nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒02‒12
eight papers chosen by
Martin Berka
Massey University, Albany

  1. Transition to FDI openness: reconciling theory and evidence By Ellen R. McGrattan
  2. Purchasing Power Parity and the Taylor Rule By Hyeongwoo Kim; Masao Ogaki
  3. India's financial globalisation. By Shah, Ajay; Patnaik, Ila
  4. International capital flows to emerging and developing countries: national and global determinants By Joseph P. Byrne; Norbert Fiess
  5. Monetary policy transmission in an emerging market setting. By Bhattacharya, Rudrani; Patnaik, Ila; Shah, Ajay
  6. International Transmission of Business Cycles By Siedschlag, Iulia
  7. Running for the Exit: International Banks and Crisis Transmission By Ralph de Haas; Neeltje van Horen
  8. The Duration of Intermediate Exchange Rate Regimes and Capital Controls By Raul Razo-Garcia

  1. By: Ellen R. McGrattan
    Abstract: Empirical studies quantifying the economic effects of increased foreign direct investment (FDI) have not provided conclusive evidence that they are positive, as theory predicts. This paper shows that the lack of empirical evidence is consistent with theory if countries are in transition to FDI openness. Anticipated welfare gains lead to temporary declines in domestic investment and employment. Also, growth measures miss some intangible FDI, which is expensed from company profits. The reconciliation of theory and evidence is accomplished with a multicountry dynamic general equilibrium model parameterized with data from a sample of 104 countries during 1980–2005. Although no systematic benefits of FDI openness are found, the model demonstrates that the eventual gains in growth and welfare can be huge, especially for small countries.
    Date: 2011
  2. By: Hyeongwoo Kim; Masao Ogaki
    Abstract: In the Kehoe and Midrigan (2007) model, the persistence parameter of the real exchange rate is closely related to the measure of price stickiness in the Calvo-pricing model. When we employ this view, Rogoff's (1996) 3 to 5 year consensus half-life implies that firms update their prices every 18 to 30 quarters on average. This is at odds with most estimates from U.S. aggregate data when single equation methods are applied to the New Keynesian Phillips Curve (NKPC), or when system methods are applied to Dynamic Stochastic General Equilibrium (DSGE) models that include the NKPC. It is well known, however, that there is a large degree of uncertainty around the consensus half-life of the real exchange rate. To obtain a more efficient estimator, this paper develops a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. We use a median unbiased estimator for the system method with nonparametric bootstrap confidence intervals, and compare the results with those from the single equation method typically used in the literature. Applying the method to the real exchange rates of 18 developed countries against the U.S. dollar, we find that most of the half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals, most of which range from 3 quarters to 5 years. These median unbiased estimates and the lower bound of the confidence intervals for the half-lives of real exchange rates are consistent with most estimates of price stickiness using aggregate U.S. data for the NKPC and DSGE models.
    Keywords: Purchasing Power Parity, Calvo Pricing, Taylor Rule, Half-Life of PPP Deviations, Median Unbiased Estimator, Grid-t Confidence Interval
    JEL: C32 E52 F31
    Date: 2011–02
  3. By: Shah, Ajay (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy)
    Abstract: India embarked on reintegration with the world econ- omy in the early 1990s. At first, a certain limited open- ing took place emphasising equity flows by certain kinds of foreign investors. This opening has had myriad in- teresting implications in terms of both microeconomics and macroeconomics. A dynamic process of change in the economy and in economic policy then came about, with a co-evolution between the system of capital con- trols, macroeconomic policy, and the internationalisa- tion of firms including the emergence of Indian multi- nationals. Through this process, de facto openness has risen sharply. De facto openness has implied a loss of monetary policy autonomy when exchange rate pegging was attempted. The exchange rate regime has evolved towards greater flexibility.
    Keywords: India ; Financial globalisation ; Capital controls, Capital flows
    JEL: F15 F23 F32 F36 G15
    Date: 2011–01
  4. By: Joseph P. Byrne; Norbert Fiess
    Abstract: This paper examines international capital flows to emerging and developing countries. We assess whether commonalities exist, the permanence of shocks to commonalities and their determinants. Also, we consider individual country coherence with global capital flows and we measure the extent of co-movements in the volatility of capital flows. Our results suggest there are commonalities in capital inflows, although aggregate or disaggregate capital flows respond differently to shocks. We find that the US long run real interest rate is an important determinant of global capital flows, and real commodity prices are relevant but to a lesser extent. We also find a role for human capital in explaining why some countries can successfully ride the wave of financial globalisation.
    Keywords: Capital Flows; Emerging Markets; Developing Countries; Global Factors
    JEL: F32 F34
    Date: 2011–01
  5. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy); Shah, Ajay (National Institute of Public Finance and Policy)
    Abstract: Some emerging economies have a relatively ineffective monetary policy transmis- sion owing to weaknesses in the domestic financial system and the presence of a large and segmented informal sector. At the same time, small open economies can have a substantial monetary policy transmission through the exchange rate channel. In order to understand this setting, we explore a unified treatment of monetary policy transmission and exchange-rate pass-through. The results for an emerging market, India, suggest that the most effective mechanism through which monetary policy impacts inflation runs through the exchange rate.
    Keywords: Monetary policy transmission ; Exchange rate pass-through ; Exchange rate regime ; Financial development ; India
    JEL: E31 E52
    Date: 2011–01
  6. By: Siedschlag, Iulia
    Date: 2010–10
  7. By: Ralph de Haas; Neeltje van Horen
    Abstract: The global financial crisis has reignited the debate about the risks of financial globalization, in particular the international transmission of financial shocks. We use data on individual loans by the largest international banks to their various countries of operation to examine whether banks’ access to borrower information affected the transmission of the financial shock across borders. The simultaneous use of country and bank fixed effects allows us to disentangle credit supply and demand and to control for general bank characteristics. We find that during the crisis banks continued to lend more to countries that are geographically close, where they are integrated into a network of domestic co-lenders, and where they had gained experience by building relationships with (repeat) borrowers.
    Keywords: Crisis transmission; sudden stop; cross-border lending; syndicated loans
    JEL: F36 F42 F52 G15 G21 G28
    Date: 2011–02
  8. By: Raul Razo-Garcia (Department of Economics, Carleton University)
    Abstract: We perform a survival analysis of the policy composed of an intermediate ex- change rate regime and a closed nancial account. The analysis proposed is novel because we overcome the potential endogeneity between the two policies by ana- lyzing the duration of the policy mix, estimate a multiple destinations model and control for unobserved heterogeneity. The deepness of the nancial system, in ation, per capita income, size, trade openness, and the global acceptance of intermediate regimes and capital controls aect the duration of the policy mix. Finally, the evi- dence shows that the single destination model hides interesting factors aecting the duration of the regime.
    JEL: F32 F33
    Date: 2011–01–31

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