nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒03‒12
seven papers chosen by
Martin Berka
Massey University, Albany

  1. Expected fiscal policy and interest rates in open economy By Salvatore Dell’Erba, Sergio Sola
  2. The Macroeconomic Effects of Large Exchange Rate Appreciations By Marcus Kappler; Helmut Reisen; Moritz Schularick; Edouard Turkisch
  3. Primary commodity prices : co-movements, common factors and fundamentals By Byrne, Joseph P.; Fazio, Giorgio; Fiess, Norbert
  4. Have Consumption Risks in the G7 Countries Become Diversified? By Nikolaos Antonakakis; Johann Scharler
  5. Business Conditions and Default Risks across Countries By Pflüger, Michael P.; Russek, Stephan
  6. Asian Business Cycle Synchronisation By Dong He; Wei Liao
  7. The Dynamics between Real Exchange Rate Movements and Trends in Trade Performance: The Case of Ethiopia By Melesse, Wondemhunegn Ezezew

  1. By: Salvatore Dell’Erba, Sergio Sola (IHEID, The Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper reconsiders the long term effect of fiscal policy on interest rates using a real-time dataset of macroeconomic and fiscal variables in a panel of 17 OECD countries over the period 1989-2009. We show that, after controlling for cross sectional dependence using a Factor Augmented Panel, interest rates are mostly related to global factors. Among domestic fiscal variables, the level of expected public debt mantains a positive correlation with interest rates, while among the global factors, the aggregate monetary and fiscal stance play a quantitatively sizeable role. We then analyze how impulses from the aggregate fiscal stance influence each country's interest rates. We find that these effects are modest in large economies and particularly strong in economies characterized by low initial financial integration, leading the way to a novel interpretation of the divergent behaviour of interest rates in the recent financial crisis.
    Keywords: Real time data; Fiscal Policy; Interest rates; Cross sectional dependence; Heterogeneous panels; Factor model.
    JEL: C10 E43 F42 H68
    Date: 2011–03–03
  2. By: Marcus Kappler; Helmut Reisen; Moritz Schularick; Edouard Turkisch
    Abstract: In this paper we study the macroeconomic effects of large exchange rate appreciations. In a sample of 128 countries since 1960, we identify 25 episodes of large nominal and real appreciations shocks and study their macroeconomic effects in a dummy-augmented panel autoregressive model. Our results show that an exchange rate appreciation can have strong effects on current account balances. Within three years after the appreciation event, the current account balance on average deteriorates by three percentage points of GDP. This effect occurs through a reduction of savings without a meaningful reduction in investment. Real export growth slows down substantially, while imports remain by and large unaffected. However, the output costs of appreciation are small and not statistically significant, indicating a shift towards domestic sources of growth. All these effects appear somewhat more pronounced in developing countries.<BR>Dans ce document de travail, nous étudions les effets macroéconomiques de larges appréciations du taux de change. Dans un échantillon de 128 pays depuis 1960, nous identifions 25 épisodes de larges appréciations nominales et réelles, et nous étudions leurs effets macroéconomiques dans un modèle autorégressif en données de panel augmenté d’une variable indicatrice. Nos résultats montrent qu’une appréciation du taux de change peut avoir des effets importants sur la balance courante. En moyenne, dans les trois ans suivant l’épisode d’appréciation, la balance courante se détériore en moyenne de trois points de PIB. Cet effet se produit via par une réduction de l’épargne, sans une réduction significative de l’investissement. La croissance réelle des exportations se ralentit sensiblement, alors que les importations restent dans l’ensemble inchangées. Toutefois, les pertes en termes de production résultant des appréciations sont faibles et non statistiquement significatifs, ce qui indique un déplacement vers des sources internes de croissance. Tous ces effets apparaissent quelque peu plus prononcés dans les pays en développement.
    Keywords: current account adjustment, global imbalances, exchange rate changes, ajustement du compte courant, déséquilibres mondiaux, variations de taux de change
    JEL: F31 F32 F4 N10 O16
    Date: 2011–02
  3. By: Byrne, Joseph P.; Fazio, Giorgio; Fiess, Norbert
    Abstract: The behavior of commodities is critical for developing and developed countries alike. This paper contributes to the empirical evidence on the co-movement and determinants of commodity prices. Using nonstationary panel methods, the authors document a statistically significant degree of co-movement due to a common factor. Within a Factor Augmented VAR approach, real interest rate and uncertainty, as postulated by a simple asset pricing model, are both found to be negatively related to this common factor. This evidence is robust to the inclusion of demand and supply shocks, which both positively impact on co-movement of commodity prices.
    Keywords: Emerging Markets,Markets and Market Access,Commodities,Currencies and Exchange Rates,E-Business
    Date: 2011–02–01
  4. By: Nikolaos Antonakakis; Johann Scharler
    Abstract: This paper studies the dynamics of international consumption risk sharing among the G7 countries. Based on the dynamic conditional correlation model due to Engle (2002), we construct a time-varying, consumption-based measure of risk sharing. We find that although the exposure to countryspecific shocks has declined in the G7 countries, with Japan being an exception, the evolution of risk sharing is rather heterogeneous across countries.
    Keywords: Dynamic conditional correlation, consumption risk sharing
    JEL: E3 F4
    Date: 2011–02
  5. By: Pflüger, Michael P. (University of Passau); Russek, Stephan (University of Passau)
    Abstract: The risk of default that business firms face is very significant and differs widely across countries. This paper explores the links between countries' business conditions and international trade embedment and the default risk at the country level from a theoretical point of view. Our main contribution is to set up a general equilibrium model which allows us to derive sharp predictions concerning how key factors which shape a country's business and trade environment impact on the default risk of firms which operate in these environments. The predictions are in accord with readily available data.
    Keywords: firm death, firm heterogeneity, business conditions and firm productivity, trade integration
    JEL: F12 F13 F15 L25
    Date: 2011–02
  6. By: Dong He (Hong Kong Institute for Monetary Research); Wei Liao (Hong Kong Institute for Monetary Research)
    Abstract: This paper develops a multi-level structural factor model to study international output comovement and its underlying driving forces. Our method combines a structural VAR with a multi-level factor model, which helps us understand the economic meaning of the estimated factors. Using quarterly data of real GDP growth covering nine emerging Asian economies and G-7 countries, we estimate a global supply factor, a global demand factor, and group supply and demand factors for each group of the economies. We find that, while the role of the global factors has intensified over the past fifteen years for most of the economies, output fluctuations in Asia have remained less synchronised with the global factor than those in the industrial countries. The Asian regional factors have become increasingly important in tightening the interdependence within the region over time. Thus while emerging Asian economies cannot "decouple" completely from the advanced economies, they have nonetheless sustained a strong independent cycle among themselves. We also find that synchronised supply shocks contributed more to the observed synchronisation in output fluctuations among the Asian economies than demand shocks. This points to the role of productivity enhancement through vertical trade integration, rather than dependence on external demand, as the primary source of business cycle synchronisation in emerging Asia.
    Keywords: Business Cycle Synchronization, Asia's External Dependency, Decoupling, Multi-Level Factor Model, Structural VAR
    Date: 2011–02
  7. By: Melesse, Wondemhunegn Ezezew
    Abstract: ABSTRACT Ethiopia’s exchange rate policies have been a bone of contention for concerned economic analysts and commentators alike. This study takes a new look at the record to explore the impact of exchange rate liberalization reforms on export growth in Ethiopia. I employ generalized method of moments estimators (GMM) techniques on time series data for the period 1981- 2009. The study does not support the widely held view that exchange rate reforms induce export growth. But world income was found to positively impact Ethiopia’s export receipts over time.
    Keywords: KEYWORDS: Real Exchange Rate; Devaluation; Export Performance.
    JEL: F0
    Date: 2011–03–01

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