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on Open MacroEconomics |
| By: | Gita Gopinath; Oleg Itskhoki |
| Abstract: | The closed and open economy literatures both work on evaluating the role of real rigidities, but in parallel. This paper brings the two literatures together. We use international price data and exchange rate shocks to evaluate the importance of real rigidities in price setting. We show that, consistent with the presence of real rigidities, the response of reset-price inflation to exchange rate shocks exhibits significant persistence. Individual import prices, conditional on changing, respond to exchange rate shocks prior to the last price change. At the same time, aggregate reset-price inflation for imports, like that for consumer prices, exhibits little persistence. Competitor prices affect firm pricing, and exchange rate pass-through into import prices is greater in response to trade-weighted, as opposed to bilateral, exchange rate shocks. We quantitatively evaluate sticky-price models (Calvo and menu cost) with variable markups at the wholesale level and constant markups at the retail level, consistent with empirical evidence. Variable markups alone generate price sluggishness at the aggregate level, while they fall short of matching price persistence at the micro level. Finally, variable markups magnify the size of the contract multiplier, but their absolute effects are modest unless they are coupled with exogenous sources of persistence. |
| Keywords: | Prices ; Imports - Prices ; Foreign exchange rates |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:10-9&r=opm |
| By: | Ina Simonovska |
| Abstract: | This paper presents novel evidence of price discrimination, using prices of identical goods in 28 countries. I explain the observed phenomenon via non-homothetic preferences, in a model of trade with product differentiation and firm productivity heterogeneity. The model brings theory and data closer along a key dimension: it generates positively related prices of tradables and income, while preserving exporter behavior and trade flows of existing frameworks. It further captures observations that richer countries buy more per product and consume more diverse bundles. Quantitatively, the model suggests that variable markups account for 80 percent of the positive price-income relationship across 123 countries. |
| Keywords: | Price discrimination ; Pricing ; International trade - Econometric models ; Income |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:55&r=opm |
| By: | Joong Shik Kang; Alessandro Prati; Alessandro Rebucci |
| Abstract: | The available evidence on the effects of aid on growth is notoriously mixed. We use a novel empirical methodology, a heterogeneous panel vector-autoregression model identified through factor analysis, to study the dynamic response of exports, imports, and per capita GDP growth to a "global" aid shock (the common component of individual country aid-to-GDP ratios). We find that the estimated cumulative resposive of exports and per capita GDP growth to a global aid shock are strongly positively correlated, and both responses are inversely related to exchange rate overvaluation measures. We interpret this evidence as consistent with the Dutch disease hypothesis. However, we also find that, in countries with less overvalued real exchange rates, exports and per capita GDP growth respond positively to a global aid shock. This evidence suggests that preventing exchange rate overvaluations may allow aid-receiving countries to avoid the Dutch disease. |
| Keywords: | Aid, Common factors, Dutch Disease, Growth Panel VARs, Exchange rate overvaluation |
| JEL: | F35 F43 O11 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4678&r=opm |
| By: | Balazs Egert |
| Abstract: | This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel’s Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-makret service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistant and that commodity prices have a stronger effect on inflation in a higher inflation environment. |
| Keywords: | European Union, inflation, Balassa-Samuelson, real convergence,catching up, Bayesian model average, non-linearity. |
| JEL: | E43 E50 E52 C22 G21 O52 |
| Date: | 2010–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2010-991&r=opm |
| By: | Martin Schmitz (Institute for International Integration Studies, Trinity College Dublin); |
| Abstract: | This paper shows that, controlling for standard determinants of net external positions, financially-remote countries exhibit more positive net external positions. This finding is found to be stronger for less advanced countries, hinting at external funding problems for more remote countries. Being located near financially very open countries, being in currency unions with creditor countries, or being highly integrated through financial and trade linkages with a ‘core’ country facilitates net external borrowing. Consequently, evidence is found for an important role of geographic and bilateral factors for a country’s net external wealth. |
| Keywords: | net foreign assets, cross-border investment, distance, proximity |
| JEL: | F21 F34 F41 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp332&r=opm |
| By: | Nathan S. Balke; Stephen P.A. Brown; Mine K. Yücel |
| Abstract: | Oil price shocks are thought to have played a prominent role in U.S. economic activity. In this paper, we employ Bayesian methods with a dynamic stochastic general equilibrium model of world economic activity to identify the various sources of oil price shocks and economic fluctuation and to assess their effects on U.S. economic activity. We find that changes in oil prices are best understood as endogenous. Oil price shocks in the 1970s and early 1980s and the 2000s reflect differing mixes of shifts in oil supply and demand, and differing sources of oil price shocks have differing effects on economic activity. We also find that U.S. output fluctuations owe mostly to domestic shocks, with productivity shocks contributing to weakness in the 1970s and 1980s and strength in the 2000s. |
| Keywords: | Petroleum products - Prices ; Petroleum industry and trade ; Economic conditions - United States ; Business cycles |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:1003&r=opm |
| By: | Pels (Institute for International Integration Studies, Trinity College Dublin); |
| Abstract: | The establishment of a monetary union in Europe in 1999 has eliminated exchange rate risk within the euro area and has led to a more unified financial framework. It has been established in the literature that the euro has led to a disproportional increase in bilateral asset holdings within the euro area. This paper builds on this evidence and answers the question whether this has been a one-off effect, or whether the euro effect in intra-euro area bilateral asset holdings has changed over time. We show, using a gravity framework, that the proportional increase in bilateral asset holdings took place in the early years of the European monetary union and was a unique event. The data used are bilateral data on equity and bond holdings, provided by the Coordinated Portfolio Investment Survey of the IMF for the years 1997, and 2001 until 2006. |
| Keywords: | international asset trade; gravity equation; euro |
| JEL: | F30 F36 F41 G11 |
| Date: | 2010–07 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp331&r=opm |
| By: | Paulo Bastos; Odd Rune Straume |
| Abstract: | This paper develops a two-country, general equilibrium model of oligopoly in which the degree of horizontal product differentiation is endogenously determined by rms’ strategic investments in product innovation. Consumers seek variety and product innovation is more skill intensive than production. Stronger import competition increases innovation incentives, and thereby the relative demand for skill. An intraindustry trade expansion following trade liberalization can therefore increase wage inequality between skilled and unskilled workers. In addition, since product differentiation is resource consuming, freer trade entails a potential trade-off between production and variety. The import competition effect highlighted by the model, which plays a key role in determining the general equilibrium, is consistent with panel data on Chilean manufacturing plants. |
| Keywords: | Trade liberalization, Product differentiation, Innovation,Wage inequality, General oligopolistic equilibrium |
| JEL: | F15 F16 L13 O31 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4679&r=opm |
| By: | Steven B. Kamin |
| Abstract: | This paper reviews the available evidence and previous research on potential effects of financial globalization, that is, the international integration of financial markets. In particular, we address the questions: Has financial globalization materially increased the influence of external developments on domestic monetary conditions? And, has it reduced the influence of central banks over financial and economic conditions in their own country? We find that central banks with floating currencies retain the ability to independently determine short-term interest rates and thus influence broader financial conditions and macroeconomic performance in their economies. However, domestic financial conditions appear to have become more vulnerable to a wide range of external shocks, complicating the task of making appropriate monetary policy decisions. Moreover, the financial crisis has highlighted the importance of cross-border channels for the transmission of liquidity and credit shocks. With financial transactions increasingly being undertaken in vehicle currencies such as dollars and euros, the liquidity provision and the lender-of-last resort functions of many central banks are being challenged. Accordingly, international arrangements for liquidity provision may become increasingly important in the future. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:1002&r=opm |