nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒06‒11
six papers chosen by
Martin Berka
Massey University

  1. The Intranational Business Cycle in Japan By Michael Artis; Toshihiro Okubo
  2. Cross-border banking and the international transmission of financial distress during the crisis of 2007-2008 By Alexander Popov; Gregory F. Udell
  3. VECM Estimations of the PPP Reversion Rate Revisited: The Conventional Role of Relative Price Adjustment Restored By Hyeongwoo Kim
  4. Readdressing the trade effect of the Euro: Allowing for currency misalignment By Hogrefe, Jan; Jung, Benjamin; Kohler, Wilhelm
  5. "Global Imbalances, the U.S. Dollar, and How the Crisis at the Core of Global Finance Spread to "Self-insuring" Emerging Market Economies" By Jörg Bibow
  6. On The Purchasing Power Parity For Latin-American Countries By Divino, Jose Angelo; Teles, Vladimir Kuhl; Pinto De Andrade, Joaquim

  1. By: Michael Artis (Swansea University, and CEPR); Toshihiro Okubo (Research Institute for Economics and Business Administration)
    Abstract: This paper studies the intranational business cycle – that is the set of regional (prefectural) business cycles – in Japan. One reason for choosing to examine the Japanese case is that long time series of relatively detailed data are available. A Hodrick-Prescott filter is applied to identify cycles in annual data from 1955 to 1995 and bilateral cross-correlations of prefectural GDPs are calculated for all pairs of prefectures, in our results we find fairly high cross-correlations. The paper then turns to an econometric explanation of the cross-correlation coefficients in the augmented gravity model framework. Two prefectures with similar GDPs and a shorter distance between them lead to business cycle synchronization whilst those with larger regional gaps in factor endowments (capital, labor and human capital) result in more idiosyncratic business cycle.
    Keywords: Intranational business cycle, Hodrick-Prescott filter, Optimal Currency Area, Gravity Model, Heckscher-Ohlin theorem
    JEL: E32 F41 R11
    Date: 2010–06
  2. By: Alexander Popov (European Central Bank, Financial Research Division, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gregory F. Udell
    Abstract: We study the effect of financial distress in foreign parent banks on local SME financing in 14 central and eastern European countries during the early stages of the 2007-2008 financial crisis. We use survey data on applicant and non-applicant firms that enable us to disentangle effects driven by shocks to the banking system from recession-driven demand shocks that may vary across lenders. We find strong evidence that credit tightened in the relatively early stages of the crises caused by the following types of bank financial distress: 1) low equity ratio; 2) low Tier 1 capital ratio; and 3) losses on financial assets. We also find that foreign banks transmit to Main Street a larger portion of similar financial shocks than domestic banks. The observed decline in credit is greater among high-risk firms and firms with fewer tangible assets. JEL Classification: E44, E51, F34, G21.
    Keywords: credit crunch, financial crisis, bank lending channel, business lending.
    Date: 2010–06
  3. By: Hyeongwoo Kim
    Abstract: Cheung et al. (2004) use a vector error correction model that allows different speeds of convergence for nominal exchange rates and relative prices toward PPP. With the current float monthly data for five countries, they argue that the sluggish PPP reversion is primarily driven by nominal exchange rate adjustment rather than price adjustment, which is at odds with the conventional sticky-price models. Major findings of this paper are twofold. First, we show that it may be inappropriate to use short-horizon high frequency data in vector error correction models, even when both the nominal exchange rate and the relative price are not weakly exogenous. Second, using a long-horizon annual data set for 11 countries vis-à-vis the US, we find a significantly important role of relative prices in real exchange rate dynamics.
    Keywords: Purchasing Power Parity, Convergence Rate, Half-Life, Impulse-Response, Variance Decomposition
    JEL: C32 F31
    Date: 2010–05
  4. By: Hogrefe, Jan; Jung, Benjamin; Kohler, Wilhelm
    Abstract: We know that euro-area member countries have absorbed asymmetric shocks in ways that are inconsistent with a common nominal anchor. Based on a reformulation of the gravity model that allows for such bilateral misalignment, we disentangle the conventional trade cost channel and trade effects deriving from 'implicit currency misalignment'. Econometric estimation reveals that the currency misalignment channel exerts a significant trade effect on bilateral exports. We retrieve country specific estimates of the euro effect on trade based on misalignment. This reveals asymmetric trade effects and heterogeneous outlooks across countries for the costs and benefits from adopting the euro. --
    Keywords: Euro,gravity model,exchange rates,purchasing power parity,trade imbalances
    JEL: F12 F13 F15
    Date: 2010
  5. By: Jörg Bibow
    Abstract: This paper investigates the spread of what started as a crisis at the core of the global financial system to emerging economies. While emerging economies had exhibited some resilience through the early stages of the financial turmoil that began in the summer of 2007, they have been hit hard since mid-2008. Their deteriorating fortunes are only partly attributable to the collapse in world trade and sharp drop in commodity prices. Things were made worse by emerging markets' exposure to the turmoil in global finance itself. As "innocent bystanders," even countries that had taken out "self-insurance" proved vulnerable to the global "sudden stop" in capital flows. We critique loanable funds theoretical interpretations of global imbalances and offer an alternative explanation that emphasizes the special status of the U.S. dollar. Instead of taking out even more self-insurance, developing countries should pursue capital account management to enlarge their policy space and reduce external vulnerabilities.
    Keywords: Financial Crisis; Capital Flows; Self-insurance; Capital Controls; Bretton Woods II Hypothesis; Global Saving Glut Hypothesis
    JEL: E12 E43 E44 F02 F10 F32 F33 F42
    Date: 2010–03
  6. By: Divino, Jose Angelo; Teles, Vladimir Kuhl; Pinto De Andrade, Joaquim
    Abstract: The purpose of this paper is to test the hypothesis of long-run purchasingpower parity (PPP) for all Latin American countries. These countries sharesimilar economic history and contagious effects from currency crises, whichmight lead to comovements in their real exchange rates. New time series unitroot tests found evidence of PPP for the vast majority of countries. In thepanel data framework, tests for the null of unit root, null of stationarity, andunit root under multiple structural breaks indicated stationary real exchangerates. Thus, there is convincing evidence that PPP holds for Latin-Americancountries in the post-1980 period.
    Date: 2010–06–01

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