nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒01‒10
seven papers chosen by
Martin Berka
Victoria University of Wellington

  1. Multilateral Economic Cooperation and the International Transmission of Fiscal Policy By Giancarlo Corsetti; Gernot J. Müller
  2. World Technology Shocks and the Real Euro-Dollar Exchange Rate By Lambrias, Kyriacos
  3. The Balassa-Samuelson Effect Reversed: New Evidence from OECD Countries By Matthias Gubler; Christoph Sax
  4. Dedollarization and financial robustness By Gondo, Rocio; Orrego, Fabrizio
  5. Assessing real exchange rate misalignments By Kubota, Megumi
  6. Estimating Intra Country and Cross Country Purchasing Power Parities from Household Expenditure Data Using Single Equation and Complete Demand Systems Approach: India and Vietnam By Amita Majumder; Ranjan Ray; Kompal Sinha
  7. The Exchange Rate, Diversification, and Distribution in a Modified Ricardian Model with a Continuum of Goods By Razmi, Arslan

  1. By: Giancarlo Corsetti; Gernot J. Müller
    Abstract: During the global financial crisis 2007–2009 fiscal policy was widely used as a stabilization tool. Policymakers allowed a large build-up of public debt resulting from both automatic and discretionary expansionary measures. At the same time, calls for policy coordination stressed that international spillovers of fiscal policy might be sizeable. We reconsider the case for fiscal coordination by providing new evidence on the cross-border effects of discretionary fiscal measures. We rely on a vector autoregression model as well as on a quantitative business cycle model. We find that i) large spillover effects cannot be ruled out and, in contrast to conventional wisdom, ii) financial factors rather than trade flows lie at the heart of the international transmission mechanism. We discuss the implications of these results for policy coordination when markets price sovereign default risk, and put pressure on governments for implementing budget consolidation measures.
    JEL: E62 F42
    Date: 2011–12
  2. By: Lambrias, Kyriacos
    Abstract: We extend the empirical SVAR literature on real exchange rates by extracting a common stochastic trend in productivity, interpreted as a permanent world technology shock. Overall, we find that innovations to world technology constitute an important, albeit not the dominant, source of movements in the real euro-dollar exchange rate. First, the dollar appreciates significantly in response to such an impulse. Second, the world technology shock accounts for approximately one-fifth of the variance of the forecast error in the real euro-dollar rate at business-cycle frequencies. Our results are in line with previous studies who find that demand or nominal shocks are the dominant sources of fluctuations in relative prices and provides limited support to productivity-based models of real exchange rate determination.
    Keywords: Euro-Dollar Real Exchange Rate, World Technology Shocks, Structural VAR
    JEL: C32 F41 E32
    Date: 2011–12–15
  3. By: Matthias Gubler; Christoph Sax (University of Basel)
    Keywords: Real Exchange Rate, Balassa-Samuelson Hypothesis, Panel Data Estimation, Terms of Trade
    JEL: F14 F31 F41
    Date: 2011
  4. By: Gondo, Rocio (University of Maryland); Orrego, Fabrizio (Central Bank of Peru)
    Abstract: This paper evaluates the qualitative and quantitative implications of financial dedollarization of firms' liabilities on real aggregates in a small open economy model. We extend the standard Cespedes, Chang, and Velasco (2004) model by allowing entrepreneurs borrow in both foreign and domestic currency so as to finance firms' capital needs. A real depreciation reduces the value of firms' net worth whenever there is a currency mismatch in their balance sheets. Under flexible exchange rates, a lower degree of dollarization lessens the negative impact on output and investment, since there is a smaller increase in the cost of external borrowing. The quantitative results show that the balance sheet channel accounts for about 70 percent of the output and investment drop in Peru following the Russian Crisis, and a reduction in debt dollarization would have reduced output drop in 0.9 percentage points of GDP.
    Keywords: Small open economy, balance sheet eects, dollarization
    JEL: F31 F41 G32
    Date: 2011–12
  5. By: Kubota, Megumi
    Abstract: There is a renewed debate on the role of exchange rate policies as an industrial policy tool in both academic and policy circles. Policy practitioners usually examine real exchange rate misalignments to monitor the behavior of this key relative price and, if possible, exploit distortions in the traded and non-traded relative price to promote growth. Anecdotal evidence shows that some countries have pursued very active exchange rate policies to promote the export sector and enhance growth by undervaluing their currencies. The main goal of this paper is to provide a systematic characterization of real exchange rate undervaluations. The long-run real exchange rate equation is estimated using: (a) Johansen time series cointegration estimates, and (b) pooled mean group estimates for non-stationary panel data. The paper constructs a dataset of real undervaluation episodes. It first evaluates whether (and if so, to what extent) economic policies can be used to either cause or sustain real undervaluations. In this context the paper empirically models the likelihood and magnitude of sustaining real exchange rate undervaluations by examining their link to policy instruments (such as exchange rate regimes and capital controls, among other policies) using probit and Tobit models. Finally, it investigates whether foreign exchange intervention can generate persistent real exchange rate deviations from equilibrium. In general, it finds that intervention can lead to greater persistence in the incidence and magnitude of real exchange rate undervaluations.
    Keywords: Currencies and Exchange Rates,Debt Markets,Economic Theory&Research,Economic Stabilization,Emerging Markets
    Date: 2011–12–01
  6. By: Amita Majumder; Ranjan Ray; Kompal Sinha
    Abstract: This study departs from the previous literature on purchasing power parity (PPP) by proposing a demand system based methodology for calculating the PPP that takes account of consumer preferences and allows for the substitution effect of price changes. The methodology is applied to provide evidence on PPP between the Indian Rupee and the Vietnamese Dong. The study is conducted within a framework that allows for regional variation in preferences and price changes both inside the country and between countries and proposes and applies a methodology for constructing prices from unit values after adjusting them for quality and demographic effects. Using these prices the intra-country PPPs for India and Vietnam are calculated using the single equation (Engel curve based) procedure of Coondoo, Majumder and Chattopadhyay (2011). The cross country PPPs are calculated between sectors and across expenditure classes, apart from PPP at aggregate country to country level, using both the single equation and system based procedures. The paper contains evidence that the incorporation of price effects leads to a significant change in the PPP rates obtained from using cross section data (single equation procedure) ignoring price changes. The demand system based methodology yields PPP rates that are consistent with those obtained from conventional procedures such as the CPD method, yields standard errors of the PPPs and has the additional advantage of testing for invariance of inter-country PPP across expenditure classes. The disaggregated PPP rates question the conventional practice of using a single economy wide PPP in inequality and poverty comparisons.
    Keywords: Purchasing Power Parity, QAIDS, CPD method, Spatial Prices, TCLI.
    JEL: C18 D11 E31 O53
    Date: 2011–12
  7. By: Razmi, Arslan (Asian Development Bank Institute)
    Abstract: Several recent empirical and theoretical studies have revived interest in the relationship between the level of the exchange rate and economic development. This paper develops a dynamic model based on the Ricardian framework with a continuum of goods to consider the issue from a somewhat different perspective. While directly suppressing the real wage could also lead to diversification, what makes nominal devaluation a particularly useful tool is that it makes it possible to expand domestic profits while limiting internal distributional conflict and the ensuing negative effects on development.
    Keywords: economic development; exchange rate
    JEL: F12 F16 O24 O40
    Date: 2012–01–03

This nep-opm issue is ©2012 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.