nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒07‒10
seven papers chosen by
Martin Berka
Massey University

  1. Search-Theoretic Money, Capital and International Exchange Rate Fluctuations By Gomis-Porqueras, Pere; Kam, Timothy; Lee, Junsang
  2. Optimal Monetary Policy with Non-Zero Net Foreign Wealth By Mykhaylova, Olena
  3. Export Market Dynamics and Plant-level Productivity: Impact of Tariff Reductions and Exchange Rate Cycles By Baldwin, John R.; Yan, Beiling
  4. Global imbalances before and after the global crisis By Serven, Luis; Nguyen, Ha
  5. Capital mobility, balance of payments constraints, and economic growth: an empirical dynamic analysis. By Sérgio Fornazier Meirelles Filho; Frederico Gonzaga Jayme Jr
  6. Exchange rate policies, patterns of specialization and economic development: theory and evidence in developing countries By Gala, Paulo; Libanio, Gilberto
  7. On European monetary integration and the persistence of real effective exchange rates By Robinson Kruse

  1. By: Gomis-Porqueras, Pere; Kam, Timothy; Lee, Junsang
    Abstract: In this paper we develop a two-country global monetary economy where a monetary equilibrium exists because of fundamentaldecentralized trade frictions ? a Lagos-Wright search and matching friction. In the decentralized markets (DM), the terms of trade can be determined either by bargaining or by competitive price taking (baseline model). We show that the baseline model is capable of generating quite realistic real and nominal exchange rate volatility observed in the data, without relying on more ad-hoc sticky price assumptions commonly used in the international macroeconomics literature. The key mechanism lies in the role of search and matching frictions and a primitive technological assumption ? that capital is also a complementary input to production in the DM. This creates an internal propagation mechanism by modifying asset-pricing relations and relative price dynamics in the model.
    Keywords: Search-theoretic Money, Open Economy, Real Exchange Rate Puzzle
    JEL: E31 E32 E43 E44
    Date: 2010–06
  2. By: Mykhaylova, Olena
    Abstract: I study the impact of net foreign wealth on the optimal monetary policy of an open economy in a two-country DSGE model with incomplete markets, sticky prices and deviations from the Law of One Price. I find that by optimally manipulating monetary policy, central banks can affect the timing of interest receipts (or payments) and therefore increase the risk-sharing role of the internationally traded asset. In particular, debtor nations find it optimal to allow their currency to float relatively more freely than do creditor nations. In order to maximize consumer welfare, in most specifications of the model central bank should target a weighted average of CPI inflation and changes in the nominal exchange rate.
    Keywords: Optimal monetary policy; welfare; open economy; net foreign wealth.
    JEL: F34 F32 E52 E44
    Date: 2010–07–01
  3. By: Baldwin, John R.; Yan, Beiling
    Abstract: This paper examines how trade liberalization and fluctuations in real exchange rates affect export-market entry/exit and plant-level productivity. It uses the experience of Canadian manufacturing plants over three separate periods that featuring different rates of bilateral tariff reduction and differing movements in bilateral real exchange rates. The patterns of entry and exit responses as well as the productivity outcomes differ markedly in the three periods. Consistent with much of the recent literature, the paper finds that plants self-select into export markets-that is, more efficient plants are more likely to enter and less likely to exit export markets. The reverse also occurs: entrants to export markets improve their productivity performance relative to the population from which they originated and plants that stay in export markets do better than comparable plants that exited, lending support to the thesis that exporting boosts productivity. Finally, we find that overall market access conditions, including real exchange rate trends, significantly affect the extent of productivity gains to be derived from participating in export markets. In particular, the increase in the value of the Canadian dollar during the post-2002 period almost completely offset the productivity growth advantages that new export-market participants would otherwise have enjoyed.
    Keywords: International trade, Business performance and ownership, Economic accounts, Business adaptation and adjustment, Productivity accounts
    Date: 2010–06–25
  4. By: Serven, Luis; Nguyen, Ha
    Abstract: This paper surveys the academic and policy debate on the roots of global imbalances, their role in the inception of the global crisis, and their prospects in its aftermath. The conventional view holds that global imbalances result primarily from unsustainably high demand for goods in the United States and other rich countries, and that their impending correction must involve major United States trade adjustment and dollar depreciation -- although recent literature argues that their extent may be dampened by financial adjustment effects. In contrast, an alternative view portrays global imbalances as the equilibrium result of asymmetries in world asset demand and supply. Absent changes in the deep determinants of these, global imbalances can persist. International capital flow patterns before and during the crisis lend support to the equilibrium view. The paper also examines different hypotheses proposed in the literature on the role of global imbalances in the generation and propagation of the financial crisis. On the whole, the evidence suggests that global imbalances were not among the major causes of the crisis. Lastly, the paper assesses alternative scenarios about the future of global imbalances, considering in particular their potential consequences for developing countries, and the policy measures that these might adopt to enhance their growth prospects in a changing global equilibrium.
    Keywords: Currencies and Exchange Rates,Debt Markets,Emerging Markets,Economic Theory&Research,Investment and Investment Climate
    Date: 2010–06–01
  5. By: Sérgio Fornazier Meirelles Filho (FACE-UFG, Ciências Econômicas); Frederico Gonzaga Jayme Jr (Cedeplar/UFG)
    Abstract: This paper analyses empirically the relationship between economic growth and the openness of the financial account of the balance of payments. It takes into consideration the balance of payments’ constrained growth, as well as the difficulties in the empirical literature in measuring capital mobility. Starting from traditional capital mobility indexes we estimate a panel across 80 countries, both developed and developing between 1979-2003. Results suggest that more capital mobility in developing countries affects growth negatively, whereas it possibly stimulates growth in developed countries.
    Keywords: Economic Growth, Capital Mobility, Dynamic Panel.
    JEL: F41 F43
    Date: 2010–06
  6. By: Gala, Paulo; Libanio, Gilberto
    Abstract: The objectives of this paper are twofold. First, it intends to provide theoretical elements toanalyze the relation between real exchange rates and economic development. Our mainhypothesis is very much in line with the Dutch disease literature, and states that competitivecurrencies contribute to the existence and maintenance of the manufacturing sector in theeconomy. This, in turn, brings about higher growth rates in the long run, given the existenceof increasing returns in the industrial sector, and its importance in generating technologicalchange and increasing productivity in the overall economy. The second objective of this paperis empirical. It intends to analyze examples of successful exchange rate policies, such as Chileand Indonesia in the eighties, as a benchmark for comparison with countries where currencyovervaluation has taken place, such as Brazil. In the latter case, the local currency is beinginflated by large capital inflows, due to high domestic interest rates and to a boom in demandand prices of commodities in the international markets. It will be argued that the industrialsector bears most of the burden when the currency appreciates, and that Brazil risks at deindustrializationif there are no changes in the exchange rate regime.
    Date: 2010–07–02
  7. By: Robinson Kruse (Aarhus University, School of Economics and Management, CREATES)
    Abstract: This paper deals with the possibility of changing persistence in European real effective exchange rates as initially analyzed by Gadea and Gracia (2009). By applying a CUSUM of squares-based test for constant versus changing persistence with desirable statistical properties, an OECD data set is reconsidered. The empirical results suggest that persistence remains constant over time for nearly all time series. Thus, European monetary integration has not affected the persistence of external competitiveness significantly. Moreover, strong evidence for non-stationarity is found. Explanations for the sharp contrast of new results towards the ones by Gadea and Gracia (2009) are provided.
    Keywords: Changing persistence, unit roots, structural breaks, European monetary integration
    JEL: C22 E61 F31 F42
    Date: 2010–03–01

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