nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒07‒03
five papers chosen by
Martin Berka
Massey University

  1. The Role of Expenditure Switching in the Global Imbalance Adjustment By Wei Dong
  2. What lies beneath the euro's effect on financial integration? Currency risk, legal harmonization, or trade? By Sebnem Kalemli-Ozcan; Elias Papaioannou; José-Luis Peydró
  3. The Impact of Oil Prices on the Real Exchange Rate of the Dirham: a Case Study of the United Arab Emirates By Al-mulali, Usama; Che Sab, Normee
  4. Characterizing the business cycles of emerging economies By Calderon, Cesar; Fuentes, Rodrigo
  5. A Dynamic General Equilibrium Analysis of Japanese & Korean Immigration By Phillips, Kerk L.

  1. By: Wei Dong
    Abstract: In theory, nominal exchange rate movements can lead to “expenditure switching” when they generate changes in the relative prices of goods across countries. This paper explores whether the expenditure-switching role of exchange rates has changed in the current episode of significant global imbalances. We develop a multi-sector two-country model for the United States and the G6 countries, with the rest of the world captured by exogenous price and demand shocks, and estimate the model over two sub-samples, which cover the periods before and after the early 1990s. Our results indicate that both U.S. imports and exports have become much less responsive to exchange rate movements in recent years, mainly due to changes in firms’ pricing behavior and the increased size of distribution margins. These findings suggest that the exchange rate would have to move by a much larger amount now than in the 1970s and 1980s to reduce the U.S. trade deficit by a given amount.
    Keywords: Exchange rates; International topics
    JEL: F3 F4
    Date: 2010
  2. By: Sebnem Kalemli-Ozcan (University of Houston, Department of Economics, Houston, TX, 77204, USA.); Elias Papaioannou (Dartmouth College, 6106 Rockefeller Hall, 319 Silsby Hanover, NH 03755, USA.); José-Luis Peydró (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: Although recent research shows that the euro has spurred cross-border financial integration, the exact mechanisms remain unknown. We investigate the underlying channels of the euro’s effect on financial integration using data on bilateral banking linkages among twenty industrial countries in the past thirty years. We also construct a dataset that records the timing of legislative-regulatory harmonization policies in financial services across the European Union. We find that the euro’s impact on financial integration is primarily driven by eliminating the currency risk. Legislative-regulatory convergence has also contributed to the spur of cross-border financial transactions. Trade in goods, while highly correlated with bilateral financial activities, does not play a key role in explaining the euro’s positive effect on financial integration. JEL Classification: F1, F3, G2, K0.
    Keywords: Financial integration, Law and finance, Euro, European Union, FSAP, Trade, Regulation.
    Date: 2010–06
  3. By: Al-mulali, Usama; Che Sab, Normee
    Abstract: This study investigated the impact of oil shocks on the real exchange rate of the United Arab Emirates (UAE) dirham. Time series data were used for the period 1977 to 2007 covering four important oil shocks. Five variables have been used in this study, with the real exchange rate of the dirham as the dependent variable and the gross domestic product per capita, oil price, trade balance, and foreign direct investment inflows as the independent variables. In this study we used the Johansen-Juselius cointegration procedure, and conducted the Granger causality tests based on the VECM. Through this research, we found that a fixed exchange rate to the U.S. dollar is not an appropriate exchange rate regime for the UAE. This is because when the price of oil increases, and with a fixed exchange rate regime, this would lead to rapid growth in GDP and liquidity in the UAE economy. This in turn causes domestic prices to increase, which results in high levels of inflation.
    Keywords: oil Prices; real exchange rate; UAE; VAR
    JEL: E30 F31 Q43
    Date: 2009–06–23
  4. By: Calderon, Cesar; Fuentes, Rodrigo
    Abstract: Using the dating algorithm by Harding and Pagan (2002) on a quarterly database for 23 emerging market economies (EMEs) and 12 developed countries over the period 1980.Q1 - 2006.Q2, the authors proceed to characterize and compare the business cycle features of these two groups. They first find that recessions are deeper and more frequent among EMEs (especially, among LAC countries) and that expansions are more sizable and longer (especially, among East Asian countries). After this characterization, this paper explores the linkages between the cost of recessions (as measured by the average annual rate of output loss in the peak-to-trough phase of the cycle) and several country-specific factors. The main findings are: (a) adverse terms of trade shocks raises the cost of recessions in countries with a more open trade regime, deeper financial markets and, surprisingly, a more diversified output structure. (b) U.S. interest rate shocks seem to have a significant impact on the cost of recessions in East Asian countries. (c) Recessions tend to be deeper if they coincide witha sudden stop, but the effect tends to be mitigated in countries with deeper domestic credit markets. (d) Countries with stronger institutions tend to have less costly recessions.
    Keywords: Debt Markets,Currencies and Exchange Rates,Emerging Markets,Economic Theory&Research,Banks&Banking Reform
    Date: 2010–06–01
  5. By: Phillips, Kerk L.
    Abstract: This paper constructs a multi-sector dynamic general equilibrium model for a trading economy. We incorporate three major factors of production: capital, skilled labor & unskilled labor. We solve and calibrate the model using data from Japan and Korea. We then consider changes to immigration policy in both countries. We are able to examine the effects on output, consumption, wages, and utility. We do this for both the new steady state and for the time-path leading to that steady state. In addition, we are able, if we so wish, to impose a series of unrelated macroeconomic shock to the model. This has the advantage of allowing us to calculate confidence bands around our policy impulse response functions. We find that allowing skilled labor to immigrate leads to greater welfare gains in the steady state. We also show that there is a great deal of uncertainty surrounding the exact time path to a new steady state in the presence of the typical fluctuations associated with business cycles. We find a great deal of inertia in the transition to a new steady state.
    Keywords: labor migration; factor mobility; dynamic general equilibrium; Japan; Korea; DSGE
    JEL: F22 F15 F42
    Date: 2010–04

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