nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒10‒17
ten papers chosen by
Martin Berka
Massey University

  1. A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds By Christopher D. Carroll; Olivier Jeanne
  2. Stochastic Growth in the United States and Euro Area By Peter N. Ireland
  3. The Importance of Global Shocks for National Policymakers: Rising Challenges for Central Banks By Ansgar Belke; Andreas Rees
  4. Taking Home Bias Seriously: Absolute and Relative Measures Explaining Consumption Risk-Sharing By Holinski Nils; Kool Clemens; Muysken Joan
  5. The Feldstein-Horioka Fact By Domenico Giannone; Michele Lenza
  6. Medium Term Business Cycles in Developing Countries By Diego A. Comin; Norman Loayza; Farooq Pasha; Luis Serven
  7. A Financial Approach to the Balance of Payments By Peijie Wang
  8. Terms of Trade Effects: Theory and Methods of Measurement By Marshall Reinsdorf
  9. Does inflation targeting lead to excessive exchange rate volatility? By Thórarinn G. Pétursson
  10. The impact of oil price changes on Spanish and euro area consumer price inflation By Luis J. Álvarez; Samuel Hurtado; Isabel Sánchez; Carlos Thomas

  1. By: Christopher D. Carroll (Johns Hopkins University); Olivier Jeanne (Peterson Institute for International Economics)
    Abstract: We model the motives for residents of a country to hold foreign assets, including the precautionary motive that has been omitted from much previous literature as intractable. Our model captures many of the principal insights from the existing specialized literature on the precautionary motive, deriving a convenient formula for the economy's target value of assets. The target is the level of assets that balances impatience, prudence, risk, intertemporal substitution, and the rate of return. We use the model to shed light on two topical questions: The "upstream" flows of capital from developing countries to advanced countries, and the long-run impact of resorbing global financial imbalances.
    Keywords: Buffer Stock Saving, Net Foreign Assets, Sovereign Wealth Funds, Foreign Exchange Reserves, Small Open Economy
    JEL: C61
    Date: 2009–10
  2. By: Peter N. Ireland (Boston College)
    Abstract: This paper constructs a two-country stochastic growth model in which neutral and investment-specific technology shocks are nonstationary but cointegrated across economies. It uses this model to interpret data showing that while real investment has grown faster than real consumption in the United States since 1970, the opposite has been true in the Euro Area. The model, when estimated with these data, reveals that the EA missed out on the rapid investment-specific technological change enjoyed in the US during the 1990s; the EA, however, experienced more rapid neutral technological progress while the US economy stagnated during the 1970s.
    Keywords: growth, shocks, Euro area, technological change
    JEL: E32 F41 F43 O41 O47
    Date: 2009–09–30
  3. By: Ansgar Belke; Andreas Rees
    Abstract: We analyze the importance of global shocks for the global economy and national policy makers. More specifically, we investigate whether monetary policy has become less effective in the wake of financial globalization. We also examine whether there is increasing uncertainty for central banks due to globalization-driven changes in the national economic structure. A FAVAR framework is applied to derive structural shocks on a worldwide level and their impact on other global and also national variables. We estimate our macro model using quarterly data from Q1 1984 to Q4 2007 for the G7 countries plus the euro area. According to our results, global liquidity shocks are a driving force of the global economy and various national economies. However, some other shocks originating in house prices, GDP, technology and long-term interest rates play a role at the global level as well. These results prove to be robust across different specifications. Structural break tests indicate that global liquidity shocks have recently become more important as a determinant for house prices. In general, global variables have become more powerful over time in driving national variables.
    Keywords: Global shocks, international business cycle, international policy coordination and transmission, factor augmented vector autoregressive (FAVAR) models, common factors
    JEL: C22 E31 E32 F42
    Date: 2009
  4. By: Holinski Nils; Kool Clemens; Muysken Joan (METEOR)
    Abstract: Recent empirical work has shown that ongoing international financial integration facilitates cross-country consumption risk-sharing. While these studies typically employ absolutemeasures to account for a country''s integration in international capital markets, we devise a relative measure that is motivated by the International Capital Asset Pricing Model (I-CAPM) literature. Our measure captures the composition of a country''s international portfolio relative to the world portfolio, which all countries should optimally hold according to the I-CAPM. Using panel-data regression for a group of OECD countries during the financial globalization period 1980-2007, we show that the geography of international portfolioshelps to explain the degree of consumption risk-sharing obtained.
    Keywords: macroeconomics ;
    Date: 2009
  5. By: Domenico Giannone; Michele Lenza
    Abstract: This paper shows that general equilibrium effects can partly rationalize the high correlation between saving and investment rates observed in OECD countries. We find that once controlling for general equilibrium effects the saving-retention coefficient remains high in the 70’s but decreases considerably since the 80’s, consistently with the increased capital mobility in OECD countries.
    Keywords: Saving-Investment correlation, capital mobility, international comovement, dynamic factor model.
    JEL: C23 F32 F41
    Date: 2009
  6. By: Diego A. Comin (Harvard Business School, Business, Government and the International Economy Unit); Norman Loayza (Economics Research, World Bank Group); Farooq Pasha (Boston College, Economics); Luis Serven (World Bank - Office of the Chief Economist)
    Abstract: We build a two country asymmetric DSGE model with two features: (i) a product cycle structure determines the range of intermediate goods used to produce new capital in each country and (ii) there are investment flow adjustment costs in the developing economy. We calibrate the model to match the Mexico-US trade and FDI flows. The model is able to explain (i) why US shocks have a larger effect on Mexico than in the US and hence why the Mexican economy is more volatile than the US; (ii) why US business cycles lead over medium term fluctuations in Mexico and (iii) why Mexican consumption is not less volatile than output.
    Keywords: Business Cycles in Developing Countries, Co-movement between Developed and Developing economies, Volatility, Extensive Margin of Trade, Product Life Cycle, FDI.
    JEL: E3 O3
    Date: 2009–10
  7. By: Peijie Wang (University of Hull, IÉSEG School of Management)
    Abstract: A new approach to addressing balance of payments issues by analyzing the constituents of the financial account has been developed in this study and is referred to the financial approach accordingly. It pays attention to the different roles of foreign direct investment (FDI) and international portfolio investment (IPI), both of which have witnessed phenomenal increases in the last four decades. On the one hand, balance on the financial account exclusive of changes in official reserves is no longer negligible or inconsequential, and can no longer be neglected. On the other hand, FDI and IPI differ in countries’ international economic relations, with different effects of FDI and IPI on trade and trade balance in particular. Responding to a noticeably changed global economic environment, this new approach is effective in addressing balance of payments issues in a new era of globalization. The illuminating results lend support to the theoretical propositions, thereby opening up a new line of research for furthering theoretical and empirical inquiries.
    Keywords: financial account, foreign direct investment, international portfolio investment, trade balance, current account
    JEL: F41 F21
    Date: 2009–04
  8. By: Marshall Reinsdorf (Bureau of Economic Analysis)
    Abstract: Changes in export and import prices that increase the opportunity for trading gains raise real income, and changes in these prices that reduce trading gains reduce real income. Even though trade is less important for the US economy than it is for many other economies, trading gains have a median absolute effect on US real GDI of 0.2 percentage points in annual data.
    JEL: E60
    Date: 2009–01
  9. By: Thórarinn G. Pétursson
    Abstract: This paper analysis whether the adoption of inflation targeting affects excessive exchange rate volatility, i.e. the share of exchange rate fluctuations not related to economic fundamentals. Using a signal-extraction approach to estimate this excessive volatility in multivariate exchange rates in a sample of forty-four countries, the empirical results show no systematic relationship between inflation targeting and excessive exchange rate volatility. Joint analysis of the effects of inflation targeting and EMU membership shows, however, that a membership in the monetary union significantly reduces this excessive volatility. Together, the results suggest that floating exchange rates not only serve as a shock absorber but are also an independent source of shocks, and that these excessive fluctuations in exchange rates can be reduced by joining a monetary union. At the same time the results suggest that adopting inflation targeting does not by itself contribute to excessive exchange rate volatility.
    Date: 2009–10
  10. By: Luis J. Álvarez (Banco de España); Samuel Hurtado (Banco de España); Isabel Sánchez (Banco de España); Carlos Thomas (Banco de España)
    Abstract: This paper assesses the impact of oil price changes on Spanish and euro area consumer price inflation. We find, consistently with recent international evidence, that the inflationary effect of oil price changes is limited, even though crude oil price fluctuations are a major driver of inflation variability. The impact on Spanish inflation is found to be somewhat higher than in the euro area. Direct effects are increasing over time, reflecting the higher spending of households on refined oil products, whereas indirect ones, defined in broad terms, are losing importance.
    Keywords: oil prices, consumer price infl ation, Spanish and Euro area infl ation, DSGE models
    JEL: E20 E31 E37
    Date: 2009–10

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