establishes a clear relationship between the persistence of crises, their complexity, and the intensity of movement of key macroeconomic variables. Second, we provide a systematic examination of the determinants of crisis duration. Our econometric analysis suggests that initial conditions and the external environment plays a key role in determining crisis persistence. The policy response also matters, but cannot offset a record of poor past policies. Overall, the results underscore the critical importance of crisis prevention efforts. |
| Keywords: | Capital account , Capital controls , Capital markets , Capital outflows , Data analysis , Economic models , Exchange rate regimes , External sector , Financial crisis , Fiscal policy , Monetary policy , |
| Date: | 2009–05–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/103&r=opm |
| By: | Emil Stavrev; Jörg Decressin |
| Abstract: | A fear about EMU was that in the absence of national currencies, country-specific shocks would result in greater current account divergences between member states. This paper finds that divergences across euro-area countries are smaller and have not risen relative to those across 13 other advanced economies with more flexible exchange rates. Also, the size of country-specific current account shocks in EMU countries is smaller and their persistence is greater than in the other advanced economies. However, these differences in current account dynamics do not appear related to different exchange rate dynamics. |
| Keywords: | Cross country analysis , Current account , Economic models , European Economic and Monetary Union , External shocks , Monetary unions , Real effective exchange rates , Regional shocks , |
| Date: | 2009–06–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/127&r=opm |
| By: | Andrei A. Levchenko; Julian di Giovanni |
| Abstract: | Countries that trade more with each other exhibit higher business cycle correlation. This paper examines the mechanisms underlying this relationship using a large cross-country industry-level panel dataset of manufacturing production and trade. We show that sector pairs that experience more bilateral trade exhibit stronger comovement. Vertical linkages in production are an important explanation behind this effect: bilateral international trade increases comovement significantly more in cross-border industry pairs that use each other as intermediate inputs. Our estimates imply that these vertical production linkages account for some 30% of the total impact of bilateral trade on the business cycle correlation. |
| Keywords: | Bilateral trade , Business cycles , Cross country analysis , Economic models , Globalization , Industrial production , Industrial sector , Industrial trade , International trade , Manufacturing sector , Trade relations , |
| Date: | 2009–08–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/181&r=opm |
| By: | Ugo Panizza; Valerie Cerra; Sweta Chaman Saxena |
| Abstract: | Although negative shocks have persistent effects on output on average, this paper shows that macroeconomic policies and the structure of the economy can influence the speed of recovery and mitigate the persistence of the shock. Indeed, monetary and fiscal stimulus and foreign aid can spur a rebound, with impacts that are asymmetrically stronger than in nonrecovery years. Real depreciation and the exchange rate regime also have asymmetric growth effects in a recovery year relative to other years of expansion. Recoveries are more sluggish in open economies, partly because fiscal policy is less effective than in closed economies. |
| Keywords: | Banking crisis , Business cycles , Concessional aid , Developed countries , Economic growth , Economic recession , Economic recovery , Emerging markets , Exchange rate regimes , External shocks , Fiscal policy , Monetary policy , Real effective exchange rates , Trade policy , |
| Date: | 2009–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/183&r=opm |
| By: | Kingsley I. Obiora |
| Abstract: | This paper uses VAR models to examine the magnitude and sources of growth spillovers to the Baltics from key trading partners, as well asfrom the real effective exchange rate (REER). Our results show there are significant cross-country spillovers to the Baltics with those from the EU outweighing spillovers from Russia. Shocks to the REER generally depress growth in the Baltics, and this intensifies over time. We also find that financial and trade channels dominate the transmission of spillovers to the region which partly explains the realization of downside risks to the Baltics from the global slowdown. |
| Keywords: | Commodity prices , Cross country analysis , Economic models , Estonia , European Union , External shocks , Financial crisis , Latvia , Lithuania , Real effective exchange rates , Regional shocks , Russian Federation , Spillovers , Trade integration , |
| Date: | 2009–06–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/125&r=opm |
| By: | Luc Eyraud |
| Abstract: | The purpose of this paper is to assess Madagascar's competitiveness in recent years, using both price and nonprice indicators and an exchange rate assessment of the currency. We estimate the distance between the equilibrium and the actual real exchange rates using three methods: the macroeconomic balance approach, the external sustainability approach, and the reduced-form equilibrium real exchange rate approach. These methods suggest that in the medium term the real exchange rate is only slightly overvalued. We also carry out a comparative analysis of nonprice indicators and find that Madagascar performs less favorably than its competitors on structural competitiveness. |
| Keywords: | Cross country analysis , Exchange rate assessments , Export markets , Global competitiveness , International trade , Madagascar , Price structures , Real effective exchange rates , |
| Date: | 2009–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/107&r=opm |
| By: | Olivier Cardi (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Panthéon-Assas - Paris II, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X) |
| Abstract: | One of the most prominent and consistent findings of the recent empirical literature on fiscal policy is that investment expenditure is crowded-out by public spending in the short-run. In this contribution, we address this empirical fact using a dynamic general equilibrium model and show that the introduction of a habit-forming behavior plays a major role in accommodating the observed negative relationship between investment and government expenditure. Our numerical experiments point out the role of consumption inertia in determining the reactions of the open economy: as habit persistence gets stronger, a fiscal expansion crowds-out real consumption by a smaller amount and investment by a larger one, while the current account enters into a greater deficit. |
| Keywords: | Investment; Habit Formation; Current Account; Fiscal Expansion |
| Date: | 2009–09–28 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00420132_v1&r=opm |
| By: | Bastos, Fabiano; Angelo Divino, Jose |
| Abstract: | The authors estimate a VAR and compute generalized impulse response to analyze the joint dynamics of four key macroeconomic variables in the small open economy of Mauritius. Results suggest that nominal exchange rate and interest rate have limited ability to impact output growth over the medium-run. Large error bands hinder analysis of the inflation output trade-off, but evidence points to a weak relationship in the short run as well. These findings are used to shed some light into the policy response to the current worldwide economic slowdown affecting Mauritius. |
| Keywords: | Debt Markets,Emerging Markets,Economic Stabilization,Currencies and Exchange Rates,Economic Theory&Research |
| Date: | 2009–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:5065&r=opm |
| By: | Kishor, N. Kundan; Ssozi, John |
| Abstract: | This paper investigates whether the East African Community (EAC) constitutes an optimum currency area (OCA) by estimating the degree and evolution of business cycle synchronization between the EAC countries. We also investigate whether the degree of business cycle synchronization has improved after signing of the EAC treaty in 1999. The degree of business cycle synchronization is estimated using an unobserved components model of structural shocks obtained from a structural VAR model. We then use a time-varying parameter model to estimate the evolution of business cycle synchronization. Our results indicate that the proportion of shocks that is common across different countries is small, implying weak synchronization. However, we also find that the degree of synchronization has improved after signing of the EAC treaty in 1999. |
| Keywords: | East African Community; Optimum Currency Area; Business Cycle Synchronization; Structural VAR; State-Space Model |
| JEL: | F15 E42 F33 |
| Date: | 2009–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:17645&r=opm |
| By: | Michael Kumhof; Isabel K. Yan |
| Abstract: | Several emerging economies have, until recently, experienced large government surpluses and accelerating foreign exchange reserve accumulation. This has been accompanied by economic booms, exchange rate appreciations and in some cases increases in domestic inflation. We show that one way to understand these episodes is as manifestations of balance of payments anti-crises, as reflecting the perception that the government intends to discontinue its accumulation of reserves in the near future. The end-phase of such crises is characterized by nominal interest rates approaching their zero lower bound in accelerating fashion and, if the government targets CPI inflation, by fast increasing domestic inflation. |
| Keywords: | Balance of payments , Current account surpluses , Data analysis , Economic models , Emerging markets , Exchange rate appreciation , Fiscal policy , Foreign exchange reserves , Inflation , Monetary policy , Reserves accumulation , |
| Date: | 2009–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/134&r=opm |
| By: | Pelin Berkmen |
| Abstract: | This paper presents a version of the global integrated monetary fiscal (GIMF) model adapted and calibrated to the Argentine economy. The model replicates the effect of the strong improvement in Argentina's terms of trade stemming from higher world commodity prices as well as other key economic trends in Argentina during the period 2003-2007. The model can be used to assess the potential impact of different combinations of monetary and fiscal policies on output, inflation, and the external trade. |
| Keywords: | Argentina , Commodity prices , Demand , Economic models , External shocks , Fiscal policy , Inflation , International trade , Monetary policy , Price increases , Revenues , Terms of trade , Time series , |
| Date: | 2009–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/117&r=opm |
| By: | Dong He (Research Department, Hong Kong Monetary Authority); Frank Leung (Research Department, Hong Kong Monetary Authority); Philip Ng (Research Department, Hong Kong Monetary Authority) |
| Abstract: | In this paper we attempt to delineate conceptual issues relating to the definition of capital flows, and introduce a framework that organises survey data and accounting information at different time horizons to form a judgment on the nature and scale of fund flows in Hong Kong. Given the complexity of international financial transactions in Hong Kong, cross-border capital flows may not correspond closely to fund flows into and out of the Hong Kong dollar. A comprehensive view on the scale and nature of capital flows in Hong Kong requires the joint analysis of both monetary and Balance of Payments statistics, in addition to information gathered through market intelligence. We then apply the monitoring framework to analyse four episodes of large fund flows between 2003 and mid-2009. |
| Keywords: | Capital flows; Fund flows; Hong Kong; Balance of Payments; External claims and liabilities of banks; Monetary Survey |
| JEL: | F21 F32 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:hkg:wpaper:0916&r=opm |
| By: | Theo S. Eicher; Christian Henn |
| Abstract: | The introduction of the euro generated substantial interest in measuring the impact of currency unions (CUs) on trade flows. Rose's (2000) initial estimates suggested a tripling of trade and created a literature in search of "more reasonable" CU effects. A recent meta-analysis of this literature shows that subsequent papers quantify CU trade impacts at 30-90 percent. However, most recent studies use shorter time series and fewer countries than Rose in his original work. We revisit Rose's original benchmark, extend the dataset, and address Baldwin's (2006) critiques regarding the proper specification of gravity models in large panels by simultaneously accounting for multilateral resistance and unobserved bilateral heterogeneity. This produces a robust average CU trade effect of 45 percent. Yet, the trade impacts of individual CUs vary substantially and are generally lower than those of preferential trade agreements (PTAs). Our revised benchmark can be used as a yardstick for future studies to delineate how estimates differ due to new data or differences in econometric specifications. |
| Keywords: | Bilateral trade , Economic models , Markets , Monetary systems , Monetary unions , Trade integration , Trade relations , |
| Date: | 2009–09–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/186&r=opm |