nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒03‒28
thirteen papers chosen by
Martin Berka
Massey University

  1. On the Solvency of Nations: Are Global Imbalances Consistent with Intertemporal Budget Constraints? By Ceyhun Bora Durdu; Marco Terrones; Enrique G. Mendoza
  2. Globalization and Price Dispersion: Evidence from U.S. Trade Flows By John Tang
  3. Globalization, Pass-Through and Inflation Dynamics By Pierpaolo Benigno; Ester Faia
  4. Financial Liberalization, Structural Change, and Real Exchange Rate Appreciations By Carlos Urrutia; Felipe Meza
  5. Current Account Balance Estimates for Emerging Market Economies By Leandro Medina; Jordi Prat; Alun H. Thomas
  6. Income convergence and inflation in Central and Eastern Europe : does the sun always rise in the East By Staehr, Karsten
  7. The Composition and Cyclical Behavior of Trade Flows in Emerging Economies By Reinout De Bock
  8. Investigating the Effect of Exchange Rate Changes on the People’s Republic of China’s Processed Exports By Willem Thorbecke
  9. An Estimated Model with Macrofinancial Linkages for India By Shanaka J. Peiris; Magnus Saxegaard; Rahul Anand
  10. The Real Exchange Rate and Growth Revisited: The Washington Consensus Strikes Back? By Yanliang Miao; Andrew Berg
  11. The spread of international financial shocks to Asean countries By Céline Gimet
  12. Properties of Foreign Exchange Risk Premia By Sarno, Lucio; Schneider, Paul; Wagner, Christian
  13. Macroeconomic Impacts of Foreign Exchange Reserve Accumulation: Theory and International Evidence By Yoshifumi Kon

  1. By: Ceyhun Bora Durdu; Marco Terrones; Enrique G. Mendoza
    Abstract: Theory predicts that a nation's stochastic intertemporal budget constraint is satisfied if net exports (NX) and net foreign assets (NFA) satisfy an error-correction specification with a residual integrated of any finite order. We test this hypothesis using data for 21 industrial and 29 emerging economies for the 1970-2004 period to search for existence of negative relationship between NX and NFA. The results show that, despite the large global imbalances of recent years, NX and NFA positions are consistent with external solvency. Pooled Mean Group error-correction estimation yields evidence of a statistically significant, negative response of the NX-GDP ratio to the NFA-GDP ratio that is largely homogeneous across countries.
    Keywords: Balance of payments positions , Cross country analysis , Current account , Debt sustainability , Developed countries , Economic models , Emerging markets , International financial system , Time series ,
    Date: 2010–02–26
  2. By: John Tang
    Abstract: Historically, the integration of international markets has corresponded with decreasing prices for traded goods due to higher competition among suppliers, scale economies, and consumption demand. In recent years, product differentiation and multinational firm pricing behavior across markets and between suppliers make it difficult to assess the degree to which this still occurs. Using a confidential panel dataset comprising the universe of U.S. import trade transactions between 1992 and 2007, this paper explores the change in prices for imported commodities across American trade partners. Overall price dispersion appears to decline, albeit unevenly, over time; nevertheless, there is considerable heterogeneity within commodity groups, geographic regions, and income levels, which may owe to increased product and quality differentiation within commodity categories. Unusually, after controlling for gravity trade factors, trade openness and extensive measures of globalization are positively associated with price dispersion, which suggests a more disaggregated approach both at the commodity and firm level to account for these differences.
    Keywords: price convergence, offshoring, product differentiation, multinational firm, law of one price
    Date: 2010–03
  3. By: Pierpaolo Benigno; Ester Faia
    Abstract: An important aspect of the globalization process is the increase in interdependence among countries through the deepening of trade linkages. This process should increase competition in each destination market and change the pricing behavior of firms. We present an extension of Dornbusch (1987)’s model to analyze the extent to which globalization, interpreted as an increase in the number of foreign products in each destination market, modifies the slope and the position of the New-Keynesian aggregate-supply equation and, at the same time, affects the degree of exchange-rate pass-through. We provide empirical evidence that supports the results of our model
    Date: 2010–03
  4. By: Carlos Urrutia; Felipe Meza
    Abstract: We account for the appreciation of the real exchange rate in Mexico between 1988 and 2002 using a two sector dynamic general equilibrium model of a small open economy with two driving forces: (i) differential productivity growth across sectors and (ii) a decline in the cost of borrowing in foreign markets. These two mechanisms account for 60 percent of the decline in the relative price of tradable goods and explain a large fraction of the reallocation of labor across sectors. We do not find a significant role for migration remittances, foreign reserves accumulation, government spending, terms of trade, or import tariffs.
    Date: 2010–03–15
  5. By: Leandro Medina; Jordi Prat; Alun H. Thomas
    Abstract: This paper uses a modified version of the methodology used by the IMF's Consultative Group on Exchange Rate Issues (CGER) to calculate equilibrium current account balances (or ?norms?) for a sample of 33 emerging market economies. We find that the fundamental determinants of the equilibrium current account balances are similar to those identified by the CGER using a sample that also comprises advanced economies. However, the fiscal balance has a considerably stronger impact on current account norms for emerging markets. This paper also offers estimates for the equilibrium current account balances of eleven smaller emerging market economies that are not currently included in the country sample used by the CGER.
    Keywords: Cross country analysis , Current account balances , Economic models , Emerging markets , Real effective exchange rates ,
    Date: 2010–02–22
  6. By: Staehr, Karsten
    Abstract: This paper investigates the process of price convergence in the 10 new EU countries from Central and Eastern Europe. The analyses are based on panel data from 1995 to 2008 of the common currency price relative to the EU15 average. The lagged income level exhibit little explanatory power towards relative inflation, while the lagged price level has some explanatory power. In the long term the relative income and price levels are closely correlated implying concurrent nominal and real convergence. Deviations from the long-term relation between price and income levels are gradually closed by changes in relative inflation and GDP growth, but the process of convergence appears to be rather slow. In the short term the capital inflows associated with current account deficits put substantial upward pressure on the relative price inflation, while the Balassa-Samuelson effect appears to be subdued
    Keywords: real convergence, nominal convergence, real exchange rate, inflation, transition economies
    JEL: E31 O57 P24
    Date: 2010–03–22
  7. By: Reinout De Bock
    Abstract: Trade flows data show that the composition and cyclical properties of imports are similar in developed economies and emerging markets (EM) but this is not the case for exports. Unlike developed economies, (i) EM export few or only a selective set of capital goods and (ii) capital good and overall exports tend to be acyclical. The lack of procyclicality in exports drives the strong countercyclicality of EM trade balances observed in previous studies. A quantitative exercise demonstrates how the standard small open economy business cycle model can be improved for EM by incorporating these features.
    Keywords: Balance of trade , Business cycles , Capital goods , Consumption , Cross country analysis , Economic models , Emerging markets , Exports , Imports , International trade , Productivity ,
    Date: 2010–02–23
  8. By: Willem Thorbecke (Asian Development Bank Institute)
    Abstract: Many argue that the yuan needs to appreciate to rebalance the People’s Republic of China’s trade. However, empirical evidence on the effects of a CNY appreciation on the People’s Republic of China’s exports has been mixed for the largest category of exports, processed exports. Since much of the value-added of these goods comes from parts and components produced in Japan, the Republic of Korea, and other East Asian supply chain countries, it is important to control for exchange rate changes in these countries. Employing dynamic ordinary least squares, or DOLS, techniques and quarterly data, this paper finds that exchange rate appreciations across supply chain countries would cause a much larger drop in processed exports than a unilateral appreciation of the yuan.
    Keywords: China, exchange rate policy, exchange rate appreciations, trade
    JEL: F32 F41
    Date: 2010
  9. By: Shanaka J. Peiris; Magnus Saxegaard; Rahul Anand
    Abstract: This paper develops a small open economy dynamic stochastic general-equilibrium model with macrofinancial linkages. The model includes a financial accelerator--entrepreneurs are assumed to partially finance investment using domestic and foreign currency debt--to assess the importance of financial frictions in the amplification and propagation of the effects of transitory shocks. We use Bayesian estimation techniques to estimate the model using India data. The model is used to assess the importance of the financial accelerator in India and the optimality of monetary policy.
    Keywords: Bank credit , Capital flows , Corporate sector , Economic models , Exchange rates , External borrowing , External financing , External shocks , Financial sector , Foreign exchange , India , Monetary policy ,
    Date: 2010–01–28
  10. By: Yanliang Miao; Andrew Berg
    Abstract: There is good reason and much evidence to suggest that the real exchange rate matters for economic growth, but why? The "Washington Consensus" (WC) view holds that real exchange rate misalignment implies macroeconomic imbalances that are themselves bad for growth. In contrast, Rodrik (2008) argues that undervaluation relative to purchasing power parity is good for growth because it promotes the otherwise inefficiently small tradable sector. Our main result is that WC and the Rodrik views of the role of misalignment in growth are observationally equivalent for the main growth regressions he reports. There is an identification problem: Determinants of misalignment are also likely to be independent drivers of growth, and these types of growth regressions are hard-pressed to disentangle the different channels. However, we confirm that not only are overvaluations bad but undervaluations are also good for growth, a result squarely consistent with the Rodrik story but one that requires some gymnastics from the WC viewpoint.
    Keywords: Economic growth , Economic models , Purchasing power parity , Real effective exchange rates ,
    Date: 2010–02–19
  11. By: Céline Gimet (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This article focuses on the reaction of Asean economies to international financial shocks. The crises in emerging markets at the end of the last century underlined the vulnerability of emerging Asean economies to international financial fluctuations and a lack of sustainability in their exchange rate regime. A Structural VAR model is used to analyze the efficiency of the measures adopted by these countries, after this crisis episode, to protect their economies against speculative attacks. The results reveal that the impact of the current subprime crisis on emerging Asean countries is less significant than that observed in industrialized ones.
    Keywords: Asean countries, international financial fluctuations, macroeconomic impact, regional integration, SVAR Model
    Date: 2009
  12. By: Sarno, Lucio; Schneider, Paul; Wagner, Christian
    Abstract: We study the properties of foreign exchange risk premia that can explain the forward bias puzzle - the tendency of high-interest rate currencies to appreciate rather than depreciate. These risk premia arise endogenously from imposing the no-arbitrage condition on the relation between the term structure of interest rates and exchange rates, and they compensate for both currency risk and interest rate risk. In our empirical analysis, we estimate risk premia using an affine multi-currency term structure model and find that model-implied risk premia yield unbiased predictions for exchange rate excess returns. While interest rate risk affects the level of risk premia, the time-variation in excess returns is almost entirely driven by currency risk. Furthermore, risk premia are (i) closely related to global risk aversion, (ii) countercyclical to the state of the economy, and (iii) tightly linked to traditional exchange rate fundamentals.
    Keywords: term structure; exchange rates; forward bias; predictability
    JEL: E43 F31 G10
    Date: 2010–01
  13. By: Yoshifumi Kon (Asian Development Bank Institute)
    Abstract: Recently, a dramatic accumulation in foreign exchange reserves has been widely observed in developing countries. This paper explores the possible long-run impacts of this trend on macroeconomic variables in developing countries. We analyze a simple open economy model where increased foreign exchange reserves reduce the costs of liquidity risk. Given the amount of foreign exchange reserves, utility-maximizing representative agents decide consumption, capital stock, and labor input, as well as the amounts of liquid and illiquid external debt. The equilibrium values of these variables depend on the amount of foreign exchange reserves. A rise in foreign exchange reserves increases both liquid and total debt, while shortening debt maturity. To the extent that interest rates of foreign exchange reserves are low, an increase in foreign reserves also leads to a permanent decline in consumption. However, when the tradable sector is capital intensive, the increase may enhance investment and economic growth. We provide empirical support for our theoretical analysis using panel data from the Penn World Table. The cross-country evidence shows that an increase in foreign exchange reserves raises external debt outstanding and shortens debt maturity. The results also imply that increased foreign exchange reserves may lead to a decline in consumption, but can also enhance investment and economic growth. The positive impact on economic growth, however, disappears when we control the impact through investment.
    Keywords: foreign exhange reserves, developing countries, consumption, investment, economic growth
    JEL: F21 F32 F34
    Date: 2010

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