nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒04‒16
twelve papers chosen by
Martin Berka
Massey University, Albany

  1. Carry Trade and Momentum in Currency Markets By Craig Burnside; Martin S. Eichenbaum; Sergio Rebelo
  2. Trade, Exchange Rate Regimes and Output Co-Movement: Evidence from the Great Depression By Gabriel P. Mathy; Christopher M. Meissner
  3. Fiscal Shocks in a Two-Sector Open Economy By Olivier CARDI; Romain RESTOUT
  4. An Empirical Analysis of Current Account Determinants in Emerging Asian Economies By Yang, Lucun
  5. The Real Exchange Rate, Real Interest Rates, and the Risk Premium By Engel, Charles
  6. Real Exchanges Rates in Commodity Producing Countries: A Reappraisal By Vincent BODART; Bertrand CANDELON; Jean-François CARPANTIER
  7. Financial imbalances and financial fragility By Frédéric Boissay
  8. Financial globalization in emerging economies : much ado about nothing ? By Yeyati, Eduardo Levy; Williams, Tomas
  9. Asian Monetary Unit and Monetary Cooperation in Asia By Ogawa, Eiji; Shimizu, Junko
  10. Using the global dimension to identify shocks with sign restrictions By Alexander Chudik; Michael Fidora
  11. Chinese reserves accumulation and US monetary policy: Will China go on buying US financial assets? By Luigi Bonatti; Andrea Fracasso
  12. Globalization, brain drain and development By Frédéric DOCQUIER; Hillel RAPOPORT

  1. By: Craig Burnside; Martin S. Eichenbaum; Sergio Rebelo
    Abstract: We examine the empirical properties of the payoffs to two popular currency speculation strategies: the carry trade and momentum. We review three possible explanations for the apparent profitability of these strategies. The first is that speculators are being compensated for bearing risk. The second is that these strategies are vulnerable to rare disasters or peso problems. The third is that there is price pressure in currency markets.
    JEL: F31
    Date: 2011–04
  2. By: Gabriel P. Mathy; Christopher M. Meissner
    Abstract: A large body of cross-country empirical evidence identifies monetary policy and trade integration as key determinants of business cycle co-movement. Partially consistent with this, many argue that the re-emergence of the gold standard allowed for the global transmission of a deflationary shock in 1929 that culminated in the Great Depression. It is puzzling then to see decreased co-movement between 1920 and 1927 when international integration increased and nations returned to the gold standard. Fixed exchange rates and global trade were also on the rise after 1932, but co-movement declined again. Our empirical results shows that exchange rate regimes and trade were associated with higher co-movement at the bilateral level while common shocks and exchange control policies also mattered. Much of the fall after 1932 was driven by the rise of smaller blocs of monetary and trade cooperation and an inter-bloc fall in co-movement.
    JEL: E32 E42 F42 N1 N12 N14
    Date: 2011–04
  3. 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 two-sector neoclassical open economy model with traded and non-traded goods to investigate both the aggregate and the sectoral effects of temporary fiscal shocks. One central finding is that both sectoral capital intensities and labor supply elasticity matter in determining the response of key economic variables. In particular, the model can produce a drop in investment and in the current account, in line with empirical evidence, only if the traded sector is more capital intensive than the non-traded sector, and labor is supplied elastically. Irrespective of sectoral capital intensities, a fiscal shock raises the relative size of the non-traded sector substantially in the short-run. Additionally, allowing for the markup to depend on the number of competitors, the two-sector model can produce the real exchange rate depreciation found in the data. Finally, markup variations triggered by firm entry modify substantially the response of the real wage and the sectoral composition of GDP in the short-run.
    Keywords: Non-traded Goods; Fiscal Shocks; Investment; Current Account
    JEL: F41 E62 E22 F32
    Date: 2011–02–21
  4. By: Yang, Lucun (Cardiff Business School)
    Abstract: Limited empirical work has been done to the diverging current account balances of the individual emerging Asian economies. Based on the intertemporal approach to current account, this paper empirically examines both the long-run and short-run impacts of initial stock of net foreign assets, degree of openness to international trade, real exchange rate and relative income on current account balances for eight selected emerging Asian economies over the period 1980-2009, making use of the cointegrated VAR (Vector Autoregression) methodology. This paper finds that current account behaviours in emerging Asian economies are heterogeneous. Initial stock of net foreign assets and degree of openness to international trade are important factors in explaining the long-run behaviour of current accounts. Moreover, the current accounts of all sample economies have a self-adjusting mechanism except China. Short-run current account adjustment towards long-run equilibrium path is gradual, with the disequilibrium term being the main determinant of the short-run current account variations.
    Keywords: Current account; Emerging Asia; Structural and macroeconomic determinants; Saving-investment balance; Cointegration
    JEL: E21 F10 F32 F41
    Date: 2011–04
  5. By: Engel, Charles (Department of Economics, University of Wisconsin, Madison, USA)
    Abstract: The well-known uncovered interest parity puzzle arises from the empirical regularity that, among developed country pairs, the high interest rate country tends to have high expected returns on its short term assets. At the same time, another strand of the literature has documented that high real interest rate countries tend to have currencies that are strong in real terms – indeed, stronger than can be accounted for by the path of expected real interest differentials under uncovered interest parity. These two strands – one concerning short-run expected changes and the other concerning the level of the real exchange rate – have apparently contradictory implications for the relationship of the foreign exchange risk premium and interest-rate differentials. This paper documents the puzzle, and shows that existing models appear unable to account for both empirical findings. The features of a model that might reconcile the findings are discussed.
    Keywords: Uncovered interest parity, foreign exchange risk premium, forward premium puzzle
    JEL: F30 F31 F41 G12
    Date: 2011–04
  6. By: Vincent BODART (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Department of Economics); Bertrand CANDELON (University of Maastricht, Department of Economics); Jean-François CARPANTIER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Center for Operations Research and Econometrics (CORE))
    Abstract: Commodity currency literature recently stressed the importance of commodity prices as a determinant of real exchange rates in developing countries (Cashin, Cespedes and Sahay 2004). We provide new empirical evidence on this issue by focusing on countries which are specialized in the export of one leading commodity. For those countries, we investigate to which extent their real exchange rate is sensitive to price uctuations of their dominant commodity. By using non-stationary panel techniques robust to cross-sectional-dependence, we find that the price of the dominant commodity has a significant long-run impact on the real exchange rate when the exports of the leading commodity have a share of at least 20 percent in the country's total exports of merchandises. Our results also show that the larger the share, the larger the size of the impact.
    Keywords: Real exchange rates,commodity prices,non-stationary panel
    JEL: C32 C33 E31 F32
    Date: 2011–02–04
  7. By: Frédéric Boissay (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper develops a general equilibrium model to analyze the link between financial imbalances and financial crises. The model features an interbank market subject to frictions and where two equilibria may (co-)exist. The normal times equilibrium is characterized by a deep market with highly leveraged banks. The crisis times equilibrium is characterized by bank deleveraging, a market run, and a liquidity trap. Crises occur when there is too much liquidity (savings) in the economy with respect to the number of (safe) investment opportunities. In effect, the economy is shown to have a limited liquidity absorption capacity, which depends –inter alia– on the productivity of the real sector, the ultimate borrower. I extend the model in order to analyze the effects of financial integration of an emerging and a developed country. I find results in line with the recent literature on global imbalances. Financial integration permits a more efficient allocation of savings worldwide in normal times. It also implies a current account deficit for the developed country. The current account deficit makes financial crises more likely when it exceeds the liquidity absorption capacity of the developed country. Thus, under some conditions –which this paper spells out– financial integration of emerging countries may increase the fragility of the international financial system. Implications of financial integration and global imbalances in terms of output, wealth distribution, welfare, and policy interventions are also discussed. JEL Classification: E21, F36, G01, G21.
    Keywords: Financial Integration, Global Imbalances, Asymmetric Information, Moral Hazard, Financial Crisis.
    Date: 2011–04
  8. By: Yeyati, Eduardo Levy; Williams, Tomas
    Abstract: Financial globalization, defined as global linkages through cross-border financial flows, has become increasingly relevant for emerging markets as they integrate financially with the rest of the world. This paper argues that, because of the way it is often measured, it has also led to the misperception that financial globalization in emerging markets has been growing in recent years. The authors characterize the evolution of financial globalization in emerging markets using alternative measures, and find that, in the 2000s, financial globalization has grown only marginally and international portfolio diversification has been limited and declining over time. The paper revisits the empirical literature on the implications of financial globalization for local market deepening, international risk diversification, financial contagion, and financial dollarization, and finds them to be rather limited. Whereas financial globalization has indeed fostered domestic market deepening in good times, it has yielded neither the dividends of consumption smoothing (in line with limited portfolio diversification) nor the costs of amplifying global financial shocks. In turn, financial de-dollarization has largely reflected the undoing of financial offshoring and the valuation effects of real appreciation.
    Keywords: Debt Markets,Emerging Markets,Mutual Funds,Economic Theory&Research,Currencies and Exchange Rates
    Date: 2011–04–01
  9. By: Ogawa, Eiji (Asian Development Bank Institute); Shimizu, Junko (Asian Development Bank Institute)
    Abstract: Regional monetary and financial cooperation in Asia has been discussed for years. To move towards a coordinated exchange rate policy, 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+3 currencies, and AMU Deviation Indicators (AMU DIs), which indicates the deviation of each Asian currency in terms of the AMU compared with the benchmark rate. The AMU and the AMU DIs are considered both as surveillance measures under the Chiang Mai Initiative and as benchmarks for coordinated exchange rate policies among Asian countries. In this paper, the authors show that monitoring the AMU and the AMU DIs plays an important role in the regional surveillance process under the Chiang Mai Initiative. By using daily and monthly data of AMU and AMU DIs for the period from January 2000 to June 2010, which are available from the website of the Research Institute of Economy, Trade, and Industry (RIETI), they examine their usefulness as a surveillance indicator. Our studies of AMU and AMU DIs confirm the following: first, an AMU peg system stabilizes the nominal effective exchange rate (NEER) of each Asian country. Second, the AMU and the AMU DIs could signal overvaluation or undervaluation for each of the Asian currencies. Third, trade imbalances within the region have been growing as the AMU DIs have been widening. Fourth, the AMU DIs could predict huge capital inflows and outflows for each Asian country. The above findings support the usefulness of using the AMU and the AMU DIs as surveillance indicators for monetary cooperation in Asia.
    Keywords: asian monetary unit; asian monetary cooperation; asian financial cooperation; chiang mai initiative; exchange rate policy; common currency basket; asian currencies
    JEL: F31 F33 F36
    Date: 2011–04–05
  10. By: Alexander Chudik (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Michael Fidora (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: Identification of structural VARs using sign restrictions has become increasingly popular in the academic literature. This paper (i) argues that identification of shocks can benefit from introducing a global dimension, and (ii) shows that summarising information by the median of the available impulse responses—as commonly done in the literature—has some undesired features that can be avoided by using an alternatively proposed summary measure based on a “scaled median” estimate of the structural impulse response. The paper implements this approach in both a small scale model as originally presented in Uhlig (2005) and a large scale model, introducing the sign restrictions approach to the global VAR (GVAR) literature, that allows to explore the global dimension by adding a large number of sign restrictions. We find that the patterns of impulse responses are qualitatively similar though point estimates tend to be quantitatively much larger in the alternatively proposed approach. In addition, our GVAR application in the context of global oil supply shocks documents that oil supply shocks have a stronger impact on emerging economies’ real output as compared to mature economies, a negative impact on real growth in oil-exporting economies as well, and tend to cause an appreciation (depreciation) of oil-exporters’ (oil-importers’) real exchange rates but also lead to an appreciation of the US dollar. One possible explanation would be the recycling of oil-exporters’ increased revenues in US financial markets. JEL Classification: C32, E17, F37, F41, F47.
    Keywords: Identification of shocks, sign restrictions, VAR, global VAR, oil shocks.
    Date: 2011–04
  11. By: Luigi Bonatti; Andrea Fracasso
    Abstract: It has been argued that China may stop financing the US external deficit, appreciate the currency, increase consumption and move its economy away from tradables and towards nontradables. Our two-country model shows that paradoxically this policy option is unattractive if the US authorities keep monetary policy sufficiently loose, thus reducing the real value of the US liabilities held by China. As long as the American and Chinese authorities pursue complementary objectives, the current China-US arrangement continues. In addition, an untimely appreciation of China’s real exchange rate may have negative consequences on employment in the US and in China.
    Keywords: China-US co-dependency; global imbalances; reserve accumulation; external debt
    JEL: F32 F41
    Date: 2011
  12. By: Frédéric DOCQUIER (FNRS and UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Hillel RAPOPORT (Department of Economics, Bar-Ilan University, EQUIPPE, Universités de Lille, and Center for International Development, Harvard University)
    Abstract: This paper reviews four decades of economics research on the brain drain, with a focus on recent contributions and on development issues. We first assess the magnitude, intensity and determinants of the brain drain, showing that brain drain (or high-skill) migration is becoming the dominant pattern of international migration and a major aspect of globalization. We then use a stylized growth model to analyze the various channels through which a brain drain affects the sending countries and review the evidence on these channels. The recent empirical literature shows that high-skill emigration need not deplete a country's human capital stock and can generate positive network externalities. Three case studies are also considered: the African medical brain drain, the recent exodus of European scientists to the United States, and the role of the Indian diaspora in the development of India's IT sector. We conclude with a discussion of the implications of the analysis for education, immigration, and international taxation policies in a global context.∗
    Date: 2011–02–28

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