nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒11‒20
five papers chosen by
Martin Berka
Massey University, Albany

  1. Does Inflation Targeting decrease Exchange Rate Pass-through in Emerging Countries? By Coulibaly, D.; Kempf, H.
  2. The effects of capital market openness on exchange rate pass-through and welfare in an inflation-targeting small open economy By Sanchita Mukherjee
  3. Tariff Pass-Through, Firm Heterogeneity and Product Quality By Zhi George Yu
  4. Credit Market Quality, Innovation and Trade By Terra Cristina; Vasconcelos Enrico
  5. The impact of population ageing on international capital flows By Narciso, Alexandre

  1. By: Coulibaly, D.; Kempf, H.
    Abstract: In this paper, we empirically examine the effect of inflation targeting on the exchange rate pass-through to prices in emerging countries. We use a panel VAR that allows us to use a large dataset on twenty-seven emerging countries (fifteen inflation targeters and twelve inflation nontargeters). Our evidence suggests that inflation targeting in emerging countries contributed to a reduction in the pass-through to various price indexes (import prices, producer prices and consumer prices) from a higher level to a new level that is significantly different from zero. The variance decomposition shows that the contribution of exchange rate shocks to price fluctuations is more important in emerging targeters compared to nontargeters, and the contribution of exchange rate shocks to price fluctuations in emerging targeters declines after adopting inflation targeting.
    Keywords: Inflation Targeting, Exchange Rate Pass-Through, panel VAR.
    JEL: E31 E52 F41
    Date: 2010
  2. By: Sanchita Mukherjee
    Abstract: This paper analyzes the impact of capital market openness on exchange rate pass-through and subsequently on the social loss function in an inflation-targeting small open economy under a pure commitment policy. Applying the intuition behind the macroeconomic trilemma, the author examines whether a more open capital market in an inflation-targeting country improves the credibility of the central bank and consequently reduces exchange rate pass-through. First, the effect of capital openness on exchange rate pass-through is empirically examined using a new Keynesian Phillips curve. The empirical investigation reveals that limited capital openness leads to greater pass-through from the exchange rate to domestic inflation, which raises the marginal cost of deviation from the inflation target. This subsequently worsens the inflation output-gap trade-off and increases the social loss of the inflation targeting central bank under pure commitment. However, the calibration results suggest that the inflation output-gap trade-off improves and the social loss decreases even in the presence of larger exchange rate pass-through if the capital controls are effective at insulating the exchange rate from interest rate and risk-premia shocks.
    Keywords: Monetary policy ; Inflation targeting ; Foreign exchange
    Date: 2010
  3. By: Zhi George Yu
    Abstract: Previous studies on tariff pass-through were constrained at the industry level. This paper is the first attempt to explore tariff pass-through at the firm level, and to investigate how it depends on firm heterogeneity in productivity and product differentiation in quality. Using an extended version of the Melitz and Ottaviano (2008) model, I show that exporting firms absorb tariff changes by adjusting both their markups and product quality, which leads to an incomplete tariff pass-through. Moreover, tariff absorption elasticity negatively depends on firm productivity for quality differentiated goods, but positively depends on firm productivity for quality homogeneous goods. Using the U.S. transaction level export data and plant-level manufacturing data, I find evidence for these predictions. The firm-level tariff absorption elasticity is 0.87 on average. All products in the sample on average fit the definition of quality differentiated goods, and the tariff absorption elasticity is indeed higher for low productivity firms (1.27) and lower for high productivity firms (0.44). Dividing all products into quality homogeneous goods and quality differentiated goods in terms of various criteria also results in estimates consistent with model predictions for quality differentiated goods.
    Date: 2010–10
  4. By: Terra Cristina; Vasconcelos Enrico (Universite de Cergy-Pontoise, THEMA, F-95000 Cergy-Pontoise.; Graduate School of Economics, Fundação Getulio Vargas, and Secretaria de Política Econômica, Ministério da Fazenda)
    Abstract: Using a general equilibrium model with private R&D financing, this article investigates the impact of trade openness to trade on growth and on welfare for two countries equal in all aspects, except for the quality of credit markets. We show that opening to trade increases growth in the country with better credit markets (North) and decreases it in the other country (South). With respect to trade pattern, South imports high tech goods and exports traditional goods. In terms of welfare, opening to trade may lower the welfare of individuals in the short run, but in the long run all of them are better o¤ under free trade than if they were under autarky.
    Keywords: credit markets; growth; trade pattern
    JEL: F12 G11 O16
    Date: 2010
  5. By: Narciso, Alexandre
    Abstract: This paper is oriented to study the relationship between demographical factors and international capital flows. We analyse the impact of ageing on foreign direct investments (FDI) and foreign portfolio investments (FPI) on a bilateral level. Firstly we present a theoretical foundation of the relationship and then we test it by an empirical model. Theoretical foundations are based on the lifecycle hypothesis and overlapping generations model in a demographic context. The bilateral FDI and FPI are modelled by using fixed effects balanced panel data. The results suggest that the current and future age structure of the nation has significant effect on current international capital flows.
    Keywords: International Capital Flows; Demography; Capital Mobility; FDI; Portfolio Investment
    JEL: G15 E00 F21 J20
    Date: 2010–11–04

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