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on Open MacroEconomics |
| By: | Barry Eichengreen (Asian Development Bank Institute (ADBI)); Gisela Rua |
| Abstract: | This paper considers the general equilibrium relationship between exchange rates and global imbalances. It emphasizes that the exchange rate is not a primitive but an equilibrium price determined by the policy mix. It uses extensions of the two-country Obstfeld-Rogoff model to analyze the response of imbalances and real exchange rates to shocks. Finally, it analyzes the characteristics of episodes in which chronic current account surpluses (as opposed to deficits) come to an end. |
| Keywords: | exchange rates, Global rebalancing, Obstfeld-Rogoff model, chronic current account surpluses |
| JEL: | F0 F3 F4 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:23258&r=opm |
| By: | Hafedh Bouakez; Aurélien Eyquem |
| 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 effective 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: | Incomplete markets, monetary policy, public spending shocks, real exchange rate, small open economy, sticky prices |
| JEL: | F31 F41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:lvl:lacicr:1212&r=opm |
| By: | Santanu Chatterjee; Azer Mursagulov |
| Abstract: | Government spending on infrastructure has recently increased sharply in many emerging-market economies. This paper examines the mechanism through which public infrastructure spending affects the dynamics of the real exchange rate. Using a two-sector dependent open economy model with intersectoral adjustment costs, we show that government spending generates a non-monotonic U-shaped adjustment path for the real exchange rate with sharp intertemporal trade-offs. The effect of government spending on the real exchange rate depends critically on (i) the composition of public spending, (ii) the underlying financing policy, (iii) the intensity of private capital in production, and (iv) the relative productivity of public infrastructure. In deriving these results, the model also identifies conditions under which the predictions of the neoclassical open economy model can be reconciled with empirical regularities, namely the intertemporal relationship between government spending, private consumption, and the real exchange rate. |
| Keywords: | Fiscal policy , Government expenditures , Infrastructure , Public investment , Real effective exchange rates , Resource allocation , |
| Date: | 2012–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/52&r=opm |
| By: | Charles Amo Yartey; Yehenew Endegnanew; Therese Turner-Jones |
| Abstract: | This paper examines the empirical link between fiscal policy and the current account focusing on microstates defined as countries with a population of less than 2 million between 1970 and 2009. The paper employs panel regression and panel vector autoregression (VAR) on 155 countries of which 42 are microstates. Panel regression results show that a percentage point improvement in the fiscal balance improves the current account balance by 0.4 percentage points of GDP. The real effective exchange rate has no significant impact on the current account in microstates but the coefficient is significant in the global sample. Panel VAR results show that an increase in government consumption results in real exchange appreciation but the effect on the current account after an initial deterioration dies out quicker in microstates than in the global sample. The result implies that fiscal policy has little effect on the current account in microstates beyond its direct impact on imports. Overall, the results suggest that the weak relative price effects make the effect of fiscal adjustment on the current account much more difficult in microstates. |
| Keywords: | Current account , Economic models , Fiscal policy , Government expenditures , Real effective exchange rates , Small states , |
| Date: | 2012–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/51&r=opm |
| By: | Andrea Ferrero |
| Abstract: | One of the most striking features of the period before the Great Recession is the strong positive correlation between house price appreciation and current account deficits, not only in the United States but also in other countries that have subsequently experienced the highest degree of financial turmoil. A progressive relaxation of credit standards can rationalize this empirical observation. Lower collateral requirements facilitate access to external funding and drive up house prices. The current account turns negative because households borrow from the rest of the world. At the same time, however, the world real interest rate counterfactually increases. The two key ingredients that reconcile a demand-based explanation of house price booms and current account deficits with the evidence on real interest rates are nominal interest rates lower than the predictions of a standard monetary policy rule in leveraged economies and foreign exchange rate pegs in saving countries. |
| Keywords: | Housing - Prices ; Credit ; Interest rates ; Monetary policy ; Balance of payments |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:541&r=opm |
| By: | Wei Liao (Hong Kong Institute for Monetary Research); Ana Maria Santacreu (INSEAD and Hong Kong Institute for Monetary Research) |
| Abstract: | Countries that trade more with each other tend to have more correlated business cycles. Yet, traditional international business cycle models predict a much weaker link between trade and business cycle comovement. We propose that the international diffusion of technology through trade in varieties may be driving the observed comovement by increasing the correlation of total factor productivity (TFP). Our hypothesis is that business cycles should be more correlated between countries that trade a wider variety of goods. We find empirical support for this hypothesis. After decomposing trade into its extensive and intensive margins, we find that the extensive margin explains most of the trade-TFP and trade-output comovement. This result is striking because the extensive margin accounts for only a third of total trade. We then develop a three-country model of technology innovation and international diffusion through trade, in which TFP correlation increases with trade in varieties. A numerical exercise shows that the proposed mechanism increases business cycle synchronization relative to traditional models. Impulse responses to a TFP shock in one country reveal a strong positive effect on the output of its trading partner. Finally, our model implies a trade-output coefficient that is 40% of that observed in the data and 5 times higher than that predicted by standard models. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:042012&r=opm |
| By: | Eiji Ogawa (Asian Development Bank Institute (ADBI)); Junko Shimizu |
| Abstract: | Regional monetary and financial cooperation in Asia has been discussed for years. To move towards a coordinated exchange rate policy, Ogawa and Shimizu (2005) proposed both an Asian Monetary Unit (AMU), which is a common currency basket computed as a weighted average of the thirteen ASEAN+3 currencies, and AMU Deviation Indicators (AMU DIs), which indicates the deviation of each Asian currency in terms of the AMU compared with the benchmark rate. The AMU and the AMU DIs are considered both as surveillance measures under the Chiang Mai Initiative and as benchmarks for coordinated exchange rate policies among Asian countries. In this paper, the authors show that monitoring the AMU and the AMU DIs plays an important role in the regional surveillance process under the Chiang Mai Initiative. By using daily and monthly data of AMU and AMU DIs for the period from January 2000 to June 2010, which are available from the website of the Research Institute of Economy, Trade, and Industry (RIETI), they examine their usefulness as a surveillance indicator. Our studies of AMU and AMU DIs confirm the following : first, an AMU peg system stabilizes the nominal effective exchange rate (NEER) of each Asian country. Second, the AMU and the AMU DIs could signal overvaluation or undervaluation for each of the Asian currencies. Third, trade imbalances within the region have been growing as the AMU DIs have been widening. Fourth, the AMU DIs could predict huge capital inflows and outflows for each Asian country. The above findings support the usefulness of using the AMU and the AMU DIs as surveillance indicators for monetary cooperation in Asia. |
| Keywords: | Asian Monetary Unit, Monetary cooperation, Asia, regional financial cooperation, Asian currencies |
| JEL: | F31 F33 F36 |
| Date: | 2011–04 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:23261&r=opm |
| By: | Yang Jiao; Yi Wen |
| Abstract: | This paper proposes a model of international trade with capital accumulation and financial intermediation. This is achieved by embedding the Melitz (2003) model into an incomplete-markets neoclassical framework with an endogenous credit market. The model preserves the analytical tractability of the original Melitz model despite non-trivial distribution of firms’ net worth and capital stocks. We use the model to examine the differential effects of financial and non-financial shocks on aggregate output and international trade flows. The model predicts that trade volume declines far more sharply and significantly than that of output (with an elasticity larger than 3) under financial shocks than under non-financial shocks. The prediction is consistent with the stylized fact that most countries that experienced major financial crises had significantly larger and sharper contraction in exports than aggregate output (as is also true during the recent financial crisis). In the long run, however, a deeper financial market is a great source of "comparative advantage"— it raises not only the level of aggregate productivity but also the ratio of trade volume to domestic output.> |
| Keywords: | Financial crises ; Credit ; International trade |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-003&r=opm |
| By: | Willem Thorbecke (Asian Development Bank Institute); Atsuyuki Kato |
| Abstract: | This paper investigates how exchange rates affect Japanese exports. This is difficult because many of Japan’s exports are used to produce goods for re-export. An appreciation in the importing country that decreases exports can decrease its imported inputs from Japan. To correct for this bias we examine consumption exports. Using a panel dataset of Japan’s consumption exports to 17 countries over the 1988–2009 period, we find that a 10% appreciation of the yen would reduce Japan’s consumption goods exports by 9%. These results indicate that the large swings in the value of the yen over the last decade have caused large swings in the volume of Japanese exports |
| Keywords: | exchange rates, Japanese exports, effects of the exchange rate, Japan, trade |
| JEL: | F30 F32 |
| Date: | 2011–07 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:23238&r=opm |
| By: | Anna Ivanova |
| Abstract: | The discussion of global and regional imbalances has put the spotlight on the possible link between current accounts and structural policies. Drawing on standard empirical current account models, the paper finds that the commonly recommended structural factors cannot explain the widening of imbalances prior to the 2008 - 09 crisis. That said, structural factors do help explain some part of long-standing cross-country differences in the current account levels. In particular, countries with stricter credit market regulation, higher taxes on businesses, lower minimum wage (in particular,in slow growing economies) and generous unemployment benefits tend to have higher current account balances than others. |
| Keywords: | Cross country analysis , Current account balances , Economic models , Fiscal policy , Monetary policy , |
| Date: | 2012–02–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:12/61&r=opm |
| By: | Samba MBAYE |
| Abstract: | The literature on the effect of real exchange rate undervaluation on growth points toward two main transmission channels: the "capital accumulation channel" and the "total factor productivity (TFP) growth channel". This paper carries out an empirical investigation on the TFP growth channel. We provide answers to the three following questions. Does undervaluation of the currency boost the overall productivity level in the economy? If so, does this "undervaluation-induced" productivity improvement significantly enhance growth? And what is the magnitude of the TFP growth channel relative to the capital accumulation channel? Based on a panel of 72 countries over 1970-2008, and separating explicitly the effect of undervaluation from that of overvaluation, our estimations suggest that: (i) the TFP growth channel is empirically verified, (ii) this channel seems to convey the most important part of the growth enhancing effect of undervaluation. These results are robust to the use of both an enhanced-PPP undervaluation measure and a behavioral equilibrium exchange rate based undervaluation index. |
| Keywords: | real exchange rate misalignment, growth, total factor productivity. |
| JEL: | O47 F31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:cdi:wpaper:1338&r=opm |
| By: | Alberto Felettigh (Bank of Italy) |
| Abstract: | The work of Ghironi and Melitz (2005) is at the frontier of international real business cycle (IRBC) models with heterogeneous firms. In their model, the dynamic behaviour of real marginal costs is puzzling: a positive technology shock hitting the home country makes it permanently less cost-effective than the foreign economy. Wages grow more than profits during booms and the labour share in GDP is counterfactually procyclical. Entry by new firms is crucial in delivering this result. It is sufficient to posit that technology improvements are more efficacious in manufacturing than in the "production of new firms" for the labour share and real marginal costs to become countercyclical, consistently with empirical evidence. Once I introduce tradable capital goods and endogenous labour supply, the two models are on average equally good in replicating the empirical moments typically considered in the IRBC literature. |
| Keywords: | international real business cycles, firm heterogeneity, firm entry dynamics, real marginal costs, labour share |
| JEL: | F12 F41 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_854_12&r=opm |
| By: | Paul R. Bergin; Ju Hyun Pyun |
| Abstract: | Not only are investors biased toward home assets, but when they do invest abroad, they appear to favor countries with returns more correlated with home assets, reducing diversification yet further. This paper argues that understanding this correlation puzzle requires a multi-county theoretical perspective, and we construct an N-country DSGE model that allows for heterogeneous stock return correlations. It shows that bilateral asset holdings depend not only upon the stock return correlation with the destination country, but also on the correlation with all other countries. This effect is analogous to ‘multilateral resistance’ in the trade literature. An empirical study controlling for this multilateral resistance in correlations overturns the result of preceding literature, finding that higher stock return correlation lowers bilateral equity asset holdings as theory predicts, reducing the losses of home bias. |
| JEL: | F36 F41 G11 G15 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17907&r=opm |
| By: | Etienne Gagnon; Benjamin R. Mandel; Robert J. Vigfusson |
| Abstract: | A large body of empirical work has found that exchange rate movements have only modest effects on inflation. However, the response of an import price index to exchange rate movements may be underestimated because some import price changes are missed when constructing the index. We investigate downward biases that arise when items experiencing a price change are especially likely to exit or to enter the index. We show that, in theoretical pricing models, entry and exit have different implications for the timing and size of these biases. Using Bureau of Labor Statistics microdata, we derive empirical bounds on the magnitude of these biases and construct alternative price indexes that are less subject to selection effects. Our analysis suggests that the biases induced by selective exits and entries do not materially alter the literature’s view that pass-through to U.S. import prices is low over the short- to medium-term horizons that are most useful for both forecasting and differentiating among economic models. |
| Keywords: | Foreign exchange rates ; Inflation (Finance) ; Imports - Prices ; Price indexes |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:537&r=opm |
| By: | Russell Cooper |
| Abstract: | This paper studies the role of exit from a monetary union during a debt crisis. A monetary union, such as the European Monetary Union, needs to establish a procedure for exit as a tool to cope with debt default. The paper studies various forms of exit and argues that “Euroization” is both a credible and effective means of punishment for countries in default. |
| JEL: | E02 E58 E61 E63 F33 F34 F36 |
| Date: | 2012–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:17908&r=opm |