nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒12‒13
twelve papers chosen by
Martin Berka
Victoria University of Wellington

  1. The International Monetary System: Living with Asymmetry By Maurice Obstfeld
  2. International Capital Flows with Limited Commitment and Incomplete Markets By Jurgen von Hagen; Haiping Zhang
  3. Risk Sharing through Capital Gains By Faruk Balli; Sebnem Kalemli-Ozcan; Bent Sorensen
  4. PPP in OECD Countries: An Analysis of Real Exchange Rate Stationarity, Cross-sectional Dependency and Structural Breaks By Mark J. Holmes; Jesús Otero; Theodore Panagiotidis
  5. Real Exchange Rates and Productivity: Evidence From Asia By Yan, Isabel K.; Kakkar, Vikas
  6. Global Imbalances in a World of Inflexible Real Exchange Rates and Capital Controls By Hallett, Andrew Hughes; Oliva, Juan Carlos Martinez
  7. Foreign Output Shocks and Monetary Policy Regimes in Small Open Economies: A DSGE Evaluation of East Asia By Joseph D. ALBA; Wai–Mun CHIA; Donghyun PARK
  8. The Impact of Monetary Policy on the Exchange Rate: puzzling evidence from three emerging economies By Emanuel Kohlscheen
  9. Dynamics, Structural Breaks and the Determinants of the Real Exchange Rate of Australia By Khorshed Chowdhury
  10. When Credit Bites Back: Leverage, Business Cycles, and Crises By Òscar Jordà; Moritz HP. Schularick; Alan M. Taylor
  11. Can Asia Sustain an Export-Led Growth Strategy in the Aftermath of the Global Crisis? An Empirical Exploration By Razmi, Arslan; Hernandez, Gonzalo
  12. The Irish Macroeconomic Response to an External Shock with an Application to Stress Testing By Birmingham, Colin; Conefrey, Thomas

  1. By: Maurice Obstfeld
    Abstract: This paper analyzes current stresses in the two key areas that concerned the architects of the original Bretton Woods system: international liquidity and exchange rate management. Despite radical changes since World War II in the market context for liquidity and exchange rate concerns, they remain central to discussions of international macroeconomic policy coordination. To take two prominent examples of specific (and related) coordination problems, liquidity issues are paramount in strategies of national self-insurance through foreign reserve accumulation, while recent attempts by emerging market economies (EMEs) to limit real currency appreciation have relied heavily on nominal exchange rate management. A central message is that a diverse set of potential asymmetries among sovereign member states provides fertile ground for a variety of coordination failures. The paper goes on to discuss institutions and policies that might mitigate some of these inefficiencies.
    JEL: F32 F33 F36 F42 G15
    Date: 2011–12
  2. By: Jurgen von Hagen (University of Bonn, Indiana University and CEPR. Lennestrasse. 37, D-53113 Bonn, Germany.); Haiping Zhang (School of Economics, Singapore Management Unversity)
    Abstract: Recent literature has proposed two alternative types of financial frictions, i.e., limited commitment and incomplete markets, to explain the patterns of international capital flows between developed and developing countries observed in the past two decades. This paper integrates both types of frictions into a two-country overlapping-generations framework to facilitate a direct comparison of their eects. In our model, limited commitment distorts the investment made by agents with different productivity, which creates a wedge between the interest rates on equity capital vs. credit capital; while incomplete markets distort the investment among projects with different riskiness, which creates a wedge between the risk-free rate and the mean rate of return to risky capital. We show that the two approaches are observationally equivalent with respect to their implications for international capital flows, production eciency, and aggregate output.
    Keywords: financial development, financial frictions, foreign direct investment, incomplete markets, limited commitment, international capital flows
    JEL: E44 F41
    Date: 2011–12
  3. By: Faruk Balli; Sebnem Kalemli-Ozcan; Bent Sorensen
    Abstract: We estimate channels of international risk sharing between European Monetary Union (EMU), European Union, and other OECD countries 1992-2007. We focus on risk sharing through savings, factor income flows, and capital gains. Risk sharing through factor income and capital gains was close to zero before 1999 but has increased since then. Risk sharing from capital gains, at about 6 percent, is higher than risk sharing from factor income flows for European Union countries and OECD countries. Risk sharing from factor income flows is higher for Euro zone countries, at 14 percent, reflecting increased international asset and liability holdings in the Euro area.
    JEL: F21 F36
    Date: 2011–11
  4. By: Mark J. Holmes (Department of Economics,Waikato University, New Zealand); Jesús Otero (Facultad de Economía, Universidad del Rosario, Colombia); Theodore Panagiotidis (Department of Economics, University of Macedonia, Greece)
    Abstract: The stationarity of OECD real exchange rates over the period 1972-2008 is tested using a panel of twenty six member countries. The methodology followed stems from the need to meet several key concerns: (i) the identification of which panel members are stationary; (ii) the presence of cross-sectional dependence among the countries in the panel; and (iii) the identification of potential structural breaks that might have occurred at different points in time. To address these concerns, we employ a recent test that examines the time series properties of the data within a panel framework, namely the Hadri and Rao (2008) panel stationarity test. The real exchange rates of the twenty six OECD countries are found to be stationary when considered as a panel, but only after allowing for endogenously-determined structural breaks and cross section dependence. We also find that once these structural breaks are removed from the underlying series, the half-life of shocks to the real exchange rate is much shorter than has been calculated in earlier studies.
    Keywords: Heterogeneous dynamic panels, purchasing power parity, mean reversion, panel stationarity test.
    JEL: F31 F33 G15
    Date: 2011–12
  5. By: Yan, Isabel K.; Kakkar, Vikas
    Abstract: This paper examines a productivity-based explanation of the long run real exchange rate movements of six Asian economies. Using industry level data, we construct total factor productivities (TFPs) for the tradable and nontradable sectors. We find that (a) within each country the relative price of nontradable goods is cointegrated with the sectoral TFP differential, and (b) the real exchange rates are cointegrated with the home and foreign sectoral TFP differentials. Using the predicted real exchange rate as a measure of the "long-run equilibrium", we find that most Asian economiesreal exchange rates are overvalued before the Asian Financial Crisis.
    Keywords: Nontraded Goods; Balassa-Samuelson Model; Cointegration
    JEL: F41 F31
    Date: 2011–09
  6. By: Hallett, Andrew Hughes (Asian Development Bank Institute); Oliva, Juan Carlos Martinez (Asian Development Bank Institute)
    Abstract: This paper addresses the issue of international payments in a stock-flow framework, by capturing the interaction between the current account balance and international assets portfolios of domestic and foreign investors. It is argued that the stability of such interaction may be affected by shifts in the preferences of investors, by the relative rate of return of different assets, and—more in general—by institutional settings. The model is then used for policy analysis purposes to derive the conditions for the existence of dynamic equilibria, and if they can be attained, under the assumption of market-distorting policy choices.
    Keywords: global economic imbalances; international payments; exchange rates; capital controls; current account balance; international assets portfolios
    JEL: F13 F32 F34
    Date: 2011–12–08
  7. By: Joseph D. ALBA (Division of Economics, Nanyang Technological University, Singapore 637332, Singapore); Wai–Mun CHIA (Division of Economics, Nanyang Technological University, Singapore 637332, Singapore); Donghyun PARK (Asian Development Bank6 ADB Avenue, Mandaluyong City,Metro Manila, Philippines 1550)
    Abstract: East Asia’s small open economies were hit in varying degrees by the sharp drop in the output of major industrial countries during the global financial and economic crisis of 2008-2009. This highlights the role of monetary policy regimes in cushioning small open economies from adverse external output shocks. To assess the welfare impact of external shocks on key macroeconomic variables under different monetary policy regimes, we numerically solve and calculate the welfare loss function of a dynamic stochastic general equilibrium (DSGE) model. We find that CPI inflation targeting minimizes welfare losses for import-to-GDP ratios from 0.3 to 0.9. However, welfare under the pegged exchange rate regime is almost equivalent to CPI inflation targeting when the import-to-GDP ratio is one while the Taylor-type rule minimizes welfare when the import-to-GDP ratio is 0.1. We calibrate the model and derive welfare implications for eight East Asian small open economies.
    Keywords: Trade channel, Import-to-GDP ratio, small open economies, welfare, exchange rate regimes, inflation targeting, Taylor rule, foreign output shock
    JEL: F40 F41 E52 F31
    Date: 2011–05
  8. By: Emanuel Kohlscheen
    Abstract: This study investigates the impact effect of monetary policy shocks on the exchange rates of Brazil, Mexico and Chile. We find that even a focus on 1 day exchange rate changes following policy events – which reduces the potential for reverse causality considerably – fails to lend support for the conventional view that associates interest rate hikes with appreciations. This lack of empirical backing for the predictions of standard open economy models that, for instance, combine the UIP condition with rational expectations (as in Dornbusch (1976)) persists irrespective of whether we use the US Dollar or effective exchange rates, whether interest rate changes are anticipated or not, whether changes in the policy rate that were followed by exchange rate intervention are excluded or whether "contaminated" events are dropped from the analysis. We argue that it is difficult to attribute this stronger version of the exchange rate puzzle to fiscal dominance, as similar results are obtained in the case of Chile - a country that has had the highest possible short-term credit rating since 1997 and a debt/GDP ratio below 10%. Indeed, in Chile a 100 b.p. hike leads to a 2.2 to 2.6% devaluation of the Peso on impact.
    Date: 2011–11
  9. By: Khorshed Chowdhury (University of Wollongong)
    Abstract: This paper examines the dynamics, structural breaks and determinants of the real exchange rate (RER) of Australia derived from an inter-temporal general equilibrium model. Autoregressive Distributed Lag (ARDL) modelling results show that a one per cent increase in: (1) terms of trade appreciates the RER by 0.96 to 1.05 per cent in the long-run; (2) government expenditure appreciates the RER by 0.53 to 0.46 per cent in the long-run; (3) net foreign liabilities appreciates the RER by 0.18 to 0.22 per cent in the long-run; (4) interest rate differential depreciates the RER by 0.007 to 0.01 per cent in the long-run; (5) openness in trade depreciates the RER by 1.15 to 1.31 per cent in the long-run; and (6) per-worker labour productivity depreciates the RER by 0.38 to 0.55 per cent in the long-run. The two endogenously determined structural breaks are positive but are statistically insignificant. The speed of adjustment towards equilibrium is high with short-run disequilibrium correcting by nearly 39 to 47 per cent per quarter. These results add new insights to the literature on the determinants of RER in Australia. Apart from the terms of trade, the effects of other determinants of RER are contrary to the results obtained in previous studies.
    Keywords: Determinants of RER; Endogenous Structural Breaks; Unit-root; ARDL
    JEL: F13 F31 F41
    Date: 2011
  10. By: Òscar Jordà; Moritz HP. Schularick; Alan M. Taylor
    Abstract: This paper studies the role of leverage in the business cycle. Based on a study of nearly 200 recession episodes in 14 advanced countries between 1870 and 2008, we document a new stylized fact of the modern business cycle: more credit-intensive booms tend to be followed by deeper recessions and slower recoveries. We find a close relationship between the rate of credit growth relative to GDP in the expansion phase and the severity of the subsequent recession. We use local projection methods to study how leverage impacts the behavior of key macroeconomic variables such as investment, lending, interest rates, and inflation. The effects of leverage are particularly pronounced in recessions that coincide with financial crises, but are also distinctly present in normal cycles. The stylized facts we uncover lend support to the idea that financial factors play an important role in the modern business cycle.
    JEL: C14 C52 E51 F32 F42 N10 N20
    Date: 2011–11
  11. By: Razmi, Arslan (Asian Development Bank Institute); Hernandez, Gonzalo (Asian Development Bank Institute)
    Abstract: Many developing countries have attempted to pursue the East Asian growth model in recent decades. This model is widely perceived to have been based on export-led growth. Given that developed countries are likely to grow at a slower rate and be less willing to run trade deficits in the post-financial-crisis world can this growth model be sustained? Using panel data for Asian countries, this paper contributes to addressing this question by distinguishing between different kinds of export- and tradable-led growth in order to more precisely identify the nature of growth in the pre-crisis decades.
    Keywords: export-led growth; tradable-led growth; global imbalances; industrialization; capital accumulation
    JEL: F43 O11 O53
    Date: 2011–12–05
  12. By: Birmingham, Colin (Central Bank of Ireland); Conefrey, Thomas (Central Bank of Ireland)
    Abstract: This paper carries out an empirical analysis of the sensitivity of the Irish economy to an unanticipated external demand shock using a Bayesian VAR model which includes a number of Irish macroeconomic variables such as GDP, unemployment and wages. A 1% increase in US GDP growth leads to an increase in Irish GDP growth of 1.3% in the model. We also assess the relative importance of demand shocks in Ireland’s other key trading partners, the UK and the euro area. The Irish GDP response to shocks in our main trading partners is roughly proportional to our export shares to these regions. We feed the results of the VAR analysis into a mortgage delinquency model to derive the implication of changes in external demand on mortgage delinquency. The results suggest that a negative one standard deviation shock to US GDP growth leads to an increase of 1600 in the number of mortgages in arrears for at least 90 days.
    Keywords: Trade Shock, Bayesian VAR, Stress Testing
    JEL: F47 G21
    Date: 2011–10

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