nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒02‒19
eleven papers chosen by
Martin Berka
Massey University, Albany

  1. Getting Surplus Countries to Adjust By John Williamson
  2. Evidence on financial globalization and crisis: capital raisings By Galina Hale
  3. Exchange rate pass-through, domestic competition and inflation -- evidence from the 2005/08 revaluation of the Renminbi By Raphael Auer
  4. Renminbi Undervaluation, China's Surplus, and the US Trade Deficit By William R. Cline
  5. Does the euro make a difference? Spatio-temporal transmission of global shocks to real effective exchange rates in an infinite VAR By Matthieu Bussière; Alexander Chudik; Arnaud Mehl
  6. Regional Single Currency Effects on Bilateral Trade with the European Union By Joan Costa-i-Font
  7. The non-monetary side of the global disinflation By Gregor Schwerhoff; Mouhamadou Sy
  8. Estimates of Fundamental Equilibrium Exchange Rates, May 2010 By William R. Cline; John Williamson
  9. The missing wealth of nations: Evidence from Switzerland, 1914-2010 By Gabriel Zucman
  10. The impact of world price instability on agricultural supply according to several macroeconomic factors By Julie Subervie
  11. Dealing with Volatile Capital Flows By Olivier Jeanne

  1. By: John Williamson (Peterson Institute for International Economics)
    Abstract: It has been 80 years since John Maynard Keynes first proposed a plan that would have disciplined persistent surplus countries. But the Keynes Plan, like the subsequent Volcker Plan in 1972-74, was defeated by the major surplus country of the day (the United States and Germany, respectively), and today China (not to mention Japan or Germany) exhibits no enthusiasm for new revisions of these ideas. Williamson evaluates the two earlier attempts and several new proposals now on the table. Morris Goldstein proposes using the International Monetary Fund (IMF) to discipline surplus countries. Countries showing large and persistent current account surpluses would receive a Fund mission with the purpose of judging whether the country had a misaligned exchange rate. Penalties would depend on the size and persistence of any misalignment the Fund diagnosed. Aaditya Mattoo and Arvind Subramanian propose that countries could bring a case for unfair trade through currency undervaluation to the World Trade Organization (WTO) dispute settlement system. The WTO would seek to establish the facts of the matter from the IMF. C. Fred Bergsten proposes that either a reserve currency country or the IMF itself should be able to engage in counter-intervention to push up the value of a currency that is being deliberately held down to an undervalued rate through intervention. US Secretary of the Treasury Timothy Geithner, echoing ideas of the Korean G-20 summit hosts and endorsed by Yi Gang, a vice governor of the People's Bank of China, has proposed that members of the G-20 should commit themselves to limit their current account imbalances to a maximum of 4 percent of GDP. Daniel Gros and Gary Hufbauer have advanced other ways of disciplining surplus countries, by limiting or taxing the assets that surplus countries can hold. Williamson suggests incorporating ideas from the various proposals into a feasible mechanism for disciplining surplus countries. He finds the Mattoo-Subramanian proposal most attractive for typical countries: They focus attention on the exchange rate rather than reserve holdings, seek to use the IMF in an area where it undoubtedly has expertise, but also exploit the greatest success in international cooperation in recent years, namely the dispute settlement mechanism of the WTO. To deal with the problem when a member of a monetary union--which by definition does not have an independent exchange rate--has an excessive surplus, Williamson suggests running the Goldstein proposal in parallel--perhaps operated by the European Central Bank rather than the IMF, and with the focus on the level of demand rather than the exchange rate.
    Date: 2011–01
  2. By: Galina Hale
    Abstract: Financial globalization opened international capital markets to investors and firms all over the world. Foreign capital raisings by firms have increased substantially since the early 1990s in terms of equity as well as debt. I review the literature on the determinants and patterns of cross-border capital raisings and their effects on developments of domestic markets, highlighting the differences between mature and emerging economies. I focus on the effects the introduction of the euro had on European and global capital markets by bringing into existence a currency area comparable in size to that of the United States. Finally, I discuss the effects of financial crises on foreign capital raisings and review capital raisings during the 2007-09 global financial crisis.
    Keywords: Globalization ; Capital market
    Date: 2011
  3. By: Raphael Auer
    Abstract: How important is the effect of exchange rate fluctuations on the competitive environment faced by domestic firms and the prices they charge? To answer this question, this paper examines the 17 percent appreciation of the yuan against the U.S. dollar from 2005 to 2008. In a monthly panel covering 110 sectors, a 1 percent appreciation of the Yuan increases U.S. import prices by roughly 0.8 percent. It is then shown that import prices, in turn, pass through into producer prices at an average rate of roughly 0.7, implying that a 1 percent Yuan appreciation increases the average U.S. producer price of tradable goods by 0.8 percent*0.7=0.56 percent. In contrast, exchange rate movements of other trade partners have much smaller effects on import prices and hardly any effect on producer prices. The paper next demonstrates that the pass through response into import prices is heterogeneous across sectors with different characteristics such as traded-input intensity or the shape of demand for the sector's goods. In contrast, the rate at which import prices pass through into domestic producer prices is found to be homogenous across the sectors. Finally, the insights of the analysis are employed to simulate the inflationary effect of a Yuan revaluation. For example, the relative price shock caused by a 25 percent appreciation of the Yuan spread evenly over 10 months is equivalent to a temporary increase of the U.S. PPI inflation rate by over five percentage points. Because such an appreciation would also influence the overall skewness of the distribution of price changes at the sectoral level, it would likely also impact U.S. equilibrium inflation.
    Keywords: Imports - Prices ; International trade ; Labor market ; Macroeconomics ; Price levels
    Date: 2011
  4. By: William R. Cline (Peterson Institute for International Economics)
    Abstract: The impact of China's exchange rate on both its current account balance and the US-China bilateral trade balance is considerable. A 1 percent rise in the real effective exchange rate would cause a reduction in China's current account surplus of 0.30 to 0.45 percent of GDP. A 10 percent real effective appreciation would bring China's current account surplus down by roughly $170 billion to $250 billion annually with a corresponding improvement in the US current account balance ranging from $22 billion to $63 billion annually. William R. Cline also warns that the increasing trend for China's current account surplus, combined with the negative trend for the US deficit, indicate that adjustments accomplished through exchange rate correction at any one time will have a tendency to erode unless the renminbi successively appreciates by around 2 percent annually to reflect its rapid productivity growth. Special Chinese efforts to shift the economy away from external to domestic demand are important complements of exchange rate adjustment, without which the long-term trend toward a rising trade surplus could cause excess demand to grow and increase inflationary pressures on the economy.
    Date: 2010–08
  5. By: Matthieu Bussière (Banque de France, 31 rue Croix des petits champs – 75001 Paris, France.); Alexander Chudik (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Arnaud Mehl (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper provides evidence on whether the creation of the euro has changed the way global turbulences affect euro area and other economies. Specifically, it considers the impact of global shocks on the competitiveness of individual euro area countries and assesses whether their responses to such shocks have converged, as well as to what pattern. Technically, the paper applies a newly developed methodology based on infinite VAR theory featuring a dominant unit to a large set of over 60 countries' real effective exchange rates, including those of the individual euro area economies, and compares impulse response functions to the estimated systems before and after EMU with respect to three types of shocks: a global US dollar shock, generalised impulse response function shocks and a global shock to risk aversion. Our results show that the way euro area countries' real effective exchange rates adjust to these shocks has converged indeed, albeit to a pattern that depends crucially on the nature of the shock. This result is noteworthy given the apparent divergence in competitiveness indicators of these countries in the first ten years of EMU, which suggests that this diverging pattern is unlikely to be due to global external shocks with asymmetric effects but rather to other factors, such as country-specific domestic shocks. JEL Classification: C21, C23.
    Keywords: Euro, Real Effective Exchange Rates, Weak and Strong Cross Sectional Dependence, High-Dimensional VAR, Identification of Shocks.
    Date: 2011–02
  6. By: Joan Costa-i-Font
    Abstract: The regional effects of sharing a single currency on bilateral trade with other European Union member states are a contentious question. This paper examines the regional effects on trade of the set up of the euro as a common currency. It takes advantage of a gravity specification of bilateral trade between the seventeen Spanish regions and EU-13 countries over the period 1997-2004 and accounts for two distinct effects depending on the temporal set up of the euro. That is, the exchange rate volatility effect (from exchange rate fixing of national currencies in 1999) is distinguished from the so-called common currency effect (resulting from the issuing of a new currency in 2002). Findings are suggestive of a regional concentration of currency union effects in a few regions, namely those relatively more open to trade, though such effects are found to fade away over time. Trade expansion for the set up of the euro ranges between 45 to 16% depending on the specification, but only the exchange rate volatility effect of a common currency was found significant, pure currency union effects were instead found to be almost negligible.
    Date: 2010–10–01
  7. By: Gregor Schwerhoff (BGSE - Bonn Graduate School of Economics - BGSE); Mouhamadou Sy (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    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.
    Keywords: globalization ; openness ; productivity ; disinflation
    Date: 2010–10
  8. By: William R. Cline (Peterson Institute for International Economics); John Williamson (Peterson Institute for International Economics)
    Abstract: This policy brief updates Cline and Williamson's estimates of fundamental equilibrium exchange rates (FEERs) to May 2010 using the data to March contained in the April issue of the International Monetary Fund's World Economic Outlook. The IMF's data are updated to May by subsequent exchange rate changes and Cline's estimates of the impact of exchange rate changes on trade flows. In addition, the assumptions about current account targets have been somewhat modified from previous years: All countries are now assumed to aim to keep current account balances within 3 percent of equilibrium, whereas formerly some countries with large net foreign assets to GDP ratios (NFA/GDP) were allowed larger targeted imbalances. The fundamental question explored is what pattern of exchange rates is consistent with satisfactory medium-term evolution of the world economy, interpreted as achieving those objectives while maintaining internal balance in each country. The big disequilibrium in the pattern of exchange rates remains the undervaluation of the renminbi and the overvaluation of the dollar. The size of this disequilibrium is, however, less than previously estimated (now 15 percent on an effective basis and 24 percent bilaterally with respect to the dollar), due to the decline in the IMF's estimate of China's prospective current account surplus. The recent depreciation of the euro, while increasing the size of Euroland's prospective surplus, does not threaten to lead to an internationally unacceptable imbalance (i.e., greater than 3 percent of GDP) and therefore does not create a case for international action to reverse the rise. The yen is no longer found to be overvalued on an effective basis, although if China revalued that would create a case for a stronger yen/dollar rate. Several of the other East Asian currencies would also need to appreciate bilaterally to avoid effective undervaluation. Of the 28 other economies covered, Hong Kong, Malaysia, Singapore, Sweden, Switzerland, and Taiwan are judged to need an effective appreciation and Australia, Brazil, New Zealand, South Africa, and Turkey to need an effective depreciation.
    Date: 2010–06
  9. By: Gabriel Zucman (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper draws on direct evidence from Swiss banks and on systematic inconsistencies in international accounts across countries to document the level of unrecorded wealth in tax havens, its nature and its evolution. I find that 8% of global household net financial wealth is held in tax havens, of which one third in Switzerland. The bulk of offshore assets are invested in equities, in particular mutual fund shares. For this reason, 20% of all cross-border equities have no identifiable owner in international statistics across the world. Taking into account tax havens alters dramatically the picture of global imbalances: with minimal assumptions, it is possible to turn the world's second largest debtor, the eurozone, into a net creditor. With stronger assumptions, the largest debtor, the U.S., can be made a balanced economy. Europeans are richer than we think, because a significant part of their wealth has historically been held where domestic national accountants and tax authorities cannot see it.
    Keywords: tax havens ; external assets ; wealth distribution ; tax evasion
    Date: 2011–02
  10. By: Julie Subervie (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    Abstract: This paper aims at analyzing the effect of world price instability on the aggregate agricultural supply of developing countries and determining to what extent this effect depends on the macroeconomic environment. Producers of agricultural commodity-exporting countries are particularly vulnerable to the fluctuations of world prices : they are exposed to price shocks and their ability to cope with them is weak. But the effectiveness of risk coping strategies is conditional on the influence of macroeconomic factors. We test the impact of international price instability on the aggregate agricultural supply, taking account of some features of the national environment (infrastructure, inflation, and financial deepening). The analysis is based on a sample of 25 countries during the period 1961-2002. Results from panel data highlight a significant negative effect of international price instability on aggregate agricultural supply. Moreover, they show that high inflation, weak infrastructure and poorly developed financial system contribute to reinforce this effect.
    Keywords: aggregate supply;price instability;inflation;infrastructure;financial deepening
    Date: 2011–02–09
  11. By: Olivier Jeanne (Peterson Institute for International Economics)
    Abstract: The tools and mechanisms with which emerging-market countries insure themselves against volatile capital flows are in a state of flux. Most emerging-market countries had accumulated an unprecedented level of international reserves before the 2008 global financial crisis. The crisis itself led to a large increase in International Monetary Fund (IMF) resources and the introduction of a new lending facility, the Flexible Credit Line. Meanwhile, some progress was made toward transforming the Chiang Mai Initiative into an Asian Monetary Fund, and the Greek debt crisis even prompted calls for the creation of a European Monetary Fund. How have emerging-market countries dealt with capital flow volatility in the current crisis? What is the appropriate level of reserves for emerging-market countries? How can international crisis-lending and liquidity-provision arrangements be improved? What role can financial regulation and capital controls play in dealing with volatile capital flows? Olivier Jeanne discusses these and other important questions that are useful to keep in mind when thinking about the reform of international liquidity provision for emerging-market countries to deal with volatile capital flows. Jeanne concludes that the IMF and the international community should make more efforts to establish normative rules for the appropriate level of prudential reserves in emerging-market and developing countries and actively develop with its members a code of good practice for prudential capital controls.
    Date: 2010–07

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