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on Open MacroEconomics |
| By: | Michael B. Devereux; Viktoria Hnatkovska |
| Abstract: | A basic prediction of effcient risk-sharing is that relative consumption growth rates across countries or regions should be positively related to real exchange rate growth rates across the same areas. We investigate this hypothesis, employing a newly constructed multi-country and multi-regional data set. Within countries, we find signifcant evidence for risk sharing: episodes of high relative regional consumption growth are associated with regional real exchange rate depreciation. Across countries however, the association is reversed: relative consumption and real exchange rates are negatively correlated. We identify this failure of risk sharing as a border effect. We find that the border effect is substantially (but not fully) accounted for by nominal exchange rate variability. We then ask whether standard open economy macro models can explain these features of the data. We argue that they cannot. To explain the role of the nominal exchange rate in deviations from cross country consumption risk sharing, it is necessary to combine multiple sources of shocks, ex-ante price setting, and incomplete financial markets. |
| JEL: | F3 F4 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17288&r=opm |
| By: | Jamel Saadaoui (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris-Nord - Paris XIII - CNRS : UMR7234) |
| Abstract: | The paper investigates if the most popular alternative to the purchasing parity power approach (PPP) to estimate equilibrium exchange rates, the fundamental equilibrium exchange rate (FEER) influences exchange rate dynamics in the long run. For a large panel of industrialized and emerging countries and on the period 1982-2007, we detect the presence of unit roots in the series of real effective exchange rates and in the series of FEERs. We find and estimate a cointegration relationship between real effective exchange rates and FEERs. The results show that the FEER has a positive and significant influence on exchange rate dynamics in the long run. |
| Keywords: | Fundamental equilibrium exchange rates; Panel unit root tests; Global imbalances; Fully modified ordinary least square; Dynamic ordinary least square; Pooled Mean Group |
| Date: | 2011–07–06 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00593674&r=opm |
| By: | Ayako Saiki |
| Abstract: | The purpose of this study is to examine how monetary integration affects the exchange rate pass-through, by testing whether monetary policy convergence in the euro area led to a convergence in terms of exchange rate pass-through. We conduct a comparative study between the “experiment group” (the euro area) and the “control group” (non-euro industrial countries). We find evidence for stronger convergence of exchange rate pass-through for the euro area economies as a group, especially around the 1980s. The group of non-euro industrial countries also had conditional convergence (convergence with permanent cross-sectional heterogeneity) in exchange rate pass-through, but its cross-sectional dispersion remains substantially larger compared to the euro area. This indicates that monetary integration affects the exchange rate pass-through. This has an important policy implication for the euro area, especially for the new member countries, as their exchange rate pass-through would not remain constant or purely exogenous; it should also converge to the euro area average as they work to achieve the Maastricht Criteria. |
| Keywords: | Monetary Policy; Central Banks and Their Policies; International Monetary Arrangements and Institutions |
| JEL: | E52 E58 F33 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:308&r=opm |
| By: | Michael B. Devereux; Viktoria Hnatkovska |
| Abstract: | This paper documents some previously neglected features of sectoral shares at business cycle frequencies in OECD economies. In particular, we find that the nontraded sector share of output is as volatile as aggregate GDP, and that for most countries, the nontraded sector is distinctly countercyclical. While the standard international real business cycle model has difficulty in accounting for these properties of the data, an extended model which allows for sectoral adjustment along both the intensive and extensive margins does a much better job in replicating the volatilities and co-movements in the data. In addition, the model provides a closer match between theory and data with respect to the correlation between relative consumption growth and real exchange rate changes, a key measure of international risk-sharing. |
| JEL: | F3 F4 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17289&r=opm |
| By: | Nabil Aflouk (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Se-Eun Jeong (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jacques Mazier (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII); Jamel Saadaoui (CEPN - Centre d'économie de l'Université de Paris Nord - CNRS : UMR7115 - Université Paris-Nord - Paris XIII) |
| Abstract: | Since the mid-1990s, the world imbalances have increased significantly with a large US current deficit facing Asian surpluses, mainly Chinese. Since 2007, a partial reduction of these imbalances has been obtained, largely thanks to production's decreases, without large exchange rate adjustments. The Asian surpluses have remained important. The objective of this paper is to examine the exchange rate misalignments (ERM) of the main emerging countries in Asia and Latin America since the 1980s, so as to shed light on the 2000s by a long term analysis and compare with the industrialized countries' case. Our results confirm that ERM have been reduced since the mid-2000s at the world level, but the dollar remained overvalued against the East Asian countries, except the yen. Chinese, Indian and Brazilian exchange rate policies have been much contrasted since the 1980s. The Indian rupee has been more often overvalued while a more balance situation prevailed in Brazil only since the 2000s. The Latin American countries have faced wider and more dispersed ERM and current imbalances than East Asian countries. But Argentina, Chile and Uruguay benefits now of undervalued currencies while Mexico is closer to equilibrium. |
| Keywords: | Equilibrium Exchange Rate, Current Account Balance, Macroeconomic Balance, Emerging Countries |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:halshs-00484808&r=opm |
| By: | Klaus Adam; Pei Kuang; Albert Marcet |
| Abstract: | A simple open economy asset pricing model can account for the house price and current account dynamics in the G7 over the years 2001-2008. The model features rational households, but assumes that households entertain subjective beliefs about price behavior and update these using Bayes' rule. The resulting beliefs dynamics considerably propagate economic shocks and crucially contribute to replicating the empirical evidence. Belief dynamics can temporarily delink house prices from fundamentals, so that low interest rates can fuel a house price boom. House price booms, however, are not necessarily synchronized across countries and the model correctly predicts the heterogeneous response of house prices across the G7, following the fall in real interest rates at the beginning of the millennium. The response to interest rates depends sensitively on agents' beliefs at the time of the interest rate reduction, which are a function of the prior history of disturbances hitting the economy. According to the model, the US house price boom could have been largely avoided, if real interest rates had decreased by less after the year 2000. |
| Keywords: | interest rates, house prices, short-term capital movements |
| JEL: | F41 F32 E43 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp1064&r=opm |
| By: | Gonzalo Varela (Department of Economics, University of Sussex) |
| Abstract: | Southern Cone economies exhibit a high record of exchange rate volatility. In this context, rms tend to contract dollar debt, irrespective of their trade orientation, and without available hedging instruments. This exposes them to bankruptcy risk, in the event of large exchange rate movements. This paper provides a framework to analyze the output eect of exchange rate uncertainty in that context, by focusing on the channel uncertainty-output that operates through the nancial strategy of the rm. We nd that increases in exchange rate uncertainty increase the probability of bankruptcy, thus increasing expected marginal bankruptcy costs, and reducing optimal output of a risk-neutral rm. Furthermore, we nd that rms with higher than average liquidity balances will face lower marginal bankruptcy costs, thus producing more than the average rm. The model displays persistence, as any shock to current prots aects future liquidity balances, and so, future output. This framework can easily be extended to explain the response of other rms' decisions to exchange rate uncertainty, such as investment. |
| Keywords: | Exchange rates, Bankruptcy Costs, Production Under Uncertainty |
| JEL: | F31 G33 D81 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:sus:susewp:2411&r=opm |
| By: | Anderson, Kym; Brückner, Markus |
| Abstract: | To what extent has Sub-Saharan Africa’s slow economic growth over the past five decades been due to price and trade policies that have discouraged production of agricultural relative to non-agricultural tradables? This paper uses a new set of estimates of policy distortions to relative prices to address this question econometrically. We first test if these policy distortions respond to economic growth, using rainfall and international commodity price shocks as instrumental variables. We find that on impact there is no significant response of relative price distortions to changes in real GDP per capita. We then test the reverse proposition and find a statistically significant and sizable negative effect of relative price distortions on the growth rate of Sub-Saharan African countries. Our fixed effects estimates suggest that, during 1960-2005, a one standard deviation increase in distortions to relative prices reduced the region’s real GDP per capita growth rate by about half a percentage point per annum. |
| Keywords: | Agricultural incentives; Economic growth; Trade restrictions |
| JEL: | F14 F43 N17 O13 O55 Q18 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:8530&r=opm |
| By: | Vahagn Galstyan (Trinity College Dublin, IIIS); Philip Lane (Trinity College Dublin, IIIS and CEPR) |
| Abstract: | There has been considerable bilateral variation in the pattern of portfolio capital flows during the global financial crisis: for a given destination, investors from different countries adjusted their holdings to different degrees. We show that the size of the initial bilateral holding, geographical distance, common language, the level of trade and common institutional linkages help to explain the pattern of adjustment. These bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries. |
| Keywords: | International capital flows, International portfolios, External adjustment |
| JEL: | F30 F41 G15 |
| Date: | 2011–08 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp366&r=opm |
| By: | Anders Akerman; Anna Larsson; Alireza Naghavi |
| Abstract: | Data on the growth performances of countries with similar comparative (dis)advantage and political institutions reveal a striking variation across world regions. While some former autoc- racies such as the East Asian growth miracles have done remarkably well; others such as the Latin American economies have grown at much lower rates. In this paper; we propose a political economy explanation of these diverging paths of development by addressing the preferences of the country?s political elite. We build a theoretical framework where factors of production owned by the political elites di¤er across countries. In each country; the incumbent autocrat will cater to the preferences of the elites when setting trade policy and the property rights regime. We show how stronger property rights may lead to capital accumulation and labor reallocation to the manufacturing sector. This; in turn; can lead to a shift in the comparative advantage; a decision to open up to trade and an in?ow of more productive foreign capital. Consistent with a set of stylised facts on East Asia and Latin America; we argue that strong property rights are crucial for success upon globalization. |
| Keywords: | Autocracy; Growth; Political Elites; Landowners; Capitalists; Growth Miracles; Trade; Comparative Advantage; Capital Mobility; Property Rights |
| JEL: | F10 F20 P14 P16 O10 O24 |
| Date: | 2011–06 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:065&r=opm |
| By: | Raphael Anton Auer; Kathrin Degen; Andreas M. Fischer |
| Abstract: | What is the impact of import competition from low-wage countries (LWCs) on inflationary pressure in Europe? This paper examines whether labor-intensive exports from emerging Europe, Asia, and other global regions have a uniform impact on producer prices in Germany, France, Italy, Sweden, and the United Kingdom. In a panel covering 110 (4-digit) NACE industries from 1995 to 2008, instrumental variable estimations predict that LWC import competition is associated with strong price effects. More specifically, when LWC exporters capture 1% of European market share, producer prices decrease by about 3%. In contrast, no effect is present for import competition from low-wage countries in Central and Eastern Europe. Next, decomposing the mechanisms that underlie the LWC price effect on European industry, we show that import competition has a pronounced effect on average productivity and only a muted effect on wages. Owing to the exit of firms and the increase in productivity, LWC import competition is shown to have substantially reduced employment in the European manufacturing sector. |
| Keywords: | intra-industry trade, comparative advantage, globalization |
| JEL: | F11 F12 F14 F16 F40 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2011-09&r=opm |
| By: | Onur, Esen |
| Abstract: | This paper offers a dynamic model of the foreign exchange market where some investors in the market are more informed than others. By adjusting the proportion of informed investors in the market, it is shown that the disconnect between macroeconomic variables and the exchange rate is sensitive to the amount of asymmetric information in the market. A surprising fi nding is that this disconnect is bigger when the proportion of informed investors in the market is smaller. |
| Keywords: | Market microstructure; Foreign exchange market; Asymmetric information |
| JEL: | D82 F31 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:32772&r=opm |