nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒10‒09
nine papers chosen by
Martin Berka
Victoria University of Wellington

  1. Trade adjustment and productivity in large crises By Gita Gopinath; Brent Neiman
  2. A Many-Country Model of Industrialization By Holger Breinlich; Alejandro Cuñat
  3. Financial integration and international business cycle co-movement: the role of balance sheets By Scott Davis
  4. Emerging economies in the 2000s:Real decoupling and financial recoupling By Eduardo Levy Yeyati; Tomas Williams
  5. A sentiment-based explanation of the forward premium puzzle By Jianfeng Yu
  6. International Business Cycle Comovement: Trade and Foreign Direct Investment By Jos Jansen; Ad Stokman
  7. Optimal Government Spending Reversal in a Small Open Economy By Shigeto Kitano; Kenya Takaku
  8. Opposition to capital market opening By Engler, Philipp; Wulff, Alexander
  9. Empirical testing of Balassa-Samuelson hypothesis with German and UK data By Josheski, Dushko; Koteski, Cane; Lazarov , Darko

  1. By: Gita Gopinath; Brent Neiman
    Abstract: The authors empirically characterize the mechanics of trade adjustment during the Argentine crisis using detailed firm-level customs data covering the universe of import transactions made during 1996-2008. Their main findings are as follows: First, the extensive margin defined as the entry and exit of firms or of products (at the country level) plays a small role during the crisis. Second, the sub-extensive margin defined as the churning of inputs within firms plays a sizeable role in aggregate adjustment. This implies that the true increase in input costs exceeds that imputed from conventional price indices. Third, the relative importance of these margins and of overall trade adjustment varies with firm size. Motivated by these facts, we build a model of trade in intermediate inputs with heterogeneous firms, fixed import costs, and round-about production to evaluate the channels through which a collapse in imports affects TFP (total factor productivity) in manufacturing. Measured aggregate productivity in the sector depends on within-firm adjustments to the varieties imported as well as the joint distribution of each firm's technology and the share of imports in its total spending on inputs. We simulate an imported input cost shock and show that these mechanisms can deliver quantitatively significant declines in manufacturing TFP.
    Keywords: International trade - Argentina
    Date: 2011
  2. By: Holger Breinlich; Alejandro Cuñat
    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: Industrialization, economic geography, international trade
    JEL: F11 F12 F14 O14
    Date: 2011–09
  3. By: Scott Davis
    Abstract: This paper investigates the effect of international financial integration on international business cycle co-movement. We first show with a reduced form empirical approach how capital market integration (equity) has a negative effect on business cycle co-movement while credit market integration (debt) has a positive effect. We then construct a model that can replicate these empirical results.> ; In the model, capital market integration is modeled as crossborder equity ownership and involves wealth effects. Credit market integration is modeled as cross-border borrowing and lending between credit constrained entrepreneurs and banks, and thus involves balance sheet effects. The wealth effect tends to reduce cross-country output correlation, but balance sheet effects serve to increase correlation as a negative shock in one country causes loan losses on the balance sheets of foreign banks.> ; In versions of the model with a financial accelerator and balance sheet effects, credit market integration has a positive effect on cyclical correlation. However, in versions of the model without the financial accelerator and balance sheet effects, credit market integration has a negative effect on cyclical correlation.
    Keywords: International finance ; Business cycles ; Equity ; Debt
    Date: 2011
  4. By: Eduardo Levy Yeyati; Tomas Williams
    Date: 2011
  5. By: Jianfeng Yu
    Abstract: This paper presents a sentiment-based explanation of the forward premium puzzle. Agents over- or underestimate the growth rate of the economy. All else equal, when perceived domestic growth is higher than perceived foreign growth, the domestic interest rate is higher than the foreign interest rate. At the same time, an econometrician would expect an increase in the home currency value. Together, the model with investor misperception can account for the forward premium puzzle.> ; In addition, it helps explain the low correlation of consumption growth differentials and exchange rate growth and the high stock market correlation across countries, despite a low correlation of fundamentals. Finally, this paper provides direct empirical evidence supporting the mechanism in the sentiment-based explanation.
    Keywords: Asset pricing ; Foreign exchange ; Financial markets
    Date: 2011
  6. By: Jos Jansen; Ad Stokman
    Abstract: This paper investigates the relationship between foreign direct investment (FDI) and business cycle synchronization in the period 1982–2010 for eight industrialized countries. We find that more synchronized business cycles are associated with stronger FDI relations during 1995–2010, but that they are mainly associated with stronger trade linkages before 1995. More intensive FDI links are also associated with a greater vulnerability to lagged output spillovers from abroad, whereas trade links are not. Our findings suggest that FDI has become a separate channel through which economies may affect each other and that FDI stocks are now an essential aspect of economic interdependence.
    Keywords: business cycle synchronization; international linkages; trade; FDI; vertical integration
    JEL: F21
    Date: 2011–09
  7. By: Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University); Kenya Takaku (Graduate School of Economics, Nagoya University)
    Abstract: This paper reexamines optimal debt stabilization policy in a small open economy borrowing from abroad. We incorporate spending reversals as a policy option available to policy-makers for stabilizing public debt. Results show that spending reversals can be welfare-improving and that there exists an optimal degree of spending reversal if the debt elasticity of the country-specific risk premium is high. The tradeoff between smoothing the tax rate and stabilizing the sovereign interest rate in the discussion of optimal tax rate policy (Bi, 2010) does not arise. Spending reversals can lower both the tax rate volatility and that of the interest rate.
    Keywords: sovereign debt, debt stabilization, welfare, spending reversals, small open economy
    JEL: F41
    Date: 2011–09
  8. By: Engler, Philipp; Wulff, Alexander
    Abstract: We employ a neoclassical growth model to assess the impact of financial liberalization in a developing country on capital owners` and workers` consumption and welfare. We find in a baseline calibration for an average non-OECD country that capitalists suffer a 42 percent reduction in permanent consumption because capital inflows reduce their return to capital while workers gain 8 percent of permanent consumption because capital inflows increase wages. These huge gross impacts contrast with the small positive net effect found in a neoclassical represent agent model by Gourinchas and Jeanne (2006). We further show that the result for capitalists is insensitive to enhanced productivity catch-up processes induced by capital inflows. Our findings can help explain why poorer countries tend to be less financially open as capitalists` losses are largest for countries with the lowest capital stocks, inducing strong opposition to capital market opening. --
    Keywords: Capital flows,international financial integration,growth,neoclassical model,heterogenous agents
    JEL: F2 F3 F43 E13 E25 O11
    Date: 2011
  9. By: Josheski, Dushko; Koteski, Cane; Lazarov , Darko
    Abstract: There are a lot of studies that test Ballasa –Samuelson hypothesis also known as Harrod-BalassaSamuelson effect directly via the effect of productivity, one possible explanation is that PER Capita GDP is not good explanation for productivity (.i.e. Labor productivity) differences; an increase (decrease) in relative efficiency of the distribution sector with respect to foreign countries induces depreciation (appreciation) of the exchange rate. After we obtained the number of co-integrated vectors we continue further to see whether the CV tells us something about the long run relationship into the model, likelihood ratio test of exactly identified restrictions test confirms that constant is insignificant variable therefore we can confirm that there is long-run relationship in which the changes in Exchange rate are positively correlated with the changes of ratio of German Consumer Price Index (CPI) to the UK Retail Price Index (RPI). In order to test for relative PPP to support the theoretical relationship between the variables, restrictions are put on the PPP knowing that PPP and that downward movement in the series indicates increase of UK price level relative to German price level. In each EC model there is an EC mechanism and coefficient on the co integrating vector measures the rate per period at which one of the endogenous variables adjusts. In the first equation the error correction mechanism is highly significant and negative. If the system is out of equilibrium, alteration in the change of the exchange rates will be downward (everything else ceteris paribus) compensating around 68% of the disequilibrium per year. In the second equation error correction mechanism is also highly significant but positive meaning that if the system is in disequilibrium changes of change in the ratio of German CPI relative to UK Retail Price index will rise offsetting 15% of the disequilibrium per year until the equilibrium rate of exchange rate will be achieved. Model implies German Labor productivity to UK Labor productivity ratio doesn’t have significant influence on explaining on relative change on prices not even on theexchange rate contrary to Pugh, Beachil study
    Keywords: Purchasing power parity; Exchange rate; co integration; error correction model; productivity; Consumer Price Index; Retail Price Index
    JEL: B23 E6
    Date: 2011–09–29

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