nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒06‒18
twelve papers chosen by
Martin Berka
Massey University, Albany

  1. Establishment heterogeneity, exporter dynamics, and the effects of trade liberalization By George Alessandria; Horag Choi
  2. The Real Exchange Rate, Real Interest Rates, and the Risk Premium By Charles Engel
  3. Current Account Imbalances in the Euro Area: Catching up or Competitiveness? By Ansgar Belke; Christian Dreger
  4. Sectoral price facts in a sticky-price model By Carlos Carvalho; Jae Won Lee
  5. An empirical estimation of Balassa – Samuelson Effect in case of Eastern European Countries By Paun, Cristian
  6. Labor wedges and open economy puzzles By Karabarbounis, Loukas
  7. Expanding Varieties in the Nontraded Goods Sector and the Real Exchange Rate Depreciation By He, Qichun
  8. Common factors of the exchange risk premium in emerging European markets By Byrne, Joseph P; Nagayasu, Jun
  9. Till Labor Cost Do Us Part A Vecm Model of Unit Labor Cost Convergence in the Euro Area By F. Pancotto; F. Pericoli
  10. Welfare and excess volatility of exchange rates By M. Salto; T. Pietra
  11. Cross-border bank lending to selected SEACEN economies: an integrative report By Pontines, Victor; Siregar, Reza Yamora
  12. Exports and Italy’s economic development: a long-run perspective (1863-2004) By Barbara Pistoresi; Alberto Rinaldi

  1. By: George Alessandria; Horag Choi
    Abstract: The authors study the effects of tariffs in a dynamic variation of the Melitz (2003) model, a monopolistically competitive model with heterogeneity in productivity across establishments and fixed costs of exporting. With fixed costs of starting to export that are on average 3.7 times as large as the costs incurred to continue as an exporter, the model can match both the size distribution of exporters and annual transition in and out of exporting among US manufacturing establishments. The authors find that the tariff equivalent of these fixed costs is nearly 30 percentage points. They use the calibrated model to estimate the effect of reducing tariffs on welfare, trade, and export participation. The authors find sizeable gains to moving to free trade equivalent to 1.03 percent of steady state consumption. Considering the transition dynamics following the cut in tariffs, they find that the model predicts economic activity overshoots its steady state, with the peak in output coming 10 years after the trade reform. Because of this overshooting, steady state changes in consumption understate the welfare gain to trade reform. The authors also find simpler trade models that abstract from these export dynamics provide a poor approximation of the aggregate responses from our more general model.
    Keywords: International trade ; Tariff
    Date: 2011
  2. By: Charles Engel
    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.
    JEL: F30 F31 G12
    Date: 2011–06
  3. 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 back 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 F32 F36
    Date: 2011–02
  4. By: Carlos Carvalho; Jae Won Lee
    Abstract: We develop a multi-sector sticky-price DSGE (dynamic stochastic general equilibrium) model that can endogenously deliver differential responses of prices to aggregate and sectoral shocks. Input-output production linkages induce across-sector pricing complementarities that contribute to a slow response of prices to aggregate shocks. In turn, input-market segmentation at the sectoral level induces within-sector pricing substitutability, which helps the model deliver a fast response of prices to sector-specific shocks. Estimating the factor-augmented vector autoregression specification of Boivin, Giannoni, and Mihov (2009) on data generated by a parameterized version of our model, we find results that resemble what they obtain with disaggregated data for the U.S. economy. We then employ Bayesian methods to estimate the model using aggregate and sectoral data, and find that it accounts extremely well for a wide range of sectoral price facts.
    Date: 2011
  5. By: Paun, Cristian
    Abstract: Integration into the European Monetary Union (EMU) and adoption of Euro became a specific objective for Eastern European Countries after their accession into the European Union. This objective implies specific nominal and real economic convergence for these countries within a given period of time (Copenhagen criteria). Nominal convergence measurement is based on well-defined system of economic indicators (Maastricht and Amsterdam criteria). Real convergence refers to real economic performance of a country and it is commonly associated with GDP growth rate and productivity level. From a broader perspective, real and nominal convergence could be seen as complementary. Tensions between real and nominal convergence are tested through Balassa – Samuelson Effect. In this paper it is analyzed the evolution of nominal and real convergence based on a proposed set of indicators and it is estimated Balassa-Samuelson Effect on non-Euro countries.
    Keywords: EMU; Euro; Optimal Currency Area; Balassa Samuelson Effect
    JEL: E42 F41 F33
    Date: 2010–03–15
  6. By: Karabarbounis, Loukas
    Abstract: A parsimonious model with home production, estimated to match moments of the “labor wedge,” explains prominent puzzles of the international business cycle. If market and home activity are substitutes, then the measured labor wedge increases whenever market consumption and employment decrease. Home production breaks the tight negative link between market consumption and its marginal utility and therefore helps explain the international risk sharing puzzle. In an estimated two-country dynamic general equilibrium model in which the labor wedge is endogenously generated to match its empirical moments, market output and market employment are more correlated than market consumption and investment across countries, relative market consumption is negatively related to the real exchange rate and real net exports are countercyclical. Further, the international risk sharing puzzle becomes easier to explain as the degree of financial completeness increases.
    Keywords: Labor Wedge; Home Production; International Business Cycles; Risk Sharing
    JEL: F4 F3 E3
    Date: 2010–10
  7. By: He, Qichun
    Abstract: This paper studies how the real exchange rate changes with economic growth. Although Devereux (1999) proves that endogenous growth in the distribution sector can cause exchange rate depreciation, MacDonald and Rucci (2005) empirically find that growth in the distribution sector significantly causes the exchange rate to appreciate. To resolve the discrepancy, we replace perfect competition with monopolistic competition in the nontraded goods sector. Although growth of the distribution sector may cause the currency to appreciate, the endogenous growth in the nontraded goods sector tends to cause the currency to depreciate, because the expanding varieties from monopolistic competition drive down the price index of nontraded goods. With reasonable structural parameters, the latter effect dominates, and the real exchange rate depreciates. An economy with a smaller elasticity of substitution between demand for different varieties of the nontraded goods or higher TFP growth in the nontraded goods sector is more likely to have real exchange rate depreciation.
    Keywords: Nontraded goods sector; expanding varieties; real exchange rate
    JEL: F41 F31 F43
    Date: 2010–10
  8. By: Byrne, Joseph P; Nagayasu, Jun
    Abstract: Existing empirical evidence suggests that the Uncovered Interest Rate Parity (UIRP) condition may not hold due to an exchange risk premium. For a panel data set of eleven emerging European economies we decompose this exchange risk premium into an idiosyncratic (country-specific) element and a common factor using a principal components approach. We present evidence of stationary idiosyncratic and common factors. This result leads to the conclusion of a stationary risk premium for these countries, which is consistent with previous studies often documenting a stationary premium in developed countries. Furthermore, we report that the variation in the premium is largely attributable to a common factor influenced by economic developments in the United States.
    Keywords: Uncovered Interest Rate Parity; Emerging Economies; Exchange Risk Premiums; Common Factors
    JEL: F41
    Date: 2011–05
  9. By: F. Pancotto; F. Pericoli
    Abstract: A sustainable path of relative competitiveness among the EMU countries is a key factor for the survivorship of the currency union in the long run. We analyze unit labor costs in the European Union with VECM methodology to evaluate relative competitiveness of euro area countries, controlling for exchange rate on the adjustment dynamics, for the economy as a whole and for the manufacturing sector, considered as a proxy of the tradable sector. Results show a lack of convergence of member countries, which is more pronounced for the tradable sector. Persisting idiosyncratic dynamics may be driven by different bargaining policies and institutional structures of national labor markets, and by differential path of technological advance deterring convergence of long run productivity.
    JEL: E31 O47 C32
    Date: 2011–06
  10. By: M. Salto; T. Pietra
    Abstract: We study the properties of a GEI model with nominal assets, outside money (injected into the economy as in Magill and Quinzii), and multiple currencies. We analyze the existence of monetary equilibria and the structure of the equilibrium set under two different assumptions on the determination of the exchange rates. If currencies are perfect substitutes, equilibrium allocations are indeterminate and, generically, sunspot equilibria exist. Generically, given a nonsunspot equilibrium, there are Pareto improving (and Pareto worsening) sunspot equilibria associated with an increase in the volatility of the future exchange rates. We interpret this property as showing that, in general, there is no clear-cut effect on welfare of the excess volatility of exchange rates, even when due to purely extrinsic phenomena.
    JEL: D52
    Date: 2011–06
  11. By: Pontines, Victor; Siregar, Reza Yamora
    Abstract: This study seeks to address a number of rising policy concerns from the aftermath of the recent subprime crisis. Did foreign bank lending decline sharply and transmit the financial shocks from the advanced economies to the SEACEN emerging markets? Was the decline driven by the drying-up in supply of cross-border loans or more by the sharp decline in the demand for this funding? Does greater exposure of foreign banks to a host country lowered the sensitivity of its claims to shocks originating from their own economies? Do bank claims to a country affected by the aggregate changes in claims to another country? How about the stability of these flows? In short, this study aims to ascertain the various multi-faceted aspects of this international bank lending.
    Keywords: International Bank Claims; Cross-border Lending; Bank Exposure; Subprime crisis; East and Southeast Economies.
    JEL: F34 G15 C23 N25 F36
    Date: 2011–06–10
  12. By: Barbara Pistoresi; Alberto Rinaldi
    Abstract: This paper investigates the relationship between real export and real GDP in Italy from 1863 to 2004 by using cointegration analysis and causality tests. The outcome suggests that these variables comove in the long run but the direction of causality depends on the level of economic development: in the period prior to WW1 the growth of the Italian economy led that of exports, while in the post-WW2 period the causal relationship was reversed with the expansion of exports that determined the growth of the Italian economy
    Keywords: Export led growth hypothesis, unit root tests, cointegration analysis, Granger – causality
    JEL: F43 O11 N1 N7
    Date: 2011–05

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