nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒09‒25
nine papers chosen by
Martin Berka
Massey University, Albany

  1. Dynamic Effects of Foreign Direct Investment When Credit Markets are Imperfect By Gall, Thomas; Schiffbauer, Marc; Kubny, Julia
  2. The impacts of economic structures on the performance of simple policy rules in a small open economy By Siok Kun, Sek
  3. Characterizing the Business Cycles of Emerging Economies By César Calderón; Rodrigo Fuentes.
  4. Supply, demand and monetary policy shocks in a multi-country New Keynesian Model By Stéphane Dées; M. Hashem Pesaran; L. Vanessa Smith; Ron P. Smith
  5. Current account determinants and external sustainability in periods of structural change By Sophocles N. Brissimis; George Hondroyiannis; Christos Papazoglou; Nicholas T. Tsaveas; Melina A. Vasardani
  6. Analysing the Terms of Trade Effect for Pakistan By Nishat Fatima
  7. Strategic Technology Investments in Open Economies By Anna Bohnstedt; Christian Schwarz
  8. A new approach to analyzing convergence and synchronicity in growth and business cycles: cross recurrence plots and quantification analysis By Crowley, Patrick M; Schultz, Aaron
  9. Synchronization of Recessions in Major Developed and Emerging Economies By Pami Dua; Anirvan Banerji

  1. By: Gall, Thomas; Schiffbauer, Marc; Kubny, Julia
    Abstract: This paper argues that foreign direct investment in economies with credit market imperfections may increase their vulnerability to capital flow shocks. Due to better access to financial markets foreign firms can use other wage contracts than domestic ones. This alters the domestic wage composition and the subsequent wealth distribution. When credit markets are imperfect, the wealth distribution typically determines an economy's growth potential in autarky; hence, high exposure to foreign direct investment may significantly impede the capability to recover from sudden withdrawals of foreign capital. This is substantiated by empirical evidence on durations of output recovery after systemic sudden stops. --
    Keywords: Credit market imperfections,foreign direct investment,growth,occupational choice,sudden stops
    JEL: F43 F23 O16
    Date: 2010
  2. By: Siok Kun, Sek
    Abstract: Applying a stochastic dynamic general equilibrium model, the performance of various simple rules is analyzed in a small open economy context. The aspects that are considered in the analysis include the degree of exchange rate pass-through, trade openness, the policy objective and the source and persistency of shocks. The main objective of this analysis is to investigate if the rule reacts to exchange rate performs better than the basic closed economy rule without exchange rate term. Comparison on the performances is also made between the consumer inflation targeting and domestic inflation targeting rules. The results show that adding the exchange rate term to the policy rule enhances improvement especially in the higher pass-through case. The superior rule is the hybrid rule that reacts to the exchange rate term. CPI inflation targeting rules outperform the domestic inflation targeting rules in term of welfare loss. However, more complicated domestic inflation targeting rules generate lower loss in term of relative loss. On the second part of this chapter, comparisons on the performances of different exchange rate regimes are made under different source and persistency of shocks. The floating (pegged) regime is favored under more prominent real (nominal) shocks. The results suggest that emerging countries that experience very large real shocks should float their exchange rate.
    Keywords: simple policy rule; exchange rate pass-through; open economy model
    JEL: E58 N15 E52 H30 N25 F41 E61
    Date: 2009–11
  3. By: César Calderón; Rodrigo Fuentes.
    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, we proceed to characterize and compare the business cycle features of these two groups. We 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. Our 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 with a 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: Business cycles, peaks and troughs, emerging markets
    JEL: E32 F41
    Date: 2010
  4. By: Stéphane Dées (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); M. Hashem Pesaran (Cambridge University, Faculty of Economics, Austin Robinson Building, Sidgwick Avenue, Cambridge, CB3 9DD, United Kingdom.); L. Vanessa Smith (Cambridge University, Trumpington Street, Cambridge CB2 1AG, United Kingdom.); Ron P. Smith (Birkbeck College, London, United Kingdom.)
    Abstract: This paper estimates and solves a multi-country version of the standard DSGE New Keynesian (NK) model. The country-specific models include a Phillips curve determining inflation, an IS curve determining output, a Taylor Rule determining interest rates, and a real effective exchange rate equation. The IS equation includes a real exchange rate variable and a countryspecific foreign output variable to capture direct inter-country linkages. In accord with the theory all variables are measured as deviations from their steady states, which are estimated as long-horizon forecasts from a reduced-form cointegrating global vector autoregression. The resulting rational expectations model is then estimated for 33 countries on data for 1980Q1-2006Q4, by inequality constrained IV, using lagged and contemporaneous foreign variables as instruments, subject to the restrictions implied by the NK theory. The multi-country DSGE NK model is then solved to provide estimates of identified supply, demand and monetary policy shocks. Following the literature, we assume that the within country supply, demand and monetary policy shocks are orthogonal, though shocks of the same type (e.g. supply shocks in different countries) can be correlated. We discuss estimation of impulse response functions and variance decompositions in such large systems, and present estimates allowing for both direct channels of international transmission through regression coefficients and indirect channels through error spillover effects. Bootstrapped error bands are also provided for the cross country responses of a shock to the US monetary policy. JEL Classification: C32, E17, F37, F42.
    Keywords: Global VAR (GVAR), New Keynesian DSGE models, supply shocks, demand shocks, monetary policy shocks.
    Date: 2010–09
  5. By: Sophocles N. Brissimis (Bank of Greece, Economic Research Department, 21 E. Venizelos Ave., Athens 10250, Greece.); George Hondroyiannis (Bank of Greece, 21 E. Venizelos Ave., Athens 10250, Greece.); Christos Papazoglou (Bank of Greece, 21 E. Venizelos Ave., Athens 10250, Greece.); Nicholas T. Tsaveas (Bank of Greece, 21 E. Venizelos Ave., Athens 10250, Greece.); Melina A. Vasardani (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The aim of this paper is to study the main macroeconomic, financial and structural factors that shaped current account developments in Greece over the period from 1960 to 2007 and discuss these developments in relation to the issue of external sustainability. Concerns over Greece’s external sustainability have emerged since 1999 when the current account deficit widened substantially and exhibited high persistence. The empirical model used, which theoretically rests on the intertemporal approach, treats the current account as the gap between domestic saving and investment. We examine the behaviour of the current account in the long run and the short run using co-integration analysis and a variety of econometric tests to account for the effect of significant structural changes in the period under review. We find that a stable equilibrium current account model can be derived if the ratio of private sector financing to GDP, as a proxy for financial liberalisation, is included in the specification. Policy options to restore the country’s external sustainability are explored based on the estimated equilibrium model. JEL Classification: F30, F32.
    Keywords: Current account model, external sustainability.
    Date: 2010–09
  6. By: Nishat Fatima (Pakistan Institute of Development Economics)
    Abstract: The study investigates the impact of changes in terms of trade in Pakistan on its income and consumption potentials, by employing two measures of terms of trade, namely, barter terms of trade and income terms of trade. The study examines Pakistan’s terms of trade behaviour using time series data from 1990- 2008, and works out the losses the country had to bear owing to deterioration in its terms of trade. Paper finds that worsening of terms of trade has a negative impact on economic growth of Pakistan, as it ultimately reduces gross domestic product.
    Keywords: Terms of Trade; Commodity Terms of Trade; Income Terms of Trade; GDP; Pakistan
    JEL: E21 F10 F13
    Date: 2010
  7. By: Anna Bohnstedt; Christian Schwarz
    Abstract: We study a general equilibrium model of international trade with heterogeneous fi rms, where countries can strategically invest in technology. The countries’ motive is to improve fi rms’ productivity, leading to a competitive advantage in international trade. We are interested in how trade liberalization aff ects this governmental incentive to invest in technology. In the closed economy countries invest if consumers have a suffi ciently high preference for varieties. In the open economy we analyze the Nash-equilibrium policy and the cooperative policy. If there are no cross-country investment spillovers, countries strategically compete in their investment levels and increase their investments with higher trade openness. From a social perspective we have an overinvestment problem. If there are cross-country investment spillovers, we diff erentiate between weak and strong spillovers. In both cases the cooperative solution predicts a positive relationship between investments and trade openness. If there are weak (strong) spillovers, we fi nd a positive (hump-shaped) relationship between technology investments and trade openness in the Nash-equilibrium. From a social perspective we obtain an over (under)-investment problem if spillovers are weak (strong).
    Keywords: Heterogeneous fi rms; technology investments; monopolistic competition; strategic trade policy
    JEL: F12 F13
    Date: 2010–08
  8. By: Crowley, Patrick M (Texas A&M University and Bank of Finland Research); Schultz, Aaron (Athinoula A. Martinos Center for Biomedical Imaging and Massachusetts General Hospital)
    Abstract: Convergence and synchronisation of business and growth cycles are important issues in the efficient formulation of euro area economic policies, and in particular European Central Bank (ECB) monetary policy. Although several studies in the economics literature address the issue of synchronicity of growth within the euro area, this is the first to address the issue using cross recurrence analysis. The main findings are that member state growth rates had largely converged before the introduction of the euro, but there is a wide degree of different synchronisation behaviours which appear to be non-linear in nature. Many of the euro area member states display what is termed here ‘intermittency’ in synchronization, although this is not consistent across countries or members of the euro area. These differences in synchronization behaviors could introduce further challenges in managing the country-specific effects of the common monetary policy in the euro area.
    Keywords: Euro area; business cycles; growth cycles; recurrence plots; non-stationarity; complex systems; surrogate analysis
    JEL: C65 E32 F15
    Date: 2010–09–20
  9. By: Pami Dua; Anirvan Banerji
    Abstract: This paper examines various measures of synchronization of recessions, including clustering of the onset of recession across economies, proportion of economies in expansion and the diffusion index of international coincident indexes, and shows that the recent global recession was possibly the most concerted in the post world war period. Factors that contributed to the synchronization and severity of the recession, such as trade and financial linkages and timing of policy actions, are analysed. [Working Paper No. 182]
    Keywords: synchronization, recessions, international, global recession, policy actions,
    Date: 2010

This nep-opm issue is ©2010 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.