nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒02‒01
eleven papers chosen by
Martin Berka
Victoria University of Wellington

  1. Optimal monetary policy in a two country model with firm-level heterogeneity By Dudley Cooke
  2. Transmission of Sovereign Risk in the Euro Crisis By Filippo Brutti; Philip Sauré
  3. Has the Euro affected the choice of invoicing currency? By Jenny E. Ligthart; Sebastian E. V. Werner
  4. Common and idiosyncratic disturbances in developed small open economies By Pablo A. Guerron-Quintana
  5. International Risk-Sharing and Commodity Prices By Martin Berka; Mario J. Crucini; Chih-Wei Wang
  6. How Does Quality Impact on Import Prices? By Konstantins Benkovskis; Julia Wörz
  7. Re-examining Purchasing Power Parity for the Australian Real Exchange Rate By Mubariz Hasanov
  8. Capital Controls and Foreign Exchange Policy By Marcel Fratzscher
  9. Are Proposed African Monetary Unions Optimal Currency Areas? Real and Monetary Policy Convergence Analysis By Simplice A , Asongu
  10. Globalization and the (Mis)Governance of Nations By Blouin, Arthur; Ghosal, Sayantan; Mukand, Sharun
  11. International Macroeconomic Policy: When Wealth Affects People's Impatience By Wang Peng; Heng-fu Zou

  1. By: Dudley Cooke
    Abstract: This paper studies non-cooperative monetary policy in a two country general equilibrium model where international economic integration is endogenised through firm-level heterogeneity and monopolistic competition. Economic integration between countries is a source of policy competition, generating higher long-run inflation, and increased gains from monetary cooperation.
    Keywords: Price levels ; Macroeconomics - Econometric models
    Date: 2012
  2. By: Filippo Brutti (University of Zurich); Philip Sauré (Swiss National Bank)
    Abstract: We assess the role of financial linkages for the transmission of sovereign risk in the Euro Crisis. Building on the narrative approach by Romer and Romer (1989), we use financial news to identify structural shocks in a VAR model of daily sovereign CDS for eleven European countries. To estimate how these shocks transmit across borders, we use data on cross-country bank exposures to sovereign debt. Our results indicate that exposure to Greek sovereign debt and debt of Greek banks constitute important transmission channels. Overall, financial linkages explain up to two thirds of transmission of sovereign debt in the Euro Crisis.
    Date: 2012–01
  3. By: Jenny E. Ligthart (CentER and Department of Economics, Tilburg University, P.O. Box 90153, 5000 LE Tilburg, The Netherlands.); Sebastian E. V. Werner (Tilburg University, Warandelaan 2, 5037 AB Tilburg, The Netherlands.)
    Abstract: We present a new approach to study empirically the effect of the introduction of the euro on the pattern of currency invoicing. Our approach uses a compositional multinomial logit model, in which currency choice is explained by both currency-specific and country-specific determinants. We use unique quarterly panel data on the invoicing of Norwegian imports from OECD countries for the 1996-2006 period. We find that eurozone countries have substantially increased their share of home currency invoicing after the introduction of the euro, whereas the home currency share of non-eurozone countries fell slightly. In addition, the euro as a vehicle currency has overtaken the role of the US dollar in Norwegian imports. The substantial rise in producer currency invoicing by eurozone countries is primarily caused by a drop in inflation volatility and can only to a small extent be explained by an unobserved euro effect. JEL Classification: F33, F41, F42, E31, C25.
    Keywords: Euro, invoicing currency, exchange rate risk, inflation volatility, vehicle currencies, compositional multinomial logit.
    Date: 2012–01
  4. By: Pablo A. Guerron-Quintana
    Abstract: Using an estimated dynamic stochastic general equilibrium model, I show that shocks to a common international stochastic trend explain on average about 10% of the variability of output in several small developed economies. These shocks explain roughly twice as much of the volatility of consumption growth as the volatility of output growth. Country-speci c disturbances account for the bulk of the volatility in the data. Substantial heterogeneity in the estimated parameters and stochastic processes translates into a rich array of impulse responses across countries.
    Date: 2012
  5. By: Martin Berka (Victoria University of Wellington); Mario J. Crucini (Department of Economics, Vanderbilt University); Chih-Wei Wang (Department of Economics, Pacific Lutheran University)
    Abstract: Cole and Obstfeld (1991) exposited a classic result where equilibrium movements in the terms of trade could make ex ante risk-sharing arrangements unnecessary: a unity elasticity of substitution across goods and production specialization. This paper extends their model to N countries and M commodities (N > M). Here the terms of trade provides insurance against commodity-specific shocks, not country-specific shocks. Using commodity-level production data at the national level and world commodity prices we document significant terms of trade variability and positive responses of nation-specific production to terms of trade improvements. The endogenous terms of trade insurance mechanism highlighted in CO is virtually non-existent.
    Keywords: Risk-sharing; developing countries; terms of trade
    JEL: F3 F4
    Date: 2011–10
  6. By: Konstantins Benkovskis (Monetary Policy Department, Latvijas Banka); Julia Wörz (Foreign Research Division, Oesterreichische Nationalbank)
    Abstract: Understanding the dynamics of import price developments is an important but challenging issue which affects the way we look on consumers' welfare, real exchange rates and exchange rate pass-through. In this paper we propose an exact import price index which extends the approach by Broda and Weinstein (2006) who adjust price developments for changes in varieties of imported products. We relax two assumptions still underlying the Broda and Weinstein (2006) approach, thus allowing the set of imported goods and the quality to vary. This variety-, set-of-products-, and quality-adjusted import price index shows that gains from variety in European G7 countries, although positive, are rather small compared to calculated gains from quality. Using HS 07 (vegetables) as our benchmark group of products with unchanged quality, we find significant gains from quality for Germany, France, Italy and the UK between 1995 and 2010. Although these results are not invariant to the choice of the benchmark category, they clearly stress the importance of incorporating the quality issues in empirical literature. Ignoring changes in import quality can give misleading estimates of import prices and consumers' welfare. JEL classification: C43, D60, F12, F14, L15
    Keywords: import variety, price index, quality, welfare gains from trade
    Date: 2011–12–31
  7. By: Mubariz Hasanov (Hacettepe University, Department of Economics)
    Abstract: In this paper, we re-examine stationarity of the Australian real exchange rate (RER). For this purpose, we modify the test of Kapetanios et al. [Testing for a unit root in the nonlinear STAR framework. Journal of Econometrics 112 (2003), 359-379] to allow for a nonlinear trend function in the data generating process. Using bootstrap techniques, we show that the null hypothesis of unit root can be rejected, providing evidence in favour of PPP proposition for the Australian RER.
    Keywords: Purchasing Power Parity; Nonlinearity; Unit Root
    JEL: C12 C22 F31
    Date: 2012
  8. By: Marcel Fratzscher
    Abstract: The empirical analysis in the paper suggests that an FX policy objective and concerns about an overheating of the domestic economy have been the two main motives for the (re-)introduction and persistence of capital controls over the past decade. Capital controls are strongly associated with countries having significantly undervalued currencies. Capital controls also appear to be less motivated by worries about financial market volatility or fickle capital flows per se, but rather by concerns about capital inflows triggering an overheating of the economy – in the form of high credit growth, rising inflation and increased output volatility. Moreover, countries with a high level of capital controls, and those actively implementing controls, tend to be those that have fixed exchange rate regimes, a non-IT monetary policy framework and shallow financial markets. This evidence is consistent with capital controls being used, at least in part, to compensate for the absence of autonomous macroeconomic and prudential policies and effective adjustment mechanisms for dealing with capital flows.
    Date: 2011–12
  9. By: Simplice A , Asongu
    Abstract: A spectre is hunting embryonic African monetary zones: the EMU crisis. The introduction of common currencies in West and East Africa is facing stiff challenges in the timing of monetary convergence, the imperative of bankers to apply common modeling and forecasting methods of monetary policy transmission, as well as the requirements of common structural and institutional characteristics among candidate states. Inspired by the premise of the EMU crisis, this paper assesses real and monetary policy convergence within the proposed WAM and EAM zones. In the analysis, monetary policy targets inflation and financial dynamics of depth, efficiency, activity and size while real sector policy targets economic performance in terms of GDP growth at macro and micro levels. Findings suggest overwhelming lack of convergence; an indication that candidate countries still have to work towards harmonizing cross-country differences in fundamental, structural and institutional characteristics that hamper the convergence process.
    Keywords: Currency Area; Convergence; Policy Coordination; Africa
    JEL: F15 F42 O55 F36 P52
    Date: 2012–01–19
  10. By: Blouin, Arthur (University of Warwick); Ghosal, Sayantan (University of Warwick); Mukand, Sharun (University of Warwick)
    Abstract: We analyze whether or not the globalization of capital, `disciplines' governments and improves gov- ernance. We demonstrate that globalization a ects governance, by increasing a country's vulnerability to sudden capital ight. This increased threat of capital ight can discipline governments and improve governance and welfare by placing countries in a `golden straitjacket'. However, globalization may also overdiscipline' governments { resulting in a perverse impact on governmental incentives that catalyzes mis)governance. Accordingly, the paper suggests a novel (and quali ed) role for capital controls. Finally, we provide some suggestive evidence consistent with the predictions from our theoretical framework.
    Keywords: Globalization, Governance; Capital Flight; Capital Controls, Discipline.
    Date: 2011
  11. By: Wang Peng (Institute for Advanced Studies, Wuhan University); Heng-fu Zou (Institute for Advanced Studies, Wuhan University; CEMA in Central University of Finance and Economics)
    Abstract: Under a modified neo-classical framework, this paper reexamined the effect of international macroeconomic policies by rejecting the routine assumption of a constant rate of time preference. In the model presented here, we suppose the holdings of real financial wealth will affect people's impatience which has far-reaching implications towards various core issues in international macroeconomics. The introducing of wealth into instantaneous discounting function yields intriguing dynamics of consumption, real balances, and foreign bond holdings. One interesting feature of our model is that stationary rate of time preference no longer necessarily equals real interest rate. We also find that central bank's foreign exchange intervention is not super-neutral even if households capitalize all transfers from the government, which contradicts Obstfeld(1981) in that the distribution of the economy¡¯s claims on the rest of the world between the public and the central bank is relevant to the economic performance. The monetary policy affects the real factors, but how the economy behaves in the long run and in the short run differs a lot from Uzawa(1968) and Obstfeld(1981).
    Keywords: international macroeconomic policy, impatience, foreign exchange, monetary policy
    JEL: D90 F3 F4
    Date: 2012

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