nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒03‒20
eight papers chosen by
Martin Berka
Massey University

  1. Local Currency Pricing, Foreign Monetary Shocks and Exchange Rate Policy By Ozge Senay; Alan Sutherland
  2. Varieties and the terms of trade By Free Huizinga; Sjak Smulders
  3. Technology shocks: novel implications for international business cycles By Andrea Raffo
  4. Exchange Rate Misalignments at World and European Levels By Se-Eun Jeong; Jacques Mazier; Jamel Saadaoui
  5. All together now: do international factors explain relative price comovements? By Karagedikli, Özer; Mumtaz, Haroon; Tanaka, Misa
  6. Exchange Rate Pass-through in South Africa: Panel Evidence from Individual Goods and Services By Parsley, David
  7. Time-varying dynamics of the real exchange rate. A structural VAR analysis By Mumtaz, Haroon; Sunder-Plassmann, Laura
  8. Sovereign Credit Ratings, Transparency and International Portfolio Flows By Gande, Amar; Parsley, David

  1. By: Ozge Senay; Alan Sutherland
    Abstract: The implications of local currency pricing (LCP) for monetary regime choice are analysed for a country facing foreign monetary shocks. In this analysis expenditure switching is potentially welfare reducing. This contrasts with the existing LCP literature, which focuses on productivity shocks and thus analyses a world where expenditure switching is welfare enhancing. This paper shows that, when home and foreign pro?ducers follow LCP, expenditure switching is absent and a floating rate is preferred by the home country. But when only home producers follow LCP, expenditure switching is present and a fixed rate can be welfare enhancing for the home country.
    Keywords: Monetary Policy, Foreign Monetary Shocks, Expenditure Switching, Exchange Rates, Local Currency Pricing, Reference Currency.
    JEL: E52 F41 F42
    Date: 2010–02
  2. By: Free Huizinga; Sjak Smulders
    Abstract: This paper analyzes the dynamic adjustment of the terms of trade in an intertemporal, two country model with endogenous product variety. In the base model all workers are identical. In an extended version the development of new varieties requires skilled labor while manufacturing uses skilled and unskilled labor. In the model without skill, a population increase in one of the countries has no effect on its terms of trade, not even in the short run. In the model with skill, the terms of trade initially worsen, but eventually return to their original level. The terms of trade immediately and permanently worsen in response to a productivity increase in manufacturing. However, they gradually improve if the productivity in variety research rises. If productivity in both activities rises equiproportionally, the terms of trade respond in the same manner as after a population shock.
    Keywords: terms of trade; product variety; scale effect; productivity
    JEL: F12 F41 O31 O41
    Date: 2009–07
  3. By: Andrea Raffo
    Abstract: Understanding the joint dynamics of international prices and quantities remains a central issue in international business cycles. International relative prices appreciate when domestic consumption and output increase more than their foreign counterparts. In addition, both trade flows and trade prices display sizable volatility. This paper incorporates Hicks-neutral and investment-specific technology shocks into a standard two-country general equilibrium model with variable capacity utilization and weak wealth effects on labor supply. Investment-specific technology shocks introduce a source of fluctuations in absorption similar to taste shocks, thus reconciling theory and data. The paper also presents implications for the transmission mechanism of technology shocks across countries and for the Barro and King (1984) critique of investment shocks.
    Date: 2010
  4. 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, these 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 the specific constraints that exist for each member of the Euro area. This article aims to examine to what extent the intra-European imbalances reflect exchange rate misalignments for each “national euro”.
    Keywords: Equilibrium Exchange Rate; Current Account Balance; Macroeconomic Balance
    Date: 2010–03–07
  5. By: Karagedikli, Özer (Reserve Bank of New Zealand); Mumtaz, Haroon (Bank of England); Tanaka, Misa (Bank of England)
    Abstract: Recent research has found evidence of increasing comovement in CPI inflation rates across industrialised countries. This paper considers whether this can be attributed to greater global integration of product markets. To examine this question, we build a data set of 28 matched product category price indices for fourteen advanced economies for 1998 Q1 to 2008 Q2, and decompose the inflation rates into a world factor, country-specific factors, and category-specific factors using a Bayesian dynamic factor model with Gibbs sampling. We find that the category-specific factors account for a large part of the comovement in the prices of goods which are intensive in internationally traded primary commodities; but this is less evident for other traded goods. We also find that both the world factor and the category-specific factors become more significant in explaining the movement in the relative prices in the second half of our sample.
    Keywords: Disaggregated international price; dynamic factor model; Gibbs sampling
    JEL: E30 E52
    Date: 2010–03–10
  6. By: Parsley, David
    Abstract: This paper studies exchange rate pass-through in South Africa at the most disaggregated level possible. To accomplish this, two distinct panels of disaggregated data are employed. The first data set contains annual prices of 158 individual goods and services at the consumer level from 1990 to 2009. The second panel contains quarterly average import unit-values for twenty-six 8-digit import categories from ten of South Africa’s top trading partners from 1998 Q1 to 2009 Q2. The study finds low pass-through to consumer prices (between 15 and 25 percent in the two years following an exchange rate change), slow convergence to long run purchasing power parity (6.4 years), and no apparent tendency for pass-through to have declined during the last twenty years. Relatively high estimates were found for import price pass-through from Brazil and the United States (75 percent), while Taiwan, Switzerland, India, Great Britain, and Germany were nearer the overall average of 60 percent. As with final consumer prices, there is little evidence of a decline in pass-through to import prices.
    Keywords: exchange rate pass-through;
    JEL: F40 F30
    Date: 2010–01
  7. By: Mumtaz, Haroon (Bank of England); Sunder-Plassmann, Laura (University of Minnesota)
    Abstract: The aim of this paper is to explore the evolution of real exchange rate dynamics over time. We use a time-varying structural vector autoregression to investigate the role of demand, supply and nominal shocks and consider their impact on, and contribution to fluctuations in, the real exchange rate, output growth and inflation in four major economies over the past four decades. Our analysis therefore extends recent empirical research on evolving macroeconomic dynamics which has primarily focused on inflation and output and the time-varying impact of monetary policy on these variables. In addition we generalise recent VAR studies on exchange rate dynamics where the analysis is limited to a time-invariant setting. Our main results are as follows. The transmission of demand, supply and nominal shocks to the real exchange rate, output and inflation has changed substantially over time. Demand shocks have a larger impact on the real exchange rate after the mid-1980s for the United Kingdom, euro area and Japan and after the mid-1990s for Canada. Nominal shocks had a larger impact on output and inflation during the 1970s relative to the recent past. The forecast error variance of the real exchange rate is explained mainly by demand shocks with a smaller role for nominal shocks.
    Keywords: Real exchange rate; time-varying VAR; sign restrictions; Bayesian estimation
    JEL: C32 E42 F31 F33
    Date: 2010–03–10
  8. By: Gande, Amar; Parsley, David
    Abstract: We examine the response of equity mutual fund flows to sovereign rating changes in a wide sample of countries during the crisis prone years from 1996-2002. We find that Sovereign downgrades are strongly associated with outflows of capital from the downgraded country while improvements in a country’s sovereign rating are not associated with discernable changes in equity flows. Transparency, as proxied by the level of corruption matters: more transparent (i.e., less corrupt) countries experience smaller outflows around downgrades. Moreover, abnormal flows around downgrades are consistent with a ‘flight to quality’ phenomenon. That is, less corrupt non-event countries are net recipients of capital inflows, and these inflows increase with the severity of the cumulative downgrade abroad. The results remain after controlling for country size, legal traditions, market liquidity, crisis versus non-crisis periods. Taken together, the results suggest that increasing transparency could mitigate some of the perceived negative effects often associated with global capital flows.
    Keywords: Asymmetric effects; portfolio flows; sovereign rating agencies
    JEL: G14 G15 F36
    Date: 2010–02

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