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on Open MacroEconomics |
| By: | Pau Rabanal; Damiano Sandri; Isabelle Méjean |
| Abstract: | A reduction in the U.S. current account deficit vis-Ã -vis emerging Asia involves a shift in demand from U.S. to emerging Asia tradable goods and a change in international relative prices. This paper quantifies the required adjustment in the terms of trade and real exchange rates in a three-country open economy model of the U.S., China, and other emerging Asia. We compare scenarios where both Chinese and other emerging Asian export prices change by the same proportion to the case where export prices remain constant in one country and increase in the other. Our results are robust to different assumptions about elasticities of substitution and to introducing a high degree of vertical fragmentation in production in the model. |
| Keywords: | Asia , Bilateral trade , China, People's Republic of , Current account , Economic models , Emerging markets , Export prices , Exports , Price elasticity , Real effective exchange rates , Terms of trade , United States , |
| Date: | 2011–03–04 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/46&r=opm |
| By: | Frankel, Jeffrey A. (Harvard University) |
| Abstract: | Fiscal and monetary policy each has a role to play in mitigating the volatility that stems from the large trade shocks hitting commodity-exporting countries. All too often macroeconomic policy is procyclical, that is, destabilizing, rather than countercyclical. This paper suggests two institutional innovations designed to achieve greater countercyclicality, one for fiscal policy and one for monetary policy. The proposal for fiscal policy is to emulate Chile's structural budget rule, and particularly its avoidance of over-optimism in forecasting. The proposal for monetary policy is called Product Price Targeting (PPT), an alternative to CPI-targeting that is designed to be more robust with respect to terms of trade shocks. |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp11-015&r=opm |
| By: | Gino Gancia; Andreas Müller; Fabrizio Zilibotti |
| Abstract: | We construct and estimate a unifi ed model combining three of the main sources of cross-country income disparities: differences in factor endowments, barriers to technology adoption and the inappropriateness of frontier technologies to local conditions. The key components are different types of workers, distortions to capital accumulation, directed technical change, costly adoption and spillovers from the world technology frontier. Despite its parsimonious parametrization, our empirical model provides a good fi t of GDP data for up to 86 countries in 1970 and 122 countries in 2000. Removing barriers to technology adoption would increase the output per worker of the average non-OECD country relative to the US from 0.19 to 0.61, while increasing skill premia in all countries. Removing barriers to trade in goods amplifi es income disparities, induces skill-biased technology adoption and increases skill premia in the majority of countries. These results are reverted if trade liberalization is coupled with international IPR protection. |
| Keywords: | Directed technology adoption, development accounting, distance to frontier, inappropriate technologies, skill-biased technical change, productivity, TFP differences |
| JEL: | F43 O11 O31 O33 O38 O41 O43 O47 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:010&r=opm |
| By: | Gianluca Benigno; Huigang Chen; Christopher Otrok; Alessandro Rebucci; Eric Young |
| Abstract: | Stochastic general equilibrium models of small open economies with occasionally binding financial frictions are capable of mimicking both the business cycles and the crisis events associated with the sudden stop in access to credit markets (Mendoza, 2010). This paper studies the inefficiencies associated with borrowing decisions in a two-sector small open production economy, finding that this economy is much more likely to display under-borrowing rather than over-borrowing in normal times. As a result, macro-prudential policies (e.g, Tobin taxes or economy-wide controls on capital inflows) are costly in welfare terms. Moreover, macro-prudential policies aimed at minimizing the probability of the crisis event might be welfare-reducing in production economies. The analysis shows that there is a much larger scope for welfare gains from policy interventions during financial crises. That is to say that, ex post or crisis-management policies dominate ex ante or macro-prudential ones. |
| Keywords: | Capital controls, Crises, Financial frictions, Macro-prudential policies, Bailouts, Overborrowing |
| JEL: | E52 F37 F41 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:idb:wpaper:4710&r=opm |
| By: | Paolo A. Pesenti; Jan J.J. Groen |
| Abstract: | In this paper we seek to produce forecasts of commodity price movements that can systematically improve on naive statistical benchmarks, and revisit the forecasting performance of changes in commodity currencies as efficient predictors of commodity prices, a view emphasized in the recent literature. In addition, we consider different types of factor-augmented models that use information from a large data set containing a variety of indicators of supply and demand conditions across major developed and developing countries. These factor-augmented models use either standard principal components or partial least squares (PLS) regression to extract dynamic factors from the data set. Our forecasting analysis considers ten alternative indices and sub-indices of spot prices for three different commodity classes across different periods. We .find that the exchange rate-based model and especially the PLS factor-augmented model are more prone to outperform the naive statistical benchmarks. However, across our range of commodity price indices we are not able to generate out-of-sample forecasts that, on average, are systematically more accurate than predictions based on a random walk or autoregressive specifications. |
| JEL: | E24 E62 J45 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecopap:0440&r=opm |
| By: | Ethan Ilzetzki; Enrique G. Mendoza; Carlos A. Végh Gramont |
| Abstract: | We contribute to the intense debate on the real effects of fiscal stimuli by showing that the impact of government expenditure shocks depends crucially on key country characteristics, such as the level of development, exchange rate regime, openness to trade, and public indebtedness. Based on a novel quarterly dataset of government expenditure in 44 countries, we find that (i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fisscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero. |
| Keywords: | Consumption , Cross country analysis , Developed countries , Developing countries , Exchange rate regimes , External shocks , Fiscal policy , Government expenditures , Public debt , Trade liberalization , |
| Date: | 2011–03–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:11/52&r=opm |
| By: | Yamin Ahmad (Department of Economics, University of Wisconsin-Whitewater); William D. Craighead (Department of Economics, Wesleyan University) |
| Abstract: | This paper uses a unique new monthly US-UK real exchange rate series for the January 1794 – December 2009 period to reexamine the academic debate over purchasing power parity (PPP). The consensus view described by Rogoff (1996) is that PPP holds in the long-run, but short run deviations are very persistent, with half-lives ranging from 3-5 years. Most of the literature using long time series relies on the annual data developed by Lee (1976) and Lothian and Taylor (1996), which were both constructed from underlying higher-frequency data sources. Estimates of purchasing power parity persistence using these series may therefore be subject to temporal aggregation bias. We find evidence of aggregation bias which indicates the half-life of PPP deviations has been overestimated in much of the previous literature. We also find that estimates of the half-lives under temporal aggregation are further reduced once we account for the Harrod (1933)-Balassa (1964) - Samuelson (1964) effect. The result of aggregation bias appears to be robust even when considering the case that real exchange rates exhibit nonlinear dynamics. |
| Keywords: | Temporal Aggregation, Real Exchange Rates, Purchasing Power Parity, Exchange Rate Persistence, Half-Lives |
| JEL: | F31 C22 |
| Date: | 2011–02 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2011-001&r=opm |