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on Open MacroEconomics |
| By: | Frankel, Jeffrey A. (Harvard University) |
| Abstract: | Seven possible nominal variables are considered as candidates to be the anchor or target for monetary policy. The context is countries in Latin America and the Caribbean (LAC), which tend to be price takers on world markets, to produce commodity exports subject to volatile terms of trade, and to experience procyclical international finance. Three anchor candidates are exchange rate pegs: to the dollar, euro and SDR. One candidate is orthodox Inflation Targeting. Three candidates represent proposals for a new sort of inflation targeting that differs from the usual focus on the CPI, in that prices of export commodities are given substantial weight and prices of imports are not: PEP (Peg the Export Price), PEPI (Peg an Export Price Index), and PPT (Product Price Targeting). The selling point of these production-based price indices is that each could serve as a nominal anchor while yet accommodating terms of trade shocks, in comparison to a CPI target. CPI-targeters such as Brazil, Chile, and Peru are observed to respond to increases in world prices of imported oil with monetary policy that is sufficiently tight to appreciate their currencies, an undesirable property, which is the opposite of accommodating the terms of trade. As hypothesized, a product price target generally does a better job of stabilizing the real domestic prices of tradable goods than does a CPI target. Bottom line: A Product Price Targeter would appreciate in response to an increase in world prices of its commodity exports, not in response to an increase in world prices of its imports. CPI targeting gets this backwards. |
| JEL: | E50 F40 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecl:harjfk:rwp11-027&r=opm |
| By: | Bayoumi, Tamim; Vitek, Francis |
| Abstract: | This paper analyzes past and possible future spillovers from the Euro Area Sovereign Debt Crisis, both within the Euro Area and to the rest of the world. This analysis is based on a structural macroeconometric model of the world economy, disaggregated into fifteen national economies. We find that macroeconomic and financial market spillovers have been small outside of countries with high trade or financial exposures, but that they could become large if severe financial stress were to spread beyond Greece, Ireland and Portugal. |
| Keywords: | Contagion; Euro Area Sovereign Debt Crisis; Panel unobserved components model; Spillovers |
| JEL: | E44 F41 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8497&r=opm |
| By: | Katrin Forster (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Melina Vasardani (Bank of Greece, 21 E. Venizelos Ave., Athens 10250, Greece.); Michele Ca’ Zorzi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main) |
| Abstract: | This paper analyses the impact of the global financial crisis on euro area cross-border financial flows by comparing recent developments with the main pre-crisis trends. Two prominent features of the period of turmoil were (i) the sizeable deleveraging of external financial exposures by the private sector and, in particular, the banking sector from 2008 and (ii) the significant changes in the composition of euro area cross-border portfolio flows, as investors shifted from equity to debt instruments, from long-term to short-term debt instruments and from private to public sector securities. Since 2009 such trends have started reversing. However, as balance sheet restructuring by financial and non-financial corporations continues, cross-border financial flows have remained well below pre-crisis levels. The degree of resumption and volatility of cross-border financial activity may have a major bearing on growth prospects for the euro area and may also matter from a financial stability perspective. We argue that the recent experience, first of extraordinary growth and then of scaling down of international financial activity, calls for enhanced monitoring of developments in cross-border financial flows so that the underlying risks to the domestic economy stemming from the financial sector can be better assessed. Looking forward, successful implementation of policy actions to promote macroeconomic discipline and enhance financial regulation and supervision could influence, inter alia, the composition and volume of cross-border capital flows, contributing to a more efficient and sustainable allocation of resources. JEL Classification: E44, E58, F33, F42 |
| Keywords: | Global financial crisis, euro area, capital flows. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20110126&r=opm |
| By: | Popov, Vladimir |
| Abstract: | While developing countries as a group did better than developed countries in 2008-09 recession, transition economies – former communist countries – experienced the largest reduction of output. Out of 42 countries that experienced negative growth in 2007-09, 13 were transition economies. In fact, 4 out of 5 most affected economies were former communist countries (Latvia, Estonia, Ukraine, Lithuania). The hypothesis is that these transition countries (1) suffered more than the others from the sudden outflow of capital and (2) did not manage this outflow particularly well. The rule of thumb was that large outflows of capital, especially coupled with negative trade shocks, suppressed economic activity. But if the shocks were relatively small (up to 3% of GDP change in trade and capital account from Q2 2008 to an average of subsequent 3 quarters), it was possible to mitigate them through devaluation (not allowing foreign exchange reserves to drop by the same amount). If the shocks were large, even devaluation did not allow to avoid output fall. |
| Keywords: | Recession 2008-09; capital outflow; trade shocks; devaluation |
| JEL: | F42 F40 F41 F43 |
| Date: | 2011–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32388&r=opm |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | The causes of the 2008 collapse and subsequent surge in global capital flows remain an open and highly controversial issue. Employing a factor model coupled with a dataset of high-frequency portfolio capital flows to 50 economies, the paper finds that common shocks – key crisis events as well as changes to global liquidity and risk – have exerted a large effect on capital flows both in the crisis and in the recovery. However, these effects have been highly heterogeneous across countries, with a large part of this heterogeneity being explained by differences in the quality of domestic institutions, country risk and the strength of domestic macroeconomic fundamentals. Comparing and quantifying these effects shows that common factors (“push” factors) were overall the main drivers of capital flows during the crisis, while country-specific determinants (“pull” factors) have been dominant in accounting for the dynamics of global capital flows in 2009 and 2010, in particular for emerging markets. JEL Classification: F3, F21, G11. |
| Keywords: | capital flows, factor model, common shocks, liquidity, risk, push factors, pull factors, emerging markets, advanced economies. |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20111364&r=opm |
| By: | Jean-Baptiste Gossé (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris-Nord - Paris XIII - CNRS : UMR7234); Cyriac Guillaumin (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : FRE3389 - Université Pierre Mendès-France - Grenoble II) |
| Abstract: | This paper studies the impact of the main external shocks which the eurozone and member states have undergone since the start of the 2000s. Such shocks have been monetary (drop in global interest rates), financial (two stock market crises) and real (rising oil prices and an accumulation of global current account imbalances). We have used a structural VAR (SVAR) methodology, on the basis of which we have defined four structural shocks: external, supply, demand and monetary. The estimates obtained using SVAR models enabled us to determine the impact of these shocks on the eurozone and its member countries. The study highlights the diversity of reactions inside the eurozone. The repercussions of the oil and monetary shocks were fairly similar in all eurozone countries - excepting the Netherlands and the United Kingdom - but financial crises and global imbalances have had very different effects. External shocks explain one-fifth of the growth differential and current account balance variance and about one-third of fluctuations in the real effective exchange rate in Europe. The impact of the oil crisis was particularly large, but it pushed the euro down. Global imbalances explain a large proportion of exchange rate fluctuations but drove the euro up. Furthermore the response functions to financial and monetary crises are similar, except for current account functions. A financial crisis seems to result in the withdrawal of larger volumes of assets than a monetary crisis. The study thus highlights the diversity of the reactions in the eurozone and shows that external shocks do more to explain variations in the real effective exchange rate than in the growth differential or current account, while underlining the particularly important part played by global imbalances in European exchange rate fluctuations. |
| Keywords: | global imbalances, current account, eurozone, structural VAR model, contemporary and long-term restrictions, external shock, exogeneity hypothesis. |
| Date: | 2011–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:hal:cepnwp:hal-00610024&r=opm |
| By: | Roe, Terry L.; Shane, Mathew; Heerman, Kari |
| Abstract: | This paper explores the emergence of large current account imbalances in a few large countries, the factors behind the emergence, the role of those imbalances in the financial crisis of 2008-09, and the implications of achieving global balance. Imbalances reflect a countryâs net savings and suggest that growth in GDP of a surplus country is partly dependent upon growth in external demand of deficit countries. Although a country can incur a surplus or deficit for ever, we suggest that the increasing surpluses of relatively large and rapidly growing countries is likely to be destabilizing to global growth in the long-run. The adjustment will likely require a surplus country, such as China, to rely more on domestic demand for growth while a deficit country, such as the U.S., may need to rely more on external demand for growth. We suggest the Eurozone imbalances are not directly linked to U.S. imbalances. There are a variety of potential causes of global imbalances including excess savings in surplus countries, the twin deficit hypothesis, the export-led growth hypothesis, and the possible miss-measurement of the U.S. current account due to repatriation of profits from U.S. owned foreign affiliates. However, whatever the combination of causes of the growing imbalances, adjustments need to be made to return to long-terms sustainable growth. |
| Keywords: | International Relations/Trade, |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:ags:umciwp:109244&r=opm |
| By: | Marián Dinga (CERGE-EI); Vilma Dingová (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic) |
| Abstract: | This paper studies the effect of the euro introduction on international FDI flows. Using country-pair data on 35 OECD economies during 1997-2008 and adopting the propensity score matching as identification strategy, we investigate the impact of the euro on capital reallocation. In general, the euro exhibits no significant impact on FDI. However, the effect becomes significant on the subset of EU countries, increasing FDI flows by 14.3 to 42.5 percent. Furthermore, we find that the EU membership fosters FDI flows much more than the euro, increasing FDI flows by 55 to 166 percent. Among other FDI determinants, high gross domestic product, low distance between countries and low unit labor costs in target country have a positive effect on FDI. On the contrary, long-term exchange rate volatility deters FDI flows. |
| Keywords: | monetary union, foreign direct investment, common currency area, euro |
| JEL: | E42 F15 F21 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:fau:wpaper:wp2011_25&r=opm |
| By: | Diallo, Ibrahima Amadou |
| Abstract: | This paper uses panel data cointegration techniques to study the impacts of real exchange rate misalignment and real exchange rate volatility on total exports for a panel of 42 developing countries from 1975 to 2004. The results show that both real exchange rate misalignment and real exchange rate volatility affect negatively exports. The results also illustrate that real exchange rate volatility is more harmful to exports than misalignment. These outcomes are corroborated by estimations on subsamples of Low-Income and Middle-Income countries. |
| Keywords: | real effective exchange rate; misalignment; volatility; exports; pooled mean group estimator |
| JEL: | F13 F41 F31 |
| Date: | 2011–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32387&r=opm |
| By: | Lima, Gilberto Tadeu; Porcile, Gabriel |
| Abstract: | We present a dynamic model of capacity utilization and growth which takes into due account the joint determination of the international competitiveness (measured by the real exchange rate) and functional income distribution. It follows that how distribution, capacity utilization and growth vary with the real exchange rate depends on the cause of change in the latter (nominal exchange rate or markup). Over the medium run, the nominal exchange rate (markup) changes when the actual real exchange rate differs from the level preferred by the government (capitalists). While there is a medium-run equilibrium in which capitalists and the government come to share a preferred real exchange rate, the economy may not converge to it. In fact, when the government is primarily concerned with preserving workers’ share in income when manipulating the nominal exchange rate, a limit cycle obtains: the economy experiences endogenous cyclical fluctuations in the real exchange rate, distribution, capacity utilization and growth that resemble the experience of several developing countries. Thus, growth regressions featuring the real exchange rate should include distribution in the vector of control variables, which has not been the case. |
| Keywords: | growth; distribution; capacity utilization; real exchange rate. |
| JEL: | O11 E12 O15 F43 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32356&r=opm |
| By: | Breinlich, Holger; Cuñat, Alejandro |
| Abstract: | We draw attention to the role of economic geography in explaining important cross-sectional facts which are difficult to account for in existing models of industrialization. By construction, closed-economy models that stress the role of local demand in generating sufficient expenditure on manufacturing goods are not suited to explain the strong and negative correlation between distance to the world's main markets and levels of manufacturing activity in the developing world. Secondly, open-economy models that emphasize the importance of comparative advantage are at odds with a positive correlation between the ratio of agricultural to manufacturing productivity and shares of manufacturing in GDP. This paper provides a potential explanation for these puzzles by nesting the above theories in a multi-location model with trade costs. Using a number of simple analytical examples and a full-scale multi-country calibration, we show that the model can replicate the above stylized facts. |
| Keywords: | Economic Geography; Industrialization; International Trade |
| JEL: | F11 F12 F14 O14 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8495&r=opm |
| By: | Thorbecke, Willem (Asian Development Bank Institute); Kato, Atsuyuki (Asian Development Bank Institute) |
| Abstract: | This paper investigates how exchange rates affect Japanese exports. This is difficult because many of Japan’s exports are used to produce goods for re-export. An appreciation in the importing country that decreases exports can decrease its imported inputs from Japan. To correct for this bias the authors examine consumption exports. Using a panel dataset of Japan’s consumption exports to 17 countries over the 1988–2009 period, they found that a 10% appreciation of the yen would reduce Japan’s consumption goods exports by 9%. These results indicate that the large swings in the value of the yen over the last decade have caused large swings in the volume of Japanese exports. |
| Keywords: | exchange rate elasticities; japanese consumption exports |
| JEL: | F30 F32 |
| Date: | 2011–07–26 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0298&r=opm |