nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒10‒02
eight papers chosen by
Martin Berka
Massey University, Albany

  1. Theories of Heterogeneous Firms and Trade By Stephen Redding
  2. How well do the sticky price models explain the disaggregated price responses to aggregate technology and monetary policy shocks? By Jouchi Nakajima; Nao Sudo; Takayuki Tsuruga
  3. The Cross-Country Incidence of the Global Crisis By Gian Maria Milesi-Ferretti; Philip R. Lane
  4. Real Exchange Rate Fluctuations, Wage Stickiness and Tradability By Yothin Jinjarak; Kanda Naknoi
  5. Structural Change in Current Account and Real Exchange Rate Dynamics: Evidence from the G7 Countries By Masahiko Shibamoto; Shigeto Kitano
  6. Trade crisis ? What trade crisis ? By Kristian Behrens; Gregory Corcos; Giordano Mion
  7. India’s trilemma: financial liberalization, exchange rates and monetary policy By Hutchison, Michael; Sengupta, Rajeswari; Singh, Nirvikar
  8. The Sustainability of South African Current Account Deficits By Peter Searle; Albert Touna Mama

  1. By: Stephen Redding
    Abstract: This paper reviews the recent theoretical literature on heterogeneous firms and trade, whichemphasizes firm selection into international markets and reallocations of resources acrossfirms. We discuss the empirical challenges that motivated this research and its relationship totraditional trade theories. We examine the implications of firm heterogeneity for comparativeadvantage, market size, aggregate trade, the welfare gains from trade, and the relationshipbetween trade and income distribution. While a number of studies examine the endogenousresponse of firm productivity to trade liberalization, modelling internal firm organization andthe origins of firm heterogeneity remain interesting areas of ongoing research.
    Keywords: Heterogeneous firms, international trade, within-industry reallocation, selectioninto exporting
    JEL: F12 F16 L22
    Date: 2010–08
  2. By: Jouchi Nakajima (Currently in the Personnel and Corporate Affairs Department (studying at Duke University, E-mail:; Nao Sudo (Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Takayuki Tsuruga (Associate Professor, Kyoto University (Email:
    Abstract: This paper documents empirically and analyzes theoretically the responses of disaggregated prices to aggregate technology and monetary policy shocks. Based on the price data of US personal consumption expenditure, we find that disaggregated price responses have features across shocks and across sectors that are difficult to explain using standard multi-sector sticky price models. In terms of shocks, a substantial fraction of disaggregated prices initially rise in response to a contractionary monetary policy shock, while most prices fall immediately in response to an aggregate technological improvement. In terms of sectors, the disaggregated price responses are correlated weakly with the frequency of price changes. To reconcile these observations, we extend the standard model. We find that the cost channel of monetary policy and cross-sectional heterogeneity in real rigidity are possible avenues in accounting for these facts.
    Keywords: Disaggregated Prices, Technology Shocks, Monetary Policy Shocks, Sticky Price Models
    JEL: E31 F52
    Date: 2010–09
  3. By: Gian Maria Milesi-Ferretti; Philip R. Lane
    Abstract: We examine whether the cross-country incidence and severity of the 2008-2009 global recession is systematically related to pre-crisis macroeconomic and financial factors. We find that the pre-crisis level of development, increases in the ratio of private credit to GDP, current account deficits, and openness to trade are helpful in understanding the intensity of the crisis. International risk sharing did little to shield domestic demand from the country-specific component of output declines, while those countries with large pre-crisis current account deficits saw domestic demand fall by much more than domestic output during the crisis.
    Date: 2010–07–26
  4. By: Yothin Jinjarak; Kanda Naknoi
    Abstract: This study proposes a new measure of tradability and examines its relationship with volatility of the sector-specic real exchange rate (RER). We derive degree of tradability from a model in which nal goods are produced from labor, capital and intermediate inputs. With free capital mobility, the share of labor in value added measures degree of nontradability. Then the RER is driven by changes in relative wage and those in seller's markup. The contribution of relative wage into RER variance is predicted to be increasing in nontradability. We provide evidence for our theory using U.S.-Canada monthly RERs and U.S.-Germany quarterly RERs.
    Keywords: real exchange rate; wage stickiness; tradability
    JEL: L12 L13 L22 L42
    Date: 2010–09
  5. By: Masahiko Shibamoto (Research Institute for Economics and Business Administration, Kobe University); Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University)
    Abstract: Lee and Chinn (2006) and Chinn and Lee (2009) decomposed the current account and real exchange rate into temporary and permanent shocks, and argued that a temporary shock creates the combination of current account surplus (deficit) and real exchange rate depreciation (appreciation). This paper extends their framework by examining a possible structural break in the current account and real exchange rate dynamics. Using the data of the G7 countries during the period 1980--2007, we find structural changes in two-variable dynamics for all the countries during the mid 1990s. Since the mid 1990s, the temporary shocks have not been the main source of fluctuations in the current account. Our empirical results imply that the conventional mechanism has played a limited role in explaining the dynamics of the two variables.
    Keywords: Current account, Real exchange rate, Structural change, Global imbalances
    JEL: F31 F41
    Date: 2010–09
  6. By: Kristian Behrens (Université du Québec à Montréal, Département des Sciences Économiques, Canada Research Chair; CIRPÉE; CEPR); Gregory Corcos (Norwegian School of Economics and Business Administration, Department of Economics); Giordano Mion (National Bank of Belgium, Research Department; London School of Economics, Department of Geography and Environment)
    Abstract: We provide an analysis of the 2008-2009 trade collapse using microdata from a small open economy, Belgium. First, we find that changes in firm-country-product exports and imports occurred mostly at the intensive margin: the number of firms, the average number of destination and origin markets per firm, and the average number of products per market changed only very little. Second, econometric analysis reveals some composition effects in the intensive margin fall along firm, product and country characteristics. The most important factor explaining changes in exports is the destination country's growth rate of GDP. Had growth rates in 2008-2009 been the same as in 2007-2008, Belgian exports would have fallen by about 57% less than what we observe. Trade in consumer durables and capital goods fell more severely than trade in other product categories, which explains another 22% of the observed fall. Financial variables and involvement in global value chains have some explanatory power on the exports and imports fall respectively, but appear to have affected domestic operations in equal proportion. More generally, exports-to-turnover and imports-to-intermediates ratios at the firm level did neither systematically decrease nor reveal strong firm- or sector-specific patterns. Overall, our results point to a demand-side explanation: the fall in trade was mostly driven by the fall in economic activity. It is not a trade crisis - just a trade collapse.
    Keywords: trade crisis; trade collapse; margins of trade; firm-level analysis; Belgium
    JEL: F01 F10 F14
    Date: 2010–09
  7. By: Hutchison, Michael; Sengupta, Rajeswari; Singh, Nirvikar
    Abstract: A key challenge for macroeconomic policy in open economies is how to simultaneously manage exchange rates, interest rates and capital account openness—the trilemma. This paper calculates a trilemma index for India and investigates its evolution over time. We find that financial integration has increased markedly after the mid-2000s, with corresponding limitations on monetary independence and exchange rate stability. This tradeoff has been mitigated, however, with the rise of international reserves as a partially independent instrument of macroeconomic policy. In addition, we confirm that the weighted sum of the three indexes adds up to a constant, validating the notion that a rise in one trilemma variable should be traded-off with a drop of the weighted sum of the other two. Finally, we consider the implications of changes in the trilemma index for macroeconomic outcomes. We find some evidence that greater financial integration and corresponding loss of monetary autonomy and exchange rate stability has influenced inflation and inflation volatility, though not in a consistent manner.
    Keywords: Financial trilemma; Indian economy; International reserves; Foreign exchange intervention; Monetary policy
    JEL: F4 F3 E5 E4
    Date: 2010–09–22
  8. By: Peter Searle; Albert Touna Mama
    Abstract: Deficits in the South African current account since 2003 have been met with growing concern by economists. As these deficits reached unprecedented levels, questions about the sustainability of the country's external position have begun to arise. This paper tests the sustainability of South Africa's current account deficits via a test of the country's intertemporal budget constraint. Following a similar methodology to Husted (1992) in testing for the sustainability of U.S. current account deficits and Wu, Fountas and Chen (1996) for U.S. and Canadian deficits, this paper employs the Engle and Granger (1987) ADF test for cointegration. An initial finding of an unsustainable current account position is reversed once structural breaks at 1994:1 and 2003:2 are controlled for in the cointegration equation. This investigation therefore concludes that South African current account deficit is sustainable.
    Keywords: deficit sustainability, cointegration, structural breaks, capital flows
    JEL: F30
    Date: 2010

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