nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒04‒30
six papers chosen by
Martin Berka
Massey University, Albany

  1. Financial remoteness and the net external position By Martin Schmitz
  2. Current account imbalances in the euro area: Catching up or competitiveness? By Belke, Ansgar; Dreger, Christian
  3. Does the level of capital openness explain “fear of floating” amongst the inflation targeting countries? By Mukherjee, Sanchita
  4. Global rebalancing: the macroeconomic impact on the United Kingdom By Haberis, Alex; Markovic, Bojan; Mayhew, Karen; Zabczyk, Pawel
  5. Emerging Market Business Cycles Revisited: Learning about the Trend By Emine Boz; Christian Daude; C. Bora Durdu
  6. Measuring globalization: A hierarchical network approach By David Matesanz Gomez; Guillermo J. Ortega; Benno Torgler

  1. By: Martin Schmitz (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper shows that, controlling for standard determinants of net external positions, financially-remote countries exhibit more positive net external positions. This finding is found to be stronger for less advanced countries, hinting at external funding problems for more remote countries. Being located near financially very open countries, being in currency unions with creditor countries, or being highly integrated through financial and trade linkages with a ‘core’ country facilitates net external borrowing. Consequently, evidence is found for an important role of geographic and bilateral factors for a country’s net external wealth. JEL Classification: F21, F34, F41.
    Keywords: net foreign assets, cross-border investment, distance, proximity.
    Date: 2011–04
  2. By: Belke, Ansgar; Dreger, Christian
    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
  3. By: Mukherjee, Sanchita
    Abstract: Abstract Under the assumption of perfect capital mobility, inflation targeting (IT) requires central banks to primarily focus on domestic inflation and to let their exchange rate float freely. This is consistent with the macroeconomic trilemma suggesting monetary independence, perfect capital mobility and a fixed exchange rate regime are mutually incompatible. However, some recent empirical evidence suggests that many developed and developing countries following an IT regime are reacting systematically both to deviations of inflation from its target and to exchange rates. I empirically examine whether the responsiveness of the interest rate to exchange rate fluctuations can be explained in terms of limited capital openness. Applying Arellano-Bond dynamic panel estimation method for 22 IT countries, I find that short-term interest rates do respond to real exchange rate fluctuations. However, the responsiveness of the interest rate to the exchange rate declines significantly as capital market openness increases. The results indicate that capital controls have a significant impact on the exchange rate policy of the IT central banks, as the central banks have relatively less control over the exchange rate movements with greater openness of the capital market.
    Keywords: Macroeconomic Trilemma; Inflation Targeting; Interest Rates; Exchange Rate Policy; Capital Market Openness
    JEL: E58 E52 E44 F41
    Date: 2011–04–12
  4. By: Haberis, Alex (Bank of England); Markovic, Bojan (National Bank of Serbia); Mayhew, Karen (Bank of England); Zabczyk, Pawel (Bank of England)
    Abstract: This paper considers the implications for the United States, the United Kingdom and the rest of the world (ROW) of shocks that may contribute to a further reduction in global current account imbalances using a dynamic stochastic general equilibrium (DSGE) model. We consider a shock that increases domestic demand in the ROW; a shock that reduces domestic demand in the United States; and a supply shock that raises US productivity relative to other countries. The impact on UK output and inflation depends on the nature of the shock that drives global rebalancing. An increase in domestic demand in the ROW would raise UK exports and output, but would also contribute to increased inflationary pressure in the United Kingdom. Further weakness in US domestic demand is likely to weigh on UK output and inflation. Productivity gains in the United States relative to other countries would worsen the United Kingdom’s current account position, pushing down on output, but would lead to reduced inflationary pressure in the United Kingdom.
    Keywords: Global imbalances; Current account; DSGE models.
    JEL: D58 F41 F47
    Date: 2011–04–15
  5. By: Emine Boz (IMF); Christian Daude (OECD); C. Bora Durdu (FRB)
    Abstract: We build an equilibrium business cycle model in which agents cannot perfectly distinguish between the permanent and transitory components of TFP shocks and learn about those components using the Kalman filter. Calibrated to Mexico, the model predicts a higher variability of consumption relative to output and a strongly negative correlation between the trade balance and output for a wide range of variability and persistence of permanent shocks vis-a-vis the transitory shocks. Moreover, our estimation for Mexico and Canada suggests more severe informational frictions in emerging markets than in developed economies.
    Keywords: emerging markets, business cycles, learning, Kalman filter
    JEL: F41 E44 D82
    Date: 2011–04
  6. By: David Matesanz Gomez; Guillermo J. Ortega; Benno Torgler
    Abstract: This paper investigates the business cycle co-movement across countries and regions since the middle of the last century as a measure for quantifying the ongoing globalization process of the world economy. Our methodological approach is based on analysis of a correlation matrix and the networks it contains. Such an approach summarizes the interaction and interdependence of all elements and it represents a more accurate measure of the global interdependence involved in the economic system. Our results show (1) that the dynamics of globalization has been more driven by synchronization in regional growth patterns than by the synchronization of the world economy as a whole in contrast with other empirical works and (2) that world crisis periods increase dramatically the global co movement in the world economy.
    Keywords: Globalization; regionalism; correlation matrix; clustering; synchronization
    JEL: E32 C45 O47
    Date: 2011–04

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