nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒01‒23
eight papers chosen by
Martin Berka
Massey University

  1. Exchange-Rate Misalignments in Duopoly: the Case of Airbus and Boeing By Agnes Benassy-Quere; Lionel Fontagne; Horst Raff
  2. How do Different Exporters React to Exchange Rate Changes? Theory, Empirics and Aggregate Implications By Nicolas Berman; Philippe Martin; Thierry Mayer
  3. A Macro-Finance Approach to Exchange Rate Determination By Yu-chin Chen; Kwok Ping Tsang
  4. Valuation effects with transitory and trend productivity shocks By Nguyen, Ha
  5. Growth and convergence/divergence in productivity under balance-of-payments constraint By Perez Caldentey, Esteban; Ali, Anesa
  6. Savings, Investment and Current Account Surplus in Asia By Raghav Gaiha; Katsushi S. Imai; Ganesh Thapa; Woojin Kang
  7. Currency Misalignments and Growth: a New Look Using Nonlinear Panel Data Methods By Sophie Bereau; Antonia Lopez Villavicencio; Valerie Mignon
  8. How Does Financial Openness Affect Economic Growth and its Components? By Garita, Gus

  1. By: Agnes Benassy-Quere; Lionel Fontagne; Horst Raff
    Abstract: We examine the effect of exchange-rate misalignments on competition in the market for large commercial aircraft. This market is a duopoly where players compete in dollar-denominated prices while one of them, Airbus, incurs costs mostly in euros. We construct and calibrate a simulation model to investigate how companies adjust their prices to deal with the effects of a temporary misalignment, and how this affects profit margins and volumes. We also explore the effects on the long-run dynamics of competition. We conclude that, due to the duopolistic nature of the aircraft market, Airbus will pass only a small part of the exchange-rate fluctuations on to customers through higher prices. Moreover, due to features specific to the aircraft industry, such as customer switching costs and learning-by-doing, even a temporary departure of the exchange rate from its long-run equilibrium level may have permanent effects on the industry.
    Keywords: Exchange-rate pass-through; duopoly; aircraft industry
    JEL: F31 D43 L11 L62
    Date: 2009–06
  2. By: Nicolas Berman; Philippe Martin; Thierry Mayer
    Abstract: This paper analyzes the reaction of exporters to exchange rate changes.We present a model where, in the presence of distribution costs in the export market, high and low productivity firms react differently to a depreciation. Whereas high productivity firms optimally raise their markup rather than the volume they export, low productivity firms choose the opposite strategy. Hence, pricing to market is both endogenous and heterogenous. This heterogeneity has important consequences for the aggregate impact of exchange rate movements. The presence of fixed costs to export means that only high productivity firms can export, firms which precisely react to an exchange rate depreciation by increasing their export price rather than their sales. We show that this selection effect can explain the weak impact of exchange rate movements on aggregate export volumes. We then test the main predictions of the model on a very rich French firm level data set with destination-specific export values and volumes on the period 1995-2005. Our results confirm that high performance firms react to a depreciation by increasing their export price rather than their export volume. The reverse is true for low productivity exporters. Pricing to market by exporters is also more pervasive in sectors and destination countries with higher distribution costs. Consistent with our theoretical framework, we show that the probability of firms to enter the export market following a depreciation increases. The extensive margin response to exchange rate changes is modest at the aggregate level because firms that enter, following a depreciation, are smaller relative to existing firms.
    Keywords: Gravity; heterogeneity; exchange rate; trade
    JEL: F12
    Date: 2009–12
  3. By: Yu-chin Chen (University of Washington); Kwok Ping Tsang (Virginia Tech)
    Abstract: The nominal exchange rate is both a macroeconomic variable equilibrating international markets, and a financial asset that embodies expectations and prices risks about cross border currency-holdings. Recognizing this, we adopt a joint macro-finance strategy to model the exchange rate. We incorporate into a monetary exchange rate model macroeconomic stabilization through Taylor-rule monetary policy on one hand, and on the other, market expectations and perceived risks embodied in the cross-country yield curves. Using monthly data between 1985 and 2005 for Canada, Japan, the UK and the US, we summarize information in the relative yield curves between country-pairs using the Nelson and Siegel (1987) latent factors, and combine them with monetary policy targets (output gap and inflation) into a Vector Autoregression (VAR) for bilateral exchange rate changes. We find strong evidence that both the financial and macro variables are important for explaining exchange rate dynamics and excess currency returns, especially for the yen and the pound relative to the dollar. By decomposing the yield curves into expected future yields and bond market term premia, we show that both expectations and perceived risks are priced into the currency market. These findings provide support for the view that the nominal exchange rate is determined by both macroeconomic as well as financial forces.
    Date: 2009–12
  4. By: Nguyen, Ha
    Abstract: In the past two decades, cross-border portfolio holdings of a large variety of assets have risen sharply. This has created an important role for changes in asset prices of a country's external assets and liabilities (i.e."valuation effects") in affecting the country's net foreign asset position. Valuation effects are commonly thought as stabilizing: they counteract current account movements and mitigate the impact of the current account on the country's net foreign asset position. This paper shows that whether valuation effects are stabilizing or not depends critically on the nature of underlying productivity shocks. In response to transitory shocks, valuation effects are stabilizing; but in response to trend shocks, such effects amplify the impact of the current account on the net foreign asset position. These contrasting results arise because optimally smoothing consumers respond differently to a transitory shock than to a trend shock to income. The results are consistent with the pattern of external imbalances between the United States and other G.7 countries since the 1990s.
    Keywords: Debt Markets,Economic Theory&Research,Currencies and Exchange Rates,Emerging Markets,Labor Policies
    Date: 2010–01–01
  5. By: Perez Caldentey, Esteban; Ali, Anesa
    Abstract: This paper presents a model of convergence/divergence in productivity for two economies of different size and development building on Kaldor’s cumulative causation and the technological gap approaches to growth. Both operate within the logic provided by a balance-of-payments constraint framework. The more developed and larger economy, the leader, is technologically more advanced with higher levels of productivity and issues the international reserve currency. The developing economy, the follower, is closely linked to the leader economy and is balance-of-payments-constrained (BPC). The paper argues that the growth of the leader has at the same time divergent and convergent effects on the productivity gap between both economies. The divergent effect (the Kaldor effect) works through a process of induced productivity and cumulative causation. The convergent effect (Thirlwall’s Law) works through the BPC constraint. The model states that growth with convergence in productivity requires that the ratio of export to import income elasticities of the follower economy exceeds the ratio of the induced productivity of the leader economy to that of the follower economy. The paper then highlights the difficulty of achieving convergence under a BPC constraint and provides policy implications.
    Keywords: Kaldor effect; Thirlwall effect; convergence/divergence; balance-of-payments constraint
    JEL: O1 O54 R11
    Date: 2010–04
  6. By: Raghav Gaiha; Katsushi S. Imai; Ganesh Thapa; Woojin Kang
    Date: 2010
  7. By: Sophie Bereau; Antonia Lopez Villavicencio; Valerie Mignon
    Abstract: The aim of this paper is to investigate the link between currency misalignments and economic growth. Relying on panel cointegration techniques, we calculate real exchange rate (RER) misalignments as deviations of actual RERs from their equilibrium values for a set of advanced and emerging economies. Estimating panel smooth transition regression models, we show that RER misalignments have a differentiated impact on economic growth depending on their sign: whereas overvaluations negatively affect economic growth, real exchange rate undervaluations significantly enhance it. This result indicates that undervaluations may drive the exchange rate to a level that encourages exports and promotes growth.
    Keywords: Growth; exchange rate misalignments; nonlinearity; PSTR models
    JEL: F31 O47 C23
    Date: 2009–09
  8. By: Garita, Gus
    Abstract: This paper aims at uncovering the different channels through which de facto financial openness affects economic growth and its components. The results herein indicate that de facto measures of financial openness (as proxied by different types of capital inflows) stimulate economic growth. In particular, the results indicate that higher levels of FDI inflows stimulate GDP per worker growth and crowd-in domestic investment for developing and emerging markets. As far as developed economies, I find that higher levels of both FDI and Portfolio-type inflows improve GDP per worker growth, but that only the latter type of capital stimulates capital accumulation with crowding-in effects. The one similarity between developed and developing economies is that FDI positively affects total factor productivity in both cases.
    Keywords: Capital account liberalization; capital flows; dynamic panels; foreign direct investment; total factor productivity
    JEL: C23 F21 F41 F43 O40 F36
    Date: 2009–07–14

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