|
on Open MacroEconomics |
| By: | Miguel de Carvalho (Ecole Polytechnique Federale de Lausanne, Institute of Mathematics); Paulo Julio (Gabinete de Estrategia e Estudos, Ministry of Economy, Innovation, and Development) |
| Abstract: | We use several popular tests to test the validity of the Purchasing Power Parity (PPP) hypothesis. In particular, we analyze four classes of tests { standard univariate unit root tests, co-integration, panel unit root tests and unit root tests for nonlinear frameworks {, for a dataset consisting of 20 bilateral exchange rates. Through this approach, we ascertain the eectiveness of each methodology in assessing the validity of PPP. Overall, our results suggest little evidence to support PPP. Among the conducted tests, the panel analysis of nonstationarity idiosyncratic and common components provides the richest insights by disentangling the possible sources of non-stationarity of real exchange rates. The relevance of using price indexes with dierent characteristics is also pinpointed. |
| Keywords: | PPP; Real exchange rate; Unit roots; Co-integration; Panel; Nonlinear models; Cross-sectional dependence |
| JEL: | F31 F41 |
| Date: | 2010–09 |
| URL: | http://d.repec.org/n?u=RePEc:mde:wpaper:0024&r=opm |
| By: | Yongseung Jung (Asian Development Bank Institute) |
| Abstract: | This paper sets up a canonical new Keynesian small open economy model with nominal price rigidities to explore the impact of habit persistence and exchange rate pass-through on the welfare ranking of alternative monetary policy rules. It identifies three factors that can affect the welfare ranking: the degree of habit persistence, the degree of exchange rate pass-through, and labor supply elasticity. In contrast to the findings of De Paoli (2009a, 2009b), the analysis reveals a reversal in the welfare ranking of alternative monetary policy rules for unitary intertemporal and intratemporal elasticities of substitution, depending on the asset market structures of small open economies with external habit. The paper also finds that exchange rate pegging outperforms domestic producer price index inflation targeting at high degrees of intratemporal elasticity of substitution and external habit, regardless of asset market structures. Finally, the paper finds that exchange rate pegging outperforms domestic or consumer price index inflation targeting if the exchange rate is misaligned. |
| Keywords: | Keynesian small open economy model, exchange rate, labour elasticity |
| JEL: | E52 F41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2311&r=opm |
| By: | Ila Patnaik; Ajay Shah (Asian Development Bank Institute) |
| Abstract: | In this paper, we examine capital account openness and exchange rate flexibility in 11 Asian economies. Asia has made slow progress in de jure capital account openness, but has made much more progress in de facto capital account openness. While there has been a gradual increase in exchange rate flexibility, most Asian economies continue to have largely inflexible exchange rates. This combination of advancing de facto capital account integration without greater exchange rate flexibility has led to procyclical monetary policy, when capital flows are procyclical. This paper emphasises the need for a consistent monetary policy framework. |
| Keywords: | capital account openness, exchange rate flexibility, Asia, capital account integration, monetary policy |
| JEL: | E40 E60 F41 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:2314&r=opm |
| By: | Yongseung Jung |
| Abstract: | This paper sets up a canonical new Keynesian small open economy model with nominal price rigidities to explore the impact of habit persistence and exchange rate pass-through on the welfare ranking of alternative monetary policy rules. It identifies three factors that can affect the welfare ranking: the degree of habit persistence, the degree of exchange rate pass-through, and labor supply elasticity. In contrast to the findings of De Paoli (2009a, 2009b), the analysis reveals a reversal in the welfare ranking of alternative monetary policy rules for unitary intertemporal and intratemporal elasticities of substitution, depending on the asset market structures of small open economies with external habit. The paper also finds that exchange rate pegging outperforms domestic producer price index inflation targeting at high degrees of intratemporal elasticity of substitution and external habit, regardless of asset market structures. Finally, the paper finds that exchange rate pegging outperforms domestic or consumer price index inflation targeting if the exchange rate is misaligned. |
| Keywords: | Keynesian, economy, monetary policy, market structures, consumer price index |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:3104&r=opm |
| By: | Shu-Ling Chen; John D. Jackson; Hyeongwoo Kim; Pramesti Resiandini |
| Abstract: | This paper examines common forces driving the prices of 51 highly tradable commodities. We demonstrate that highly persistent movements of these prices are mostly due to the first common component, which is closely related to the US nominal exchange rate. In particular, our simple factor-based model outperforms the random walk model in out-of-sample forecast for the US exchange rate. The second common factor and de-factored idiosyncratic components are consistent with stationarity, implying short-lived deviations from the equilibrium price dynamics. In concert, these results provide an intriguing resolution to the apparent inconsistency arising from stable markets with nonstationary prices. |
| Keywords: | Commodity Prices, US Nominal Exchange Rate, PANIC, Cross-Section Dependence, Out-of-Sample Forecast |
| JEL: | C53 F31 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:abn:wpaper:auwp2010-05&r=opm |
| By: | Shin-ichi Fukuda; Yoshifumi Kon |
| Abstract: | Recently, a dramatic accumulation in foreign exchange reserves has been widely observed in developing countries. This paper explores the possible long-run impacts of this trend on macroeconomic variables in developing countries. We analyze a simple open economy model where increased foreign exchange reserves reduce the costs of liquidity risk. Given the amount of foreign exchange reserves, utility-maximizing representative agents decide consumption, capital stock, and labor input, as well as the amounts of liquid and illiquid external debt. The equilibrium values of these variables depend on the amount of foreign exchange reserves. A rise in foreign exchange reserves increases both liquid and total debt, while shortening debt maturity. [ADBI Working Paper 197] |
| Keywords: | dramatic, foreign exchange reserves, developing countries, macroeconomic, consumption, capital stock, labor input |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:3106&r=opm |
| By: | Korap, Levent; Aslan, Özgür |
| Abstract: | In this article, we re-examine the empirical validity of the Purchasing Power Parity (PPP) theory for the Turkish economy. For this purpose, an empirical model is constructed using some contemporaneous estimation techniques such as multivariate co-integration and vector error correction methodology. Our estimation results reveal that the PPP can strongly be supported as a long-run stationary steady-state relationship for the Turkish economy. |
| Keywords: | Purchasing power parity; Co-integration; Turkish economy; |
| JEL: | C32 F41 F31 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:26273&r=opm |
| By: | Yuqing Xing (Asian Development Bank Institute) |
| Abstract: | This paper estimated the pass-through effects of yuan’s exchange rates on prices of the US and Japanese imports from the People’s Republic of China (PRC). Empirical results show that, a 1% nominal appreciation of the yuan would result in a 0.23% increase in prices of the US imports in the short run and 0.47% in the long run. Japanese import prices were relatively more responsive to changes of the bilateral exchange rates between the yuan and the yen. For a 1% nominal appreciation of the yuan against the yen, Japanese import prices would be expected to rise 0.55% in the short run and 0.99%, a complete pass-through, in the long run. The high degree of pass-through effects were also found at the disaggregated sectoral level: food, raw materials, apparel, manufacturing, and machinery. However, further analysis indicated that the high pass-through effects in the case of Japan were mainly attributed to the PRC’s policy to peg the yuan to the United States (US) dollar, and that the dollar is used as a dominant invoicing currency for the PRC’s exports to Japan. After controlling the currency invoicing factor, I found no evidence that the yuan’s cumulative appreciation since July 2005 was passed on to prices of Japanese imports at either the aggregate or disaggregated levels. The estimated low pass-through effects of the yuan’s appreciation suggest that a moderate appreciation of the yuan would have very little impact on the PRC’s trade surplus. |
| Keywords: | exchange rates, import prices, yuan appreciation, currency policy |
| JEL: | F31 F32 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:eab:tradew:2326&r=opm |
| By: | Joan Costa-i-Font |
| Abstract: | This paper empirically examines the regional effects of sharing a single currency on bilateral trade with other European Union partners. It takes advantage of a gravity specification of bilateral trade between 17 Spanish regions and 13 European countries over the period 1997-2004, which in turn allows accounting for two distinct definitions of a single currency depending on its temporal set up. That is, the “exchange rate volatility effect” (from exchange rate fixing in 1999) is distinguished from the so-called “common currency effect” (resulting from the issuing of a new currency in 2002). Findings are suggestive of a regional concentration of currency union effects in a few regions, namely those relatively more open to trade. Such effects on regional trade within Europe are found to fade away over time. Trade enhancing effects are found to vary range from 45% to 16%. When the “exchange rate volatility effect” was significant, the pure currency union effect was found to be almost negligible. |
| Keywords: | gravity models, trade flows, regional heterogeneity, monetary union |
| JEL: | F4 F11 F33 |
| Date: | 2010–10 |
| URL: | http://d.repec.org/n?u=RePEc:eiq:eileqs:26&r=opm |
| By: | De Paoli, Bianca (Bank of England); Küçük-Tuğer, Hande (Centre for Economic Performance, London School of Economics); Søndergaard, Jens (Fixed Income Research, Global Markets EMEA, Nomura International plc) |
| Abstract: | Using an endogenous portfolio choice model, this paper examines how different monetary policy regimes can lead to different foreign currency positions by changing the cyclical properties of the nominal exchange rate. We find that strict inflation-targeting regimes are associated with a short position in foreign currency, while the opposite is true for non inflation targeting regimes. We also explore how these different external positions affect the international transmission of monetary shocks through the valuation channel. When central banks follow inflation-targeting Taylor-type rules, valuation effects of monetary expansions are beggar-thy-self, but they are beggar-thy-neighbour in a money growth targeting regime (or when monetary policy puts weight on output stabilisation). |
| Keywords: | Portfolio choice; international transmission of shocks; monetary policy |
| JEL: | F31 F41 |
| Date: | 2010–10–28 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0403&r=opm |
| By: | Kym Anderson (School of Economics, University of Adelaide); James Giesecke (Monash University); Ernesto Valenzuela (School of Economics, University of Adelaide) |
| Abstract: | Agricultural protection in rich countries, which had depressed Australian farm incomes via its impact on AustraliaÂ’s terms of trade, has diminished over the past two decades. So too has agricultural export taxation in poor countries, which has had the opposite impact on those terms of trade. Meanwhile, however, import protection for developing country farmers has been steadily growing. To what extent are Australian farmers and rural regions still adversely affected by farm and non-farm price- and trade-distortive policies abroad? This paper draws on new estimates of the current extent of those domestic and foreign distortions first to model their net impact on AustraliaÂ’s terms of trade (using the World BankÂ’s Linkage model of the global economy), and second to model the effects of that terms of trade impact on output and real incomes in rural vs urban and other regions and households within Australia as of 2004 (using MonashÂ’s multi-regional TERM model of the Australian economy). |
| Keywords: | Trade liberalisation, rural income, regional CGE modeling |
| JEL: | F13 Q18 C68 R13 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:adl:cieswp:2010-02&r=opm |