nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒02‒05
ten papers chosen by
Martin Berka
Massey University, Albany

  1. Exchange rate pass-through: evidence based on vector autoregression with sign restrictions By Lian An; Jian Wang
  2. Role of the U.S. Dollar in International Financial System By Mária Vojtková
  3. Interest Rate Rules, Endogenous Cycles, and Chaotic Dynamics in Open Economies By Marco Airaudo; Luis-Felipe Zanna
  4. U.S. trade and inventory dynamics By George Alessandria; Joseph P. Kaboski; Virgiliu Midrigan
  5. Global banking and international business cycles By Robert Kollmann; Zeno Enders; Gernot J. Mueller
  6. Impact of GDP volatility on current account balances By Michał Brzozowski; Sadananda Prusty
  7. Solving the multi-country real business cycle model using ergodic set methods By Kenneth Judd; Lilia Maliar; Serguei Maliar
  8. Business Cycle Synchronization Since 1880 By Michael Artis; George Chouliarakis; Pkg Harischandra
  9. The home bias in equities and distribution costs By Harms, Philipp; Hoffmann, Mathias; Ortseifer, Christina
  10. Trade Barriers and the Price of Nontradables Relative to Tradables By Sposi, Michael J.

  1. By: Lian An; Jian Wang
    Abstract: We estimate exchange rate pass-through (PT) into import, producer and consumer price indexes for nine OECD countries, using a method proposed by Uhlig (2005). In a Vector Autoregression (VAR) model, we identify the exchange rate shock by imposing restrictions on the signs of impulse responses for a small subset of variables. These restrictions are consistent with a large class of theoretical models and previous empirical findings. We find that exchange rate PT is less than one at both short and long horizons. Among three price indexes, exchange rate PT is greatest for import price index and smallest for consumer price index. In addition, greater exchange rate PT is found in an economy which has a smaller size, higher import share, more persistent exchange rate, more volatile monetary policy, higher inflation rate, and less volatile aggregate demand.
    Keywords: Vector autoregression ; Price indexes ; Consumer price indexes
    Date: 2011
  2. By: Mária Vojtková (University of Economics in Bratislava, Faculty of National Economy, Department of Banking and International Finance)
    Abstract: In the study we focus on theoretical and practical aspects of the role of the U.S. dollar in current international monetary system. We shortly describe the historical evolution of monetary system when it comes to the dollar position in it. Subsequently, we assess current status of the U.S. dollar in financial markets and its share on international foreign exchange reserves. In the application part, we examine how changes in the U.S. dollar exchange rate affect countries operating in the pegged exchange regime. At the same time, we focus on the problem of current account deficit of the U.S. balance of payments and its relationship to the export-oriented countries pegged to the U.S. dollar.
    Keywords: Bretton-Wood monetary system, U.S. dollar, pegged exchange regime, fixed exchange regime, balance of payment, terms of trade
    JEL: E42 E52 F30 F33
    Date: 2011–01–28
  3. By: Marco Airaudo; Luis-Felipe Zanna
    Abstract: In this paper we present an extensive analysis of the consequences for global equilibrium determinacy in flexible-price open economies of implementing active interest rate rules, i.e., monetary rules where the nominal interest rate responds more than proportionally to changes in inflation. We show that conditions under which these rules generate aggregate instability by inducing liquidity traps, endogenous cycles, and chaotic dynamics depend on particular characteristics of open economies, including the degree of trade openness and the degree of exchange rate pass-through into import prices. For instance, in our model, we find that a rule that responds to expected future inflation is more prone to induce endogenous cyclical and chaotic dynamics the more open the economy and the higher the degree of exchange rate pass-through.
    Keywords: Small Open Economy; Interest Rate Rules; Taylor Rules; Multiple Equilibria; Chaos; Endogenous Fluctuations
    JEL: E32 E52 F41
    Date: 2010
  4. By: George Alessandria; Joseph P. Kaboski; Virgiliu Midrigan
    Abstract: The authors examine the source of the large fall and rebound in U.S. trade in the recent recession. While trade fell and rebounded more than expenditures or production of traded goods, they find that relative to the magnitude of the downturn, these trade fluctuations were in line with those in previous business cycle fluctuations. The authors argue that the high volatility of trade is attributed to more severe inventory management considerations of firms involved in international trade. They present empirical evidence for autos as well as at the aggregate level that the adjustment of inventory holdings helps explain these fluctuations in trade.
    Keywords: Trade ; Financial crises ; Inventories
    Date: 2011
  5. By: Robert Kollmann; Zeno Enders; Gernot J. Mueller
    Abstract: This paper incorporates a global bank into a two-country business-cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank's capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007–09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reduction in the U.S. and the euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis.
    Keywords: Equity ; Bank capital ; Productivity ; Default (Finance) ; Loans
    Date: 2011
  6. By: Michał Brzozowski (Faculty of Economic Sciences, University of Warsaw); Sadananda Prusty (Institute of Management Technology)
    Abstract: This paper empirically investigates the impact of GDP volatility on current account balances for a large sample of developed and developing countries. We extend the standard set of short- and long-term determinants of current accounts to include GDP volatility computed from the annual growth rate of GDP. It turns out that for low income countries the impact of GDP volatility on their current account balances is negative, whereas the reverse is true for high income countries. The intertemporal approach to the balance of payments followed in this paper suggests that a diverse response of current account balances to GDP volatility can be due to the different degree of shock persistence in developed and developing countries.
    Keywords: current account, savings, investment, volatility
    JEL: F32 F41 C33
    Date: 2011
  7. By: Kenneth Judd (Hoover Institution); Lilia Maliar (Universidad de Alicante); Serguei Maliar (Universidad de Alicante)
    Abstract: We use the stochastic simulation algorithm, described in Judd, Maliar and Maliar (2009), and the cluster-grid algorithm, developed in Judd, Maliar and Maliar (2010a), to solve a collection of multi-country real business cycle models. The following ingredients help us reduce the cost in high-dimensional problems: an endogenous grid enclosing the ergodic set, linear approximation methods, fixed-point iteration and efficient integration methods, such as non-product monomial rules and Monte Carlo integration combined with regression. We show that high accuracy in intratemporal choice is crucial for the overall accuracy of solutions and offer two approaches, precomputation and iteration-on-allocation, that can solve for intratemporal choice both accurately and quickly. We also implement a hybrid solution algorithm that combines the perturbation and accurate intratemporal-choice methods
    Keywords: heterogeneous agents, numerical methods, stochastic simulation, parameterized expectations algorithm, projection, perturbation.
    JEL: C63
    Date: 2011–01
  8. By: Michael Artis; George Chouliarakis; Pkg Harischandra
    Abstract: This paper studies the international business cycle behaviour across 25 advanced and emerging market economies for which 125 years of annual GDP data are available. The picture that emerges is more fragmented than the one drawn by studies that focused on a narrower set of advanced market economies. The paper offers evidence in favour of a secular increase in international business cycle synchronization within a group of European and a group of English-speaking economies that started during 1950-1973 and accelerated since 1973. Yet, in other regions of the world, country-specific shocks are still the dominant forces of business cycle dynamics.
    Date: 2011
  9. By: Harms, Philipp; Hoffmann, Mathias; Ortseifer, Christina
    Abstract: We show that including distribution costs into a general equilibrium model of international portfolio choice contributes to explaining the 'home bias' in international equity investment. Our model is able to replicate observed investment positions for a wide range of parameter values, even if agents have an incentive to hedge labor income risk by purchasing foreign equity. This is because the existence of a retail sector affects both the correlation of domestic returns with the domestic price level and the correlation between financial and nonfinancial income. --
    Keywords: International Financial Market Integration,International Risk Sharing,Home Bias
    JEL: F41 G11 G15
    Date: 2010
  10. By: Sposi, Michael J.
    Abstract: This paper addresses the question of why the price of nontradables relative to tradables is positively correlated with income per worker. I construct a two-sector model in which agents differ with respect to managerial ability. Agents sort themselves by choosing to become a worker, a manager in nontradables, or a manager in tradables. A fixed cost of exporting places the most productive managers in the tradable sector, and the magnitude of the fixed cost determines the extent of this margin. Fixed costs together with trade costs determine the amount of competition across sectors which in turn determines prices across sectors. The calibrated model explains more than 60% of the cross-country differences in the relative price of nontradables, due to the presence of larger fixed costs in poor countries combined with nontrivial import costs.
    Keywords: relative prices; PPP; tradables; nontradables; competition
    JEL: F16 F10 F12
    Date: 2010–12–01

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