nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒07‒31
seven papers chosen by
Martin Berka
Massey University

  1. Exchange Rate Fluctuations, Plant Turnover and Productivity By Ben Tomlin
  2. Organizational Capital and the International Co-movement of Investment By Alok Johri; Marc-Andre Letendre; Daqing Luo
  3. Banking Globalization and International Business Cycles By Kozo Ueda
  4. Financial regulation, financial globalization and the synchronization of economic activity By Sebnem Kalemli-Ozcan; Elias Papaioannou; José-Luis Peydró
  5. Globalization, Pass-Through and Inflation Dynamic By Pierpaolo Benigno; Ester Faia
  6. Chronicle of currency collapses: re-examining the effects on output By Matthieu Bussière; Sweta C. Saxena; Camilo E. Tovar
  7. The EAGLE. A model for policy analysis of macroeconomic interdependence in the euro area By Sandra Gomes; P. Jacquinot; M. Pisani

  1. By: Ben Tomlin
    Abstract: In a small open economy fluctuations in the real exchange rate can affect plant turnover, and thus aggregate productivity, by altering the makeup of plants that populate the market. An appreciation of the local currency increases the level of competition in the domestic market as import competition intensifies and export opportunities shrink, forcing less productive plants from the market and compelling new entrants to be more competitive than they otherwise would have been. Depreciations have the opposite effect, as import competition weakens and new export opportunities arise, less competitive plants are able to continue to operate in the market and crowd out new, more productive entrants. This paper develops a dynamic structural model that captures the effect of plantlevel productivity and real exchange rate fluctuations on plant entry and exit decisions in the Canadian agricultural implements industry, and how this, in turn, affects aggregate productivity. The model's dynamic parameters are estimated in two stages. Variable profit parameters and the per-period fixed cost of operation are estimated first using the Nested Pseudo Likelihood (NPL) algorithm, and then the parameters characterizing the distribution of unobserved potential entrant productivity, along with the cost of entry, are estimated in a second stage using the Method of Simulated Moments (MSM). Finally, simulations of the model are used to investigate the effects of shocks to the exchange rate process on aggregate industry productivity.
    Keywords: Productivity; Exchange rates; Market structure and pricing
    JEL: D21 D24 L11
    Date: 2010
  2. By: Alok Johri; Marc-Andre Letendre; Daqing Luo
    Abstract: A productivity shock leads to a large international transfer of capital and negative co-movement of investment in the typical two-country real business cycle model. Most recent models that attempt to reduce or remove this transfer produce unrealistically low investment volatility. We show that adding organizational capital to the technological environment of a relatively standard international business cycle model can ameliorate this problem. In addition we show that GHH preferences along with the above modification are sufficient to deliver positive cross-country correlations of consumption, hours, output and investment.
    Keywords: International RBC; learning by doing; organizational capital; cross-country correlations; investment
    JEL: F41 F21 E32
    Date: 2010–07
  3. By: Kozo Ueda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: kouzou.ueda
    Abstract: This paper constructs a two-country DSGE model to study the nature of the recent financial crisis and its effects that spread immediately throughout the world owing to the globalization of banking. In the model, financial intermediaries (FIs) enter into chained credit contracts at home and abroad, engaging in cross-border lending to entrepreneurs by undertaking cross-border borrowing from investors. The FIs as well as the entrepreneurs in two countries are credit constrained, so all of their net worths matter. Our model reveals that under FIs' globalization, adverse shocks that hit one country affect the other, yielding business cycle synchronization on both the real and financial sides. It also suggests that the FIs' globalization, net worth shock, and credit constraints are key to understanding the recent financial crisis.
    Keywords: Financial accelerator, financial intermediaries, correlation ( quantity) puzzle, business cycle synchronization, contagion, monetary policy
    JEL: E22 E32 E44 E52 F41
    Date: 2010–07
  4. 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: We identify the effect of financial integration on international business cycle synchronization, by utilizing a confidential database on banks’ bilateral exposure and employing a country-pair panel instrumental variables approach. Countries that become more integrated over time have less synchronized growth patterns, conditional on global shocks and country-pair factors. To account for reverse causality and measurement error, we exploit variation in the transposition dates of financial legislation. We find that increases in financial integration stemming from regulatory harmonization policies are followed by more divergent cycles. Our results contrast with those of the previous studies which suffer from the standard identification problems. JEL Classification: E32, F15, F36, G21, G28, O16.
    Keywords: Banking Integration, Co-movement, Fluctuations, Financial Legislation.
    Date: 2010–07
  5. By: Pierpaolo Benigno (Professor, LUISS Guido Carli and EIEF (E-mail:; Ester Faia (Professor, Goethe University Frankfurt, Kiel IfW and CEPREMAP (E-mail:
    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)fs 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.
    Keywords: AS equations, Oligopolistic Competition, Inflation Dynamic
    JEL: E31 F41
    Date: 2010–07
  6. By: Matthieu Bussière (Banque de France, 31 rue Croix des petits champs, 75001 Paris, France.); Sweta C. Saxena (International Monetary Fund (IMF), 700 19th Street, N.W., Washington DC 20431, USA.); Camilo E. Tovar (Bank for International Settlements (BIS), Centralbahnplatz 2, CH - 4002 Basel, Switzerland.)
    Abstract: The impact of currency collapses (i.e. large nominal depreciations or devaluations) on real output remains unsettled in the empirical macroeconomic literature. This paper provides new empirical evidence on this relationship using a dataset for 108 emerging and developing economies for the period 1960-2006. We provide estimates of how these episodes affect growth and output trend. Our main finding is that currency collapses are associated with a permanent output loss relative to trend, which is estimated to range between 2% and 6% of GDP. However, we show that such losses tend to materialise before the drop in the value of the currency, which suggests that the costs of a currency crash largely stem from the factors leading to it. Taken on its own (i.e. ceteris paribus) we find that currency collapses tend to have a positive effect on output. More generally, we also find that the likelihood of a positive growth rate in the year of the collapse is over two times more likely than a contraction, and that positive growth rates in the years that follow such episodes are the norm. Finally, we show that the persistence of the crash matters, i.e. one-time events induce exchange rate and output dynamics that differ from consecutive episodes. JEL Classification: E32, F31, F41, F43.
    Keywords: currency crisis, nominal devaluations, nominal depreciations, exchange rates, real output growth, recovery from crises.
    Date: 2010–07
  7. By: Sandra Gomes; P. Jacquinot; M. Pisani
    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: C53 E32 E52 F47
    Date: 2010

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