nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2010‒12‒18
seven papers chosen by
Martin Berka
Massey University, Albany

  1. Sectoral Effects of Tax Reforms in an Open Economy By Olivier Cardi; Romain Restout
  2. Habit Formation and Fiscal Transmission in Open Economies By Olivier Cardi; Gernot J. Muller
  3. The role of the terms of trade in the trade channel of transmission of oil price shoc. By Alessandro Maravalle
  4. Liability dollarization and fear of floating By Nguyen, Quoc Hung
  5. "China in the Global Economy" By Sunanda Sen
  6. Does the purchasing power parity hypothesis hold after 1998? By Zanetti Chini, Emilio
  7. Crisis in the Euro area: coopetitive game solutions as new policy tools By Carfì, David; Schilirò, Daniele

  1. By: Olivier Cardi (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Panthéon-Assas - Paris II, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Romain Restout (Université Catholique de Louvain, IRES - UCL)
    Abstract: We use a neoclassical open economy model with traded and non traded goods to investigate the sectoral effects of three tax reforms: i) two revenue-neutral shifting the tax burden from labor to consumption taxes and ii) one labor tax restructuring keeping the marginal tax wedge constant. Regardless of its type, a tax reform crowds-in both consumption and investment and raises employment. Whereas tax reforms have a small impact on GDP, they exert substantial effects on sectoral outputs which move in opposite direction in the short-run. The sensitivity analysis reveals that raising the elasticity of labor supply or reducing the tradable content in consumption expenditure amplifies the heterogeneity in sectoral output responses. Finally, allowing for the markup to depend on the number of competitors, we find that a substantial share of sectoral output variations can be attributed to the change in the markup triggered by firm entry.
    Keywords: Non Traded Goods; Employment; Current Account; Tax Reform.
    Date: 2010–12–08
  2. By: Olivier Cardi (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - CNRS : UMR7017 - Université Panthéon-Assas - Paris II, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X); Gernot J. Muller (University of Bonn, Department of Economics - Bonn Universität - University of Bonn)
    Abstract: In this paper we analyze the ability of an open economy version of the neoclassical model to account for the time-series evidence on fiscal policy transmission. In a first step, we identify government spending shocks within a vector autoregression model. We find that i) government spending increases output and induces a simultaneous decline of investment and the current account, but does not affect consumption; ii) the responses of output and investment are smaller in more open economies, while current account deficits tend to be larger. We find the predictions of the model to be broadly in line with the evidence, once we allow for habit formation in consumption. Specifically, habits are crucial for government spending to induce a simultaneous decline in investment and the current account.
    Keywords: Investment; Current Account; Habit Formation; Fiscal Policy.
    Date: 2010–12–08
  3. By: Alessandro Maravalle (University of the Basque Country)
    Abstract: This paper highlights the role of the terms of trade in the trade channel of propagation of oil price shocks both empirically and theoretically. Empirically, I show that oil price shocks have a large, persistent and statistically significant impact on the US terms of trade. Theoretically, I add oil in the model by Corsetti and Pesenti (2005) and analyse under what conditions the terms of trade plays a relevant role in the international transmission of oil price shocks. With nominal price rigidities and full exchange rate pass-through positive oil price shocks depreciate the currency of the oil importing country. The subsequent negative wealth effect adds to the recessive effect of the supply channel and may trongly reduce the consumption in the oil importing country economy. Without exchange rate pass-through oil shocks transmit to the economy only through the supply channel. The model suggests that a change in the exchange rate pass-through might contribute to explain the evidence of a weaker impact of oil price shocks on the macroeconomic activity in recent times.
    Keywords: oil price shocks; macroeconomic interdependence; exchange rate pass-through...
    JEL: F31 F41 Q43
    Date: 2010–12–10
  4. By: Nguyen, Quoc Hung
    Abstract: This paper explores the idea that fear of floating can be justified as an optimal discretionary monetary policy in a dollarized emerging economy. Specifically, I consider a small open economy in which intermediate goods importers borrow in foreign currency and face a credit constraint. In this economy, exchange rate depreciation not only worsens importers' net-worth but also increases the financing amount in domestic currency, therefore exaggerating their borrowing finance premium. Besides, because of high exchange rate pass-through into import prices, fluctuations in the exchange rate also have strong impacts on domestic prices and production. These effects, together, magnify the macroeconomic consequences of the floating exchange rate policy in response to external shocks. The paper shows that the floating exchange rate regime is dominated by the fixed exchange rate regime in the role of cushioning shocks and in welfare terms.
    Keywords: Developing countries, Foreign exchange, Exchange control, Liability Dollarization, Fear of Floating, Imported Goods
    JEL: F31
    Date: 2010–08
  5. By: Sunanda Sen
    Abstract: China occupies a unique position among developing countries. Its success in achieving relative stability in the financial sector since the institution of reforms in 1979 has given way to relative instability since the beginning of the current global financial crisis. Over the last few years, China has been on a path of capital account opening that has drawn larger inflows of capital from abroad, both foreign-direct and portfolio investment. Of late, a surge in these inflows has introduced problems for the monetary authorities in continuing with an autonomous monetary policy in China, especially with large additions to official reserves, the latter in a bid to avoid further appreciation of the country’s domestic currency. Like other developing countries, China today faces the “impossible trilemma” of managing the exchange rate with near-complete capital mobility and an autonomous monetary policy. Facing problems in devising and sustaining this policy, China has been using expansionary fiscal policy to tackle the impact of shrinking export demand. The recent drive on the part of Chinese authorities to boost real demand in the countryside and to revamp the domestic market shows a promise far different from that of the financial rescue packages in many advanced nations. The close integration of China with the world economy over the last two decades has raised concerns from different quarters that relate both to (1) the possible effects of the recent global downturn on China and (2) the second-round effects of a downturn in China for the rest of world.
    Keywords: Trade Surplus; Official Reserves; Impossible Trillemma; Integration; Capital Account Opening; Financial Crisis; State-owned Enterprises; Stock Markets; Volatility
    JEL: P31 P33 P34 P45 Q53
    Date: 2010–12
  6. By: Zanetti Chini, Emilio
    Abstract: We investigate the empirical support to the Purchasing Power Parity hypothesis by using sixteen real exchange rates for the decade 1999-2009. The literature has recently arrived to a solution to the two PPP puzzles if considering the post-Bretton Woods period from 1975 to 1998. Time series-based studies consider few cases, while panel-based studies have been recently criticized. Multivariate and panel cointegration, and nonlinear models are here implemented. The theory is rejected and both the puzzles remain unsolved if considering a linear structure, while a nonlinear scenario seems to allow for a partial solution to the first puzzle.
    Keywords: PPP; unit roots; cointegration; nonlinear models; IRF
    JEL: C32 C50 C22 F31
    Date: 2010–11–15
  7. By: Carfì, David; Schilirò, Daniele
    Abstract: The crisis within the Euro area have become frequent during 2010. First was the Greek economy to face a default problem of its sovreign debt, in November it was Ireland who has been in a serious financial situation at the verge of collapse causing difficulties to the euro. In this contribution we focus on the Greek crisis and we suggest, through a model of coopetition based on game theory and conceived at a macro level, feasible solutions in a cooperative perspective for the divergent interests which drive the economic policies in Germany and Greece, with the aim of improving the position of Greece, Germany and the whole Euro area and also giving a contribution to expand the set of macroeconomic policy tools. By means of our general analytical framework of coopetition, we show the strategies that could bring to feasible solutions in a cooperative perspective for Germany and Greece, where these feasible solutions aim at offering a win-win outcome for both countries, letting them to share the pie fairly within a growth path represented by a non-zero sum game. A remarkable analytical result of our work consists in the determination of the win-win solution by a new selection method on the transferable utility Pareto boundary of the coopetitive game.
    Keywords: European monetary Union; Coopetitive Games; Macroeconomic Policy
    JEL: F40 C71 E6
    Date: 2010–11

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