nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒04‒23
sixteen papers chosen by
Martin Berka
Victoria University of Wellington

  1. Debt Deleveraging and the Exchange Rate By Benigno, Pierpaolo; Romei, Federica
  2. Can Oil Prices Forecast Exchange Rates? By Domenico Ferraro; Kenneth S. Rogoff; Barbara Rossi
  3. Crises and Policy Responses within the Political Trilemma: Europe, 1929-1936 and 2008-2011 By Nikolaus Wolf
  4. Can a home country benefit from FDI? A theoretical analysis By Chang, Chia-Ying
  5. Fire-Sale FDI? The impact of financial crises on foreign direct investment By Bogach, Olga; Noy, Ilan
  6. The Global Welfare Impact of China: Trade Integration and Technological Change By Andrei A. Levchenko; Julian di Giovanni; Jing Zhang
  7. The impact of exchange rate volatility on trade integration among North and South Mediterranean countries By Sabri, Nidal Rachid; Peeters, Marga; Abulaben, Diama K.
  8. Unpuzzling the Purchasing Power Parity Puzzle By Matteo Pelagatti; Emilio Colombo
  9. Real Exchange Rate Undervaluation and Growth: Is there a Total Factor Productivity Growth Channel? By Samba Mbaye
  10. Current accounts in Europe: implications of the external imbalances for the future of the common monetary policy By Agnieszka Gehringer
  11. When banking systems meet currencies By Chang, Chia-Ying
  12. Rapid credit growth and international credit: Challenges for Asia By Stefan Avdjiev; Robert McCauley; Patrick McGuire
  13. Exchange Rate Volatility Under Peg: Do Trade Patterns Matter? By Constant Lonkeng Ngouana
  14. Oil Shocks and the Euro as an Optimum Currency Area By Luís Francisco Aguiar; Teresa Maria Rodrigues; Maria Joana Soares
  15. Real exchange rates and the long-run effects of aggregate demand in economies with underemployment By Peter Skott; Martin Rapetti; Arslan Razmi
  16. Financial liberalization, growth, productivity and capital accumulation: The case of European integration By Agnieszka Gehringer

  1. By: Benigno, Pierpaolo; Romei, Federica
    Abstract: Deleveraging from high debt can provoke deep recession with significant international side effects. The exchange rate of the deleveraging country will depreciate in the short run and appreciate in the long run. The real interest rate will fall by more than in the rest of the world. Bounds and policies that constrain the adjustment can prolong and deepen the recession. Early exit strategies from accommodating monetary policy can be quite harmful, as can such other policies as keeping interest rates too high during the deleveraging period. The analysis also applies to a monetary union facing internal adjustment of current account imbalances.
    Keywords: Current Account adjustment
    JEL: E40
    Date: 2012–04
  2. By: Domenico Ferraro; Kenneth S. Rogoff; Barbara Rossi
    Abstract: This paper investigates whether oil prices have a reliable and stable out-of-sample relationship with the Canadian/U.S dollar nominal exchange rate. Despite state-of-the-art methodologies, we find little systematic relation between oil prices and the exchange rate at the monthly and quarterly frequencies. In contrast, the main contribution is to show the existence of a very short-term relationship at the daily frequency, which is rather robust and holds no matter whether we use contemporaneous (realized) or lagged oil prices in our regression. However, in the latter case the predictive ability is ephemeral, mostly appearing after instabilities have been appropriately taken into account
    JEL: C22 C53 F31 F37
    Date: 2012–04
  3. By: Nikolaus Wolf (Humboldt-Universität zu Berlin, CEPR and CESifo)
    Abstract: The recent debate on the Eurozone failed to appreciate a particular characteristic of European crisis experiences, namely their fundamentally political character. To make my argument, I borrow from Dani Rodrik (2000) the framework of a “political trilemma” between cross-border economic integration, national institutions and democracy (in the sense of mass politics) and discuss its relation to the more commonly known “macroeconomic trilemma” as well as some limitations of the framework. The recent experience of a European debt crisis and the experience of Europe’s Great Depression can be interpreted as a “political trilemma”: both reflect the problem of designing effective policy responses to major economic shocks within the environment of deep economic integration across political boundaries and the regime choices that this involves. Within this framework I highlight some aspects of the 1930s that are informative to the policy choices in Europe today. Once we accept that some policy choices should be avoided, attention should be shifted to the remaining options and the obstacles that prevent their implementation, notably the challenge to transform democracy beyond national borders.
    Keywords: political trilemma, great depression, euro-crisis
    JEL: F42 F50 N14
    Date: 2012–04
  4. By: Chang, Chia-Ying
    Abstract: The effects of outward FDI on home country’s growth remain an open question. The growth of outward FDI has renewed this attention. By allowing for endogenous decisions of firms on both whether to conduct FDI and whether to flow capital returns back to the home country, we have found several interesting results. First, as long as the probability of conducting FDI is positive, a higher proportion of entrepreneurs may harm economic growth of the home country in short-run and long-run. The ambiguous effects of transaction costs and MRS between domestic and foreign consumption on the home country’s economic growth result from the role of financial intermediaries. If the effect via inflow probability dominates, conducting FDI in a host country with a more liberalized capital account, or with a higher capital return rate may promote the home country’s economic growth rate. This is consistent with the findings in the outward FDI in European Union since 1970s.
    Keywords: outward FDI, economic growth, capital returns, financial intermediaries,
    Date: 2012–03–19
  5. By: Bogach, Olga; Noy, Ilan
    Abstract: In this paper, we analyze the evolution of foreign direct investment (FDI) inflows to developing and emerging countries around financial crises. We empirically and thoroughly examine the Fire‐Sale FDI hypothesis and describe the pattern of FDI inflows surrounding financial crises. We also add a more granular detail about the types of financial crises and their potentially differential effects on FDI. We distinguish between Mergers and Acquisitions (M&A) and Greenfield investment, as well as between different motivations for FDI—horizontal (tariff jumping) and vertical (integrating production stages). We find that financial crises have a strong negative effect on inward FDI in our sample. Crises are also shown to reduce the value of horizontal and vertical FDI. We do not find empirical evidence of Fire‐Sale FDI. On the contrary, financial crises are shown to affect FDI flows and M&A activity adversely.
    Keywords: International investment, Foreign direct investment (FDI), Financial crises, Mergers and Acquisitions, Multinational firms,
    Date: 2012–03–30
  6. By: Andrei A. Levchenko; Julian di Giovanni; Jing Zhang
    Abstract: This paper evaluates the global welfare impact of China’s trade integration and technological change in a quantitative Ricardian-Heckscher-Ohlin model implemented on 75 countries. We simulate two alternative productivity growth scenarios: a "balanced" one in which China’s productivity grows at the same rate in each sector, and an "unbalanced" one in which China’s comparative disadvantage sectors catch up disproportionately faster to the world productivity frontier. Contrary to a well-known conjecture (Samuelson, 2004), the large majority of countries in the sample, including the developed ones, experience an order of magnitude larger welfare gains when China’s productivity growth is biased towards its comparative disadvantage sectors. We demonstrate both analytically and quantitatively that this finding is driven by the inherently multilateral nature of world trade. As a separate but related exercise we quantify the worldwide welfare gains from China’s trade integration.
    Keywords: Economic models , International trade , Production growth , Productivity , Trade integration , United States ,
    Date: 2012–03–19
  7. By: Sabri, Nidal Rachid; Peeters, Marga; Abulaben, Diama K.
    Abstract: The volatility of exchange rates leads to a reduction of international trade volumes, especially in emerging economies including the South Mediterranean countries. This study discusses the impact of exchange rates on bilateral South- North trade flows, which comes timely after the increased volatility between the Euro and Arab national currencies during the last few years and after the global financial crisis of 2008 that led to a sharp reduction at that time. We investigate the impact of exchange rate volatility on trade using monthly time series for the last ten years from 2000 up to 2011. By means of a Vector Auto Regression model with eXogenous variables (VARX) we estimate the reactions of bilateral exports and imports in response to exchange rate fluctuations between South and North Mediterranean economies. A sample of three South Arab countries is selected including Egypt, Jordan, and Morocco. Causality tests are conducted to examine the hypotheses. Our results show that the exports of goods from Egypt to the European Union decreases in comparison with the baseline by about 3% in case of an appreciation of 10% of the Egyptian pound vis-à-vis the euro, while the imports of Egypt from the EU increase by almost 10%. Also for Morocco, the imports from the EU react much stronger than the exports to the EU to a similar size appreciation of the Moroccan dirham. Jordan is less import-dependent, though reacts strongly in terms of exports if its dollar-pegged currency appreciates vis-à-vis the euro. Finally, we can conclude that the actual exchange rate changes are quite high.
    Keywords: international finance; trade; integration; Mediterranean; volatility; econometric modeling; Vector Autoregressions
    JEL: F4 C3 P45 F3 O16
    Date: 2012–03–27
  8. By: Matteo Pelagatti; Emilio Colombo
    Abstract: The empirical validation of the purchasing power parity (PPP) theory is generally based on real exchange rates built using consumer price indexes (CPI). The empirical evidence does not generally support the theory and this fact goes under the name of purchasing power parity puzzle. In this paper we show by theoretical arguments that, even if the law of one price holds for all the goods traded in two countries, real exchange rates based on CPI are not mean-reverting and therefore statistical tests based on them should reject the PPP hypothesis. We prove that such real exchange rates are neither stationary nor integrated, and so both unit-root and stationarity tests should reject the null according to their power properties. The performance of the most common unit-root and stationarity tests in situations in which the law of one price holds is studied by means of a simulation experiment, based on real European CPI weights and price behaviours.
    Keywords: Purchasing power parity, Law of one price, Stationarity, Unit root.
    JEL: C30 C22
    Date: 2012–03
  9. By: Samba Mbaye (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)
    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 finally, 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 using different measures of real exchange rate undervaluation.
    Keywords: total factor productivity;real exchange rate misalignment;growth
    Date: 2012–04–16
  10. By: Agnieszka Gehringer
    Abstract: The paper discusses the seriousness of current account imbalances in the last few decades in Europe, with a particular focus on the European Monetary Union. A closer look at the development of current accounts in European economies suggests the existence of some serious structural problems that might jeopardize economic performance of single countries, but even more importantly, of the entire monetary union. Although current account positions have been subject of numerous research projects till now, scarce interest has been offered regarding specifically the situation in the member states of the euro area and in the euro candidate countries. This lack of interest could be justified among others with the myopic conviction expressed in the literature that current account positions become irrelevant in a monetary union. Instead, there are conceptual reasons to be worried about external imbalances in a currency area, and particularly, in the current as well as potentially enlarged EMU.
    Keywords: current account imbalances, monetary union, central and eastern European countries, southern European countries
    JEL: F F F
    Date: 2012–03–05
  11. By: Chang, Chia-Ying
    Abstract: In this paper, we examine the link of investment portfolio decisions of households and investment on international capital flows. I extend Bencivenga and Smith (1991)’s overlapping generation model to an open economy and combine with capital market imperfections in Kiyotake and Moore (1997) to address how the portfolio decisions of one countrty might affect that of the other country. In this general equilibrium framework with flexible exchange rate, I find that the investment portfolio deicisions of households are crucial for the directions of capital inflows. In other words, the portfolio decision of individuals in one country is crucial for the deposit and loan rate, which would affect where the capital inflows from the foreign investors.
    Keywords: international capital markets, capital flows, portfolio decisions, financial intermediaries,
    Date: 2012–03–16
  12. By: Stefan Avdjiev; Robert McCauley; Patrick McGuire
    Abstract: Very low interest rates in major currencies have raised concerns over international credit flows to robustly growing economies in Asia. This paper examines three components of international credit and highlights several of the policy challenges that arise in constraining such credit. Our empirical findings suggest that international credit enables domestic credit booms in emerging markets. Furthermore, we demonstrate that higher levels of international credit on the eve of a crisis are associated with larger subsequent contractions in overall credit and real output. In Asia today, international credit generally is small in relation to overall credit - as was not the case before the Asian crisis. So even though dollar credit is growing very rapidly in some Asian economies, its contribution to overall credit growth has been modest outside the more dollarised economies of Asia.
    Keywords: international credit, credit booms, cross-border lending, emerging markets
    Date: 2012–04
  13. By: Constant Lonkeng Ngouana
    Abstract: This paper assesses the role of trade patterns in shaping the volatility of the effective exchange rate under two alternative peg regimes: a hard peg to a single currency and a peg to a basket of currencies. I link the changes in the nominal effective exchange rate of a pegged currency to the fluctuations of its anchor vis-a-vis other major currencies, with an emphasis on the dynamics of trade patterns. In an application to the WAEMU (West African Economic and Monetary Union), I find that the nominal effective exchange rate of the union was twice as volatile under the hard peg to the euro as it would have been under a hypothetical basket peg over the past decade. This result was driven by the substantial shifts that occurred in WAEMU trade patterns, away from euro area countries and toward the Â"BICs" (Brazil, India, and China). These findings suggest that policymakers should pay as much attention to the type of peg as to pegging in itself, with a particular focus on the dynamics of trade patterns.
    Keywords: Currency pegs , Exchange rates , Trade , West African Economic and Monetary Union ,
    Date: 2012–03–09
  14. By: Luís Francisco Aguiar (Universidade do Minho - NIPE); Teresa Maria Rodrigues (University of Minho); Maria Joana Soares (Universidade do Minho)
    Abstract: SWe use wavelet analysis to study the impact of the Euro adoption on the oil price macroeconomy relation in the Euroland. We uncover evidence that the oil-macroeconomy relation changed in the past decades. We show that after the Euro adoption some countries became more similar with respect to how their macroeconomies react to oil shocks. However, we also conclude that the adoption of the common currency did not contribute to a higher degree of synchronization between Portugal, Ireland and Belgium and the rest of the countries in the Euroland. On the contrary, in these countries the macroeconomic reaction to an oil shock became more asymmetric after adopting the Euro.
    Keywords: Oil prices; Business cyles, the Euro, Optimum Currency Areas; Wavelet analysis
    JEL: Q43 C22 E32 F44
    Date: 2012
  15. By: Peter Skott (University of Massachusetts Amherst); Martin Rapetti (University of Massachusetts Amherst); Arslan Razmi (University of Massachusetts-Amherst)
    Abstract: Successful economic development to a large extent derives from the mobilization of underemployed resources. Demand policy can play an important role. It is critical, however, to consider balance of payments constraints and to ensure an expansion of investment in the modern sector. A combination of investment promotion and exchange rate intervention may be required to achieve these goals. JEL Categories: F43, O11, O41
    Keywords: exchange rate, balance of payments, economic growth, inflation, aggregate demand, two-sector model
    Date: 2012–04
  16. By: Agnieszka Gehringer
    Abstract: In the present contribution, we concentrate on the process of financial liberalization in a specific context of European economic and monetary integration. We implement de facto and de jure measures of financial liberalization and find that formal aspects of financial openness generate a strongly positive impact on economic growth and its sources, productivity growth and capital accumulation. Moreover, there is evidence of a positive contribution to the process stemming from the EU membership, while no substantial effect comes from the euro adoption. Finally, we investigate the effects from financial integration on country groups within the EU.
    Keywords: Financial integration, economic growth, productivity, European integration
    JEL: F41 F36 F43
    Date: 2012–03–16

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