nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2009‒11‒27
thirteen papers chosen by
Martin Berka
Massey University

  1. Current Account Fact and Fiction By David Backus; Espen Henriksen; Frederic Lambert; Christopher Telmer
  2. Inflation Targeting and Business Cycle Synchronization By Flood, Robert P; Rose, Andrew K
  3. Government Purchases and the Real Exchange Rate By Kollmann, Robert
  4. Fiscal Deficits and Current Account Deficits By Michael Kumhof; Douglas Laxton
  5. A Tractable Model of Precautionary Reserves, Net Foreign Assets, or Sovereign Wealth Funds By Carroll, Christopher D; Jeanne, Olivier
  6. Two Orthogonal Continents? Testing a Two-country DSGE Model of the US and EU Using Indirect Inference By Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wickens, Michael R.
  7. DSGE-CH: A dynamic stochastic general equilibrium model for Switzerland By Cuche-Curti, Nicolas A.; Dellas, Harris; Natal, Jean-Marc
  8. Capital Flows to Developing Countries: The Allocation Puzzle By Pierre-Olivier; Olivier Jeanne
  9. International Business Cycle Accounting By Keisuke Otsu
  10. Limited Asset Market Participation and the Consumption-Real Exchange Rate Anomaly By Kollmann, Robert
  11. How Important is the Currency Denomination of Exports in Open-Economy Models? By Michael Dotsey; Margarida Duarte
  12. Exchange rate pass-through into Romanian price indices. A VAR approach By Cozmanca,Bogdan-Octavian; Manea, Florentina
  13. Macro-Hedging for Commodity Exporters By Damiano Sandri; Eduardo Borensztein; Olivier Jeanne

  1. By: David Backus; Espen Henriksen; Frederic Lambert; Christopher Telmer
    Abstract: With US trade and current account deficits approaching 6% of GDP, some have argued that the country is "on the comfortable path to ruin" and that the required "adjustment'' may be painful. We suggest instead that things are fine: although national saving is low, the ratios of household and consolidated net worth to GDP remain high. In our view, the most striking features of the world at present are the low rates of investment and growth in some of the richest countries, whose surpluses account for about half of the US deficit. The result is that financial capital is flowing out of countries with low investment and growth and into the US and other fast-growing countries. Oil exporters account for much of the rest.
    JEL: E21 F21 F32
    Date: 2009–11
  2. By: Flood, Robert P; Rose, Andrew K
    Abstract: Inflation targeting seems to have a small but positive effect on the synchronization of business cycles; countries that target inflation seem to have cycles that move slightly more closely with foreign cycles. Thus the advent of inflation targeting does not explain the decoupling of global business cycles, for two reasons. Indeed business cycles have not in fact become less synchronized across countries.
    Keywords: bilateral; data; empirical; GDP; insulation; regime
    JEL: F42
    Date: 2009–07
  3. By: Kollmann, Robert
    Abstract: Recent empirical research documents that an exogenous rise in government purchases in a given country triggers a persistent depreciation of its real exchange rate - which raises an important puzzle, as standard macro models predict an appreciation of the real exchange rate. This paper presents a simple model with limited international risk sharing that can account for the empirical real exchange rate response. When faced with a country-specific rise in government purchases, local households experience a negative wealth effect; they thus work harder, and domestic output increases. Under balanced trade (financial autarky) this supply-side effect is so strong that the terms of trade worsen, and the real exchange rate depreciates. In a bonds-only economy, an increase in government purchases triggers a real exchange rate depreciation, if the rise in government purchases is sufficiently persistent and/or labor supply is highly elastic.
    Keywords: government purchases; limited international risk sharing; real exchange rate
    JEL: E62 F36 F41
    Date: 2009–08
  4. By: Michael Kumhof; Douglas Laxton
    Abstract: The effectiveness of recent fiscal stimulus packages significantly depends on the assumption of non-Ricardian savings behavior. We show that, under the same assumption, fiscal deficits can have worrisome implications if they turn out to be permanent. First, if they occur in large countries they significantly raise the world real interest rate. Second, they cause a short run current account deterioration equal to around 50 percent of the fiscal deficit deterioration. Third, the longer run current account deterioration equals almost 75 percent for a large economy such as the United States, and almost 100 percent for a small open economy.
    Keywords: Budget deficits , Business cycles , Current account deficits , Economic models , Fiscal policy , Fiscal sustainability , Gross domestic product , Monetary policy , Private sector , Public debt , Savings ,
    Date: 2009–10–28
  5. By: Carroll, Christopher D; Jeanne, Olivier
    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; Capital Flows; Foreign Exchange Reserves; Net Foreign Assets; Small Open Economy; Sovereign Wealth Funds
    JEL: C61 F3
    Date: 2009–09
  6. By: Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick; Wickens, Michael R.
    Abstract: We examine a two country model of the EU and the US. Each has a small sector of the labour and product markets in which there is wage/price rigidity, but otherwise enjoys flexible wages and prices with a one quarter information lag. Using a VAR to represent the data, we find the model as a whole is rejected. However it is accepted for real variables, output and the real exchange rate, suggesting mis-specification lies in monetary relationships. The model highlights a lack of spillovers between the US and the EU.
    Keywords: Bootstrap; DSGE; indirect inference; New Classical; New Keynesian; Open economy model; VAR; Wald statistic
    JEL: C12 C32 C52 E1
    Date: 2009–07
  7. By: Cuche-Curti, Nicolas A. (Swiss National Bank); Dellas, Harris (University of Bern); Natal, Jean-Marc (Swiss National Bank)
    Abstract: This paper presents a DSGE (dynamic stochastic general equilibrium) model of the Swiss economy used since 2007 in the monetary policy decision process at the Swiss National Bank. In addition to forecasting the likely course of main macro variables under various scenarios for the Swiss economy, the model DSGE-CH serves as a laboratory for studying business cycles and examining the effects of actual and hypothetical monetary policies. The microfounded model DSGE-CH represents Switzerland as a small open economy with optimizing economic agents facing several real and nominal rigidities and exogenous foreign and domestic shocks. The comparison of the model’s implications with the real world indicates that DSGE-CH performs well along standard dimensions. It captures the overall stochastic structure of the Swiss economy as represented by the moments of its key macroeconomic variables; furthermore, it has appropriate dynamic properties, as judged by its impulse response functions. Finally, it quite accurately replicates the historical path of major Swiss variables.
    Keywords: DSGE; forecasting; small open economy; Switzerland
    JEL: E27 E52 E58
    Date: 2009–10–01
  8. By: Pierre-Olivier (University of California, Berkeley); Olivier Jeanne (Peterson Institute for International Economics)
    Abstract: The textbook neoclassical growth model predicts that countries with faster productivity growth should invest more and attract more foreign capital. We show that the allocation of capital flows across developing countries is the opposite of this prediction: capital seems to flow more to countries that invest and grow less. We then introduce wedges into the neoclassical growth model and find that one needs a saving wedge in order to explain the correlation between growth and capital flows observed in the data. We conclude with a discussion of some possible avenues for research to resolve the contradiction between the model predictions and the data.
    Keywords: Capital Flows, Productivity, Growth
    JEL: F36 F43
    Date: 2009–11
  9. By: Keisuke Otsu (Faculty of Liberal Arts, Sophia University (E-mail:
    Abstract: In this paper, I extend the business cycle accounting method a la Chari, Kehoe and McGrattan (2007) to a two-country international business cycle model and quantify the effect of the disturbances in relevant markets on the business cycle correlation between Japan and the US over the 1980-2008 period. This paper finds that disturbances in the labor market and production efficiency are important in accounting for the recent increase in the cross-country output correlation. If international financial market integration is important for considering the recent increase in cross-country output correlation, it must operate through an increase in the cross-country correlation of disturbances in the labor market and production efficiency, and not in the domestic investment market.
    Keywords: Business Cycle Accounting, International Business Cycles
    JEL: E32 F41
    Date: 2009–11
  10. By: Kollmann, Robert
    Abstract: Under efficient consumption risk sharing, as assumed in standard international business cycle models, a country’s aggregate consumption rises relative to foreign consumption, when the country’s real exchange rate depreciates. Yet, empirically, relative consumption and the real exchange rate are essentially uncorrelated. I show that this ‘consumption-real exchange rate anomaly’ can be explained by a simple model in which a subset of households trade in complete financial markets, while the remaining households lead hand-to-mouth (HTM) lives. HTM behavior also generates greater volatility of the real exchange rate and of net exports, which likewise brings the model closer to the data.
    Keywords: consumption; hand to mouth consumers; limited asset market participation; real exchange rate
    JEL: F36 F41
    Date: 2009–09
  11. By: Michael Dotsey; Margarida Duarte
    Abstract: We show that standard alternative assumptions about the currency in which firms price export goods are virtually inconsequential for the properties of aggregate variables, other than the terms of trade, in a quantitative open-economy model. This result is in contrast to a large literature that emphasizes the importance of the currency denomination of exports for the properties of open-economy models.
    Keywords: local currency pricing; producer currency pricing; international relative prices; exchange rates; nontraded goods; distribution services
    JEL: F3 F41
    Date: 2009–11–20
  12. By: Cozmanca,Bogdan-Octavian (Academy of Economic Studies Bucharest and National Bank of Romania); Manea, Florentina (RBS Romania)
    Date: 2009–11
  13. By: Damiano Sandri; Eduardo Borensztein; Olivier Jeanne
    Abstract: This paper uses a dynamic optimization model to estimate the welfare gains of hedging against commodity price risk for commodity-exporting countries. The introduction of hedging instruments such as futures and options enhances domestic welfare through two channels. First, by reducing export income volatility and allowing for a smoother consumption path. Second, by reducing the country's need to hold foreign assets as precautionary savings (or by improving the country's ability to borrow against future export income). Under plausibly calibrated parameters, the second channel may lead to much larger welfare gains, amounting to several percentage points of annual consumption.
    Keywords: Commodities , Commodity price fluctuations , Cross country analysis , Developing countries , Economic models , Export earnings , Export markets , Financial instruments , Financial risk , Hedge funds , International trade , Risk management ,
    Date: 2009–10–21

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