nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2011‒12‒19
seven papers chosen by
Martin Berka
Victoria University of Wellington

  1. The International Monetary System: Living with Asymmetry By Obstfeld, Maurice
  2. International recessions By Fabrizio Perri; Vincenzo Quadrini
  3. When credit bites back: leverage, business cycles, and crises By Òscar Jordà; Moritz Schularick; Alan M. Taylor
  4. The determinants of current account imbalances in the Euro Area: a panel estimation approach By Brissimis, Sophocles; Hondroyiannis, George; Papazoglou, Christos; Tsaveas, Nicholas; Vasardani, Melina
  5. The Exchange Rate and Interest Rate Differential Relationship: Evidence from Two Financial Crises By Li, Kui-Wai; Wong, Douglas K T
  6. Real Exchange Rates, Trade, and Growth: Italy 1861-2011 By Virginia Di Nino; Barry Eichengreen; Massimo Sbracia
  7. The relative volatility of commodity prices : a reappraisal By Arezki, Rabah; Lederman, Daniel; Zhao, Hongyan

  1. By: Obstfeld, Maurice
    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.
    Keywords: currency wars; exchange rates; global imbalances; international monetary system; liquidity; Triffin dilemma
    JEL: F32 F33 F36 F42 G15
    Date: 2011–12
  2. By: Fabrizio Perri; Vincenzo Quadrini
    Abstract: The 2007–2009 crisis was characterized by an unprecedented degree of international synchronization as all major industrialized countries experienced large macroeconomic contractions around the date of Lehman bankruptcy. At the same time countries also experienced large and synchronized tightening of credit conditions. We present a two-country model with financial market frictions where a credit tightening can emerge as a self-fulfilling equilibrium caused by pessimistic but fully rational expectations. As a result of the credit tightening, countries experience large and endogenously synchronized declines in asset prices and economic activity (international recessions). The model suggests that these recessions are more severe if they happen after a prolonged period of credit expansion.
    Date: 2011
  3. By: Òscar Jordà; Moritz 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.
    Keywords: Business cycles ; Financial crises
    Date: 2011
  4. By: Brissimis, Sophocles; Hondroyiannis, George; Papazoglou, Christos; Tsaveas, Nicholas; Vasardani, Melina
    Abstract: The purpose of this paper is to explore the main macroeconomic, financial and structural factors that influenced current account developments in the euro area countries over the period from 1980 to 2008. The analysis, which theoretically rests on the intertemporal approach, uses a panel consisting of the twelve EU member states that initially joined the euro area, which is then expanded to seventeen countries with the aim to see whether the enlargement or potential enlargement of the euro area would alter the identified set of current account determinants. The results show that factors such as the level of development, demographics, macroeconomic policies and competitiveness, are important in explaining current account positions of individual euro area countries. Moreover, the analysis of short-run dynamics indicates that the EMU has resulted in longer periods of adjustment of current account imbalances.
    Keywords: Current account determinants; euro area imbalances
    JEL: F32
    Date: 2011–06
  5. By: Li, Kui-Wai; Wong, Douglas K T
    Abstract: This paper examines the contemporaneous and inter-temporal interaction between real exchange rate and real interest rate differential in the two financial crises of 1997 and 2008 by using data from thirteen countries from different world regions. The empirical result shows that negative contemporaneous relationship exists in most countries. In addition, there is little evidence on a systematic inter-temporal relationship between the real interest rate differential and the real exchange rate, and an absence of consistent result in supporting a negative relationship among the thirteen economies. An extremely low change in the conditional correlation between real interest rate differential and real exchange rates can be found in small countries.
    Keywords: Contemporaneous; inter-temporal relationship; exchange rate; interest rate differential; financial crisis
    JEL: E43 O57 C22 F31
    Date: 2011–12
  6. By: Virginia Di Nino (Bank of Italy); Barry Eichengreen (University of California, Berkeley); Massimo Sbracia (Bank of Italy)
    Abstract: What is the relationship between real exchange rate misalignments and economic growth? And what effect, if any, did undervaluations or overvaluations of the lira/euro have on Italy's growth? We address these questions by presenting, first, three main facts: (i) there is a positive relationship between undervaluation and growth; (ii) this relationship is strong for developing countries and weak for advanced countries; (iii) these results tend to hold for both the pre- and the post-World War II period. Building a simple analytical model, we explore channels through which undervaluation may exert a positive effect on real GDP. We assume that productivity is higher in the tradeable-goods than in the non-tradeable-goods sector, and examine the roles of market structure, scale economies and wage flexibility in channelling resources from the latter to the former sector, increasing exports and real GDP. We then turn to Italy and verify empirically that, as the theory suggests, undervaluation has positively affected its exports. Undervaluation has been helpful, in particular, to increase the exports of high-productivity sectors, such as most manufacturing industries. Finally, we describe the misalignments of the lira/euro since 1861, analyze their determinants and draw the implications for Italy's economic growth.
    Keywords: Currency misalignments, Competitiveness, Italy, Export, Growth
    JEL: F30 F10 O10 N00
    Date: 2011–10
  7. By: Arezki, Rabah; Lederman, Daniel; Zhao, Hongyan
    Abstract: This paper studies the volatility of commodity prices on the basis of a large dataset of monthly prices observed in international trade data from the United States over the period 2002 to 2011. The conventional wisdom in academia and policy circles is that primary commodity prices are more volatile than those of manufactured products, although most of the existing evidence does not actually attempt to measure the volatility of prices of individual goods or commodities. The literature tends to focus on trends in the evolution and volatility of ratios of price indexes composed of multiple commodities and products. This approach can be misleading. Indeed, the evidence presented in this paper suggests that on average prices of individual primary commodities are less volatile than those of individual manufactured goods. However, the challenges of managing terms of trade volatility in developing countries with concentrated export baskets remain.
    Keywords: Markets and Market Access,Emerging Markets,Commodities,E-Business,Access to Markets
    Date: 2011–12–01

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