nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒10‒23
seven papers chosen by
Martin Berka
Massey University, Albany

  1. Disaggregating Real Exchange Rate Dynamics: A Structural Approach By P. JACOB
  2. Financial Development, Technological Change in Emerging Countries and Global Imbalances By Benhima Kenza
  3. What do we know about real exchange rate nonlinearities? By R. KRUSE; M. FRÖMMEL; L. MENKHOFF; P. SIBBERTSEN
  4. Exchange Rate Volatility and Productivity Growth: the Role of Liability Dollarization By Benhima Kenza
  5. International Business Cycles and Remittance Flows By Mallick, Debdulal; Cooray, Arusha
  6. The Feldstein Horioka Puzzle by groups of OECD members: the panel approach. By Natalya Ketenci, N.
  7. Estimation of an open economy DSGE model for Romania. Do nominal and real frictions matter? By Veaceslav Grigoras

  1. By: P. JACOB
    Abstract: This paper employs a small open economy DSGE model, estimated over 1986- 2009, to decompose the dynamic influence of domestic and international prices on the Canada-US real exchange rate. While the real exchange rate mimics the dynamic behavior of the relative price of non-tradables in terms of tradables in response to a non-tradable sector-specific disturbance, the purely tradable component dominates in the case of other shocks, irrespective of their structural origin. Variance decom- positions reveal that the sources of the movements in the tradable component lie in unsystematic deviations from uncovered interest parity as well as import price mark-up shocks. Consequently, these disturbances are far more potent than internal tradable or non-tradable sector-specific disturbances in driving real exchange rate .fluctuations.
    Keywords: New Open Economy Macroeconomics, Non-Tradables, Real Exchange Rate, Bayesian Inference, DSGE Estimation
    JEL: C11 F41
    Date: 2010–07
  2. By: Benhima Kenza
    Abstract: The paper shows that in a general equilibrium model with two countries, characterized by different levels of financial development, and two technologies, one more productive and more financially demanding than the other, the following stylized facts can be replicated: 1) the persistent US current account deficits since the beginning of the 90's; 2) growth of output per worker in developing countries in relative terms with the US during the same period; 3) relative capital accumulation and 4) TFP growth in these countries, also relative to the US. The more productive technology takes more time to implement and is subject to liquidity shocks, while the less productive one, along with external bond assets, can be used as a hoard to finance those liquidity shocks. As a result, after financial globalization, if the emerging economy is capital scarce and if its financial market is sufficiently incomplete, it experiences an increase in net foreign assets that coincides with a fall in the less productive investment and a rise in the more productive one. Convergence towards the steady state implies then both a better allocation of capital that generates endogenous aggregate TFP gains and a rise in aggregate investment that translates into higher growth.
    Keywords: growth; capital flows; credit constraints; financial globalization; technological change
    JEL: F36 F43 O16 O33
    Date: 2010–10
    Abstract: Nonlinear modeling of adjustments to purchasing power parity has recently gained much attention. However, a huge body of the empirical literature applies ES- TAR models and neglects the existence of other competing nonlinear models. Among these, the Markov Switching AR model has a strong substantiation in international finance. Our contribution to the literature is five-fold: First, we compare ESTAR and MSAR models from a unit root perspective. To this end, we propose a new unit root test against MSAR as the second contribution. Thirdly, we study the case of misspeci- fied alternatives in a Monte Carlo setup with real world parameter constellations. The ESTAR unit root test is not indicative, while the MSAR unit test is robust. Fourthly, we consider the case of correctly specified alternatives and observe low power of the ESTAR but not for the MSAR unit root test. Fifthly, an empirical application to real exchange rates suggests that they may indeed be explained by Markov Switching dy- namics rather than ESTAR.
    Keywords: Real exchange rates , unit root test , ESTAR , Markov Switching , PPP
    JEL: C12 C22 F31
    Date: 2010–09
  4. By: Benhima Kenza
    Abstract: This paper studies how liability dollarization conditions the effect of exchange rate flexibility on growth. It develops a model with credit-constrained firms facing liquidity shocks denominated in tradables while their revenues are both in tradable and nontradables. With frictions in the reallocation between tradables and nontradables, a peg is more growth-enhancing than a float in countries with dollarized debt because it stabilizes firms' cash flows. However, this relative advantage diminishes when dollarization decreases. These theoretical predictions are confirmed by an empirical analysis on a panel of 76 countries spanning 1995-2004: the higher the degree of dollarization, the more negative the impact of exchange rate flexibility on growth.
    Keywords: exchange rate regimes; growth; liability dollarization
    JEL: O16 O24 O41 O42
    Date: 2010–08
  5. By: Mallick, Debdulal; Cooray, Arusha
    Abstract: In this paper, we investigate the macroeconomic determinants and the effect of host country business cycles on remittance inflows. Estimating a dynamic panel data model by the system GMM, we document that remittance inflows are pro-cyclical to home country volatility but counter-cyclical to the volatility in host countries. This result does not hold for high income counties for which remittance inflows are acyclical to home country volatility but pro-cyclical to the volatility in host countries. For a host country, remittance outflows are counter-cyclical to the volatility of home countries. Trade openness is the single most important factor that determines both remittance inflows and outflows for the home and host countries, respectively.
    Keywords: Remittance; volatility; international business cycle; dynamic panel data
    JEL: F22 E32 C23 F24
    Date: 2010–08
  6. By: Natalya Ketenci, N.
    Abstract: This paper investigates investment savings relationships in 26 OECD countries and how these relationships change when countries in the considered panel vary. Therefore panel estimations using annual data for the period 1970-2008 are made for different groups of developed countries, such as the OECD, EU15, NAFTA and G7. Additionally, this paper examines changes in investment saving relationships in groups of developed countries taking into account the presence of structural shifts in countries where they exist. Recent panel techniques are employed in this study to examine investment savings relationships and to estimate saving retention coefficients. The empirical findings reveal that the Feldstein-Horioka puzzle exists only in the panel of G7 countries where the saving-retention coefficient is estimated at the level 0.754 and 0.864 for the full sample of G7 countries and for stable countries, respectively. The estimated saving-retention coefficient for the G7 group of unstable appear at the 0.482 level, indicating a higher level of capital mobility in unstable countries compared to stable ones. This conclusion is supported by estimations for OECD and EU15 countries.
    Keywords: Feldstein-Horioka puzzle; capital mobility; structural breaks; panel estimations; OECD.
    JEL: F32
    Date: 2010–08
  7. By: Veaceslav Grigoras
    Abstract: In this paper we use a medium scale open economy DSGE model developed by Adolfson et al. (2005). Besides authors’ observables we include also one extra observable series (CPI) in the model. Some of the parameters will be calibrated as to match sample’s mean or common values found in literature and others will be etimated on Romania’s data with the help of Bayesian techniques. Next, we specify some alternative scenarios where nominal or real rigidities will be ”turned off” and we asses their importance for the data generating process (with the help of marginal log likelihood).
    Keywords: DSGE
    Date: 2010–10

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