nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒05‒29
ten papers chosen by
Martin Berka
Massey University

  1. One TV, one price?. By Imbs, J.; Mumtaz, H.; Ravn, M.O.; Rey, H.
  2. The EAGLE. A model for policy analysis of macroeconomic interdependence in the Euro area By Sandra Gomes; Pascal Jacquinot; Massimiliano Pisani
  3. Inflation Dynamics in the New EU Member States: How Relevant Are External Factors? By Alexander Mihailov; Fabio Rumler; Johann Scharler
  4. Fiscal Policy and the Current Account By Jacques Bouhga-Hagbe; S. M. Ali Abbas; Ricardo Velloso; Antonio J. Fatas; Paolo Mauro
  5. The Structural Relationship between Current and Capital Account Balance in India: A Time Series Analysis By Chakraborty, Debashis; Mukherjee, Jaydeep; Sinha, Tanaya
  6. The Structural Manifestation of the `Dutch Disease’: The Case of Oil Exporting Countries By Kareem Ismail
  7. The Yuan's Exchange Rates and Pass-through Effects on the Prices of Japanese and US Imports By Xing, Yuqing
  8. Integration, decoupling and the global financial crisis: A global perspective By Miankhel, Adil Khan; Kalirajan, Kaliappa; Thangavelu, Shandre
  9. Spillovers of Domestic Shocks: Will They Counteract the "Great Moderation"? By Ashoka Mody; Alina Carare
  10. Developing Country Business Cycles: Revisiting the Stylised Facts By Rachel Male

  1. By: Imbs, J.; Mumtaz, H.; Ravn, M.O.; Rey, H.
    Abstract: We use a unique dataset on television prices across European countries and regions to investigate the sources of differences in price levels. Our findings are as follows: (i) Quality is a crucial determinant of price differences. Even in an integrated economic zone as Europe, rich economies tend to consume higher quality goods. This effect accounts for the lion’s share of international price dispersion. (ii) Sizable international price differentials subsist even for the same television sets. The average bilateral price difference is as high as 80 euros, or 8% of the average TV price in our sample. (iii) EMU countries display lower price dispersion than non-EMU countries. (iv) absolute price differentials and relative price volatility are positively correlated with exchange rate volatility, but not with conventional measures of transport costs. (v) Importantly we show brand premia are sizable. They differ markedly across borders, in a way that does not correlate with transport costs, nor exchange rate movements. Taken together, the evidence is consistent firms exploiting market power through brand values to price discriminate across borders.
    Date: 2009–10
  2. By: Sandra Gomes (Bank of Portugal, Economic Research Department, Av. Almirante Reis 71, 1150-012 Lisbon, Portugal.); Pascal Jacquinot (European Central Bank, Directorate General of Research, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Massimiliano Pisani (Bank of Italy, Research Department, Via Nazionale 91, 00184 Rome, Italy.)
    Abstract: Building on the New Area Wide Model, we develop a 4-region macroeconomic model of the euro area and the world economy. The model (EAGLE, Euro Area and Global Economy model) is microfounded and designed for conducting quantitative policy analysis of macroeconomic interdependence across regions belonging to the euro area and between euro area regions and the world economy. Simulation analysis shows the transmission mechanism of region-specific or common shocks, originating in the euro area and abroad. JEL Classification: C53, E32, E52, F47.
    Keywords: Open-economy macroeconomics, DSGE models, econometric models, policy analysis.
    Date: 2010–05
  3. By: Alexander Mihailov (School of Economics, University of Reading); Fabio Rumler (Economic Analysis Division, Oesterreichische Nationalbank); Johann Scharler (Department of Economics, University of Linz)
    Abstract: In this paper we evaluate the relative influence of external versus domestic inflation drivers in the 12 new European Union (EU) member countries. Our empirical analysis is based on the New Keynesian Phillips Curve (NKPC) derived in Gali and Monacelli (2005) for small open economies (SOE). Employing the Generalized Method of Moments (GMM), we find that the SOE NKPC is well supported in the new EU member states. We also find that the inflation process is dominated by domestic variables in the larger countries of our sample, whereas external variables are mostly relevant in the smaller countries.
    Keywords: New Keynesian Phillips Curve, small open economies, inflation dynamics, new EU member countries, GMM estimation
    JEL: C32 C52 E31 F41 P22
    Date: 2010–05–09
  4. By: Jacques Bouhga-Hagbe; S. M. Ali Abbas; Ricardo Velloso; Antonio J. Fatas; Paolo Mauro
    Abstract: This paper examines the relationship between fiscal policy and the current account, drawing on a larger country sample than in previous studies and using panel regressions, vector autoregressions, and an analysis of large fiscal and external adjustments. On average, a strengthening in the fiscal balance by 1 percentage point of GDP is associated with a current account improvement of 0.2–0.3 percentage point of GDP. This association is as strong in emerging and low-income countries as it is in advanced economies; and significantly higher when output is above potential.
    Keywords: Cross country analysis , Current account , Economic models , Exchange rates , Fiscal policy , Nonoil developing countries , Oil exporting countries ,
    Date: 2010–05–11
  5. By: Chakraborty, Debashis; Mukherjee, Jaydeep; Sinha, Tanaya
    Abstract: The long run relationship between current account balance (CAB) and capital account balance (KAB) and the repercussions of capital account convertibility (KAC) on growth process of a country is a much debated issue. In particular, in the aftermath of the Southeast Asian crisis, the limitation of the liberal capital regime for a developing country like India is often highlighted in the literature. However, the probable impact of introducing KAC on CAB in India generally is discussed theoretically. Though some of the existing studies in India have earlier focused on this research question, they have done so by exogenously assuming the existence of a single structural break in the interrelationship between CAB and KAB. The present study intends to bridge the gap in the literature by raising two empirical questions: first, how far KAC is likely to destabilize the CAB and second, measuring the strength of the interrelationship between CAB and KAB. The current paper also contributes to the literature by incorporating multiple endogenous structural breaks in the empirical analysis. The empirical findings do not support any long term relationship between capital and current account balance and reveals that two significant structural breaks are observed in 1993-94 and 2003-04.
    Keywords: International Capital Movements; Foreign Exchange; Current Account Adjustment
    JEL: F32 F21 F31
    Date: 2010–05–20
  6. By: Kareem Ismail
    Abstract: This study derives structural implications of the Dutch disease in oil-exporting countries due to permanent oil price shocks from a typical model. We then test these implications in manufacturing sector data across a wide group of countries including oil-exporters covering 1977 to 2004. The results on oil-exporting countries are four folds. First, we find that permanent increases in oil price negatively impact output in manufacturing as consistent with the Dutch disease. Second, Evidence in the data shows that oil windfall shocks have a stronger impact on manufacturing sectors in countries with more open capital markets to foreign investment. Third, we find that the relative factor price of labor to capital, and capital intensity in manufacturing sectors appreciate as windfall increases. Fourth, we find that manufacturing sectors with higher capital intensity are less affected by windfall shocks than their peers, possibly due to a larger share of the effect being absorbed by more laborintensive tradable sectors. An implication of the fourth result is that having diverse manufacturing sectors in capital intensity helps cushion the volatility of oil shocks.
    Keywords: Capital , Cross country analysis , Economic models , External shocks , Industrial sector , International trade , Labor costs , Manufacturing sector , Oil exporting countries , Oil prices , Price increases , Production , Resource allocation ,
    Date: 2010–04–20
  7. By: Xing, Yuqing (Asian Development Bank Institute)
    Abstract: This paper estimated the pass-though effects of yuan's exchange rates on prices of the US and Japanese imports from the People's Republic of China (PRC). Empirical results show that, a 1% nominal appreciation of the yuan would result in a 0.23% increase in prices of the US imports in the short run and 0.47% in the long run. Japanese import prices were relatively more responsive to changes of the bilateral exchange rates between the yuan and the yen. For a 1% nominal appreciation of the yuan against the yen, Japanese import prices would be expected to rise 0.55% in the short run and 0.99%, a complete pass-through, in the long run. The high degree of pass-through effects were also found at the disaggregated sectoral level: food, raw materials, apparel, manufacturing, and machinery. However, further analysis indicated that the high pass-through effects in the case of Japan were mainly attributed to the PRC's policy to peg the yuan to the United States (US) dollar, and that the dollar is used as a dominant invoicing currency for the PRC's exports to Japan. After controlling the currency invoicing factor, I found no evidence that the yuan's cumulative appreciation since July 2005 was passed on to prices of Japanese imports at either the aggregate or disaggregated levels. The estimated low pass-through effects of the yuan's appreciation suggest that a moderate appreciation of the yuan would have very little impact on the PRC's trade surplus.
    Keywords: exchange rate pass-through; prc; japan; usa
    JEL: F31 F32
    Date: 2010–05–18
  8. By: Miankhel, Adil Khan; Kalirajan, Kaliappa; Thangavelu, Shandre
    Abstract: The recent global recession requires policy makers to identify the relative importance of shock transmission mechanisms in each region and devise counter policy measures against future idiosyncratic shocks. In the last decade, world dynamics have changed considerably due to increased openness and integration requiring considering business cycles at regional levels. This paper analyzes the business cycle movements of the EU, ASEAN+3, NAFTA, MERCOSUR and SAARC regions to investigate why the subprime mortgage crisis of 2007 did not spread globally compared to the crisis that began with the fall of Lehman Brothers in September 2008. Employing a Panel Vector Autoregressive framework (PVEC), this study finds that the subprime mortgage crisis shock originated in the real sector (falling US housing prices) and was transmitted through trade variables. Due to absence of short term trade variables transmission mechanism in all regions except the MERCOSUR and SAARC, the shock did not spread widely to other regions. Even in the MERCOSUR and SAARC, due to limited goods exports exposure to the US, the shock was not significant. Resultantly, these regions exhibited a decoupling phenomenon during the subprime mortgage crisis. In contrast, the second shock originated with the fall of Lehman Brothers in 2008 and was transmitted through financial variables. Due to the presence of the short term causal relationship of the financial variable with GDP in all regions except SAARC, the slowdown contagion spread to most regions. As a result, the slowdown triggered the trade variables shock transmission mechanism and the SAARC region was also affected. Consequently, a business cycle convergence phenomenon was observed in the regions. Therefore, business cycles decoupling and convergence phenomena in the regions depend not only on the origin of the shock but also on the relative importance of the transmission mechanisms in each region.
    Keywords: Integration; Decoupling; Financial crisis; EU; NAFTA; ASEAN; MERCOSUR; SAARC; Business cycle; FDI; Exports; Intra industry Trade; Sub prime mortgage crisis; Lehman Brothers; Short term capital flows; Panel Cointegration; Panel stationarity; Panel Vector Error Correction (PVEC)
    JEL: F4 F0 O5 N2 E01 E21 D53 F2 O16 E3 N1 C5 C33 F3 F1 M2 G0 O4 C01 B41
    Date: 2010–05–05
  9. By: Ashoka Mody; Alina Carare
    Abstract: Even prior to the extreme volatility just observed, output growth volatility-following protracted decline-was flattening or mildly rising in some countries. More widespread was an increasing tendency from the mid-1990s for shocks in one country to transmit rapidly to other countries, creating the potential for heightened global volatility. The higher sensitivity to foreign shocks, in turn, appears related to stepped-up vertical specialization associated with the integration of emerging markets in international trade. Increased international spillovers call for stronger ex post coordination mechanisms when shocks are large but the best ex ante prevention strategy probably is sensible national policies.
    Keywords: Business cycles , Cross country analysis , Developed countries , Economic integration , Economic policy , Emerging markets , External shocks , Globalization , Industrial production , International trade , Production growth , Spillovers ,
    Date: 2010–03–25
  10. By: Rachel Male (Queen Mary, University of London)
    Abstract: Identifying business cycle stylised facts is essential as these often form the basis for the construction and validation of theoretical business cycle models. Furthermore, understanding the cyclical patterns in economic activity, and their causes, is important to the decisions of both policymakers and market participants. Previous analyses of developing country stylised facts have tended to feature only small samples, for example the seminal paper by Agénor <i>et al.</i> (2000) considers just twelve middle-income economies. Consequently, unlike for the industrialised countries, there is not a consistent set of developing country business cycle stylised facts. Motivated by importance of these business cycle statistics, this paper makes an important contribution to the literature by extending and generalising the developing country stylised facts for a sample of thirty-two developing countries. In particular, it is found that real interest rates are, on average, weakly procyclical in developing countries, not countercyclical as previously reported; this holds only for the Latin American economies. There is evidence that money leads the cycle in numerous developing economies, and thus that monetary shocks are an important source of business cycle fluctuations. However domestic credit, which is thought to fulfil an important role in determining investment, and hence economic activity, in developing economies, is found to lag, rather than lead, the cycle, thus implying that fluctuations in output influence credit rather than credit influencing the business cycle. A final key empirical finding is that developing country business cycles are characterised by significantly persistent output fluctuations; however, the magnitude of this persistence is somewhat lower than for the developed countries. Furthermore, prices and nominal wages are found to be significantly persistent in almost all of the developing countries. This finding is particularly important, because it justifies the use of theoretical models with staggered prices and wages for the modelling of developing country business cycles.
    Keywords: Business cycle, Developing economies, Stylised facts, Volatility, Persistence, Cross-correlations
    JEL: E31 E32 E52 F41 O50
    Date: 2010–05

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