|
on Open MacroEconomics |
| By: | Allen Head (Department of Economics, Queen's University); Lucy Qian Liu (International Monetary Fund (IMF)); Guido Menzio (Department of Economics, University of Pennsylvania); Randall Wright (Department of Economics, University of Wisconsin-Madison) |
| Abstract: | Why do some sellers set prices in nominal terms that do not respond to changes in the aggregate price level? In many models, prices are sticky by assumption. Here it is a result. We use search theory, with two consequences: prices are set in dollars since money is the medium of exchange; and equilibrium implies a nondegenerate price distribution. When money increases, some sellers keep prices constant, earning less per unit but making it up on volume, so profit is unaffected. The model is consistent with the micro data. But, in contrast with other sticky-price models, money is neutral. |
| Keywords: | Search, Sticky Prices, Monetary Policy |
| JEL: | D43 E51 E52 |
| Date: | 2010–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:10-034&r=opm |
| By: | Jonathan Eaton (Penn State; NBER); Sam Kortum (University of Chicago; NBER); Brent Neiman (University of Chicago Booth School of Business; NBER); John Romalis (University of Chicago Booth School of Business; NBER) |
| Abstract: | The ratio of global trade to GDP declined by nearly 30 percent during the global recession of 2008-2009. This large drop in international trade has generated significant attention and concern. Did the decline simply reflect the severity of the recession for traded goods industries? Or alternatively, did international trade shrink due to factors unique to cross border transactions? This paper merges an input-output framework with a gravity trade model and solves numerically several general equilibrium counterfactual scenarios which quantify the relative importance for the decline in trade of the changing composition of global GDP and changes in trade frictions. Our results suggest that the relative decline in demand for manufactures was the most important driver of the decline in manufacturing trade. Changes in demand for durable manufactures alone accounted for 65 percent of the cross-country variation in changes in manufacturing trade/GDP. The decline in total manufacturing demand (durables and non-durables) accounted for more than 80 percent of the global decline in trade/GDP. Trade frictions increased and played an important role in reducing trade in some countries, notably China and Japan, but decreased or remained relatively flat in others. Globally, the impact of these changes in trade frictions largely cancel each other out. |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbb:reswpp:201010-196&r=opm |
| By: | Scott Davis; Kevin X.D. Huang |
| Abstract: | The aggregate impact of decisions made at the level of the individual firm has recently attracted a lot of attention in both the macro and trade literatures. We adapt the benchmark international real business cycle model to a game-theoretic environment to add a channel for the strategic interaction among domestic and foreign firms. We show how the sum of strategic pricing decisions made at the level of the individual firm can have significant effects on the volatility and cross country co-movement of GDP and its components. Specifically we show that the addition of this one channel for strategic interaction leads to a significant increase in the cross-country co-movement of production and investment, as well as a significant decrease in the volatility of investment and the trade balance over the benchmark IRBC model. |
| Keywords: | Industrial organization (Economic theory) ; Business cycles - Econometric models ; International finance ; International trade - Econometric models ; Gross domestic product |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:60&r=opm |
| By: | Ethan Ilzetzki; Enrique G. Mendoza; Carlos A. Végh |
| Abstract: | We contribute to the intense debate on the real effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero. |
| JEL: | E2 E6 F41 H5 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:16479&r=opm |
| By: | Deokwoo Nam; Jian Wang |
| Abstract: | The terms of trade and the real exchange rate of the US appreciate when the US labor productivity increases relative to the rest of the world. This finding is at odds with predictions from standard international macroeconomic models. In this paper, we find that incorporating news shocks to total factor productivity (TFP) in an otherwise standard dynamic stochastic general equilibrium (DSGE) model with variable capital utilization can help the model replicate the above empirical finding. Labor productivity increases in our model after a positive news shock to TFP because of an increase in capital utilization. Under some plausible calibrations, the wealth effect of good news about future productivity can increase domestic demand strongly and induce an increase in home prices relative to foreign prices. |
| Keywords: | Business cycles - Econometric models ; International finance ; International trade - Econometric models ; Labor productivity |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:61&r=opm |
| By: | Helge Berger; Volker Nitsch |
| Abstract: | When does trade become a one-way relationship? We study bilateral trade balances for a sample of 18 European countries over the period from 1948 through 2008. We find that, with the introduction of the euro, trade imbalances among euro area members widened considerably, even after allowing for permanent asymmetries in trade competitiveness within pairs of countries or in the overall trade competitiveness of individual countries. This is consistent with indications that pair-wise trade tends to be more balanced when nominal exchange rates are flexible. Intra-euro area imbalances also seem to have become more persistent with the introduction of the euro, some of which is linked to labor market inflexibility. Reviewing the direction of imbalances, we find that bilateral trade surpluses are decreasing in the real exchange rate, decreasing in growth differentials, and increasing in the relative volatility of national business cycles. Finally, countries with relatively higher fiscal deficits and less flexible labor and product markets exhibit systematically lower trade surpluses than others. |
| Date: | 2010–10–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/226&r=opm |
| By: | Ippei Fujiwara; Yuki Teranishi |
| Abstract: | In this paper, we investigate the relationship between real exchange rate dynamics and financial market imperfections. For this purpose, we first construct a New Open Economy Macroeconomics (NOEM) model that incorporates staggered loan contracts as a simple form of the financial market imperfections. Our model with such a financial market friction replicates persistent, volatile, and realistic hump-shaped responses of real exchange rates, which have been thought very difficult to materialize in standard NOEM models. Remarkably, these realistic responses can materialize even with both supply and demand shocks, such as cost-push, loan rate and monetary policy shocks. This implies that the financial market developments is a key element for understanding real exchange rate dynamics. |
| Keywords: | Foreign exchange ; International finance ; Macroeconomics - Econometric models |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:62&r=opm |
| By: | Ben Tomlin; Loretta Fung |
| Abstract: | In this paper, we examine how the effect of movements in the real exchange rate on manufacturing plants depends on the plant’s placement within the productivity distribution. Appreciations of the local currency expose domestic plants to more competition from abroad as export opportunities shrink and import competition intensifies. As a result, smaller less productive plants are forced from the market, which truncates the lower end of the productivity distribution. For surviving plants, appreciations can lead to a reduction in plant size, which, in the presence of scale economies, can lower productivity. We examine these mechanisms using quantile regression, which allows for the study of the conditional distribution of industry productivity. Using plant-level data that covers the entire Canadian manufacturing sector from 1984 to 1997, we find that many industries exhibit a downward sloping quantile regression curve, meaning that movements in the exchange rate do, indeed, have distributional effects on productivity. |
| Keywords: | Productivity; Exchange rates; Market structure and pricing |
| JEL: | D21 F1 L16 L60 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-25&r=opm |
| By: | Daniels, Joseph P (Department of Economics Marquette University); VanHoose, David D (Hankamer School of Business Baylor University) |
| Abstract: | Considerable recent work has reached mixed conclusions about whether and how globalization affects the inflation-output trade-off and suggests that the ultimate effect of openness on the output-inflation relationship is influenced by a variety of factors. In this paper, we consider the impact of exchange-rate pass through and how pass through conditions the effect of openness on the sacrifice ratio. We develop a simple theoretical model showing how both the extent of pass through and openness can interact to influence the output-inflation relationship. Next we empirically explore the nature of these two variables and their interaction. Results indicate that greater pass through increases the sacrifice ratio, that there is significant interaction among pass through and openness, and—once the extent of pass through is taken into account alongside other factors that affect the sacrifice ratio, such as central bank independence—openness exerts an empirically ambiguous effect on the sacrifice ratio. |
| Keywords: | exchange-rate pass through, openness, sacrifice ratio, Economics |
| JEL: | F40 F41 F43 |
| Date: | 2010–08 |
| URL: | http://d.repec.org/n?u=RePEc:mrq:wpaper:2010-05&r=opm |
| By: | Ali Dib |
| Abstract: | The author proposes a micro-founded framework that incorporates an active banking sector into a dynamic stochastic general-equilibrium model with a financial accelerator. He evaluates the role of the banking sector in the transmission and propagation of the real effects of aggregate shocks, and assesses the importance of financial shocks in U.S. business cycle fluctuations. The banking sector consists of two types of profitmaximizing banks that offer different banking services and transact in an interbank market. Loans are produced using interbank borrowing and bank capital subject to a regulatory capital requirement. Banks have monopoly power, set nominal deposit and prime lending rates, choose their leverage ratio and their portfolio composition, and can endogenously default on a fraction of their interbank borrowing. Because it is costly to raise capital to satisfy the regulatory capital requirement, the banking sector attenuates the real effects of financial shocks, reduces macroeconomic volatilities, and helps stabilize the economy. The model also includes two unconventional monetary policies (quantitative and qualitative easing) that reduce the negative impacts of financial crises. |
| Keywords: | Economic models; Business fluctuations and cycles; Credit and credit aggregates; Financial stability |
| JEL: | E32 E44 G1 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:10-24&r=opm |
| By: | Silvio Contessi (Federal Reserve Bank of St. Louis, Reseach Division); Pierangelo De Pace (Pomona College, Department of Economics); Johanna Francis (Fordham University, Department of Economics) |
| Abstract: | Using formal statistical tests, we detect (i) significant volatility increases for various types of capital flows for a period of changes in business cycle comovement among the G7 countries, and (ii) mixed evidence of changes in covariances and correlations with a set of macroeconomic variables. |
| Keywords: | Capital Flows, International Business Cycles. |
| JEL: | E32 F21 F32 F36 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:frd:wpaper:dp2010-10&r=opm |
| By: | Lionel Artige; Laurent Cavenaile |
| Abstract: | Global imbalances are considered as one of the main culprits of the financial crisis which started in the United States in 2007. This paper aims to build a two- country deterministic growth framework with overlapping generations to investigate the macroeconomic effects of global imbalances that originate from forced saving in one country. This framework allows us to study the existence of a dynamic equi- librium with global imbalances, the impact on the world interest rate, and the short-run and long-run welfare implications on the young and old generations in both countries. In particular, we show that global imbalances worsen the welfare of the young generations of both countries in the short run and can offset the potential gain of the international integration of capital markets. |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:rpp:wpaper:1005&r=opm |
| By: | Rashid , Abdul |
| Abstract: | The nonlinear cointegration and Granger causality tests are applied in a bi-variate framework to investigate the effects of capital inflows, monetary expansion and interest rates on domestic price levels. The key message of the analysis is that there is a significant inflationary impact of capital inflows, money supply-to-GDP ratio and domestic debt, in particular during period of large capital inflows from 2001 to 2008. Whereas, interest rate and exchange rate do not have any significant nonlinear causal links with domestic price levels during the examined periods. |
| Keywords: | Capital Inflows; Inflationary Pressures; Monetary Expansion; Nonlinear Dynamics |
| JEL: | C32 F32 F21 |
| Date: | 2010–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26082&r=opm |