|
on Open MacroEconomics |
| By: | Yu-chin Chen (University of Washington and Hong Kong Institute for Monetary Research); Kwok Ping Tsang (Virginia Tech and Hong Kong Institute for Monetary Research) |
| Abstract: | The nominal exchange rate is both a macroeconomic variable equilibrating international markets and a financial asset that embodies expectations and prices risks associated with cross border currency holdings. Recognizing this, we adopt a joint macro-finance strategy to model the exchange rate. We incorporate into a monetary exchange rate model macroeconomic stabilization through Taylor-rule monetary policy on one hand, and on the other, market expectations and perceived risks embodied in the cross-country yield curves. Using monthly data between 1985 and 2005 for Canada, Japan, the UK and the US, we employ a state-space system to model the relative yield curves between country-pairs using the Nelson and Siegel (1987) latent factors, and combine them with monetary policy targets (output gap and inflation) into a vector autoregression (VAR) for bilateral exchange rate changes. We find strong evidence that both the financial and macro variables are important for explaining exchange rate dynamics and excess currency returns, especially for the yen and the pound rates relative to the dollar. Moreover, by decomposing the yield curves into expected future yields and bond market term premiums, we show that both expectations about future macroeconomic conditions and perceived risks are priced into the currencies. These findings provide support for the view that the nominal exchange rate is determined by both macroeconomic and financial forces. |
| Keywords: | Exchange Rate, Term Structure, Latent Factors, Term Premiums |
| JEL: | E43 F31 G12 G15 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:012011&r=opm |
| By: | Alessio, Moro; Rodolfo, Stucchi |
| Abstract: | We use a Dixit-Stiglitz setting to show that aggregate productivity fluctuations can be generated through changes in the dispersion of firms' productivity. When the elasticity of substitution among goods is larger than one, an increase in the dispersion raises aggregate productivity because firms at the top of the distribution produce most of output. When the elasticity is smaller than one, an increase in the dispersion reduces aggregate productivity because firms at the bottom of the distribution use most of inputs. We use individual firm data from Spanish manufacturing sectors to test the relationship between the dispersion of firms' productivity and aggregate productivity. The estimated coefficients are consistent with the predictions of the model: we find that an increase in the coefficient of variation of firms productivity of 1% increases aggregate productivity by 0.59% in sectors with an elasticity of substitution larger than one while the same increase in the coefficient of variation reduces aggregate productivity by 0.07% in sectors with an elasticity of substitution smaller than one. |
| Keywords: | Heterogeneous Productivity Shocks; Elasticity of Substitution; Volatility; Aggregate Productivity. |
| JEL: | E32 E30 E13 E20 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:29032&r=opm |
| By: | Saroj Bhattarai; Raphael Schoenle |
| Abstract: | In this paper, we establish three new facts about price-setting by multiproduct firms and contribute a model that can explain our findings. Our findings have important implications for real effects of nominal shocks and provide guidance for how to model pricing decisions of firms. On the empirical side, using micro-data on U.S. producer prices, we first show that firms selling more goods adjust their prices more frequently but on average by smaller amounts. Moreover, the higher the number of goods, the lower is the fraction of positive price changes and the more dispersed the distribution of price changes. Second, we document substantial synchronization of price changes within firms across products and show that synchronization plays a dominant role in explaining pricing dynamics. Third, we find that within-firm synchronization of price changes increases as the number of goods increases. On the theoretical side, we present a state-dependent pricing model where multiproduct firms face both aggregate and idiosyncratic shocks. When we allow for firm-specific menu costs and trend inflation, the model matches the empirical findings. |
| Keywords: | Price levels ; Productivity |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:73&r=opm |
| By: | Jean Imbs; Isabelle Mejean |
| Abstract: | In a demand system with conventional CES preferences, the price elasticitites of aggregate trade flows are weighted averages of sector-specific elasticities of substitution. We describe a methodology that can be used to estimate country-specific values for the price elasticities of aggregate imports and exports. We first use disaggregated trade data to compute structural estimates of international substitutability for a large cross section of countries. We aggregate up the estimates using model-implied, country-specific weights. We obtain structural estimates of the price elasticities of aggregate exports and imports for more than 30 countries, including most developed and developing economies. |
| JEL: | F32 F02 F15 F41 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0432&r=opm |
| By: | Berner, Eike |
| Abstract: | This paper examines exchange rate pass-through into German import unit values over the last 20 years. I find incomplete pass-through to be the predominant characteristic for German imports with an average rate of 42% over three months. This result holds when considering monthly 8-digit data, the most disaggregated German import data available. Furthermore, I distinguish 16 German trading partners and estimate substantial cross-country differences in the pass-through to import unit values. Imports coming from European countries generally exhibit statistically zero pass-through. By contrast, non-European trading partners are characterized by statistically significant incomplete pass-through rates. I also study whether there are differences in the pass-through rates for appreciations and depreciations, as well as for small and large exchange rate shocks. Moreover, I test for a negative correlation between the goods' quality and its pass-through rate. -- |
| Keywords: | exchange rate,pass-through,import prices,Germany |
| JEL: | F42 F31 F14 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:201101&r=opm |
| By: | Richard Frensch; Achim Schmillen (Osteuropa-Institut, Regensburg (Institut for East European Studies)) |
| Abstract: | Recent panel studies have found relatively high point estimates for the elasticity of ag-gregate price measures with respect to productivity in (former) transition economies, while other studies report price-productivity elasticity estimates to depend positively on average productivity in the sample. We aim to reconcile both results by putting com-parative price developments of transition economies in an international perspective. We argue that estimating simple price-productivity relationships without the inclusion of other real factors connected to reform effort might severely bias estimates for CEEC economies. Our results imply that, when controlling for reform effort and therefore avoiding this endogeneity problem, the price-productivity-elasticity for CEEC econo-mies was not different from that of non-transition economies during the first 15 years of transition. |
| Keywords: | Balassa-Samuelson, transition |
| JEL: | F40 F43 |
| Date: | 2011–01 |
| URL: | http://d.repec.org/n?u=RePEc:ost:wpaper:295&r=opm |
| By: | Ansgar Belke; Christian Dreger |
| Abstract: | In the debate on global imbalances, the euro area countries did not receive much attention so far. While the current account is on balance for the entire area, divergences between individual member states have increased since the introduction of the common currency. In this paper, the imbalances are traced to catching up and competitiveness factors using paneleconometric techniques. In line with the intertemporal approach to the current account, low income countries tend to run deficits, while rich countries realize surpluses. However, the effect diminishes, if early years are dropped from the sample. The competitiveness channel is more robust and shows the expected sign, i.e. a real appreciation leads to external deficits. To restore competitiveness, a reduction of unit labour costs is on the agenda. Since a deterioration of competitiveness is not a feasible strategy for the surplus countries, an asymmetric response across countries is required in order to reduce the imbalances. |
| Keywords: | Current account imbalances, catching up and competitiveness, euro area |
| JEL: | E44 F34 F36 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1106&r=opm |
| By: | Gonzalo Hernández (University of Massachusetts Amherst) |
| Abstract: | This paper explores the importance of the terms of trade to explain output fluctuations in Colombia, a developing country where almost 60% of the exports correspond to four commodities: oil (32%), coal (17%), coffee (5%) and nickel (2%), and where 80% of its imports are intermediate and capital goods. This research is motivated fundamentally by the particular importance of short run fluctuations in developing economies, the fact that the Colombian terms of trade are procyclical and the current debate in Colombia about eventual economic policies toward sterilization of the effects of changes in commodities prices in a context of an appreciation of the nominal exchange rate. The study includes a time series analysis, for the period 1994-2009 with quarterly data, which follows the Box-Jenkins methodology for an ARMAX model. I find robust evidence that indicates that the quarterly growth of GDP is positively and significantly affected by variations in the terms of trade, which explain 1/3 of GDP growth variability. This result is consistent with the possible outcome of the three-goods model for an open small economy in which the terms of trade can be the source of the aggregate output fluctuations. JEL Categories: |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2011-04&r=opm |
| By: | Lukas Vogel |
| Abstract: | The paper analyses China's external position in a multi-region macroeconomic model of the world economy. The model includes a portfolio structure and Forex intervention to proxy net/gross and government/non-government foreign asset positions, capital controls and exchange rate management in China. The selected set of transition and globalisation shocks replicates China's external position well, suggesting that it reflects capital exports driven by shifts in domestic saving supply, rather than shifts in foreign saving demand. The simulations also highlight the importance of effective capital controls for the viability of China's exchange rate management. Finally, the analysis suggests that enhanced flexibility of the RMB exchange rate could reduce China's net creditor position. |
| JEL: | F30 F40 |
| Date: | 2010–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0430&r=opm |