nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒01‒18
ten papers chosen by
Martin Berka
Victoria University of Wellington

  1. Government Spending, Monetary Policy, and the Real Exchange Rate By Hafedh Bouakez; Aurélien Eyquem
  2. Unanticipated vs. Anticipated Tax Reforms in a Two-Sector Open Economy. By Olivier Cardi; Romain Restout
  3. Trend Shocks, Risk Sharing and Cross-Country Portfolio Holdings By Yavuz Arslan; Gursu Keles; Mustafa Kilinc
  4. Global Imbalances, Current Account Rebalancing and Exchange Rate Adjustments By Yavuz Arslan; Mustafa Kilinc; M. Ibrahim Turhan
  5. Oil Prices and Emerging Market Exchange Rates By M. Ibrahim Turhan; Erk Hacihasanoglu; Ugur Soytas
  6. The role of credit in international business cycles By Xu, T.T.
  7. Predicting swings in exchange rates with macro fundamentals By Shiu-Sheng, Chen
  8. "The Euro Imbalances and Financial Deregulation: A Post-Keynesian Interpretation of the European Debt Crisis" By Esteban Perez-Caldentey; Matias Vernengo
  9. Exchange Rate Policy and Economic Growth after the Financial Crisis in Central and Eastern Europe By Zsolt Darvas
  10. Monetary Policy and the Dutch Disease in a Small Open Oil Exporting Economy By Mohamed Tahar Benkhodja

  1. By: Hafedh Bouakez (HEC Montréal and CIRPÉE, 3000 chemin de la Côte-Sainte-Catherine, Montréal, Québec, Canada H3T 2A7.); Aurélien Eyquem (Université de Lyon, Lyon, F-69007, France ; Ecole Normale Supérieure de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon St Etienne, Ecully, F-69130, France ; and GREDI, Canada)
    Abstract: A robust prediction across a wide range of open-economy macroeconomic models is that an unanticipated increase in public spending in a given country appreciates it currency in real terms. This result, however, contradicts the findings of a number of recent empirical studies, which instead document a significant and persistent depreciation of the real exchange rate following an expansionary government spending shock. In this paper, we rationalize the findings of the empirical literature by proposing a small-open-economy model that features three key ingredients : incomplete and imperfect international financial markets, sticky prices, and a not-too-aggressive monetary policy. The model predicts that in response to an unexpected increase in public expenditures, the risk-adjusted long-term real interest rate falls, causing the real exchange rate to depreciate. We establish this result both analytically, within a special version of the model, and numerically for the more general case.
    Keywords: Real exchange rate, public spending shocks, small open economy, sticky prices, monetary policy.
    JEL: F31 F41
    Date: 2011
  2. By: Olivier Cardi; Romain Restout
    Abstract: We use a two-sector neoclassical open economy model with traded and non-traded goods to investigate the effects of unanticipated and anticipated tax reforms. First, an unanticipated tax reform produces an expansion of GDP, labor, and investment, while an anticipated tax reform has opposite effects before the implementation of the labor tax cut. Quantitatively, if the traded sector is more capital intensive, GDP increases by 1.6 percentage points or declines by 2.8 percentage points after three years, depending on whether the tax cut is unanticipated or anticipated. Second, we find that GDP change masks a wide dispersion in sectoral output responses. Importantly, in all scenarios, a tax reform substantially raises the relative size of the non-traded sector while traded output always drops. Allowing for the markup to depend on the number of competitors, we find that a significant share of GDP change can be attributed to the competition channel while the dispersion of sectoral output responses is amplified. Finally, the workers only benefit from the labor tax cut if the tax change is unanticipated and the traded sector is more capital intensive.
    Keywords: Non Traded Goods; Investment; Tax Reform; Anticipation effects.
    JEL: F41 E62 E22 F32
    Date: 2012
  3. By: Yavuz Arslan; Gursu Keles; Mustafa Kilinc
    Abstract: This paper analyzes the dynamics of risk premia, real exchange rates and portfolio movements in a two-country, two-good, two-bond model. We use an asymmetric set-up in the model, where one of the countries is emerging and the other one is developed and both countries issue bonds in domestic currency. The emerging country di¤ers from the developed country in that it is subject to trend shocks and it is more risk averse. We find that the trend shocks produce strong wealth e¤ects for the emerging country, and as a result, the terms of trade and the real exchange rate appreciate. Appreciation of the terms of trade breaks the hedging opportunities coming from international trade in goods. In contrast, the appreciation of the real exchange rate generates new hedging opportunities in international financial markets for both countries. Therefore, our model can endogenously generate large portfolio holdings. And di¤erences in the risk aversion across countries lead to net positive foreign asset positions and signi?cant risk premia in the emerging country. Moreover, the relative volatilities and cyclicalities of risk premia and real exchange rates improve significantly and move closer to the observed values in the data and our model can account for the lack of international risk sharing.
    Keywords: Risk sharing, Risk premium, Exchange rates, Trend shocks, Portfolio movements
    JEL: F34 F41 F44 G15
    Date: 2012
  4. By: Yavuz Arslan; Mustafa Kilinc; M. Ibrahim Turhan
    Abstract: We analyze the global imbalances and the required adjustments for rebalancing in current accounts and real exchange rates. We set up a two-country two-sector model for the US-China with two asymmetries. First, we assume that the size of China initially is one third of the US but its size becomes half of the US in the next ten years consistent with the fast growth expectations in China. Secondly, we assume that China initially runs a net export surplus against the US. Then we quantitatively study two adjustment scenarios. First scenario, called Slow Adjustment, assumes that in the process of growth, Chinese demand composition moves more towards domestic non-tradable sector. In this case, Chinese real exchange rate appreciates gradually and net export surplus also decreases slowly. Second scenario, called Quick Adjustment, assumes that in addition to the higher non-tradable share in output, net export surplus against US goes to zero quickly in ?ve years. In this case, net export adjustment happens quickly and real exchange rates in China also appreciate faster and at a higher rate than Slow Adjustment case. Even though, global imbalances are eliminated faster in the Quick Adjustment case, high real appreciation in China hurts importers in the US. A comparison in terms of output shows that Slow Adjustments is preferred for both countries.
    Keywords: Global imbalances, Current accounts, Exchange rate adjustments
    JEL: F32 F36 F41
    Date: 2011
  5. By: M. Ibrahim Turhan; Erk Hacihasanoglu; Ugur Soytas
    Abstract: This paper investigates the role of oil prices in explaining the dynamics of selected emerging countries exchange rates. Using daily data series, the study concludes that a rise in oil price is leading to a significant appreciation in emerging economies currencies against the US dollar. In our study, we divide daily returns from 03/01/2003 to 02/06/2010 into 3 subsamples and test the role of oil price changes on exchange rate movements. We employ generalized impulse response functions to trace out the dynamic response of each exchange rate in three different time periods. Our findings suggest that oil price dynamics are changing significantly in the sample period and the relation between oil prices and exchange rates becomes more relevant after the 2008 financial crisis.
    Keywords: oil prices, emerging market exchange rates, financial crisis
    JEL: F31 G01 Q43
    Date: 2012
  6. By: Xu, T.T.
    Abstract: The recent financial crisis raises important issues about the role of credit in international business cycles and the transmission of financial shocks across country borders. This paper investigates the international spillover of US credit shocks and the importance of credit in explaining business cycle fluctuations using a global vector autoregressive (GVAR) model with credit, estimated over the period 1979Q2 to 2006Q4 for 26 major advanced and emerging economies. Results from the country-specific models reveal the importance of bank credit in explaining output growth, changes in inflation and long term interest rates in countries with developed banking sector. The generalized impulse response function (GIRF) for a one standard error negative shock to US real credit provides strong evidence of the spillover of US credit shock to the UK, the Euro area, Japan and other industrialized economies.
    JEL: C32 G21 E44 E32
    Date: 2012–01–05
  7. By: Shiu-Sheng, Chen
    Abstract: This paper investigates fundamentals-based exchange rate predictability from a different perspective. We focus on predicting currency swings (major trends in depreciation or appreciation) rather than on quantitative changes of exchange rates. Having used a nonparametric approach to identify swings in exchange rates, we examine the links between fundamentals and swings in exchange rates using both in-sample and out-of-sample forecasting tests. We use data from 12 developed countries, and our empirical evidence suggests that the uncovered interest parity fundamentals and Taylor rule model with interest rate smoothing are strong predictors of exchange rate swings.
    Keywords: exchange rate swings; fundamentals
    JEL: E31 C22
    Date: 2012–01
  8. By: Esteban Perez-Caldentey; Matias Vernengo
    Abstract: Conventional wisdom suggests that the European debt crisis, which has thus far led to severe adjustment programs crafted by the European Union and the International Monetary Fund in both Greece and Ireland, was caused by fiscal profligacy on the part of peripheral, or noncore, countries in combination with a welfare state model, and that the role of the common currency-the euro-was at best minimal. This paper aims to show that, contrary to conventional wisdom, the crisis in Europe is the result of an imbalance between core and noncore countries that is inherent in the euro economic model. Underpinned by a process of monetary unification and financial deregulation, core eurozone countries pursued export-led growth policies-or, more specifically, "beggar thy neighbor" policies-at the expense of mounting disequilibria and debt accumulation in the periphery. This imbalance became unsustainable, and this unsustainability was a causal factor in the global financial crisis of 2007-08. The paper also maintains that the eurozone could avoid cumulative imbalances by adopting John Maynard Keynes's notion of the generalized banking principle (a fundamental principle of his clearing union proposal) as a central element of its monetary integration arrangement.
    Keywords: European Union; Current Account Adjustment; Financial Aspects of Economic Integration
    JEL: F32 F36 O52
    Date: 2012–01
  9. By: Zsolt Darvas
    Abstract: In a paper on the effects of the global financial crisis in Central and Eastern Europe (CEE), the author reacts to a paper of Aslund (2011) published in the same issue of "Eurasian Geography and Economics" on the influence of exchange rate policies on the region’s recovery. The author argues that post-crisis corrections in current account deficits in CEE countries do not in themselves signal a return to steady economic growth. Disagreeing with Aslund over the role of loose monetary policy in fostering the region’s economic problems, he outlines a number of competitiveness problems that remain to be addressed in the 10 new EU member states of CEE, along with improvements in framework conditions supporting future macroeconomic growth.
    Keywords: Central and Eastern Europe, Baltic states, exchange rate policy, global financial crisis, floating exchange rate, fixed exchange rate, inflation, internal devaluation, credit boom, overheating economy, current account balance, negative output gap, euro area, unit labour costs, price competitiveness
    JEL: F30 F40 F50 P26
    Date: 2011–01
  10. By: Mohamed Tahar Benkhodja (GATE Lyon Saint-Etienne - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - École Normale Supérieure de Lyon)
    Abstract: In this paper, we compare, first, the impact of a windfall and a boom sectors on the economy of an oil exporting country and their welfare implications ; in a second step, we analyze how monetary policy should be conducted to insulate the economy from the main impact of these shocks, namely the Dutch Disease. To do so, we built a Multisector DSGE model with nominal and real rigidities. The main finding is that Dutch disease effect arise after spending and resource movement effects in the following cases : i) flexible prices and wages both in the case of a windfall and in the case of a boom ; ii) flexible wage and sticky price only in the case of a fixed exchange rate. In other cases, Dutch disease effect can be avoided if : prices are sticky and wages are flexible when the exchange rate is flexible ; iii) prices and wages are sticky whatever the objective of the central bank is in both cases : windfall and boom. We also compare the source of fluctuation that leads to Dutch disease effect and we conclude that the windfall leads to a strong e¤ect in terms of de-industrialization compared to a boom. The choice of flexible exchange rate regime also helps to improve welfare.
    Keywords: Monetary Policy; Dutch Disease; Oil Prices; Small Open Economy
    Date: 2011–12–22

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