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on Open MacroEconomics |
| By: | Alejandro Justiniano; Bruce Preston |
| Abstract: | This paper demonstrates that an estimated, structural, small open-economy model of the Canadian economy cannot account for the substantial influence of foreign-sourced disturbances identified in numerous reduced-form studies. The benchmark model assumes uncorrelated shocks across countries and implies that U.S. shocks account for less than 3 percent of the variability observed in several Canadian series, at all forecast horizons. Accordingly, model-implied cross-correlation functions between Canada and U.S. are essentially zero. Both findings are at odds with the data. A specification that assumes correlated cross-country shocks partially resolves this discrepancy, but still falls well short of matching reduced-form evidence. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-09-19&r=opm |
| By: | Pierre M. Picard; Tim Worrall (CREA, University of Luxembourg) |
| Abstract: | This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexible exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of welfare when the two countries also engage in some international assistance in order to share risk. Such risksharing is limited by enforcement constraints of cross border assistance. It is shown that, when one takes into account risk-sharing and limited commitment, fixed exchange rate regimes associated with a currency area can dominate flexible exchange rate regimes, which reverses the standard result. |
| JEL: | F12 F15 F31 F33 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:luc:wpaper:09-01&r=opm |
| By: | John Beirne (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Martin Bijsterbosch (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper provides estimates of the exchange rate pass-through (ERPT) to consumer prices for nine central and eastern European EU Member States. Using a five-variate cointegrated VAR (vector autoregression) for each country and impulse responses derived from the VECM (vector error correction model), we show that ERPT to consumer prices averages about 0.6 using the cointegrated VAR and 0.5 using the impulse responses. We also find that the ERPT seems to be higher for countries that have adopted some form of fixed exchange rate regime. These results are robust to alternative normalisation of the VAR and alternative ordering of the impulse responses. JEL Classification: E31, F31. |
| Keywords: | exchange rate pass-through, inflation, central and eastern Europe. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091120&r=opm |
| By: | Jun-ichi Shinkai (Specially Appointed Researcher, Osaka School of International Public Policy (OSIPP)); Akira Kohsaka (Professor, Osaka School of International Public Policy (OSIPP)) |
| Abstract: | This paper analyzes how those global shocks as foreign business cycles and exchange rate realignments affect the Japanese economy and whether there are structural changes in the transmission mechanism of these shocks in the recent period by using a VAR model. This paper finds that, since the 1990s the impact of exchange rate changes on the Japanese economy has become smaller and/or insignificant. But the spillover effect of business cycles in U.S. and Europe turns out to have become larger and that from East Asia, once being small and insignificant, become large and significant in the 2000s. To sum up, the Japanese economy has appeared to re-couple with the world and regional business cycles in the recent period. |
| Keywords: | global shocks, de-coupling, expenditure switching |
| JEL: | F3 E32 C5 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:osp:wpaper:09e008&r=opm |
| By: | Eduardo Levy-Yeyati; Federico Sturzenegger; Iliana Reggio |
| Abstract: | The literature has identified three main approaches to account for the way exchange rate regimes are chosen: i) the optimal currency area theory; ii) the financial view, which highlights the consequences of international financial integration; and iii) the political view, which stresses the use of exchange rate anchors as credibility enhancers in politically challenged economies. Using de facto and de jure regime classifications, we test the empirical relevance of these approaches separately and jointly. We find overall empirical support for all of them, although the incidence of financial and political aspects varies substantially between industrial and non-industrial economies. Furthermore, we find that the link between de facto regimes and their underlying fundamentals has been surprisingly stable over the years, suggesting that the global trends often highlighted in the literature can be traced back to the evolution of their natural determinants, and that actual policies have been little influenced by the frequent twist and turns in the exchange rate regime debate. |
| Keywords: | Exchange rates, Growth, Impossible trinity, Dollarization, Capital flows |
| JEL: | F30 F33 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we098374&r=opm |
| By: | Jingliang Xiao; Glyn Wittwer |
| Abstract: | We use a dynamic CGE model of China with a financial module and sectoral detail to examine the real and nominal impacts of a nominal exchange rate appreciation alone, fiscal policy alone and a combined fiscal and monetary package to redress China's external imbalance. The exchange rate policy alone is ineffective in both the short run and long run at reducing China's current account surplus. Fiscal policy is less effective than a combination of fiscal and monetary policy in reducing the surplus. |
| Keywords: | dynamic financial CGE, foreign reserves, trade surplus, monetary policy, fiscal policy |
| JEL: | D58 E52 E62 F31 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cop:wpaper:g-192&r=opm |
| By: | Michael Dotsey; Margarida Duarte |
| Abstract: | The authors 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: | Exports ; Pricing |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:09-32&r=opm |
| By: | Flavia Corneli |
| Abstract: | According to the “Saving Glut hypothesis”, global imbalances are caused by inefficiently high level of precautionary savings in financially underdeveloped regions, where agents have limited opportunity to diversify idiosyncratic risk. This paper generalizes the approach by modeling idiosyncratic risk in entrepreneurial activities, which can be only partially hedged. As a result, agents save too much and invest too little, relative to the efficient allocation, depressing production activities and the real interest rate. Capital account liberalization towards financially more advanced economies then produces an outflow of capital in search of safer investment, with the effect of further reducing domestic investment in countries with poor financial institutions. The model predicts welfare losses for less financially developed economies, and an increase in wealth inequality for advanced economies. Finally, the present analysis is able to explain the direct link between the financial crisis and global recession and the long run implications of worsening financial conditions on countries’ net external positions. |
| Keywords: | Current Account, Financial Markets, Heterogeneity, Incomplete Markets, International Capital Movements |
| JEL: | D52 E44 F32 G11 G15 O16 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2009/41&r=opm |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Christian Saborowski (University of Warwick, Coventry CV4 7AL, United Kingdom.); Roland Straub (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper shows that monetary policy shocks exert a substantial effect on the size and composition of capital flows and the trade balance for the United States, with a 100 basis point easing raising net capital inflows and lowering the trade balance by 1% of GDP, and explaining about 20-25% of their time variation. Monetary policy easing causes positive returns to both equities and bonds. Yet such a monetary policy easing shock also induces a shift in portfolio composition out of equities and into bonds, implying a negative conditional correlation between flows in equities and bonds. Moreover, such shocks induce a negative conditional correlation between equity flows and equity returns, but a positive conditional correlation between bond flows and bond returns. The findings thus provide evidence for the presence of a portfolio rebalancing motive behind investment decisions in equities, but the dominance of what is akin to a return chasing motive for bonds, conditional on monetary policy shocks. The results also shed light on the puzzle of the strongly time-varying equity-bond return correlations found in the literature. JEL Classification: F4, E52, G1, F32. |
| Keywords: | monetary policy, trade balance, capital flows, portfolio choice, asset prices, United States, vector auto regressions, sign restrictions. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091122&r=opm |
| By: | Cletus C. Coughlin; Dennis Novy |
| Abstract: | Many studies have found that international borders represent large barriers to trade. But how do international borders compare to domestic border barriers? We investigate international and domestic border barriers in a unified framework. We consider a unique data set of exports from individual U.S. states to foreign countries and combine it with trade flows within and between U.S. states. After controlling for distance and country size, we find that relative to state-to-state trade, crossing an individual U.S. state's domestic border entails a larger trade barrier than crossing the international U.S. border. This finding highlights the concentration of trade flows at the local level and the importance of factors such as informational barriers and transportation costs even for the relatively short distances associated with state-to-state trade. |
| Keywords: | International trade ; International economic integration |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2009-057&r=opm |
| By: | Baldwin, John R.; Macdonald, Ryan |
| Abstract: | This paper examines the different types of deflators that are used to compare volume estimates of national income and production across countries. It argues that these deflators need to be tailored to the specific income concept used for study. If the potential to spend concept is employed, a purchasing power deflator is needed. If a production based concept is used, a producing power deflator is necessary. The paper argues that present practice produces a hybrid deflator that fails both purposes when terms of trade shifts are large and offers a solution. |
| Keywords: | Economic accounts, International trade, Gross domestic product, Income and expenditure accounts, Trade patterns |
| Date: | 2009–12–10 |
| URL: | http://d.repec.org/n?u=RePEc:stc:stcp5e:2009058e&r=opm |