nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒02‒26
thirteen papers chosen by
Martin Berka
Massey University, Albany

  1. Exorbitant Privilege and Exorbitant Duty By Pierre-Olivier Gourinchas; Helene Rey; Nicolas Govillot
  2. Capital Flows, Exchange Rate Flexibility, and the Real Exchange Rate By Jean-Louis Combes; Patrick Plane; Tidiane Kinda
  3. Globalization, the Business Cycle, and Macroeconomic Monitoring By M. Ayhan Kose; S. Boragan Aruoba; Marco Terrones; Francis X. Diebold
  4. European Financial Linkages: A New Look at Imbalances By Claire Waysand; John C De Guzman; Kevin Ross
  5. The Evolution of Comparative Advantage: Measurement and Welfare Implications By Andrei A. Levchenko; Jing Zhang
  6. Interpreting Currency Movements During the Crisis: What's the Role of Interest Rate Differentials? By Nicoletta Batini; Thomas Dowling
  7. A Barrel of Oil or a Bottle of Wine: How Do Global Growth Dynamics Affect Commodity Prices? By Tahsin Saadi-Sedik; Serhan Cevik
  8. Sectoral Effects of Tax Reforms in an Open Economy By Olivier CARDI; Romain RESTOUT
  9. Worthy Transfers? A Dynamic Analysis of Turkey's Accession to the European Union By Gul Ertan Ozguzer; Luca Pensieroso
  10. AMU and Monetary Cooperation in Asia By Eiji Ogawa; Junko Shimizu
  11. Capital Account Liberalization and the Role of the RMB By Nicholas Lardy; Patrick Douglass
  12. Armenia: An Assessment of the Real Exchange Rate and Competitiveness By Anke Weber; Chunfang Yang
  13. Sudden stops : are global and local investors alike ? By Calderon, Cesar; Kubota, Megumi

  1. By: Pierre-Olivier Gourinchas (Associate Professor, Univeresity of California, Berkeley (; Helene Rey (Professor, London Business School); Nicolas Govillot (Ecole des Mines)
    Abstract: We update and improve the Gourinchas and Rey (2007a) dataset of the historical evolution of US external assets and liabilities at market value since 1952 to include the recent crisis period. We find strong evidence of a sizeable excess return of gross assets over gross liabilities. The center country of the International Monetary System enjoys an gexorbitant privilegeh that significantly weakens its external constraint. In exchange for this gexorbitant privilegeh we document that the US provides insurance to the rest of the world, especially in times of global stress. This gexorbitant dutyh is the other side of the coin. During the 2007-2009 global financial crisis, payments from the US to the rest of the world amounted to 19 percent of US GDP. We present a stylized model that accounts for these facts.
    Date: 2010–08
  2. By: Jean-Louis Combes; Patrick Plane; Tidiane Kinda
    Abstract: This paper analyzes the impact of capital inflows and exchange rate flexibility on the real exchange rate in developing countries based on panel cointegration techniques. The results show that public and private flows are associated with a real exchange rate appreciation. Among private flows, portfolio investment has the highest appreciation effect-almost seven times that of foreign direct investment or bank loans-and private transfers have the lowest effect. Using a de facto measure of exchange rate flexibility, we find that a more flexible exchange rate helps to dampen appreciation of the real exchange rate stemming from capital inflows.
    Keywords: Capital flows , Capital inflows , Developing countries , Economic models , Exchange rate appreciation , Exchange rate regimes , External financing , Flexible exchange rates , Private capital flows , Real effective exchange rates ,
    Date: 2011–01–10
  3. By: M. Ayhan Kose; S. Boragan Aruoba; Marco Terrones; Francis X. Diebold
    Abstract: We propose and implement a framework for characterizing and monitoring the global business cycle. Our framework utilizes high-frequency data, allows us to account for a potentially large amount of missing observations, and is designed to facilitate the updating of global activity estimates as data are released and revisions become available. We apply the framework to the G-7 countries and study various aspects of national and global business cycles, obtaining three main results. First, our measure of the global business cycle, the common G-7 real activity factor, explains a significant amount of cross-country variation and tracks the major global cyclical events of the past forty years. Second, the common G-7 factor and the idiosyncratic country factors play different roles at different times in shaping national economic activity. Finally, the degree of G-7 business cycle synchronization among country factors has changed over time.
    Keywords: Business cycles , Cross country analysis , Globalization , Group of seven ,
    Date: 2011–02–01
  4. By: Claire Waysand; John C De Guzman; Kevin Ross
    Abstract: We document external investment positions among European Union countries at the start of the financial crisis through the creation of a new database comprising bilateral external financial asset and liabilities, excluding reserve assets and derivatives. While there are some gaps in the data, the overall coverage of reported bilateral net international investment positions (IIPs) appears satisfactory. The dataset provides a richer picture of financial linkages, enabling us to map the financing of Euro area imbalances. Creditor and debtor positions vis-à-vis the rest of the EU have tended to increase between 2000 and 2008, with capital flowing largely from wealthier to catching-up economies. This has in particular resulted in an increased interdependency among Euro Area economies.
    Keywords: Balance of payments , Cross country analysis , Current account balances , Data collection , Databases , Economic integration , Euro Area , Europe ,
    Date: 2010–12–21
  5. By: Andrei A. Levchenko; Jing Zhang
    Abstract: es.Using an industry-level dataset of production and trade spanning 75 countries and 5 decades, and a fully specified multi-sector Ricardian model, we estimate productivities at the sector level and examine how they evolve over time in both developed and developing countries. We find that in both country groups, comparative advantage has become weaker: productivity grew systematically faster in sectors that were initially at the greater comparative disadvantage. The global welfare implications of this phenomenon are significant. Relative to the counterfactual scenario in which an individual country's comparative advantage remained the same as in the 1960s, and technology in all sectors grew at the same country-specific average rate, welfare today is 1.9% lower for the median country. The welfare impact varies greatly across countries, ranging from -0.5% to +6% among OECD countries, and from -9% to +27% among non-OECD countries. Contrary to frequently expressed concerns, changes in developing countries' comparative advantage had virtually no impact on welfare in the developed countries.
    JEL: F11 F43 O33 O47
    Date: 2011–02
  6. By: Nicoletta Batini; Thomas Dowling
    Abstract: Using an adaptation of the Uncovered Interest Parity (UIP) condition, this paper analyzes the drivers behind the large, symmetric exchange rate swings observed during the financial crisis of 2008-2010. Employing a Nelson-Siegel model, we estimate yield curves and decompose the exchange rate movements into changes we attribute to monetary policy and a residual. We find that the depreciation phase of the currencies in our sample was largely dominated by safe-haven effects rather than carry trade activity or other return considerations. For some countries, however, the appreciation that began at the end of 2008 seems largely to reflect downward movement in the cumulative revisions to nominal forward differentials, suggesting carry trade.
    Keywords: Currencies , Developed countries , Economic models , Emerging markets , Exchange rate adjustments , Exchange rates , Financial crisis , Global Financial Crisis 2008-2009 , Interest rates , Monetary policy ,
    Date: 2011–01–20
  7. By: Tahsin Saadi-Sedik; Serhan Cevik
    Abstract: This paper investigates the causes of extreme fluctuations in commodity prices from 1990 to 2010. Analyzing two very distinct commodities-crude oil and fine wine, we find that macroeconomic factors are the main determinants of commodity prices. Although supply constraints have the expected effect, aggregate demand growth is the key factor. The empirical results show that while advanced economies account for more than half of global consumption, emerging economies make up the bulk of the incremental change in demand, thereby having a greater weight in commodity price formation. The results also show that the shift in the composition of aggregate commodity demand is a recent phenomenon.
    Keywords: Agricultural commodities , Agricultural prices , Commodity price fluctuations , Consumption , Demand , Economic growth , Emerging markets , International liquidity , Oil prices , Oil sector , Supply ,
    Date: 2011–01–04
  8. By: Olivier CARDI (Université Panthéon-Assas ERMES, Ecole Polytechnique); Romain RESTOUT (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    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
    JEL: F41 E62 E22
    Date: 2010–12–21
  9. By: Gul Ertan Ozguzer (Department of Economics, Izmir University of Economics); Luca Pensieroso (Department of Economics, IRES - Universite catholique de Louvain)
    Abstract: We build a two-country dynamic general equilibrium model to study whether European citizens would benet from the eventual accession of Turkey to the European Union. The results of the simulations show that Turkey's accession to the European Union is welfare enhancing for Europeans, provided that Turkish total factor productivity (TFP) increases suciently after enlargement. In the model with no capital mobility, the Europeans are better o if the Turkish TFP increase bridges more than 31% of the initial TFP gap between Turkey and the European Union. That gure becomes 45% when capital mobility is introduced.
    Keywords: European Union, Turkey, Enlargement, Dynamic General Equilibrium, Open Economy Macroeconomics
    JEL: F41
    Date: 2010–10
  10. By: Eiji Ogawa; Junko Shimizu
    Abstract: Regional monetary and financial cooperation among the monetary authorities of Asian countries have been further strengthening through the recent global financial crisis in 2007-2008. Finance Ministers and Central Bank Governors of the ASEAN Members States, People’s Republic of China (PRC), Japan and Korea (ASEAN plus three) and the monetary authority of Hong Kong, China announced that the Chiang Mai Initiative Multilateralization (CMIM) agreement came into effect on March 24, 2010. They also reached agreement on establishing a surveillance office, which is called an ASEAN plus three Macroeconomic Research Office (AMRO) and would ensure technical details of regional surveillance. The regional monetary cooperation in Asia has been discussed for years. For example, Ogawa and Shimizu (2005) proposed both an Asian Monetary Unit (AMU), which is a common currency basket computed as a weighted average of the thirteen ASEAN plus three currencies, and AMU Deviation Indicators (AMU DIs), which indicates deviation of each Asian currency in terms of the AMU compared with the benchmark rate. The AMU and the AMU DIs are considered as both surveillance measures under the Chiang Mai Initiative and coordinated exchange rate policies among Asian countries. In this paper, we show that monitoring the AMU and the AMU DIs plays an important role in the regional surveillance process under the CMIM. By using daily and monthly data of AMU and AMU DIs in the period between January 2000 to June 2010, which are available in a website of the Research Institute of Economy, Trade, and Industry (RIETI), we examine their usefulness as a surveillance indicator. Our studies of AMU and AMU DIs confirm as follows: First, an AMU peg system stabilizes Nominal Effective Exchange Rate (NEER) of each Asian country. Second, the AMU and the AMU DIs could warn overvaluation or undervaluation for each of Asia currencies. Third, trade imbalances within the region have been growing as the AMU DIs have been widening. Forth, the AMU DIs could predict huge capital inflows and outflows for the Asian country. The above fact-findings support usefulness of using the AMU and the AMU DIs as surveillance indicators for monetary cooperation in Asia.
    Keywords: regional monetary cooperation, common currency basket, Asian Monetary Unit
    Date: 2010–10
  11. By: Nicholas Lardy (Peterson Institute for International Economics); Patrick Douglass (Peterson Institute for International Economics)
    Abstract: Despite an erosion of consensus on its benefits, capital account convertibility remains a long-term goal of China. This paper identifies three major preconditions for convertibility in China: a strong domestic banking system, relatively developed domestic financial markets, and an equilibrium exchange rate. The authors examine each of these in turn and find that, in significant respects, China does not yet meet any of the conditions necessary for convertibility. They then evaluate China’s progress to date on capital account liberalization, including recent efforts to promote RMB internationalization and greater use of the RMB in trade settlement. The paper concludes with an overview of remaining obstacles to convertibility and policy recommendations.
    JEL: G15 G21 O16 F31
    Date: 2011–02
  12. By: Anke Weber; Chunfang Yang
    Abstract: This paper uses a range of different methodologies to estimate the equilibrium real exchange rate in Armenia with both single-country and panel estimation techniques. We estimate a country specific autoregressive distributed lag model and then proceed with the estimation of a cointegrated panel consisting of transition economies in Europe and Central Asia. This addresses cross section dependence by using common correlated effects estimators. While our analysis focuses on Armenia, the methods are applicable to a large number of transition economies, and the paper thus provides an overview of methods that can be used to assess a country’s equilibrium exchange rate.
    Keywords: Armenia , Economic models , Exchange rate assessments , Export prices , Global competitiveness , Real effective exchange rates ,
    Date: 2011–01–27
  13. By: Calderon, Cesar; Kubota, Megumi
    Abstract: The main goal of this paper is to characterize the determinants of sudden stops caused by domestic vis-a-vis foreign residents. Are the decisions of domestic investors to invest abroad or of foreign investors to cut off funds from the domestic economy governed by the same set of determinants? Given the distribution of different types of sudden stop episodes over time and its different macroeconomic consequences, the authors argue that the determinants may not be alike. Using an effective sample of 82 countries with annual information over the period 1970-2007, the analysis finds that global investors are less likely to stop bringing their capital when their economy is growing and the world interest rate is lower. Domestic agents are more willing to invest abroad if the macroeconomic performance of the domestic economy is poor (high inflation), the financial system is weak, and there are high external savings (current account surpluses). Increasing financial openness makes the domestic country more vulnerable to sudden stops caused by either local or global investors. Finally, countries with higher shares of foreign direct investment are less prone to inflow-driven sudden stops, whereas the opposite holds for outflow-driven sudden stops.
    Keywords: Debt Markets,Emerging Markets,Currencies and Exchange Rates,Economic Theory&Research,Access to Finance
    Date: 2011–02–01

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