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on Open MacroEconomics |
| By: | Matthieu Bussiere; Alexander Chudik; Arnaud Mehl |
| Abstract: | This paper uncovers the response pattern to global shocks of euro area countries' real effective exchange rates before and after the start of Economic and Monetary Union (EMU), a largely open ended question when the euro was created. We apply to that end a newly developed methodology based on high dimensional VAR theory. This approach features a dominant unit to a large set of over 60 countries' real effective exchange rates and is based on the comparison of two estimated systems: one before and one after EMU. ; We find strong evidence that the pattern of responses depends crucially on the nature of global shocks. In particular, post-EMU responses to global US dollar shocks have become similar to Germany's response before EMU, i.e. to that of the economy that used to issue Europe's most credible legacy currency. ; By contrast, post-EMU responses of euro area countries to global risk aversion shocks have become similar to those of Italy, Portugal or Spain before EMU, i.e. of economies of the euro area's periphery. Our findings also suggest that the divergence in external competitiveness among euro area countries over the last decade, which is at the core of today's debate on the future of the euro area, is more likely due to country-specific shocks than to global shocks. |
| Keywords: | Economic and Monetary Union ; Vector autoregression |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:102&r=opm |
| By: | Punzi, Maria Teresa (Bank of Finland Research) |
| Abstract: | This paper presents a two-sector, two-country model showing that inflation in the housing market, a low personal savings rate, and a construction investment boom can contribute to a large current account deficit. In the model, demand by a group of households in the domestic country is constrained by the availability of collateral. This implies more procyclical debt capacity because constrained households can borrow against the increase in the value of their houses during an expansion. A higher degree of financial liberalization and development helps constrained households reach higher loan-to-value ratios, thus relaxing their borrowing constraints. The resulting higher net worth and lower need for savings imply a worsening current account. |
| Keywords: | housing market; current account; international economy |
| JEL: | E21 E32 F32 F41 J22 |
| Date: | 2012–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2012_001&r=opm |
| By: | Oscar Bajo-Rubio (Universidad de Castilla-La Mancha); Carmen Díaz-Roldán (Universidad de Castilla-La Mancha); Vicente Esteve (Universidad de Valencia and Universidad de La Laguna) |
| Abstract: | In this paper, we provide a test of the sustainability of external imbalances in the OECD countries, over the years 1970-2007. Specifically, we deal with the case of those countries that have experienced current account deficits in more than half of the years throughout the period of analysis, and address the recent critique of Bohn (2007) on unit root and cointegration tests of the intertemporal budget constraint. |
| Keywords: | External imbalances, Sustainability, Current account |
| JEL: | F32 F41 |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:eec:wpaper:1201&r=opm |
| By: | Michele Ca' Zorzi; Alexander Chudik; Alistair Dieppe |
| Abstract: | The global financial crisis has led to a revival of the empirical literature on current account imbalances. This paper contributes to that literature by investigating the importance of evaluating model and parameter uncertainty prior to reaching any firm conclusion. We explore three alternative econometric strategies: examining all models, selecting a few, and combining them all. Out of thousands (or indeed millions) of models a story emerges. The chance that current accounts were aligned with fundamentals prior to the financial crisis appears to be minimal. |
| Keywords: | Macroeconomics - Econometric models |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:100&r=opm |
| By: | Eickmeier, Sandra; Ng, Tim |
| Abstract: | We study how credit supply shocks in the US, the euro area and Japan are transmitted to other economies. We use the recently-developed GVAR approach to model financial variables jointly with macroeconomic variables in 33 countries for the period 1983-2009. We experiment with inter-country links that distinguish bilateral trade, portfolio investment, foreign direct investment and banking exposures, as well as asset-side vs. liability-side financial channels. Capturing both bilateral trade and inward foreign direct investment or outward banking claim exposures in a GVAR fits the data better than using trade weights only. We use sign restrictions on the short-run impulse responses to financial shocks that have the effect of reducing credit supply to the private sector. We find that negative US credit supply shocks have stronger negative effects on domestic and foreign GDP, compared to credit supply shocks from the euro area and Japan. Domestic and foreign credit and equity markets respond clearly to the credit supply shocks. Exchange rate responses are consistent with a flight to quality to the US dollar. The UK, another international financial centre, is also responsive to the shocks. These results are robust to the exclusion of the 2007-09 crisis episode from the sample. -- |
| Keywords: | international business cycles,credit supply shocks,trade and financial integration,Global VAR,sign restrictions |
| JEL: | F41 F44 F36 F15 C3 |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:201127&r=opm |
| By: | Alexander Chudik; Roland Straub |
| Abstract: | The curse of dimensionality, a problem associated with analyzing the interaction of a relatively large number of endogenous macroeconomic variables, is a prevailing issue in the open economy macro literature. The most common practice to mitigate this problem is to apply the so-called Small Open Economy Framework (SOEF). In this paper, we aim to review under which conditions the SOEF is a justifiable approximation and how severe the consequences of violation of key conditions might be. Thereby, we use a multicountry general equilibrium model as a laboratory. ; First, we derive the conditions that ensure the existence of the equilibrium and study the properties of the equilibrium using large N asymptotics. Second, we show that the SOEF is a valid approximation only for economies (i) that have a diversified foreign trade structure and if (ii) there is no globally dominant economy in the system. Third, we illustrate that macroeconomic interdependence is primarily related to the degree of trade diversification, and not to the extent of trade openness. Furthermore, we provide some evidence on the pattern of global macroeconomic interdependence by calculating probability impulse response functions in our calibrated multicountry model using data for 153 economies. |
| Keywords: | International trade |
| Date: | 2011 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:103&r=opm |
| By: | Pierucci, Eleonora; Ventura, Luigi |
| Abstract: | The main research question of this empirical work is whether or not globalization, in its various forms, has had an impact upon international risk sharing. The empirical literature so far has only investigated on one aspect of globalization: economic and financial integration. By decomposing globalization in its economic, political and social aspects, and using a standard framework of consumption insurance tests to gauge the extent of risk sharing among countries, we obtain some interesting results. One of the main findings is that economic and social integration help better cope with idiosyncratic risk, but also that without political integration this might result in an increasing exposure to systemic (uninsurable) risk. |
| Keywords: | International risk sharing; globalization; social and political integration |
| JEL: | F15 C33 D80 E20 |
| Date: | 2012–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35869&r=opm |
| By: | Arora, Vipin; Tanner, Matthew |
| Abstract: | Using a recursive vector autoregression (VAR), this paper considers the relation between the U.S. real interest rate and the real oil price. Theoretically, as outlined in Hotelling (1931) and Working (1949), a lower real interest rate results in reduced production and increased storage, implying a higher oil price. The results presented here show that the robustness of this relationship depends crucially on how the real interest rate is calculated, and the time-frame of the sample. Consistent with earlier studies, the oil price falls with an innovation to the ex-ante U.S. real interest rate. However, this is not true if the real interest rate is calculated ex-post. In this case, the oil price only falls in response to an innovation in short-term U.S. real interest rates (three months or less). Additionally, the response of the oil price to longer-term ex-ante U.S. real interest rates must include the period through 2006 for this relationship to appear. The oil price consistently responds to innovations in short-term rates throughout the entire sample. We draw two conclusions from the results. The first is that the oil price is consistently responsive to short-term U.S. real interest rates, underlying the importance of storage. Second, oil prices have become more responsive to longer-term U.S. real interest rates. The reasons behind this change are unclear and require further study. |
| Keywords: | Oil price; Real interest rate; VAR; Hotelling; Storage |
| JEL: | F49 Q43 |
| Date: | 2011–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:35883&r=opm |