nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒11‒07
sixteen papers chosen by
Martin Berka
Victoria University of Wellington

  1. Trade integration, restructuring and global imbalances: A tale of two countries By Teng, Faxin; Kamenev, Dmitry; Meier, Claudia; Klein, Martin
  2. On the Connection between Intertemporal and Intra-temporal Trades By Jiandong Ju; Kang Shi; Shang-Jin Wei
  3. Panel unit root tests of purchasing power parity hypothesis: Evidence from Turkey By Gozgor, Giray
  4. Comparative Advantage, Service Trade, and Global Imbalances By Alessandro Barattieri
  5. Misalignments and Dynamics of Real Exchange Rates in the CFA Franc Zone By Cécile Couharde; Issiaka Coulibaly; Olivier Damette
  6. Can Oil Prices Forecast Exchange Rates? By Ferraro, Domenico; Rogoff, Kenneth; Rossi, Barbara
  7. Cross-hedging of correlated exchange rates By Broll, Udo; Wong, Kit Pong
  8. Real exchange rates,domestic and foreign savings: the missing link By Paulo Gala; Marcos Rocha
  9. Are Euro exchange rates markets efficient? New evidence from a large panel By Adrian Wai-Kong Cheung; Jen-Je Su; Astrophel Kim Choo
  10. Real Exchange Rate,Income Distribution and Structural Change in a Modified Kaldorian Modelof Demand-Led Growth By Rogério Sobreira Bezerra; José Luis Oreiro
  11. Divergent competitiveness in the eurozone and the optimum currency area theory By João Rebelo Barbosa; Rui Henrique Alves
  12. The Size Distribution of Farms and International Productivity Differences By Tasso Adamopoulos; Diego Restuccia
  13. A New Open Economy Macroeconomic Model with Endogenous Portfolio Diversifi…cation and Firms Entry By Marta Arespa
  14. The international role of the dollar: Does it matter if this changes? By Linda Goldberg
  15. The “Forward Premium Puzzle” and the Sovereign Default Risk By Virginie Coudert; Valérie Mignon
  16. A Linder Hypothesis for Foreign Direct Investment By Pablo D. Fajgelbaum; Gene M. Grossman; Elhanan Helpman

  1. By: Teng, Faxin; Kamenev, Dmitry; Meier, Claudia; Klein, Martin
    Abstract: China is widely seen as one of the sources of global macroeconomic imbalances. Its persistent current account surplus and capital exports to the United States are even cited as one of the causes of the global financial crisis. The most common explanation traces China's current acca ount surplus to a mismatch between saving and investment due to inefficiently low domestic demand. We challenge this explanation. Our argument rests on an analogy that we construct between two countries generally thought to be very different: Russia and China. Russia, a raw materials exporting country, has been running current account surpluses similar to China's in relation to GDP. As for most raw materials exporting countries this is considered normal, reflecting efficient reinvestment of wealth from natural resources in financial assets. We show that a similar efficiency argument can be constructed for China, although the nature of wealth that is reinvested in financial assets is different in the two countries. Our analysis implies that China's current account surpluses can be expected to disappear over the long horizon - although the time when this will happen may still be very far away. Moreover, an appreciation of the Chinese currency may not have the desired effect of mitigating the country's current account surplus as a weakening in competitiveness is counterbalanced by a strengthening of investment motives. --
    Date: 2011
  2. By: Jiandong Ju; Kang Shi; Shang-Jin Wei
    Abstract: Sticky (or slow-adjusting) current accounts are observed in many countries. This paper explores the role of domestic factor market flexibility in understanding the phenomenon. To do so, we consider multiple tradable sectors with different factor intensities and allow substitution between intertemporal trade (current account adjustment) and intra-temporal trade (goods trade) in a dynamic general equilibrium model. An economy’s response to a shock generally involves a combination of a change in the composition of goods trade and a change in the current account. Flexible factor markets reduce the need for the current account to adjust. On the other hand, the more rigid the factor markets, the larger the size of current account adjustment relative to the volume of goods trade, and the slower the speed of adjustment of the current account towards its long-run equilibrium. We present empirical evidence in support of the theory.
    JEL: F30 F41
    Date: 2011–10
  3. By: Gozgor, Giray
    Abstract: In this paper, we employ some front page panel unit root tests to examine the validity of the purchasing power parity hypothesis in Turkey. Using monthly observations panel data of nine major county’s currency dates January 2003 through April 2010, we find that panel unit root tests are not rejected the mean-reversion of real exchange rates. Thus, the empirical results indicate significant support for the purchasing power parity holds in Turkey
    Keywords: Purchasing Power Parity; Real Exchange Rates; Panel Unit Root Tests; Floating Exchange Rates
    JEL: F31
    Date: 2011–01–01
  4. By: Alessandro Barattieri
    Abstract: The large current account deficit of the U.S. is the result of a large deficit in the goods balance and a modest surplus in the service balance. The opposite is true for Japan, Germany and China. Moreover, I document the emergence from the mid-nineties of a strong negative relation between specialization in export of services and current account balances in a large sample of OECD and developing countries. Starting from these new stylized facts, I propose in this paper a “service hypothesis” for global imbalances, a new explanation based on the interplay between the U.S. comparative advantage in services and the asymmetric trade liberalization process in goods trade versus service trade that took place in the last 15 years. First, I use a structural gravity model to show that service trade liberalization lagged behind goods trade liberalization, and I quantify the extent of this asymmetry. Second, I show that a simple two-period model can rationalize the emergence of current account deficits in the presence of such asymmetric liberalization. The key inter-temporal mechanism is the asymmetric timing of trade policies, which affects savings decisions. Finally, I explore the quantitative relevance of this explanation for global imbalances. A multi-period version of the model, fed with the asymmetric trade liberalization path found in the data, generates a current account deficit of about 1% of GDP (roughly 20% of what was observed in the U.S. in 2006).
    Keywords: Comparative Advantage, Service Trade, Global Imbalances
    JEL: F1 F32 F40
    Date: 2011
  5. By: Cécile Couharde; Issiaka Coulibaly; Olivier Damette
    Abstract: In this paper, we analyse currencies' misalignments of the CFA zone countries and the adjustment process of their real effective exchange rates towards their equilibrium level over the period 1985-2007. To this end, we firstly estimate, using panel cointegration techniques, a long term relationship between the real effective exchange rate and economic fundamentals. Secondly, we estimate a panel smooth transition error correction model in order to take into account non linearities in the convergence process of real exchange rates towards their equilibrium level. Two main results emerge from our analysis. Firstly, the real appreciation of effective exchange rates in the CFA zone countries from the 2000s did not translate, in 2007, into a real overvaluation comparable to that occurring before the devaluation of the CFA franc in 1994. However, some countries are exceptions, indicating a strong heterogeneity within the CFA zone. Finally, the convergence process of real effective exchange rates towards their equilibrium level also differs substantially between country groups. These results tend to show the difficulty to apply a single exchange rate policy in the CFA zone and rather call for further coordination and policy harmonization between the countries.
    Keywords: CFA zone, misalignments, panel smooth transition model
    JEL: C23 F31 O1
    Date: 2011
  6. By: Ferraro, Domenico; Rogoff, Kenneth; Rossi, Barbara
    Abstract: This paper investigates whether oil prices have a reliable and stable out-of-sample relationship with the Canadian/U.S dollar nominal exchange rate. Despite state-of-the-art methodologies, we find little systematic relation between oil prices and the exchange rate at the monthly and quarterly frequencies. In contrast, the main contribution is to show the existence of a very short-term relationship at the daily frequency, which is rather robust and holds no matter whether we use contemporaneous (realized) or lagged oil prices in our regression. However, in the latter case the predictive ability is ephemeral, mostly appearing after instabilities have been appropriately taken into account.
    Keywords: exchange rates
    JEL: C22 C53 F31 F37
    Date: 2011–11
  7. By: Broll, Udo; Wong, Kit Pong
    Abstract: This paper examines the behavior of a competitive exporting firm that exports to two foreign countries under multiple sources of exchange rate uncertainty. The firm has to cross-hedge its exchange rate risk exposure because there is only a forward market between the domestic currency and one foreign country's currency. When the firm optimally exports to both foreign countries, we show that the firm's production decision is independent of the firm's risk attitude and of the underlying exchange rate uncertainty. We show further that the firm's optimal forward position is an over-hedge or an under-hedge, depending on whether the two random exchange rates are positively or negatively correlated in the sense of expectation dependence. --
    Keywords: correlated exchange rates,cross-hedging,exports,production
    JEL: D21 D24 D81 F31
    Date: 2011
  8. By: Paulo Gala; Marcos Rocha
    Date: 2011
  9. By: Adrian Wai-Kong Cheung; Jen-Je Su; Astrophel Kim Choo
    Keywords: market efficiency, serial uncorrelatedness, Euro exchange rate markets
    JEL: F31 C12 C22 G15
    Date: 2011–09
  10. By: Rogério Sobreira Bezerra; José Luis Oreiro
    Date: 2011
  11. By: João Rebelo Barbosa (Faculdade de Economia, Universidade do Porto); Rui Henrique Alves (CEF.UP, Faculdade de Economia, Universidade do Porto)
    Abstract: As the euro is on its second decade, the European sovereign debt crisis and the ever more evident disparities in competitiveness among member states are prompting many to question whether monetary union is bringing more benefits than costs. The optimum currency area (OCA) theory provides a framework with several criteria for such analysis. Most literature focuses either or on OCA individual criteria or on an aggregate analysis of these criteria, using meta-properties. Differently, we start by a descriptive analysis of the first twelve euro countries under six criteria between 1999 and 2009. We detect signs of labour geographic mobility. However, nominal wages growth largely outpaced productivity growth in some periphery countries, resulting in losses of competitiveness. Financial markets seem to be deeply integrated. Total intra-EMU trade increased, though core countries seem to have benefited more, as their relative competitiveness improved. We detect no increased homogeneity of exports structures of EMU countries. Inflation rates alternated between periods of convergence and of divergence, though prices levels consistently converged between EMU countries. Finally, budgetary indiscipline was frequent preventing several countries from having fiscal room to face asymmetrical shocks.We conclude by estimating the impact of five OCA criteria on countries’ relative competitiveness, using real effective exchange rates as a proxy. Differences in the growth of unit labour costs, the dissimilarity of trade and the differences in output growth were found to be significant. With a higher confidence level, bilateral trade is significant and points towards the specialization paradigm. Thus, we identify some causes of the divergent competitiveness between some EMU countries that contributed to weaker economic growth in parts of the euro area.
    Keywords: Optimum currency area, Euro Area; Economic and Monetary Union (EMU), Competitiveness
    JEL: E42 E63 F15 F33 F41
    Date: 2011–11
  12. By: Tasso Adamopoulos; Diego Restuccia
    Abstract: There is a 34-fold difference in average farm size (land per farm) between rich and poor countries and striking differences in their size distributions. Since labor productivity is much higher in large relative to small farms, we study the determinants of farm-size differences across countries and their impact on agricultural and aggregate productivity. We develop a quantitative model of agriculture and non-agriculture that features a non-degenerate size distribution of farms. We find that measured aggregate factors such as capital, land, and economy-wide productivity cannot account for more than 1/4 of the observed differences in farm size and productivity. We argue that, among the possible explanations, farm-level policies that misallocate resources from large to small farms have the most potential to account for the remaining differences. Such farm-size distortions are prevalent in poor countries. We quantify the effects of two specific policies in developing countries: (a) a land reform that imposes a ceiling on farm size and (b) a progressive land tax. We find that each individual policy generates a reduction of 3 to 7% in average size and productivity.
    Keywords: aggregate productivity, agriculture, farm-size distortions, misallocation
    JEL: O11 O13 O4 E0
    Date: 2011–10–27
  13. By: Marta Arespa (CREB, Universitat de Barcelona.)
    Abstract: This paper provides a new benchmark for the analysis of the international diversi…cation puzzle in a tractable new open economy macroeconomic model. Building on Cole and Obstfeld (1991) and Heathcote and Perri (2009), this model speci…es an equilibrium model of perfect risk sharing in incomplete markets, with endogenous portfolios and number of varieties. Equity home bias may not be a puzzle but a perfectly optimal allocation for hedging risk. In contrast to previous work, the model shows that: (i) optimal international portfolio diversi…cation is driven by home bias in capital goods, independently of home bias in consumption, and by the share of income accruing to labour. The model explains reasonably well the recent patterns of portfolio allocations in developed economies; and (ii) optimal portfolio shares are independent of market dynamics.
    Keywords: Subsidies; Home bias, equity puzzle, New open economy macroeconomics, NOEM, extensive margin.
    JEL: F41 G11
    Date: 2011–10
  14. By: Linda Goldberg
    Abstract: There is often speculation that the international roles of currencies may be changing. This paper presents the current status of these roles. The U.S. dollar continues to be the dominant currency across various uses. Yet, such a role may change over time. If this occurs, there could be consequences for seignorage returns, U.S. funding costs, the dollar’s value, U.S. insulation from foreign shocks, and U.S. global influence. The paper concludes with a discussion of recent research on related themes and questions for future study.
    Keywords: Dollar, American ; Foreign exchange
    Date: 2011
  15. By: Virginie Coudert; Valérie Mignon
    Abstract: Carry-trade strategies which consist of buying forward high-yield currencies tend to generate positive excess returns during long periods of time. Here, we aim at explaining this puzzle by the default risk, which is frequently taken on by investing in high-yield currencies. We empirically test for this hypothesis on a sample of 18 emerging currencies over the period from June 2005 to September 2010, the default risk being proxied by the sovereign credit default swap spread. Relying on smooth transition regression models, we show that default risk fuels the carry-trade gains during periods of upbeat financial markets, and worsens the losses in bear markets. We then introduce the default risk into the “Fama regression” linking the exchange-rate depreciation to the interest-rate differential. The “forward bias”, usually evidenced by a coefficient smaller than unity in this regression, is somewhat alleviated, as the default risk partially explains the excess return.
    Keywords: Carry trades, Forward premium, UIP puzzle, Default risk, Smooth transition regression models
    JEL: G15 G30
    Date: 2011–07
  16. By: Pablo D. Fajgelbaum; Gene M. Grossman; Elhanan Helpman
    Abstract: We study patterns of FDI in a multi-country world economy. First, we present evidence for a broad sample of countries that firms direct FDI disproportionately to markets with income levels similar to their home market. Then we develop a model featuring non-homothetic preferences for quality and monopolistic competition in which specialization is purely demand-driven and the decision to serve foreign countries via exports or FDI depends on a proximity-concentration trade-off. We characterize the joint patterns of trade and FDI when countries differ in income distribution and size and show that FDI is more likely to occur between countries with similar per capita income levels. The model predicts a Linder Hypothesis for FDI, consistent with the patterns found in the data.
    JEL: F12 F23
    Date: 2011–10

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