nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒02‒20
twelve papers chosen by
Martin Berka
Victoria University of Wellington

  1. Accounting for Real Exchange Rates Using Micro-data By Mario J. Crucini; Anthony Landry
  2. Liquidity, risk and the global transmission of the 2007-08 financial crisis and the 2010-2011 sovereign debt crisis By Alexander Chudik; Marcel Fratzscher
  3. The effects of real exchange rate volatility on productivity growth By Diallo, Ibrahima Amadou
  4. Noisy Information, Distance and Law of One Price Dynamics Across US Cities By Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga
  5. Real Exchange Rates, Commodity Prices and Structural Factors in Developing Countries By Vincent BODART; Bertrand CANDELON; Jean-François CARPANTIER
  6. Global Imbalances, Current Account Rebalancing and Exchange Rate Adjustments By Turhan, Ibrahim M.; Arslan, Yavuz; Kılınç, Mustafa
  7. Oil prices and emerging market exchange rates By Hacihasanoglu, Erk; Turhan, Ibrahim M.; Soytas, Ugur
  8. Currency derivatives and the disconnect between exchange rate volatility and international trade By Bas Straathof; Paolo Calio
  9. Trilemma Policy Convergence Patterns and Output Volatility By Joshua Aizenman; Hiro Ito
  10. Real Exchange Rate and Economic Growth: Evidence from Chinese Provincial Data (1992 - 2008) By Jinzhao Chen
  11. Bernanke Was Right: Currency Manipulation Policy in Emerging Foreign Exchange Markets By Chen, Shiu-Sheng
  12. Agricultural commodities and financial markets By Modena, Matteo

  1. By: Mario J. Crucini; Anthony Landry
    Abstract: The classical dichotomy predicts that all of the time series variance in the aggregate real exchange rate is accounted for by non-traded goods in the CPI basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) found that traded goods had comparable volatility to the aggregate real exchange rate. Our work reconciles these two views by successfully applying the classical dichotomy at the level of intermediate inputs into the production of final goods using highly disaggregated retail price data. Since the typical good found in the CPI basket is about equal parts traded and non-traded inputs, we conclude that the classical dichotomy applied to intermediate inputs restores its conceptual value.
    JEL: F0 F2 F3 F4
    Date: 2012–02
  2. By: Alexander Chudik (Federal Reserve Bank of Dallas, 2200 N. Pearl Street, Dallas, Texas 75201, USA and CIMF.); Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany and CEPR.)
    Abstract: The paper analyses the transmission of liquidity shocks and risk shocks to global financial markets. Using a Global VAR methodology, the findings reveal fundamental di¤erences in the transmission strength and pattern between the 2007-08 financial crisis and the 2010-11 sovereign debt crisis. Unlike in the former crisis, emerging market economies have become much more resilient to adverse shocks in 2010-11. Moreover, a flight-to-safety phenomenon across asset classes has become particularly strong during the 2010-11 sovereign debt crisis, with risk shocks driving down bond yields in key advanced economies. The paper relates this evolving transmission pattern to portfolio choice decisions by investors and finds that countries' sovereign rating, quality of institutions and their financial exposure are determinants of cross-country differences in the transmission. JEL Classification: E44, F3, C5.
    Keywords: Global financial crisis, sovereign debt crisis, liquidity, risk, capital flows, transmission, high dimensional VARs, advanced economies, emerging market economies.
    Date: 2012–02
  3. By: Diallo, Ibrahima Amadou
    Abstract: This paper employs panel data instrumental variable regression and threshold effect estimation methods to study the link between real effective exchange rate volatility and total factor productivity growth on a sample of 74 countries on six non overlapping sub-periods spanning in total from 1975 to 2004. The results illustrate that real effective exchange rate volatility affects negatively total factor productivity growth. But this effect is not very high. This outcome is corroborated by estimations using an alternative measurement of real effective exchange rate volatility and on a subsample of developed countries. But for developing countries the negative effect of real effective exchange rate volatility is very large. We also found that real effective exchange rate volatility acts on total factor productivity according to the level of financial development. For very low and very high levels of financial development, real exchange rate volatility has no effect on productivity growth but for moderately financially developed countries, real exchange rate volatility reacts negatively on productivity.
    Keywords: real effective exchange rate; volatility; total factor productivity growth; panel data instrumental variable regression; threshold effect estimation; stochastic frontier analysis
    JEL: O47 F3 F41
    Date: 2012–01–24
  4. By: Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga
    Abstract: Using micro price data across US cities, we provide evidence that both the volatility and persistence of deviations from the law of one price (LOP) are positively correlated with the distance between cities. A standard, two-city, equilibrium model with time-varying technology under homogeneous information can predict the relationship between the volatility and distance but not between the persistence and distance. To account for the latter fact, we augment the standard model with noisy signals about the state of nominal aggregate demand that are asymmetric across cities. We further establish that the interaction of imperfect information and sticky prices improves the fit of the model.
    JEL: D40 E31 F31
    Date: 2012–02
  5. By: Vincent BODART (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Bertrand CANDELON (University of Maastricht, Department of Economics); Jean-François CARPANTIER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) and Center for Operations Research and Econometrics (CORE))
    Abstract: This paper provides new empirical evidence about the relationship that may exist between real exchange rates and commodity prices in developing countries that are specialized in the export of a main primary commodity. It investigates how structural factors like the exchange rate regime, the degree of financial and trade openness, the degree of export concentration and the type of the commodity exports affect the strength of the commodity price-real exchange rate dependence.
    Keywords: Real exchange rates, commodity prices, exchange rate regime, financial openness, panel analysis
    JEL: C32 C33 E31 F32
    Date: 2011–12–02
  6. By: Turhan, Ibrahim M.; Arslan, Yavuz; Kılınç, Mustafa
    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 fi…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 faste 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 F41 F36
    Date: 2011–12
  7. By: Hacihasanoglu, Erk; Turhan, Ibrahim M.; Soytas, Ugur
    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; international financial markets; financial crisis
    JEL: G15 F31 Q43 G01
    Date: 2012–01
  8. By: Bas Straathof; Paolo Calio
    Abstract: <p>Exchange rate risk will only have a small effect on international transactions as long as this risk is easily tradable. We find evidence indicating that the availability of currency futures can explain the relatively small impact of exchange rate volatility on trade.</p><p>The impact of exchange rate volatility on international trade is small for industrialized countries, especially since the late 1980s. An explanation for this is Wei’s (1999) “hedging hypothesis”, which states that the availability of currency derivatives has changed the relation between exchange rate volatility and trade. Exchange rate risk will only have a small effect on international transactions as long as this risk is easily tradable. We find evidence indicating that the availability of currency futures can explain the relatively small impact of exchange rate volatility on trade.</p><p> </p>
    JEL: F13 F33 F36
    Date: 2012–02
  9. By: Joshua Aizenman; Hiro Ito
    Abstract: We examine the open macroeconomic policy choices of developing economies from the perspective of the economic “trilemma” hypothesis. We construct an index of divergence of the three trilemma policy choices, and evaluate its patterns in recent decades. We find that the three dimensions of the trilemma configurations are converging towards a “middle ground” among emerging market economies -- managed exchange rate flexibility underpinned by sizable holdings of international reserves, intermediate levels of monetary independence, and controlled financial integration. Emerging market economies with more converged policy choices tend to experience smaller output volatility in the last two decades. Emerging markets with relatively low international reserves/GDP could experience higher levels of output volatility when they choose a policy combination with a greater degree of policy divergence. Yet this heightened output volatility effect does not apply to economies with relatively high international reserves/GDP holding.
    JEL: F15 F2 F32 F36 F4
    Date: 2012–02
  10. By: Jinzhao Chen (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole des Ponts ParisTech - Ecole Normale Supérieure de Paris - ENS Paris - INRA, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: This paper studies the convergence, and the role of internal real exchange rate on economic growth in the Chinese provincial level. Using informal growth equation à la Barro [1991] and dynamic panel data estimation, we find conditional convergence among the coastal provinces and among inland provinces. Moreover, our results show that the real exchange rate appreciation has a positive effect on the provincial economic growth.
    Keywords: Real Exchange Rate ; Economic Growth ; China ; Generalized method of moments
    Date: 2012–02
  11. By: Chen, Shiu-Sheng
    Abstract: This paper examines the currency manipulation policy in the foreign exchange markets of thirteen emerging countries using a structural vector autoregressive (SVAR) framework to link the dynamics of real exchange rates and foreign reserves. It is found that for Korea, Singapore, and Taiwan, exchange rate shocks are the main source of fluctuations in foreign reserves over all time horizons. Empirical evidence suggests that these countries intervene substantially in the foreign exchange markets in order to promote export competitiveness.
    Keywords: Official Intervention; Foreign Reserves
    JEL: E58 F31
    Date: 2012–01–25
  12. By: Modena, Matteo
    Abstract: The sharp raise of the price of agricultural commodities between 2006 and 2008 seems to have a rationalization that goes beyond the mere interaction between supply and demand. Data evidence suggests that financial factors, rather than real determinants, played an important role in determining the dynamics of agricultural commodity prices. In particular, there seems to be a common source underlying food price changes and the financial markets dynamics. Evidence based on principal components supports the view that large fluctuations of food commodity prices can be related to portfolios adjustments of financial agents. We find robust evidence of a strong inverse correlation between financial markets’ returns and the movements of food commodity prices. Moreover, such an inverse relationship has clearly emerged during the recent financial crisis.
    Keywords: International Financial Markets; Commodity Prices; Portfolio Diversification
    JEL: C10 G11 E31 G15
    Date: 2011–07–30

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