nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒07‒21
twelve papers chosen by
Martin Berka
Victoria University of Wellington

  1. Is the Border Effect an Artefact of Geographic Aggregation? By Carlos Llano; Asier Minondo; Francisco Requena
  2. Euro Area Export Performance and Competitiveness By Richard T. Harmsen; Jarkko Turunen; Tamim Bayoumi
  3. Till Labor Cost Do Us Part A Vecm Model of Unit Labor Cost Convergence in the Euro Area By Francesca Pancotto; Filippo Pericoli
  4. Can Leading Indicators Assess Country Vulnerability? Evidence from the 2008-09 Global Financial Crisis By Frankel, Jeffrey; Saravelos, George
  5. International Transmission of Monetary Shocks and the Non-Neutrality of International Money By Wenli Cheng; Dingsheng Zhang
  6. Real Exchange Rate Uncertainty and Output: A Sectoral Analysis By Gonzalo Varela
  7. Exchange Rate Pass-Through over the Business Cycle in Singapore By Joey Chew; Siang Meng Tan; Sam Ouliaris
  8. Business Cycles in Emerging Markets: The Role of Durable Goods and Financial Frictions By Fernando Alvarez-Parra; Manuel Toledo; Luis Brandao Marques
  9. The ¡°Exorbitant Privilege¡±: A Theoretical Exposition By Wenli Cheng; Dingsheng Zhang
  10. Do Capital Inflows Hinder Competitiveness? The Real Exchange Rate in Ethiopia By Pedro M. G. Martins
  11. A convergence-sensitive optimum-currency-area index By Michal Skořepa
  12. The Global Impact of Chinese Growth By Ippei Fujiwara; Keisuke Otsu; Masashi Saito

  1. By: Carlos Llano (Universidad Autónoma de Madrid); Asier Minondo (Universidad de Deusto-ESTE); Francisco Requena (Universidad de Valencia)
    Abstract: The existence of a large border effect is considered as one of the main puzzles of international macroeconomics. We show that the border effect is, to a large extent, an artefact of geographic concentration. In order to do so we combine international flows with intranational flows data characterised by a high geographic grid. At this fine grid, intranational flows are highly localised and dropping sharply with distance. The use of a small geographical unit of reference to measure intra-national bilateral trade flows allows to estimating correctly the negative impact of distance on shipments. When we use sector disaggregated export flows of 50 Spanish provinces in years 2000 and 2005 split into interprovincial and inter-national flows, we find that the border effect is reduced substantially and even becomes statistically not different from zero in some estimations.
    Keywords: border effect, distance, interregional trade, international trade, Spanish provinces
    JEL: F14 F15
    Date: 2010–10
  2. By: Richard T. Harmsen; Jarkko Turunen; Tamim Bayoumi
    Abstract: Concerns about export growth within the euro area peripheral countries due to a lack of competitiveness within the euro area are a key policy issue. Our analysis suggests that: (i) Long-term price elasticities for intra-euro area exports are at least double those for extra-euro area exports, so traditional real effective exchange rate indexes may overstate the effectiveness of euro depreciation in restoring exports growth in the euro area periphery and; (ii) There are surprisingly wide divergences across alternative relative price measures and even when relative price data suggest a steady loss in intra- (and extra-) euro area competitiveness, the pace of deterioration depends on the measure of relative prices used.
    Keywords: Cross country analysis , Demand , Economic models , Euro Area , Export competitiveness , Export growth , Export performance , Exports , Price elasticity , Real effective exchange rates ,
    Date: 2011–06–16
  3. By: Francesca Pancotto; Filippo Pericoli (Department of Economics, University of Bologna)
    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.
    Keywords: Unit labor costs, Exchange Rates, Convergence, Competitiveness, Manufacturing Sector
    JEL: E31 O47 C32
    Date: 2011
  4. By: Frankel, Jeffrey (Harvard University); Saravelos, George (Harvard University)
    Abstract: This paper investigates whether leading indicators can help explain the cross-country incidence of the 2008-09 financial crisis. Rather than looking for indicators with specific relevance to the current crisis, the selection of variables is driven by an extensive review of more than eighty papers from the previous literature on early warning indicators. The review suggests that central bank reserves and past movements in the real exchange rate were the two leading indicators that had proven the most useful in explaining crisis incidence across different countries and crises in the past. For the 2008-09 crisis, we use six different variables to measure crisis incidence: drops in GDP and industrial production, currency depreciation, stock market performance, reserve losses, and participation in an IMF program. We find that the level of reserves in 2007 appears as a consistent and statistically significant leading indicator of who got hit by the 2008-09 crisis, in line with the conclusions of the pre-2008 literature. In addition to reserves, recent real appreciation is a statistically significant predictor of devaluation and of a measure of exchange market pressure during the current crisis. So is the exchange rate regime. We define the period of the global financial crisis as running from late 2008 to early 2009, which probably explains why we find stronger results than earlier papers such as Obstfeld, Shambaugh and Taylor (2009, 2010) and Rose and Spiegel (2009a,b) which use annual data.
    JEL: F30
    Date: 2011–06
  5. By: Wenli Cheng (Department of Economics, Monash University); Dingsheng Zhang (China Economics and Management Academy, Central University of Finance and Economics)
    Abstract: This paper investigates how monetary shocks are transmitted internationally. It shows that where a national currency is used as an international medium of exchange, the international money is non-neutral. In particular, an increase in the supply of international money leads to a transfer of real resources to the international money-issuing country from its trading partner. It also induces an expansion of the non-tradable sector in the international money-issuing country, and an expansion the tradable sector in its trading partner. The real impact of a monetary shock is greater under a fixed exchange rate system than under a flexible exchange rate system.
    Keywords: demand for money, demand for international currency, monetary policy, exchange rate, non-neutrality of money
    JEL: F11 F31 E41 E52
    Date: 2011
  6. By: Gonzalo Varela (Department of Economics, University of Sussex)
    Abstract: Developing countries exhibit a more uncertain economic environment than developed countries. Argentina, Brazil and Uruguay in particular, display high levels of real exchange rate uncertainty. Moreover, a succession of trade agreements among them, culminating in the creation of Mercosur in 1991 have increased intra-regional trade. This paper examines empirically the impact of real-eective-exchange-rate (REER) uncertainty on the output of 28 manufacturing sectors in Argentina, Brazil and Uruguay over 1970-2002. It provides alternative uncertainty measures that take into account the non-normality of the REER distribution by considering its higher moments (skewness and kurtosis) and dierent degrees of sophistication in agents' expectation formation, and estimates an augmented supply function using sectoral data on output, prices, and including these measures of REER uncertainty. Two dierent sets of instruments are used for domestic prices, in order to deal with the simultaneity problem that arises in the estimation of the supply function. Res- ults suggest a negative non-negligible eect of uncertainty on output, homogeneous across countries. Interestingly, there is evidence of threshold eects, so that uncer- tainty aects output negatively when it exceeds some critical level. In addition, the eect is heterogeneous across sectors. This is explained by trade orientation, the intensity with which the sector trades within Mercosur and by sectoral productivity. Sectors that trade more intensively within Mercosur are more aected by REER uncertainty than those predominantly oriented to the rest of the world. Second, more productive sectors are less aected by REER uncertainty than those that are less productive.'
    Keywords: Uncertainty, Exchange rates, Output growth, Regional Integration, In- strumental Variables
    JEL: E23 F15 F31
    Date: 2011–02
  7. By: Joey Chew; Siang Meng Tan; Sam Ouliaris
    Abstract: This paper investigates exchange rate pass-through in Singapore using band-pass spectral regression techniques, allowing for asymmetric effects over the business cycle. First stage pass-through is estimated to be complete and relatively quick, confirming existing views that the exchange rate provides an effective tool to moderate imported inflation in Singapore. Asymmetric pass-through effects over the business cycle are also detected, with importers passing on a smaller share of exchange rate movements during boom periods as compared to recessions. This result suggest that Singapore’s exchange rate policy could afford to "lean against the wind," especially during cyclical expansions.
    Keywords: Business cycles , Economic models , Exchange rate policy , Monetary policy , Singapore ,
    Date: 2011–06–17
  8. By: Fernando Alvarez-Parra; Manuel Toledo; Luis Brandao Marques
    Abstract: This paper examines how durable goods and financial frictions shape the business cycle of a small open economy subject to shocks to trend and transitory shocks. In the data, nondurable consumption is not as volatile as income for both developed and emerging market economies. The simulation of the model implies that shocks to trend play a less important role than previously documented. Financial frictions improve the ability of the model to match some key business cycle properties of emerging economies. A countercyclical borrowing premium interacts with the nature of durable goods delivering highly volatile consumption and very countercyclical net exports.
    Keywords: Business cycles , Consumer goods , Economic models , Emerging markets , External shocks ,
    Date: 2011–06–07
  9. By: Wenli Cheng (Department of Economics, Monash University); Dingsheng Zhang (China Economics and Management Academy, Central University of Finance and Economics)
    Abstract: This paper develops a general equilibrium model to study how the ¡°exorbitant advantage¡± works, whether it is sustainable, and what may be the consequences if it is removed. Its main findings are: (1) the center country that issues the reserve currency enjoys the ¡°exorbitant advantage¡± in the sense that her current account deficit can be financed by the periphery country¡¯s reserve holdings. The ¡°exorbitant privilege¡± is predicated on the overvaluation of the reserve currency caused by a higher rate of money growth in the center country; (2) the ¡°exorbitant advantage¡± is not likely to be sustainable in the long run; (3) if the ¡°exorbitant advantage¡± is removed, the value of the reserve currency will depreciate, the terms of trade will change against the periphery country and sector composition will change in favour of the tradable sector in the center country and in favour of the non-tradable sector in periphery country. These changes will be more pronounced if the center country repays her debt by printing money instead of raising taxes.
    Keywords: ¡°Exorbitant Privilege¡±, international currency, external imbalances, foreign debt, internal adjustment
    JEL: F11 F31 E42
    Date: 2011
  10. By: Pedro M. G. Martins (Institute of Development Studies (IDS), University of Sussex)
    Abstract: This paper investigates the determinants of the real exchange rate (RER) in Ethiopia. In particular, it assesses whether large capital inflows (e.g. foreign aid and remittances) have an impact on the RER. This empirical exercise tries to improve the current literature in a number of ways: (i) the use of quarterly data provides a larger sample size and enables the modelling of important intra-year dynamics, which should lead to better model specifications; (ii) the use of several cointegration approaches allows interesting methodological comparisons; and (iii) the use of a time series model (Unobserved Components) provides a new empirical approach and a robustness check on the econometric models. The results suggest two main (long-run) determinants of the RER in Ethiopia: trade openness is found to be correlated with RER depreciations, while a positive shock to the terms of trade tends to appreciate the RER. Foreign aid is not found to have a statistically significant impact, while there is only weak evidence that workers’ remittances could be associated with RER appreciations. The lack of empirical support for the Dutch disease hypothesis suggests that Ethiopia has been able to effectively manage large capital inflows, thus avoiding major episodes of macroeconomic instability.
    Keywords: Real Exchange Rate, Foreign Aid, Time Series Models, Africa
    JEL: C22 F35 O24 O55
    Date: 2010–10
  11. By: Michal Skořepa (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; Czech National Bank)
    Abstract: A number of authors have used the concept of an optimum currency area (or OCA) index to assess the relative proximity of various pairs of economies to the ideal of an optimum currency area. Alas, a significant deficiency of this approach as used so far is that it provides no room for long-term real income convergence - a frequently observed process that can be viewed as a specific type of long-term asymmetric shock. In this paper, a novel way to construct the OCA index is suggested that is sensitive to any real convergence (or divergence) between the two economies under study. Estimation of this convergence-sensitive OCA index for a sample of OECD economies yields an intuitively plausible result: real convergence gains on significance within the OCA index after an initial sample, a group of advanced OECD economies, is broadened with a group of emerging economies. Applied to the 2001-2008 period, the convergence-sensitive index shows a few Central and Eastern European late-transition economies to be better prepared for a common currency with Germany than several current euro area members.
    Keywords: optimum currency area, OCA index, real convergence, real exchange rate, trend appreciation
    JEL: E58 F15 F31 O2
    Date: 2011–07
  12. By: Ippei Fujiwara; Keisuke Otsu; Masashi Saito
    Abstract: Three decades have passed since China dramatically opened up to the global market and began to catch up rapidly with leading economies. In this paper we discuss the effects of China's opening-up and rapid growth on the welfare of both China and the rest of the world (ROW). We find that the opening-up per se is welfare improving for China but has had little impact on the ROW. The opening-up of China is beneficial to the ROW if it led to significant productivity growth in China. Furthermore, China's balanced trade policy after the opening-up has helped the ROW rather than China. Hence, according to a simple neoclassical model with complete markets, a gradual trade liberalization in China is prefereble to a drastic one from the ROW perspective.
    Keywords: Chinese Growth; Reform and Opening-up; Productivity; Terms of Trade
    JEL: E13 F41 O47
    Date: 2011–07

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