nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒09‒22
twelve papers chosen by
Martin Berka
Victoria University of Wellington

  1. The Financial Crisis and the Geography of Wealth Transfers By Gourinchas, Pierre-Olivier; Rey, Hélène; Truempler, Kai Alexander
  2. International Financial Integration and National Price Levels: The Role of the Exchange Rate Regime By Mathias Hoffmann; Peter Tillmann
  3. Making sense of China’s astronomical foreign reserves By Rodolfo E. Manuelli; Adrian Peralta-Alva
  4. The Fiscal Stimulus of 2009-10: Trade Openness, Fiscal Space and Exchange Rate Adjustment By Joshua Aizenman; Yothin Jinjarak
  5. Oil Shocks in a Global Perspective: Are they Really that Bad? By Tobias N. Rasmussen; Agustin Roitman
  6. Global Imbalances and the Paradox of Thrift By W. Max Corden
  7. Are Middle Eastern Current Account Imbalances Excessive? By Samya Beidas-Strom; Paul Cashin
  8. The Natural Rate of Interest in a Small Open Economy By Fernando de Holanda Barbosa
  9. A further examination of the export-led growth hypothesis By Dreger, Christian; Herzer, Dierk
  10. Emerging economies in the 2000s:Real decoupling and financial recoupling By Eduardo Levy Yeyati; Tomas Williams
  11. Middle East and North African countries' vulnerability to commodity price increases By Loening, Josef L.; Ianchovichina , Elena
  12. Exchange rate determination in Jamaica: A market microstructures and macroeconomic fundamentals approach By Wright, Allan S; Craigwell, Roland C; RamjeeSingh, Diaram

  1. By: Gourinchas, Pierre-Olivier; Rey, Hélène; Truempler, Kai Alexander
    Abstract: This paper studies the geography of wealth transfers during the 2008 global financial crisis. We construct valuation changes on bilateral external positions in equity, direct investment and portfolio debt at the height of the crisis to map who benefited and who lost on their external exposure. We find a very diverse set of fortunes governed by the structure of countries' external portfolios. In particular, we are able to relate the gains and losses on debt portfolios to the country's exposure to ABCP conduits and the extent of dollar shortage.
    Keywords: global financial crisis; international monetary system; reserve currency; valuation effects
    JEL: F32 F33
    Date: 2011–09
  2. By: Mathias Hoffmann (Deutsche Bundesbank); Peter Tillmann (University of Giessen)
    Abstract: How does international .financial integration affect national price levels? Panel evidence for 54 industrialized and emerging countries shows that a larger ratio of foreign assets and liabilities to GDP, our measure of international .financial integration, increases the national price level under .fixed and intermediate exchange rate regimes and lowers the price level under .floating exchange rates. This paper formulates a two-country open economy sticky-price model under either segmented or complete asset markets that is able to replicate these stylized facts. It is shown that the effect of financial integration, i.e. moving from segmented to complete asset markets, is regime-dependent. Under managed exchange rates financial integration raises the national price level. Under .floating exchange rates, however financial integration lowers national price levels. Thus, the paper proposes a novel argument to rationalize systematic deviations from PPP.
    Keywords: international financial integration, exchange rate regime, national price level, PPP, foreign asset position
    JEL: F21 F36 F41
    Date: 2011
  3. By: Rodolfo E. Manuelli; Adrian Peralta-Alva
    Abstract: The current global-imbalance literature (which explains why capital flows from poor to rich countries) cannot explain China’s foreign asset positions because capital cannot flow out of China under capital controls. A related but deeper puzzle that this literature fails to address is China’s high saving rate despite an astonishingly rapid income growth rate. This paper argues that understanding China’s massive foreign reserves must start with a basic trade model (e.g., Melitz, 2003) in which a growing trade volume is driven by an elastic labor supply and rapid productivity growth. Imbalanced trade will then emerge if there exist uninsured risks (which remain constant as the economy grows) and exporters are borrowing constrained. In this case, fast growth can lead to excessively high saving rates and trade surpluses. Thus, a modified Melitz model featuring rapid productivity growth, elastic labor supply, and incomplete markets can qualitatively and quantitatively explain China’s massive (and "passive") accumulation of low-yield foreign reserves. The simple infinite-horizon model is hence consistent with the stylized fact that high saving is the consequence of high growth instead of the opposite (Modigliani and Cao, 2004), which the permanent income theory and global-imbalance literature fail to predict.
    Keywords: China ; Saving and investment - China
    Date: 2011
  4. By: Joshua Aizenman; Yothin Jinjarak
    Abstract: This paper studies the cross-country variation of the fiscal stimulus and the exchange rate adjustment propagated by the global crisis of 2008-9, identifying the role of economic structure in accounting for the heterogeneity of response. We find that greater de facto fiscal space prior to the global crisis and lower trade openness were associated with a higher fiscal stimulus/GDP during 2009-2010 (where the de facto fiscal space is the inverse of the average tax-years it would take to repay the public debt). Lowering the 2006 public debt/average tax base from the level of low-income countries (5.94) down to the average level of the Euro minus the Euro-area peripheral countries (1.97), was associated with a larger crisis stimulus in 2009-11 of 2.78 GDP percentage points. Joint estimation of fiscal stimuli and exchange rate depreciations indicates that higher trade openness was associated with a smaller fiscal stimulus and a higher depreciation rate during the crisis. Overall, the results are in line with the predictions of the neo-Keynesian open-economy model.
    JEL: E62 F42 O23
    Date: 2011–09
  5. By: Tobias N. Rasmussen; Agustin Roitman
    Abstract: Using a comprehensive global dataset, we outline stylized facts characterizing relationships between crude oil prices and macroeconomic developments across the world. Approaching the data from several angles, we find that the impact of higher oil prices on oil-importing economies is generally small: a 25 percent increase in oil prices typically causes GDP to fall by about half of one percent or less. While cross-country differences in impact are found to depend mainly on the relative size of oil imports, we also show that oil price shocks are not always costly for oil-importing countries: although higher oil prices increase the import bill, there are partly offsetting increases in external receipts. We provide a small open economy model illustrating the main transmission channels of oil shocks, and show how the recycling of petrodollars may mitigate the impact.
    Keywords: Cross country analysis , Developing countries , Economic models , Emerging markets , External shocks , Imports , Oil prices , Price increases ,
    Date: 2011–08–11
  6. By: W. Max Corden (Department of Economics, The University of Melbourne)
    Abstract: Global imbalances refer to current account surpluses and deficits. This is a form of international intertemporal trade, and the neoclassical approach suggests that there are gains from trade, and hence there may be no problem created by global imbalances. This paper presents qualifications to this argument. A crucial concept is the "return journey", namely the need for borrowers to pay interest (or dividends) and eventually to be able to repay. Thus savings must lead to investment, which provides the future resources to enable the return journey. If borrowing is used to finance current consumption, wars, or unwise ("unfruitful") investment, such as excessive housing construction, the result will be a crisis. In this way the high net savings of some countries actually led to the recent crisis. This is a new version of Keynes’ “paradox of thrift” The central issue on which this paper focuses is the failure of high net savings by the “savings glut” countries to lead to fruitful investment in other countries, both in the United States and in developing countries. Hence a crisis was caused by the lack of provision for the return journey.
    Keywords: Global imbalances, paradox of thrift, financial crisis, instability of capital flows, world savings glut, quantitative easing
    JEL: F32 F34
    Date: 2011–07
  7. By: Samya Beidas-Strom; Paul Cashin
    Abstract: Employing a dynamic panel regression, this study estimates the medium-term current account position for three subgroups of emerging market and developing countries with shared economic characteristics. The fundamental determinants of the macroeconomic balance approach to current account determination (arising from the IMF’s Consultative Group on Exchange Rate (CGER)) are augmented by determinants relevant to Middle Eastern economies’ current account positions. The study also assesses the deviation of the actual medium-term current account position of three Middle Eastern subgroups of countries (emerging markets; low-income and fragile economies; and net oil exporters) from their medium-term current account norms. Key findings are that: augmentation of the fundamental determinants yields plausible Middle Eastern current account norms; and in comparison with the medium-term current account norm, the actual and projected current account imbalances of each of the three subgroups are typically not excessive.
    Keywords: Cross country analysis , Current account balances , Developing countries , Emerging markets , Middle East and Central Asia , Oil exporting countries ,
    Date: 2011–08–11
  8. By: Fernando de Holanda Barbosa
    Abstract: The goal of this paper is two-fold. Firstly, this paper shows that the natural rate of interest in a small open economy, with access to the world capital markets, is equal to the international real rate of interest. We show this property by using the infinitely-lived overlapping generations model and we use this model to analyze both fixed and flexible exchange rate regimes. Secondly, this paper also shows that the empirical implausibility hypothesis embedded in the infinitely-lived representative-agent model, with complete asset markets, turns this framework not appropriate for a small open economy.
    Keywords: Small open economy; Natural rate of interest; Complete and incomplete asset markets
    JEL: F41
    Date: 2011
  9. By: Dreger, Christian; Herzer, Dierk
    Abstract: This paper challenges the common view that exports generally contribute more to GDP growth than a pure change in export volume, as the export-led growth hypothesis predicts. Applying panel cointegration techniques to a production function with non-export GDP as the dependent variable, we find for a sample of 45 developing countries that: (i) exports have a positive short-run effect on non-export GDP and vice versa (short-run bidirectional causality), (ii) the long-run effect of exports on non-export output, however, is negative on average, but (iii) there are large differences in the longrun effect of exports on non-export GDP across countries. Cross-sectional regressions indicate that these cross-country differences in the long-run effect of exports on nonexport GDP are significantly negatively related to cross-country differences in primary export dependence and business and labor market regulation. In contrast, there is no significant association between the growth effect of exports and the capacity of a country to absorb new knowledge. --
    Keywords: Export-led growth,Developing countries,Panel cointegration
    JEL: F43 O11 C23
    Date: 2011
  10. By: Eduardo Levy Yeyati; Tomas Williams
    Date: 2011
  11. By: Loening, Josef L.; Ianchovichina , Elena
    Abstract: New estimates of pass-through coefficients for the Middle East and North Africa indicate that a rise of global food prices is transmitted to a significant degree into domestic food prices. Over the past decade, transmission from international to domestic prices has been particularly high for Egypt, Iraq, Djibouti, United Arab Emirates and West Bank and Gaza, while being particularly low in Tunisia and Algeria. Where international food price increases translate into domestic prices, overall inflation tends to be higher.
    Keywords: Price transmission, inflation, food prices, Middle East and North Africa
    JEL: O23 E31 N15 N17
    Date: 2011–05
  12. By: Wright, Allan S; Craigwell, Roland C; RamjeeSingh, Diaram
    Abstract: This paper uses hybrid models that combine economic fundamentals and micro-market variables to investigate the behaviour of US/Jamaica exchange rate. The co-integration analysis applied to post 2000 monthly data indicates, in contrast to previous studies done on Jamaica that these models give a better fit, produce parameter estimates with sensible signs and sizes and allow for long run relationships which are not present when the micro-based variables are excluded.
    Keywords: Exchange Rates; Microstructure; Co-integration
    JEL: F4 F3 C22
    Date: 2011

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