nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒10‒31
fourteen papers chosen by
Martin Berka
Massey University

  1. A model of international cities: implications for real exchange rates By Mario J. Crucini; Hakan Yilmazkuday
  2. State-dependent pricing, local-currency pricing, and exchange rate pass-through By Anthony Landry
  3. International Risk Sharing During the Globalization Era By Akito Matsumoto; Robert P. Flood; Nancy P. Marion
  4. Commodity Terms of Trade: The History of Booms and Busts By Irina Tytell; Nikola Spatafora
  5. Cointegrated TFP Processes and International Business Cycles By Pau Rabanal; Vicente Tuesta; Juan F. Rubio-Ramirez
  6. Cross-country causes and consequences of the 2008 crisis: international linkages and American exposure By Andrew K. Rose; Mark M. Spiegel
  7. Purchasing power parity in Mexico: a historical note By Wallace, Frederick
  8. External Balance in Low Income Countries By Thierry Tressel; Lone Engbo Christiansen; Alessandro Prati; Luca Antonio Ricci
  9. Do uncertainty and technology drive exchange rates? By Pablo A. Guerron-Quintana
  10. Global economy dynamics? Panel data approach to spillover effects By Daco, Gregory; Hernandez Martinez, Fernando; Hsu, Li-Wu
  11. Managing the Impossible Trinity: The Case of Malaysia By Goh, Soo Khoon
  12. Controlling Capital? Legal Restrictions and the Asset Composition of International Financial Flows By Martin Schindler; Mahir Binici; Michael Hutchison
  13. Inflation Dynamics in the New EU Member States: How Relevant Are External Factors? By Alexander Mihailov; Fabio Rumler; Johann Scharler
  14. Causes of the Financial Crisis: An Assessment using UK Data By Martin, Christopher; Milas, C

  1. By: Mario J. Crucini; Hakan Yilmazkuday
    Abstract: We develop a model of cities each inhabited by two agents, one specializing in manufacturing, the other in retail distribution. The distribution sector represents the physical transformation of all internationally traded goods from the factory gate to the final consumer. Using a panel of micro-prices at the city level, we decompose the cross-sectional variance of long-run LOP deviations into the fraction due to distribution costs, trade costs and a residual. For the median good, trade costs account for 50 percent of the variance, distribution costs account for 10 percent with 40 percent of the variance unexplained. Since the sample of items in the data are heavily skewed toward traded goods, we also decompose the variance based on the median good on an expenditure-weighted basis. Now the tables turn, with distribution costs accounting for 43 percent, trade costs 36 percent and 21 percent of the variance unexplained.
    Keywords: Foreign exchange ; Pricing
    Date: 2009
  2. By: Anthony Landry
    Abstract: This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey, King, and Wolman (1999) in which firms price-discriminate across countries by setting prices in local currency. In this model, a domestic monetary expansion has greater spillover effects to foreign prices and foreign economic activity than an otherwise identical model with time-dependent pricing. In addition, the predictions of the state-dependent pricing model match the business-cycle moments better than the predictions of the time-dependent pricing model when driven by monetary policy shocks.
    Keywords: Pricing ; Foreign exchange rates ; Equilibrium (Economics) - Mathematical models ; Monetary policy ; Price discrimination
    Date: 2009
  3. By: Akito Matsumoto; Robert P. Flood; Nancy P. Marion
    Abstract: Though theory suggests financial globalization should improve international risk sharing, empirical support has been limited. We develop a simple welfare-based measure that captures how far countries are from the ideal of perfect risk sharing. We then take it to data and find international risk sharing has, indeed, improved during globalization. Improved risk sharing comes mostly from the convergence in rates of consumption growth among countries rather than from synchronization of consumption at the business cycle frequency. Our finding explains why many existing measures fail to detect improved risk sharing-they focus only on risk sharing at the business cycle frequency.
    Keywords: Business cycles , Consumption , Cross country analysis , Economic growth , Economic integration , Economic models , Globalization , International trade , Risk management , Welfare ,
    Date: 2009–09–28
  4. By: Irina Tytell; Nikola Spatafora
    Abstract: We compile a historical dataset covering nearly 40 years of booms and busts in the commodity terms of trade of over 150 countries. We discuss the characteristics of these events and their effects on macroeconomic performance and, in particular, compare the most recent commodity-price cycle with its historical precedents.
    Keywords: Business cycles , Commodities , Commodity price fluctuations , Commodity prices , Cross country analysis , Data analysis , Data collection , Terms of trade , Time series ,
    Date: 2009–09–25
  5. By: Pau Rabanal; Vicente Tuesta; Juan F. Rubio-Ramirez
    Abstract: A puzzle in international macroeconomics is that observed real exchange rates are highly volatile. Standard international real business cycle (IRBC) models cannot reproduce this fact. We show that TFP processes for the U.S. and the "rest of the world," is characterized by a vector error correction (VECM) and that adding cointegrated technology shocks to the standard IRBC model helps explaining the observed high real exchange rate volatility. Also we show that the observed increase of the real exchange rate volatility with respect to output in the last 20 year can be explained by changes in the parameter of the VECM.
    Keywords: Business cycles , Consumer goods , Demand , Economic models , Exchange rates , External shocks , Industrial production , International trade , Price elasticity , Prices , Private consumption , Productivity , Real effective exchange rates , Spillovers ,
    Date: 2009–09–29
  6. 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.
    Keywords: Financial crises ; Econometric models
    Date: 2009
  7. By: Wallace, Frederick
    Abstract: Purchasing power parity has been the subject of many empirical studies. Much of this work has focused on recent history in developed countries. This paper reports results of tests for nonlinear, mean reversion of the real exchange rate for a less-developed country, Mexico, using a previously unexploited data set of monthly observations for 1930-1960. The test results provide weak support for PPP.
    Keywords: purchasing power parity; nonlinear unit root
    JEL: C20 F31
    Date: 2009–10–01
  8. By: Thierry Tressel; Lone Engbo Christiansen; Alessandro Prati; Luca Antonio Ricci
    Abstract: This paper offers a coherent empirical analysis of the determinants of the real exchange rate, the current account, and the net foreign assets position in low income countries. The paper focuses on indicators specific to low income countries, such as the quality of policies and institutions, the special access to official external financing, and the role of shocks. In addition to more standard factors, we find that domestic financial liberalization is associated with higher current account balances and net foreign asset positions, while capital account liberalization is associated with lower current account balances and net foreign asset positions and with more appreciated real exchange rates. Negative exogenous shocks tend to raise (reduce) the current account in countries with closed (opened) capital accounts. Finally, foreign aid is progressively absorbed over time through net imports, and is associated with a more depreciated real exchange rate in the long-run.
    Keywords: Capital account , Capital flows , Cross country analysis , Current account , External financing , External shocks , Financial assets , Foreign investment , Low-income developing countries , Real effective exchange rates , Terms of trade , Time series ,
    Date: 2009–10–13
  9. By: Pablo A. Guerron-Quintana
    Abstract: This paper investigates the extent to which technology and uncertainty contribute to fluctuations in real exchange rates. Using a structural VAR and bilateral exchange rates, the author finds that neutral technology shocks are important contributors to the dynamics of real exchange rates. Investment-specific and uncertainty shocks have a more restricted effect on international prices. All three disturbances cause short-run deviations from uncovered interest rate parity.
    Keywords: Foreign exchange ; Uncertainty ; Technological innovations
    Date: 2009
  10. By: Daco, Gregory; Hernandez Martinez, Fernando; Hsu, Li-Wu
    Abstract: Over the past year, there has been considerable debate about how the slowing of the United States and other major developed economies affects output growth across the world. The main purpose of this paper is to establish relevant conclusions on how the U.S., Euro Area and Japan gross domestic product growth affect international business cycle fluctuations, with the objective of identifying the main factors that influence spillovers into other countries. Using panel data regression, we conclude that output growth in the U.S. and Euro area are significant in explaining output growth across countries. Depending on the specifications, trade linkages play a significant role while financial linkages with respect to the three regions does not (except in one particular specification). There are signs of potential omitted variable bias in some regression indicating that some relevant variables have not been taken into account. There is also clear evidence of a structural change in the transmission mechanism of shocks after 1985 – since when shocks have become more country-specific.
    Keywords: Output Growth; Trade and Financial Linkages; Structural Break; Cross- Section Panel Data.
    JEL: F40 C23
    Date: 2009–03
  11. By: Goh, Soo Khoon
    Abstract: This paper discusses how Malaysia manages the impossible trinity, the conjecture that a country cannot simultaneously maintain an open capital account, an exchange rate stability and monetary policy independence. Only two out of these three goals can be mutually consistent and policy makers have to decide which third goal to give up. The paper shows how Malaysia adopts an intermediate regime -- a regime that enables policy makers to manage all the three goals simultaneously. The impact of the global financial crisis on the Malaysian economy and the policy options for Malaysia to deal with the recent huge capital outflows are discussed in this paper. The willingness by Bank Negara Malaysia to allow a certain extent of exchange rate adjustments in the face of current global crisis reflects that Malaysia is not exempted from the impossible trinity
    Keywords: Impossible Trinity; Malaysia; Global Financial Crisis
    JEL: F41
    Date: 2009–08–07
  12. By: Martin Schindler; Mahir Binici; Michael Hutchison
    Abstract: How effective are capital account restrictions? We provide new answers based on a novel panel data set of capital controls, disaggregated by asset class and by inflows/outflows, covering 74 countries during 1995-2005. We find the estimated effects of capital controls to vary markedly across the types of capital controls, both by asset categories, by the direction of flows, and across countries' income levels. In particular, both debt and equity controls can substantially reduce outflows, with little effect on capital inflows, but only high-income countries appear able to effectively impose debt (outflow) controls. The results imply that capital controls can affect both the volume and the composition of capital flows.
    Keywords: Asset management , Capital account , Capital controls , Capital flows , Cross country analysis , Economic integration , Globalization , Time series ,
    Date: 2009–09–28
  13. By: Alexander Mihailov; Fabio Rumler; Johann Scharler
    Abstract: In this paper we evaluate the relative influence of external versus domestic inflation drivers in the 12 new European Union (EU) member countries. Our empirical analysis is based on the New Keynesian Phillips Curve (NKPC) derived in Galí and Monacelli (2005) for small open economies (SOE). Employing the Generalized Method of Moments (GMM), we find that the SOE NKPC is well supported in the new EU member states. We also find that the inflation process is dominated by domestic variables in the larger countries of our sample, whereas external variables are mostly relevant in the smaller countries.
    Keywords: New Keynesian Phillips Curve, small open economies, inflation dynamics, new EU member countries, GMM estimation
    JEL: C32 C52 E31 F41 P22
    Date: 2009–10
  14. By: Martin, Christopher; Milas, C
    Abstract: We present empirical evidence that the marked rise in liquidity in 2001-2007 was due to large and persistent current account deficits and loose monetary policy. If this increase in liquidity was a pre-condition for the financial crisis that began in July 2007, we can conclude that loose monetary and the deterioration in current account balances were causes of the financial crisis.
    Keywords: financial crisis; liquidity; monetary policy; global imbalances
    Date: 2009

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