nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒03‒06
eight papers chosen by
Martin Berka
Massey University

  1. What Determines European Real Exchange Rates? By Martin Berka; Michael B. Devereux
  2. Intermediation and Economic Integration By Pol Antràs; Arnaud Costinot
  3. Which Parts of Globalization Matter for Catch-up Growth? By Paul M. Romer
  4. Commodity prices, commodity currencies, and global economic developments By Jan J. J. Groen; Paolo A. Pesenti
  5. Globalization, Markups, and the U.S. Price Level By Robert C. Feenstra; David E. Weinstein
  6. Housing Markets and Current Account Dynamics By Gete, Pedro
  7. Capital Flows, Consumption Booms and Asset Bubbles: A Behavioural Alternative to the Savings Glut Hypothesis By David Laibson; Johanna Mollerstrom
  8. Real exchange rate misalignments and economic performance for the G20 countries By Audrey Sallenave

  1. By: Martin Berka; Michael B. Devereux
    Abstract: We study a newly constructed panel data set of relative prices of a large number of consumer goods among 31 European countries. We find that there is a substantial and non-diminishing deviation from PPP at all levels of aggregation, even among eurozone members. However, real exchange rates are very closely tied to relative GDP per capita within Europe, both across countries and over time. This relationship is highly robust at all levels of aggregation. We construct a simple two-sector endowment economy model of real exchange rate determination. Simulating the model using the historical relative GDP per capita for each country, we find that for most (but not all) countries there is a very close fit between the actual and simulated real exchange rate.
    JEL: F31 F41
    Date: 2010–02
  2. By: Pol Antràs; Arnaud Costinot
    Abstract: The theory of international trade has paid scant attention to market institutions. Neither neoclassical theory nor new trade models typically specify the process by which supply and demand meet. Yet in the real world, intermediaries play a central role in materializing the gains from exchange outlined by standard trade theories. In Antràs and Costinot (2010), we have developed a stylized but explicit model of intermediation in trade. In this short paper, we present a variant of this model that illustrates the potential role of intermediaries in facilitating the realization of the gains from trade.
    JEL: D3 D4 F10 F15 O1
    Date: 2010–02
  3. By: Paul M. Romer
    Abstract: Economists devote too much attention to international flows of goods and services and not enough to international flows of ideas. Traditional trade flows are an imperfect substitute for flows of the underlying ideas. The simplest textbook trade model shows that a welfare-enhancing move toward freer flows of ideas should be associated with a reduction in conventional trade. The large quantitative effect from the flow of ideas is evident in the second half of the 20th century as the life expectancies in poor and rich countries began to converge. Another example comes from China, where authorities dramatically reduced accident rates by adopting rules of civil aviation that were developed in the United States. All economists, including trade economists, would be better equipped to talk about international flows of technologies and rules if they adopted a consistent vocabulary based on the concepts of nonrivalry and excludability. An analysis of the interaction between rules and technologies may help explain important puzzles such as why private firms have successfully diffused some technologies (mobile telephony) but not others (safe municipal water.)
    JEL: F1 I1 O1 O33
    Date: 2010–02
  4. By: Jan J. J. Groen; Paolo A. Pesenti
    Abstract: In this paper we seek to produce forecasts of commodity price movements that can systematically improve on naive statistical benchmarks, and revisit the forecasting performance of changes in commodity currencies as efficient predictors of commodity prices, a view emphasized in the recent literature. In addition, we consider different types of factor-augmented models that use information from a large data set containing a variety of indicators of supply and demand conditions across major developed and developing countries. These factor-augmented models use either standard principal components or partial least squares (PLS) regression to extract dynamic factors from the data set. Our forecasting analysis considers ten alternative indices and sub-indices of spot prices for three different commodity classes across different periods. We find that the exchange rate-based model and especially the PLS factor-augmented model are more prone to outperform the naive statistical benchmarks. However, across our range of commodity price indices we are not able to generate out-of-sample forecasts that, on average, are systematically more accurate than predictions based on a random walk or autoregressive specifications.
    JEL: C23 C53 F47
    Date: 2010–02
  5. By: Robert C. Feenstra; David E. Weinstein
    Abstract: This paper is the first attempt to structurally estimate the impact of globalization on markups and welfare in a monopolistic competition model. To achieve this, we work with a class of preferences that allow for endogenous markups and firm entry and exit that are especially convenient for empirical work – the translog preferences, with symmetry in substitution imposed across products. Between 1992 and 2005 we find the U.S. market experienced a series of changes that confirm the predictions of Melitz and Ottaviano (2008): import shares rose and U.S. firms exited, leading to a fall in markups, while product variety and welfare went up. We estimate the impacts of these effects on a national level, and find a cumulative drop of 5.4 percent in merchandise prices and of 1.0 percent in overall consumer prices between 1992 and 2005. Although the magnitude of the welfare gains in our translog setup is similar to that obtained by assuming CES preferences, the sources of these gains are quite different. Variety gains under translog are at least one-third smaller than in the CES case, but there is a substantial reduction in U.S. markups, resulting in a comparable welfare gain overall.
    JEL: E31 F12 F4
    Date: 2010–02
  6. By: Gete, Pedro
    Abstract: This paper makes a theoretical and an empirical contribution to the debate on what caused the "global imbalances". On the empirical side, I provide different types of evidence to support that housing demand shocks (shocks to the aggregate marginal rate of substitution between housing and tradables) help to explain the global imbalances. On the theory side, I show that shocks to the demand for housing generate trade deficits without need for the standard ingredients used by others to model housing (wealth effects or trade in capital goods). I model housing as a durable and nontradable good. Countries import tradable goods during periods when more domestic labor is devoted to produce nontradables to smooth consumption between tradables and nontradables. Housing booms are larger if the country can run a trade deficit because the deficit lowers the opportunity cost of building, which is the foregone consumption of tradable goods due to reallocation of labor to the construction sector. Concerning the empirical evidence, I first document that over the last decade there has been a strong cross-country correlation between housing variables and current account dynamics. Second, I show that using the cross-country dynamics of employment in construction as the explanatory variable, the model generates current account dynamics matching recent global imbalances. Finally, I use sign restrictions implied by the model to estimate a vector autoregression and identify the effects of housing demand shocks on the U.S. trade deficit. The results suggest that housing shocks matter for current account dynamics.
    Keywords: Housing; Current Account; Global Imbalances; Sign Restrictions; Two Country Models; Two Sector Models
    JEL: F4 E2 F3 E4
    Date: 2009–06
  7. By: David Laibson; Johanna Mollerstrom
    Abstract: Bernanke (2005) hypothesized that a “global savings glut” was causing large trade imbalances. However, we show that the global savings rates did not show a robust upward trend during the relevant period. Moreover, if there had been a global savings glut there should have been a large investment boom in the countries that imported capital. Instead, those countries experienced consumption booms. National asset bubbles explain the international imbalances. The bubbles raised consumption, resulting in large trade deficits. In a sample of 18 OECD countries plus China, movements in home prices alone explain half of the variation in trade deficits.
    JEL: F01
    Date: 2010–02
  8. By: Audrey Sallenave
    Abstract: We evaluate the growth effects of real effective exchange rate misalignments for the G20 countries over the period 1980-2006. To this end, we first estimate real effective equilibrium exchange rates relying on the behavioral approach BEER, from which misalignments are derived. Second, we estimate a dynamic panel growth model in which among the traditional determinants of growth, our measure of misalignments is included. Our findings put forward some important differences between developed and emerging economies. The magnitude of the misalignments is more pronounced in the case of emerging countries, and the speed of convergence towards the estimated equilibrium exchange rate is slower for industrialized ones. Turning to our growth regression analysis, we find that misalignments have a negative effect on the economic growth. As a consequence, an appropriate exchange rate policy would close the gap between real exchange rates and their equilibrium level.
    Keywords: Equilibrium Real Effective Exchange Rate, Group of Twenty, Growth, Misalignments, Panel Cointegration
    JEL: C23 F31 O47
    Date: 2010

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