nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒07‒02
seven papers chosen by
Martin Berka
Victoria University of Wellington

  1. Global bond risk premiums By Rebecca Hellerstein
  2. The Penn-Belassa-Samuelson Effect in Developing Countries: Price and Income Revisited By Fadi Hassan
  3. Precautionary Savings and Global Imbalances in World General Equilibrium By Damiano Sandri
  4. On the geography of international banking: the role of third-country effects By Georgios Fotopoulos; Helen Louri
  5. Partisan cycles and the consumption volatility puzzle By Marina Azzimonti; Matthew Talbert
  6. In Which Exchange Rate Models Do Forecasters Trust? By H. Takizawa; David Hauner; Jaewoo Lee
  7. Growth rates constrained by internal and external imbalances: a demand orientated approach. By Elias Soukiazis; Pedro Cerqueira; Micaela Antunes

  1. By: Rebecca Hellerstein
    Abstract: This paper examines time-varying measures of term premiums across ten developed economies. It shows that a single factor accounts for most of the variation in expected excess returns over time, across the maturity spectrum, and across countries. I construct a global return forecasting factor that is a GDP-weighted average of each country’s local return forecasting factor and show that it has information not spanned by the traditional level, slope, curvature factors of the term structure, or by the local return forecasting factors. Including the global forecasting factor in the model produces estimates of spillover effects that are consistent with our conceptual understanding of these flows, both in direction and magnitude. These effects are illustrated for three episodes: the period following the Russian default in 1998, the bond conundrum period from mid-2004 to mid-2006, and the period since the onset of the global financial crisis in 2008.
    Keywords: Bonds ; Risk ; Forecasting
    Date: 2011
  2. By: Fadi Hassan
    Abstract: It is conventional wisdom that richer countries have a higher price level than poorer countries. This paper provides evidence that the price-income relationship is non-linear and that it turns negative, or at best flat, in low income countries. The result is robust along both cross-section and time-series dimensions. Additional robustness checks show that biases in PPP estimation and measurement error in low-income countries do not drive the result.
    Keywords: Balassa-Samuelson, Penn effect, developing countries, non-parametricestimation, purchasing power parity, real exchange rate
    JEL: E31 F4 O1
    Date: 2011–06
  3. By: Damiano Sandri
    Abstract: In this paper we assess the implications of precautionary savings for global imbalances by considering a world economy model composed by the US, the Euro Area, Japan, China, oil-exporting countries, and the rest of the world. These areas are assumed to differ only with respect to GDP volatility which is calibrated based on the 1980-2008 period. The model predicts a wide dispersion in net foreign asset positions, with the highly volatile oil-exporting countries accumulating very large asset holdings. While heterogeneity in GDP volatility may lead to large imbalances in international investment positions, its impact on current accounts is much weaker. This is because countries are expected to move towards their optimal NFA at a very slow pace.
    Date: 2011–05–31
  4. By: Georgios Fotopoulos (University of Peloponnese and visiting scholar at the Bank of Greece); Helen Louri (Bank of Greece)
    Abstract: International banking is a complex phenomenon. Among its determinants, distance has been found to be critical. But does distance only have a simple negative direct effect? Or is the role of geography more intricate? Applying spatial analysis techniques on BIS data of bank foreign claims in 178 countries in 2006, evidence of positive spatial autocorrelation under alternative spatial weights schemes is brought to light. The geographical aspects of international banking are further explored by a spatial autoregressive gravity model. The results obtained support that the operation of a spatial lag leads to important indirect or third-country effects. Evidence of such financial spillovers is further corroborated by results of a spatial autoregressive Tobit model. Geography is more important than the effect of distance on its own would suggest. Third-country effects operate in a manner that subsequently connects countries through links beyond those immediately involved in borrowing (destination) and lending (origin) relationships. Confirming earlier results, the economic size of sending and recipient countries, cultural similarity and in-phase business cycles enhance international banking, while distance and exchange rate volatility hinder it. Also, while lower political risk has a positive role, so do higher financial and economic risks, reflecting-to some extent-some of the reasons behind the current financial crisis.
    Keywords: international banking ;financial spillovers; gravity model; spatial econometrics
    Date: 2011–03
  5. By: Marina Azzimonti; Matthew Talbert
    Abstract: Standard real business cycle theory predicts that consumption should be smoother than output, as observed in developed countries. In emerging economies, however, consumption is more volatile than income. In this paper the authors provide a novel explanation of this phenomenon, the ‘consumption volatility puzzle,’ based on political frictions. They develop a dynamic stochastic political economy model where parties that disagree on the size of government (right-wing and left-wing) alternate in power and face aggregate uncertainty. While productivity shocks affect only consumption through responses to output, political shocks (switches in political ideology) change the composition between private and public consumption for a given output size via changes in the level of taxes. Since emerging economies are characterized by less stable governments and more polarized societies, the effects of political shocks are more pronounced. For a reasonable set of parameters the authors confirm the empirical relationship between political polarization and the ratio of consumption volatility to output volatility across countries.
    Keywords: Business cycles ; Developing countries
    Date: 2011
  6. By: H. Takizawa; David Hauner; Jaewoo Lee
    Abstract: Using survey data of market expectations, we ask which popular exchange rate models appear to be consistent with expectation formation of market forecasters. Exchange rate expectations are found to be correlated with inflation differentials and productivity differentials, indicating that the relative PPP and Balassa-Samuelson effect are common inputs into expectation formation of market forecasters.
    Keywords: Economic forecasting , Exchange rates , Forecasting models , Interest rate differential , Purchasing power parity ,
    Date: 2011–05–19
  7. By: Elias Soukiazis (Faculdade de Economia/GEMF, Universidade de Coimbra); Pedro Cerqueira (Faculdade de Economia/GEMF, Universidade de Coimbra); Micaela Antunes (Faculdade de Economia/GEMF, Universidade de Coimbra)
    Abstract: Thirlwall’s Law considers that growth can be constrained by the balance-of-payments when the current account is in permanent deficit. The Law focuses on external imbalances as impediments to growth and does not consider the case where internal imbalances (budget deficits or public debt) can also constrain growth. The recent European public debt crisis shows that when internal imbalances are out of control they can constrain growth and domestic demand in a severe way. The aim of this paper is to fill this gap by developing a growth model in line with Thirlwall’s Law that takes into account both internal and external imbalances. The model is tested for Portugal that recently fell into a public debt crisis with serious negative consequences on growth. The empirical analysis shows that the growth rate in Portugal is in fact balance-of-payments constrained and the main drawback is the high import elasticity of the components of demand and in particular that of exports.
    Keywords: internal and external imbalances, import elasticities of the components of demand, equilibrium growth rates, 3SLS system regressions.
    JEL: C32 E12 H6 O4
    Date: 2011–06

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