nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒11‒27
fourteen papers chosen by
Martin Berka
Massey University, Albany

  1. Entry dynamics and the decline in exchange-rate pass-through By Christopher Gust; Sylvain Leduc; Robert Vigfusson
  2. Pricing-to-market and business cycle synchronization By Luciana Juvenal; Paulo Santos Monteiro
  3. How does multinational production change international comovement? By Silvio Contessi
  4. International Capital Flows and Aggregate Output By Juergen von Hagen; Haiping zhang
  5. The Great Retrenchment: International Capital Flows During the Global Financial Crisis By Gian-Maria Milesi-Ferretti, Cédric Tille
  6. Exchange Rate Misalignments at World and European Levels: A Fundamental Equilibrium Exchange Rate Approach By Se-Eun Jeong; Jacques Mazier; Jamel Saadaoui
  7. Temporal Dimension and Equilibrium Exchange Rate: A FEER / BEER Comparison By Antonia Lòpez-Villavicencio; Jacques Mazier; Jamel Saadaoui
  8. Capital Flows and their Impact on the Real Effective Exchange Rate By Jean-Louis COMBES; Tidiane KINDA; Patrick PLANE
  9. Financial integration, entrepreneurial risk and global dynamics By Vasia Panousi; George-Marios Angeletos
  10. Are Global Imbalances Sustainable?: Shedding Further Light on the Causes of Current Account Reversals By Luiz de Mello; Pier Carlo Padoan; Linda Rousová
  11. The non-monetary side of the global disinflation By Gregor Schwerhoff; Mouhamadou Sy
  12. Absorbing A Windfall Of Foreign Exchange: Dutch disease dynamics By Rick van der Ploeg; Anthony J Venables
  13. Primary commodity prices: co-movements, common factors and fundamentals By Joseph P. Byrne; Giorgio Fazio; Norbert Fiess
  14. What happens when Wal-Mart comes to your country? multinational firms' entry, productivity, and inefficiency By Silvio Contessi

  1. By: Christopher Gust; Sylvain Leduc; Robert Vigfusson
    Abstract: The degree of exchange-rate pass-through to import prices is low. An average pass-through estimate for the 1980s would be roughly 50 percent for the United States implying that, following a 10 percent depreciation of the dollar, a foreign exporter selling to the U.S. market would raise its price in the United States by 5 percent. Moreover, substantial evidence indicates that the degree of pass-through has since declined to about 30 percent. ; Gust, Leduc, and Vigfusson (2010) demonstrate that, in the presence of pricing complementarity, trade integration spurred by lower costs for importers can account for a significant portion of the decline in pass-through. In our framework, pass-through declines solely because of markup adjustments along the intensive margin. ; In this paper, we model how the entry and exit decisions of exporting firms affect pass-through. This is particularly important since the decline in pass-through has occurred as a greater concentration of foreign firms are exporting to the United States. ; We find that the effect of entry on pass-through is quantitatively small and is more than offset by the adjustment of markups that arise only along the intensive margin. Even though entry has a relatively small impact on pass-through, it nevertheless plays an important role in accounting for the secular rise in imports relative to GDP. In particular, our model suggests that over 3/4 of the rise in the U.S. import share since the early 1980s is due to trade in new goods. Thus, a key insight of this paper is that adjustment of markups that occur along the intensive margin are quantitatively more important in accounting for secular changes in pass-through than adjustments that occur along the extensive margin.
    Date: 2010
  2. By: Luciana Juvenal; Paulo Santos Monteiro
    Abstract: There is substantial evidence that countries or regions with stronger trade linkages tend to have business cycles which are more synchronized. However, the standard international business cycle framework cannot replicate this finding. In this paper we study a multiple- country model of international trade with imperfect competition and variable markups and embed it into a real business cycle framework by including aggregate technology shocks and allowing for variable labor supply. The model is successful at replicating the empirical relation between trade and business cycle synchronization. High trade costs increase the real exchange rate volatility because firms choose to price-to-market and this volatility decouples countries' business cycle fluctuations. We find empirical evidence supporting this mechanism.>
    Keywords: International trade ; Business cycles
    Date: 2010
  3. By: Silvio Contessi
    Abstract: I study the aggregate implications of the entry of Multinational Firms (MNFs) in a two country Dynamic Stochastic General Equilibrium model in which firms have heterogeneous productivity in the sense of Ghironi and Melitz (2005). Unlike the extant open economy macroeconomics literature, this model endogenizes both multinational production and exports as possible strategies of internationalization of production, a feature that substantially improves the match between model-simulated moments and business cycle data along two dimensions. First, once I allow for concurrent entry (and exit) of MNFs and exporters over the business cycle, the consumption output anomaly disappears and I can successfully replicate the ranking of cross-country correlations of output and consumption found in the data. Second, I show that the model with heterogeneous MNFs is capable of bringing the simulated volatility of the Real Exchange Rate much closer to the data than previous models with either representative or heterogeneous exporters.>
    Keywords: Business cycles ; International business enterprises
    Date: 2010
  4. By: Juergen von Hagen (University of Bonn); Haiping zhang (School of Economics, Singapore Management University)
    Abstract: We develop a tractable multi-country overlapping-generations model and show that cross-country differences in financial development explain three recent empirical patterns of international capital flows. Domestic financial frictions in our model distort interest rates and aggregate output in the less financially developed countries. International capital flows help ameliorate the two distortions.International flows of financial capital and foreign direct investment a ect aggregate output in each country directly through affecting the size of aggregate investment. In addition, they affect aggregate output indirectly through affecting the composition of aggregate investment and the size of aggregate savings. Under certain conditions, the indirect effects may dominate the direct effects so that, despite "uphill" net capital flows, full capital mobility may raise the steady-state aggregate output in the poor country as well as raise world output. However, if foreign direct investment is restricted, "uphill" financial capital flows strictly reduce the steady-state aggregate output in the poor countries and it is more likely that the steady-state world output is lower than under international financial autarky.
    Keywords: Capital account liberalization, financial frictions, financial development, foreign direct investment, world output gains
    JEL: E44 F41
    Date: 2010–05
  5. By: Gian-Maria Milesi-Ferretti, Cédric Tille (IUHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: The current crisis saw an unprecedented collapse in international capital flows after years of rising financial globalization. We identify the stylized facts and main drivers of this development. The retrenchment in international capital flows is a highly heterogeneous phenomenon: first across time, being especially dramatic in the wake of the Lehman Brothers’ failure, second across types of flows, with banking flows being the hardest hit due to their sensitivity of risk perception, and third across regions, with emerging economies experiencing a shorter-lived retrenchment than developed economies. Our econometric analysis shows that the magnitude of the retrenchment in capital flows across countries is linked to the extent of international financial integration, its specific nature—with countries relying on bank flows being the hardest hit—as well as domestic macroeconomic conditions and their connection to world trade flows.
    Date: 2010–06–01
  6. By: Se-Eun Jeong (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: Since the mid-1990s, we observe an increase of world current account imbalances. These imbalances have only been partially reduced since the burst of the crisis in 2007. They reflect, to some extent, exchange rate misalignments, an issue which has been frequently studied in the literature. However, these imbalances, which have reinforced in the 2000s, are also important inside the Euro area. This analysis cannot be reduced to simple estimates of euro misalignment at the world level because of the specific constraints that exist for each member of the Euro area. This article aims to examine to what extent the intra-European imbalances reflect exchange rate misalignments for each “national euro”.
    Keywords: Equilibrium Exchange Rate; Current Account Balance; Macroeconomic Balance
    Date: 2010–06–02
  7. By: Antonia Lòpez-Villavicencio (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII)
    Abstract: We analyze, in a unified theoretical framework, the two main models for equilibrium exchange rate, namely, the BEER and the FEER approaches. In order to understand the interactions between them, we study in detail the temporal links between these two measures. Our results show that, in average, the BEER and the FEER are closely related. Yet, important differences can be observed for some countries and/or some periods of time. Therefore, we analyze some of the factors that may explain this disconnection, identifying several aspects which are able to alter the relation between the current account and the real effective exchange rate, and so, between the FEER and the BEER. Our analysis puts forward the structural changes in matter of competitiveness, the dynamics of foreign asset positions and valuation effects as explanations for the divergence.
    Keywords: Equilibrium Exchange Rate, BEER, FEER, Cointegration, Global Imbalances
    Date: 2010–11–14
  8. By: Jean-Louis COMBES (Centre d'Etudes et de Recherches sur le Développement International); Tidiane KINDA (Fonds Monétaire International); Patrick PLANE (Centre d'Etudes et de Recherches sur le Développement International)
    Abstract: This paper analyzes the impact of capital inflows and the exchange rate regime on the real effective exchange rate. A wide range of developing countries (42 countries) is considered with estimation based on panel cointegration techniques. The results show that both public and private inflows cause the real effective exchange rate to appreciate. Among private inflows, portfolio investment has the biggest effect on appreciation, almost seven times that of foreign direct investment or bank loans, and private inflows have the smallest effect. Using a de facto measure of exchange rate flexibility, we find that a more flexible exchange rate helps to dampen appreciation of the real effective exchange rate caused by capital inflows.
    Keywords: Private capital flows, real effective exchange rate, exchange rate flexibility, emerging markets, low-income countries, pooled mean group estimator
    JEL: F32 F31 F21
    Date: 2010
  9. By: Vasia Panousi; George-Marios Angeletos
    Abstract: How does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? This paper investigates this question within a two-country, general-equilibrium, incomplete-markets model that focuses on the importance of idiosyncratic entrepreneurial risk---a risk that introduces, not only a precautionary motive for saving, but also a wedge between the interest rate and the marginal product of capital. Our contribution is then to show that this friction provides a simple explanation for the emergence of global imbalances, a simple resolution to the empirical puzzle that capital often fails to flow from the rich or slow-growing countries to the poor or fast-growing ones, and a distinct set of policy lessons regarding the intertemporal costs and benefits of capital-account liberalization.
    Date: 2010
  10. By: Luiz de Mello; Pier Carlo Padoan; Linda Rousová
    Abstract: Large shifts in countries’ external current account positions can be disruptive, often reflecting sudden stops in the flows of external finance and leading to exchange rate and banking crises. As a result, an empirical literature has emerged on the sustainability of, and the determinants of large swings in, current account positions. We shed further light on this issue by testing for the presence of unit roots in the current account balance-to-GDP ratios of a large set of mature and emerging-market economies using a methodology that allows for structural breaks in intercepts and trends. We then construct a chronology of current account reversals that is consistent with sustainability of external positions and use it to estimate the factors explaining the likelihood and magnitude of such reversals using a selection model with ordered probit in the first stage. We find that most of the factors that explain the probability of reversals, such as trends in capital flows, in the budget balance and in external positions, also influence their magnitude. But there are a few exceptions. For instance, the stance of monetary policy and the magnitude of external imbalances prior to a reversal seem to be more powerful predictors of the probability of reversals than of their magnitude.<P>Les déséquilibres mondiaux sont-ils viables ? : Mieux comprendre les causes des retournements de balance courante<BR>Les amples variations des soldes des paiements courants des pays peuvent avoir des effets perturbateurs, puisqu'elles tiennent souvent à de brusques interruptions des entrées de capitaux extérieurs et débouchent fréquemment sur des crises de change et bancaires. En conséquence, de nombreux travaux empiriques ont été réalisés sur la viabilité des soldes des paiements courants et les déterminants de leurs amples fluctuations. Nous apportons un nouvel éclairage sur cette question en procédant à un test de racine unitaire sur les ratios solde des paiements courants/PIB d'un vaste ensemble d'économies parvenues à maturité et émergentes, à partir d'une méthodologie tenant compte des ruptures structurelles dans les niveaux et les tendances des séries statistiques considérées. Nous établissons ensuite une chronologie des retournements de balance courante concordant avec la viabilité des positions extérieures, et nous l'utilisons pour estimer les facteurs qui expliquent la probabilité et l'ampleur de ces retournements à l'aide d'un modèle de sélection probit ordonné au premier stade. Nous parvenons à la conclusion que la plupart des facteurs qui expliquent la probabilité des retournements, telles que les tendances dans les flux de capitaux, dans le solde budgétaire et dans les positions extérieures, influent également sur leur ampleur. On relève toutefois quelques exceptions. Ainsi, l'orientation de la politique monétaire et l'ampleur des déséquilibres externes avant un retournement semblent être de meilleures variables explicatives de la probabilité des retournements que de leur ampleur.
    Keywords: capital flows, current account sustainability, current account reversals, flux de capitaux, retournements de balance courante, viabilité de la balance courante
    JEL: C32 C35 F32
    Date: 2010–11–10
  11. By: Gregor Schwerhoff; Mouhamadou Sy
    Abstract: The dramatic decline in inflation across the world over the last 20 years has been largely credited to improved monetary policy. The universal nature of the phenomenon and its simultaneity with globalization however indicate that there might also be a "real" side to it. We build a model based on Melitz (2003) in which falling transport cost lead to greater openness, higher productivity and lower inflation. Following a decline in transport cost openness increases and firm selection eliminates the least productive domestic firms. The consequent increase in average productivity leads to falling relative prices for goods. A cash-in-advance constraint allows to analyse how falling relative prices can lead to lower inflation. Using a dataset of macroeconomic variables for 107 countries from all world regions we are able to show that openness-induced productivity growth leads to a significant decline in inflation world wide.
    Date: 2010
  12. By: Rick van der Ploeg; Anthony J Venables
    Abstract: The response of an economy to a windfall of foreign exchange (be it aid or natural resource revenues) is often constrained by absorptive capacity. We provide a micro-founded analysis of absorption constraints, based on the idea that expanding the economy's capital stock (in aggregate or sectorally) requires non-traded inputs, the supply of which is constrained by the initial capital stock. Given this constraint, the economy will manifest 'Dutch disease' symptoms, although many of them are temporary. On impact there is sharp appreciation of the real exchange rate, which will then depreciate back to its equilibrium level. In contrast to the permanent income hypothesis, real consumption jumps part of the way to its new long-run level, and then continues to rise. Depending on the capital-intensity of the investments needed for the adjustment, the economy may run a current account deficit or surplus in early years.
    Keywords: absorptive capacity, absorption constraints, windfall, aid, natural resources, Dutch disease
    JEL: E21 E22 F10 F35 H63 O11 O16 Q33
    Date: 2010
  13. By: Joseph P. Byrne; Giorgio Fazio; Norbert Fiess
    Abstract: The behavior of commodities is critical for developing and developed countries alike. This paper contributes to the empirical evidence on the co-movement and determinants of commodity prices. Using nonstationary panel methods, we document a statistically significant degree of co-movement due to a common factor. Within a Factor Augmented VAR approach, real interest rate and uncertainty, as postulated by a simple asset pricing model, are both found to be negatively related to this common factor. This evidence is robust to the inclusion of demand and supply shocks, which both positively impact on the co-movement of commodity prices.
    Keywords: Commodity Prices, Panel Estimation, Factor Models
    JEL: E30 F00
    Date: 2010–11
  14. By: Silvio Contessi
    Abstract: Despite the microeconomic evidence supporting the superior idiosyncratic productivity of multinational firms (MFN) and their affiliates, cross-country studies fail to find robust evidence of a positive relationship between Foreign Direct Investment and growth. In order to study the aggregate implications of MNF entry and production, I develop a Dynamic Stochastic General Equilibrium model with firm heterogeneity where MNF sort according to their own productivity. Entry and production of MNF contribute to aggregate productivity growth at decreasing rates over time but potentially crowd out domestic producers due to increased product and factor market competition. I compare the aggregate benefit of productivity contributions with the cost of crowding out and argue that composition and crowding-out effects can help explain the conflicting evidence on the impact of Foreign Direct Investment on growth.>
    Keywords: International business enterprises
    Date: 2010

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