nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒11‒13
seven papers chosen by
Martin Berka
Massey University, Albany

  1. Adjusting to Capital Account Liberalization By Kosuke Aoki; Gianluca Benigno; Nobuhiro Kiyotaki
  2. The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma By Joshua Aizenman; Hiro Ito; Menzie D. Chinna
  3. How Big (Small?) are Fiscal Multipliers? By Ethan Ilzetzki; Enrique G. Mendoza; Carlos A. Végh
  4. Discrepancies between Purchasing Power Parities and Exchange Rates under the Law of One Price: A Puzzle (partly) Explained? By Leon Podkaminer
  5. Exchange-rate pass-through to import prices: nonlinearities and exchange rate and inflationary regimes By Rehim Kýlýc
  6. Inattentive Consumers and Exchange Rate Volatility By Mehmet Fatih, Ekinci
  7. Gains from Trade and Measured Total Factor Productivity By Ferreira, Pedro Cavalcanti; Trejos, Alberto

  1. By: Kosuke Aoki; Gianluca Benigno; Nobuhiro Kiyotaki
    Abstract: We study theoretically how the adjustment to liberalization of international financialtransaction depends upon the degree of domestic financial development. Using a model withdomestic and international borrowing constraints, we show that, when the domestic financialsystem is underdeveloped, capital account liberalization is not necessarily beneficial becauseTFP stagnates in the long-run or employment decreases in the short-run. Government policy,including allowing foreign direct investment, can mitigate the possible loss of employment,but cannot eliminate it unless the domestic financial system is improved.
    Keywords: credit frictions, capital account liberalization
    JEL: F32
    Date: 2010–10
  2. By: Joshua Aizenman; Hiro Ito; Menzie D. Chinna
    Abstract: This paper extends their previous paper (Aizenman, Chinn, and Ito 2008) and explores some of the unexplored questions. First, they examine the channels through which the trilemma policy configurations affect output volatility. Secondly, they investigate how trilemma policy configurations affect the output performance of the economies under severe crisis situations. Thirdly, they look into how trilemma configurations have evolved in the aftermath of economic crises in the past. They find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. [ADBI Working Paper 213]
    Keywords: trilemma, policy, performance, economic, finances
    Date: 2010
  3. 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.
    Keywords: government expenditure, macroeconomic policy
    JEL: E2 E6 F41 H5
    Date: 2010–10
  4. By: Leon Podkaminer (The Vienna Institute for International Economic Studies, wiiw)
    Abstract: European Comparison Project data (years 1999-2008) are used for an estimation of cross-country systems (AIDS) of consumer demand functions defined over durable and non-durable tradable goods and non-tradable services. General exchange equilibrium models of inter-EU trade generate equalized relative prices of tradable goods. But domestic relative prices of services become more dispersed and can move the PPP/ER ratios away from unity. PPP/ER discrepancies may be sustained even when there are no impediments to free trade.
    Keywords: Purchasing Power Parity, exchange rate, PPP/ER discrepancy, Law of One Price, Balassa-Samuelson Effect, trade integration, computable general equilibrium, cross-country systems of demand functions, Almost Ideal Demand System, tradable goods, non-tradable goods
    JEL: F11 F15 D12 D58 F31 O57
    Date: 2010–09
  5. By: Rehim Kýlýc (Koc University)
    Abstract: This paper investigates the relationship between exchange rate pass-through and exchange rate appreciations/depreciations and inflation by estimating nonlinear time series models. Motivated by theoretical and empirical results in the literature, the paper proposes new econometric models that can characterize nonlinear and asymmetric dynamics between import prices and exchange rate changes in a parsimonious fashion. Findings show the presence of complete and incomplete pass-through regimes depending upon the magnitude of appreciations of a currency and inflation rates both in the short-run and in the long-run. Results also reveal threshold effects and asymmetry in the pass-through relationship over appreciations/depreciations as well as inflationary and disinflationary periods. Findings have important macroeconomic policy implications.
    Keywords: Conditional CAPM
    Date: 2010–11
  6. By: Mehmet Fatih, Ekinci
    Abstract: We present and study the properties of a sticky information exchange rate model where consumers and producers update their information sets infrequently. We find that introducing inattentive consumers has important implications. Through a mechanism resembling the limited participation models, we can address the exchange rate volatility for reasonable values of risk aversion. We observe more persistence in output, consumption and employment which brings us closer to the data. Impulse responses to monetary shocks are hump shaped consistent with the empirical evidence. Forecast errors of inattentive consumers provide a channel to reduce the correlation of relative consumption and real exchange rate. However, we find that decline in the correlation is quantitatively small.
    Keywords: Sticky Information; Exchange Rate Volatility
    JEL: F3
    Date: 2010–10–31
  7. By: Ferreira, Pedro Cavalcanti; Trejos, Alberto
    Abstract: We develop and calibrate a model where di¤erences in factor en-dowments lead countries to trade di¤erent goods, so that the existenceof international trade changes the sectorial composition of output fromone country to another. Gains from trade re ect in total factor produc-tivity. We perform a development decomposition, to assess the impactof trade and barriers to trade on measured TFP. In our sample, themedian size of that e¤ect is about 6.5% of output, with a median of17% and a maximum of 89%. Also, the model predicts that changes inthe terms of trade cause a change of productivity, and that e¤ect hasan average elasticity of 0.71.
    Date: 2010–11–05

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