nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒01‒30
eleven papers chosen by
Martin Berka
Massey University, Albany

  1. Current Account Imbalances Coming Back By Joseph E. Gagnon
  2. International Financial Contagion: the Role of Banks By Robert Kollmann; Frédéric Malherbe
  3. The dynamics of real exchange rates - A reconsideration By Heinen, Florian; Kaufmann, Hendrik; Sibbertsen, Philipp
  4. Globalization and FDIs: determinants and competition effects in Central and Eastern European Countries By Natalia VECHIU
  5. Centralized Innovation Policy in an agglomeration and growth model : A welfare analysis By Benjamin Montmartin
  6. International financial flows, real exchange rates and cross-border insurance By Francesca Viani
  7. To devaluate or not to devalue? How East European countries responded to the outflow of capital in 1997-99 and in 2008-09 By Vladimir Popov
  8. Endogenous Discounting, Precautionary Savings and the Current Account: the Case of China By Tianding Zhang
  9. Trade Induced Technical Change? The Impact of Chinese Imports on Innovation, IT and Productivity By Nicholas Bloom; Mirko Draca; John Van Reenen
  10. Real Exchange Rates and China's Bilateral Exports towards Industrialized Countries By Ping Hua
  11. Keynesian and Austrian Perspective on Crisis, Shock Adjustment, Exchange Rate Regime and (Long-Term) Growth. By Mathilde Maurel; Gunther Schnabl

  1. By: Joseph E. Gagnon (Peterson Institute for International Economics)
    Abstract: This paper finds statistically robust and economically important effects of fiscal policy, external financial policy, net foreign assets, and oil prices on current account balances. The statistical model builds upon and improves previous explanations of current account balances in the academic literature. A key advance is that the model captures the effect of external financial policies, including exchange rate policies, through data on net official financial flows. Based on current and expected future policies, current account imbalances in major G-20 economies are likely to widen much more in the next five years than projected by the International Monetary Fund (IMF). This paper concludes with a discussion of appropriate policies to prevent widening imbalances.
    Keywords: exchange rate, G-20, official financial flows, sterilized intervention
    Date: 2011–01
  2. By: Robert Kollmann; Frédéric Malherbe
    Abstract: This paper provides an overview of recent theories of international financial contagion, with a focus on models in which the balance sheet constraints of global banks (and other financial institutions) are the key of international transmission.
    Keywords: global financial crisis; international financial contagion; international financial multiplier; global banks; bank balance sheets; capital ratio; leverage ratio; international interbank market; asset prices; credit losses; bank runs
    Date: 2011–01
  3. By: Heinen, Florian; Kaufmann, Hendrik; Sibbertsen, Philipp
    Abstract: While it is widely agreed that Purchasing Power Parity (PPP) holds as a long-run concept the specific dynamic driving the process is largely build upon a priori economic belief rather than a thorough statistical modeling procedure. The two prevailing time series models, i.e. the exponential smooth transition autoregressive (ESTAR) model and the Markov switching autoregressive (MSAR) model, are both able to support the PPP as a long-run concept. However, the dynamic behavior of real exchange rates implied by these two models is very different and leads to different economic interpretations. In this paper we approach this problem by offering a bootstrap based testing procedure to discriminate between these two rival models. We further study the small sample performance of the test. In an application we analyze several major real exchange rates to shed light on the question which model best describes these processes. This allows us to draw a conclusion about the driving forces of real exchange rates.
    Keywords: Nonlinearities, Markov switching, Smooth transition, Specification testing, Real exchange rates
    JEL: C12 C15 C22 C52 F31
    Date: 2011–01
  4. By: Natalia VECHIU
    Abstract: Globalization and FDIs: determinants and competition effects in Central and Eastern European Countries
    Date: 2010–11
  5. By: Benjamin Montmartin (Université de Lyon, Lyon, F-69003, France ; Université Jean Monnet ; CNRS, GATE Lyon St Etienne, Saint-Etienne, F-42000, France)
    Abstract: Innovation policies are strategic tools for reinforcing long-term economic growth. If the literature highlights the need for coordination among national R&D policies, the need for transnational policies appears to be less clear. Using a model à la Martin and Ottaviano (1999), we conduct a welfare analysis in order to judge the effect of a centralized R&D subsidy policy. If theoretical results suggest that this policy can improve efficiency and equity, our welfare analysis shows that when there are few knowledge spillovers between countries, then the policy leads to a conflict of interest. In the case of strong international knowledge spillovers however, the conflict of interest disappears suggesting that innovation policies should first focus on the development of knowledge flows between countries.
    Keywords: agglomeration and growth models, innovation policy, welfare criteria
    JEL: F43 H50 R12
    Date: 2011
  6. By: Francesca Viani (Banco de España)
    Abstract: Whether cross-border financial market integration has raised global insurance, is still a controversial issue in the literature. If this is so, what should we observe in the data? The insurance literature emphasizes that efficient risk-sharing requires financial markets to channel resources to countries that have been made temporarily poorer by some negative conjuncture, net of physical capital accumulation. This standard condition, which provides the basis for virtually every test of international insurance, is however derived focusing on only one of the two channels of cross-border insurance, the financial flows channel, implicitly assuming no interaction between this and the other channel, international relative price fluctuations. This paper shows that testable conditions can only be derived theoretically placing the interaction between prices and financial flows centerstage in the analysis. Using a two-country general equilibrium model with endogenous portfolio diversification, I show that financial flows and relative prices can be either complements or substitutes in providing insurance. In the case of complementarity, financial inflows raise the international price of a country's output. This implies the standard condition. In the case of substitutability prices and flows transfer purchasing power in opposite directions. This implies a different condition: efficient financial markets are required to channel resources "upstream", from relatively poorer to relatively richer countries. The conditions for substitutability appear to be quantitatively and empirically plausible.
    Keywords: International financial flows, risk-sharing, terms of trade
    JEL: F3 F4 G1
    Date: 2011–01
  7. By: Vladimir Popov (New Economic School, Moscow)
    Abstract: If there is a negative terms of trade or financial shock leading to the deterioration in the balance of payments, there are two basic options for a country that has limited foreign exchange reserves. First, a country can maintain a fixed exchange rate (or even a currency board) and wait until the reduction of foreign exchange reserves leads to the reduction of money supply: this will drive domestic prices down and stimulate exports, raise interest rates and stimulate the inflow of capital, and finally will correct the balance of payments. Second, the country can allow the devaluation of national currency – flexible exchange rate will automatically bring the balance of payments back into the equilibrium. Because national prices are less flexible than exchange rates, the first type of adjustment is associated with the greater reduction of output. The empirical evidence on East European countries and other transition economies for 1998-99 period (outflow of capital after the 1997 Asian and 1998 Russian currency crises and slowdown of output growth rates) suggests that the second type of policy response (devaluation) was associated with smaller loss of output than the first type (monetary contraction). 2008-09 developments provide additional evidence for this hypothesis.
    Date: 2011–01
  8. By: Tianding Zhang (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: The relationship between the current account and the macroeconomic development remains an important issue in an open economy. Recently, global current account imbalances, and more specifically the large deficit in the United States and the surplus in China and other Asian economies, continue to draw considerable attention in both policy makers and academics. The macroeconomic effects induced by China's current account surplus, especially the big trade balance surpluses against the United States, and the related adjustment policy in the rebalance will affect the China's economic growth and development in the future. China's external current account surpluses are not unrelated to problems with its internal imbalances. This paper focuses on the saving channel. In particular, the objective of this paper is to study the relationship between precautionary savings and China's current account surplus.
    Keywords: Precautionary Savings;Current Account;Endogenous Discounting
    Date: 2011–01–18
  9. By: Nicholas Bloom; Mirko Draca; John Van Reenen
    Abstract: We examine the impact of Chinese import competition on patenting, IT, R&D and TFP using a panel of up to half a million firms over 1996-2007 across twelve European countries. We correct for endogeneity using the removal of product-specific quotas following China’s entry into the World Trade Organization. Chinese import competition had two effects: first, it led to increases in R&D, patenting, IT and TFP within firms; and second it reallocated employment between firms towards more innovative and technologically advanced firms. These within and between effects were about equal in magnitude, and appear to account for around 15% of European technology upgrading between 2000-2007. Rising Chinese import competition also led to falls in employment, profits, prices and the skill share. By contrast, import competition from developed countries had no effect on innovation. We develop a simple “trapped factor” model of innovation that is consistent with these empirical findings.
    JEL: F14 L25 L60 O33
    Date: 2011–01
  10. By: Ping Hua (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: A bilateral export demand function is developed to study the effects on the Chinese bilateral exports of three real exchange rates, corresponding respectively to the price-competitiveness of Chinese products on the market of the considered import country (traditional effect), on China's other export markets (pricing-to-market effect), and to the price-competitiveness of Chinese competitors on the market of the considered import country (third-export-country effect). This function is then applied for Chinese real bilateral exports towards eleven industrialized countries over the period from 1991 to 2004. The econometric results confirm the effects of the three real exchange rates on the Chinese bilateral exports.
    Keywords: bilateral exports;China;real exchange rates
    Date: 2011–01–18
  11. By: Mathilde Maurel (Centre d'Economie de la Sorbonne); Gunther Schnabl (Université de Leipzig)
    Abstract: The 2010 European debt crisis has revived the discussion concerning the optimum adjustment strategy in the face of asymmetric shocks. Whereas Mundell's (1961) seminal theory on optimum currency areas suggests depreciation in the face of crisis, the most recent emergence of competitive depreciations, competitive interest rate cuts or currency wars questions the exchange rate as an adjustment tool to asymmetric economic development. This paper approaches the question from a theoretical perspective by confronting exchange rate based adjustment with crisis adjustment via price and wage cuts. Econometric estimations yield a negative impact of exchange rate flexibility/ volatility on growth, which is found to be particularly strong for countries with asymmetric business cycles and during recessions. Based on these findings we support a further enlargement of the European Monetary Union and recommend more exchange rate stability for the rest of the world.
    Keywords: Exchange rate regime, crisis, shock adjustment, theory of optimum currency areas, Mundell, Schumpeter, Hayek, competitive depreciations, currency war.
    JEL: F31 F32
    Date: 2011–01

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