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on Open MacroEconomics |
| By: | Fabian Eser (Nuffield College, Oxford University, Oxford.) |
| Abstract: | This paper examines monetary policy in a currency union whose member countries exhibit heterogeneous rates of limited asset markets participation (LAMP). As a result risk sharing among member countries is imperfect and the monetary transmission mechanism can differ across countries. In the limit the elasticity of output to the union-wide nominal interest rate can be of opposite sign in different countries. I develop a tractable model in which the dispersion of asset markets participation (AMP) becomes a key parameter. While monetary policy can guarantee determinacy by following an active or passive rule depending on the sign of the interest-elasticity of output, ignoring dispersion can lead to incorrect computation of the sign and the size of the latter. Taking the heterogeneity into account is thus central for sound policy Furthermore, due to the failure of risk sharing, determinacy for union-aggregates does not guarantee determinacy in every member country. However, the more open a country is in trade terms, the greater the rate of LAMP for which the country still displays equilibrium determinacy. For complete openness, determinacy is guaranteed. This underlines the importance of risk sharing and trade integration for the functioning of a currency union. Considering the optimal union-wide targeting rule, a higher mean and dispersion of LAMP increase the desired inflation volatility and decrease the desired output volatility. The implied optimal Taylor rule shows that subject to the Taylor principle, the higher are mean and dispersion of LAMP, the softer should be the response of the nominal interest rate to expected inflation. |
| Keywords: | Monetary Union, Limited Asset Markets Participation, Heterogeneity, (Optimal) Monetary Policy, Real (In)determinacy, Sticky Prices |
| JEL: | E52 F41 E44 |
| Date: | 2009–11–19 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0916&r=opm |
| By: | Romain Restout |
| Abstract: | This contribution embeds the Balassa-Samuelson hypothesis in a general equilibrium model that combines monopolistic competition and markup variations to examine the determinants of relative prices of nontradables. The model emphasizes the role of markup variations as an important aspect driving relative price movements. Variations in the markup makes fiscal policy non-neutral and provides a strong magnification mechanism for shocks to productivity. The empirical evidence of these predictions are examined by using a panel cointegration framework. On the whole, the econometric findings support theoretical implications, suggesting that our model is more closely in line with data relative to the supply-side Balassa-Samuelson framework that abstracts from variations in the degree of competition. |
| Keywords: | Balassa-Samuelson effect, Monopolistic competition, Fiscal policy. |
| JEL: | E20 E62 F31 F41 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2009-39&r=opm |
| By: | Tino Berger; Bernd Kempa |
| Abstract: | This paper proposes a new approach to estimating equilibrium exchange rates for small open economies. We set up a simple structural model of output, the rate of in ation and the real exchange rate. These observed variables are explained by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate. Using Canadian data over 1974-2008 we jointly estimate the unobserved components and the structural pa- rameters using the Kalman lter and Bayesian technique. We nd that Canada's equilibrium exchange rate evolves smoothly and follows a trend depreciation. The transitory component is found to be very persistent but much more volatile than the equilibrium rate. |
| Keywords: | equilibrium exchange rate, unobserved components, Kalman lter, Bayesian analysis, Importance sampling |
| JEL: | C22 G12 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cqe:wpaper:0509&r=opm |
| By: | Se-Eun Jeong (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII) |
| Abstract: | Since the mid-1990s, we observe an increase of world current account imbalances. These imbalances have only been partially reduced since the burst of the crisis in 2007. They reflect, to some extent, exchange rate misalignments, an issue which has been frequently studied in the literature. However, imbalances, which have reinforced in the 2000s, are also important inside the Euro area. This analysis cannot be reduced to simple estimates of euro misalignment at the world level because of specific constraints that exist for each member of the Euro area. This article aims to examine to what extent intra-European imbalances reflect exchange rate misalignments for each “national euro”. |
| Keywords: | Equilibrium Exchange Rate; Current Account Balance; Macroeconomic Balance |
| Date: | 2009–11–24 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00435836_v1&r=opm |
| By: | Viktors Ajevskis; Kristine Vitola |
| Abstract: | In this paper we estimate a small open economy DSGE model for Latvia following Lubik and Schorfheide (2007) using Bayesian methods. The estimates of the structural parameters fall within plausible ranges. Simulation results suggest that under inflation targeting inflation turns out to be more volatile than under the peg in the case of Latvia. Additional concern for output stabilisation accounts for lower inflation variability while it is still higher than under existing exchange rate regime with ±1% fluctuation bands. The model results therefore support the existing exchange rate policy. |
| Keywords: | DSGE, small open economy, exchange rate policy, Bayesian estimation |
| JEL: | C11 C3 C51 D58 E58 F41 |
| Date: | 2009–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:ltv:wpaper:200904&r=opm |
| By: | Yushi Yoshida (Faculty of Economics, Kyushu Sangyo University) |
| Abstract: | Using a sample from January 1988 to December 2005 for exports of five Japanese major ports to six destination countries, we examine the effect of market share (with respect to competitors from the same country) on exchange rate pass-through (henceforth, ERPT). Our dataset is unique, allowing us to control for market shares among competing exporters with the same nationality. We provide empirical evidence that the effect of market shares on exchange rate pass-through is consistent with the findings of Feenstra et al. (1996), who show a non-linear relationship between market share and exchange rate pass-through. However, our evidence also indicates that the relationship between market share and exchange rate sensitively relies on market characteristics. With regard to recent studies on declining ERPT, our evidence shows that the ERPTs of Japanese exports are relatively stable over the last two decades and any observed changes are of small magnitude. Especially for the U.S., our evidence indicates that Japanese exports do not account for the recent decline in ERPT of U.S. imports. |
| Keywords: | Exchange rate pass-through; Local ports; Market share |
| JEL: | F12 F14 F31 F41 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:kyu:dpaper:37&r=opm |
| By: | Tervala, Juha (University of Turku) |
| Abstract: | This study analyses cross-country correlations of stock prices (values of firms) using the basic New Open Economy Macroeconomics model. We show that cross-country correlations of stock prices greatly depend on the currency of export pricing in the case of monetary shocks but not notably for temporary technology shocks. In the case of a money supply shock, the producer (local) currency pricing version of the model generates a negative (positive) cross-country correlation of stock prices. |
| Keywords: | stock prices; international business cycles; open economy |
| JEL: | E32 F30 F41 G10 |
| Date: | 2009–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2009_028&r=opm |