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on Open MacroEconomics |
| By: | YiLi Chien; Kanda Naknoi |
| Abstract: | Our paper investigates whether the valuation effect caused by a large risk premium and a low risk-free rate can help to explain the enormous US current account and trade deficit observed in the past decade. To answer this question, we set up an endowment growth model in which investors are endowed with heterogeneous trading technologies. In our model, the average US investors load up more aggregate risk by investing in a risky asset abroad and issuing a risk-free asset. Thanks to the large risk premium as well as the low risk-free rate, the US can sustain a long-run trade deficit even as a debtor country. Quantitatively, we find that the valuation effect caused solely by the high risk premium and the low risk-free rate in our model, which is calibrated to match the external assets and liabilities of the US economy, can account for more than half of the observed trade deficit and current account deficit. Our results suggest that the current US trade deficit might not necessarily lead to net export increases or dollar depreciation in the future. |
| Keywords: | International trade ; Risk management |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-009&r=opm |
| By: | Bacchetta, Philippe (University of Lausanne, CEPR); Benhima, Kenza (University of Lausanne); Kalantzis, Yannick (Banque de France) |
| Abstract: | Motivated by the Chinese experience, we analyze a semi-open economy where the central bank has access to international capital markets, but the private sector has not. This enables the central bank to choose an interest rate different from the international rate. We examine the optimal policy of the central bank by modelling it as a Ramsey planner who can choose the level of domestic public debt and of international reserves. The central bank can improve savings opportunities of credit-constrained consumers modelled as in Woodford (1990). We find that in a steady state it is optimal for the central bank to replicate the open economy, i.e., to issue debt financed by the accumulation of reserves so that the domestic interest rate equals the foreign rate. When the economy is in transition, however, a rapidly growing economy has a higher welfare without capital mobility and the optimal interest rate differs from the international rate. We argue that the domestic interest rate should be temporarily above the international rate. We also find that capital controls can still help reach the first best when the planner has more fiscal instruments. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2012-009&r=opm |
| By: | Virginie Coudert; Cécile Couharde; Valérie Mignon |
| Keywords: | EURO AREA, REAL EQUILIBRIUM EXCHANGE RATES, MISALIGNMENTS, PANEL COINTEGRATION |
| JEL: | F31 C23 A A |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2012-07&r=opm |
| By: | Joshua Aizenman (University of California, Santa Cruz and National Bureau of Economic Research and Hong Kong Institute for Monetary Research); Hiro Ito (Portland State University) |
| Abstract: | We examine the development of open macroeconomic policy choices among developing economies from the perspective of the powerful "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, equipped with managed exchange rate flexibility, underpinned by sizable holdings of international reserves, and intermediate levels of monetary independence and financial integration. We also find 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 while this heightened output volatility effect does not apply to economies with relatively high international reserves/GDP holding. |
| Keywords: | Impossible Trinity, International Reserves, Financial Liberalization, Exchange Rate Regime |
| JEL: | F31 F36 F41 O24 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:112012&r=opm |
| By: | McKibbin, Warwick J; Stoeckel, Andrew B; Lu, YingYing |
| Abstract: | The emergence of substantial fiscal deficits and a large build up of government debt in major advanced economies will inevitably lead to a period of fiscal consolidation in coming years. In an earlier paper, McKibbin and Stoeckel (2010) explored the effects of this fiscal adjustment in advanced economies on the global economic outlook. This paper focuses on the differences between the impacts of fiscal policy in advanced versus emerging economies. In particular, the need for more fiscal spending on infrastructure in emerging economies and the need for fiscal consolidation in advanced economies leads naturally to the question of what this asymmetric fiscal adjustment might do to global trade balances as well as global economic growth over the coming decades. The adjustment needed in both regions is substantial and the asymmetry of the adjustment implies important consequences for trade and capital flows between regions as well as asset price adjustments within and between regions. |
| Keywords: | Economic Theory&Research,Debt Markets,Currencies and Exchange Rates,Emerging Markets,Investment and Investment Climate |
| Date: | 2012–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6044&r=opm |
| By: | Thanasis Stengos (University of Guelph.); M. Ege Yazgan (Istanbul Bilgi University) |
| Abstract: | In this paper we use a long memory framework to examine the validity of the Purchasing Power Parity (PPP) hypothesis using both monthly and quarterly data for a panel of 47 countries over a fifty year period (1957 to 2009). The analysis focusses on the long memory parameter d that allows us to obtain different convergence classifications depending on its value. Our analysis allows for the presence of smooth structural breaks and it does not rely on the use of a benchmark. Overall the evidence strongly points to the presence of a long memory process, where 0.5=d<1. The implication of our results is that we find long memory mean reverting convergence, something that is also consistent with Pesaran et al (2009). In explaining the speed of convergence as captured by the estimated long memory parameter d we find impediments to trade such as distance between neighboring countries and sticky prices to be mainly responsible for the slow adjustment of real exchange rates to PPP rather than nominal rates for all country groups but Asia, where the opposite is true. |
| Keywords: | Purchasing Power Parity, Convergence, Long Memory, Pairwise Approach. |
| JEL: | C23 E31 F41 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:gue:guelph:2012-07.&r=opm |
| By: | Frédérique Bec; Songlin Zeng (THEMA, Universite de Cergy-Pontoise; THEMA, Universite de Cergy-Pontoise) |
| Abstract: | Since the late nineties, both theoretical and empirical analysis devoted to the real exchange rate suggest that their dynamics might be well approximated by nonlinear models. This paper examines this possibility for post-1970 monthly ASEAN-5 data, extending the existing research in two directions. First, we use recently developed unit root tests which allow for more flexible nonlinear stationary models under the alternative than the commonly used Self-Exciting Threshold or Exponantial Smooth Transition AutoRegressions. Second, while different nonlinear models survive the mis-specification tests, a Monte Carlo experiment from generalized impulse response functions is used to compare their relative relevance. Our results i) support the nonlinear mean-reverting hypothesis, and hence the Purchasing Power Parity, in most of the ASEAN-5 countries and ii) point to the Multiple Regime-Logistic Smooth Transition and the Exponantial Smooth Transition AutoRegression models as the most likely data generating processes of these real exchange rates. |
| Keywords: | Purchasing Power Parity, Nonlinear ThresholdModels, Southeast Asian Real Exchange Rates. |
| JEL: | C12 C22 F31 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2012-25&r=opm |
| By: | Mouhamadou Sy (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, Département Economie - Finances - Centre d'analyse stratégique); Hamidreza Tabarraei (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 a form of Dutch disease known as the Transfer problem in developing countries. On the theoretical side, we propose a model which unifies the channel proposed by Keynes (1929), Balassa (1964) and Samuelson (1964), and Yano and Nugent (1999). The real exchange rate dynamic is decomposed in three components: the productivity differential, the terms-of-trade, and international transfer. The effects of international transfer on the real exchange rate depend mainly on the propensity of governments to subsidize the tradable or the nontradable sectors. In the empirical section we take into account the heterogeneity of the sample, the dynamic of the real exchange rate and the non stationary nature of the data. Furthermore, we demonstrate empirically that the channels identified by Balassa, Samuelson and Keynes are the main driving forces of real exchange rate movements in developing countries. The Balassa-Samuelson effect by itself accounts for 57% of RER variations while capital inflows account only for 19% of RER variations. The Transfer problem through capital inflows is not rejected but its impact on RER movements in the LDCs is weak. |
| Keywords: | Dutch Disease ; Transfer Problem ; Capital Inflows ; Real Exchange Rate |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:hal:psewpa:halshs-00689490&r=opm |
| By: | William R. Cline (Peterson Institute for International Economics) |
| Abstract: | For several years China has run current account surpluses that have been widely seen as the most serious source of global imbalances on the surplus side. Its exchange rate intervention limited appreciation of the currency and led to a buildup of external reserves to more than $3 trillion. Nonetheless, the surplus has fallen from 10 percent of GDP in 2007 to 2.8 percent in 2011, even though in September the International Monetary Fund projected the 2011 surplus at 5.2 percent of GDP and forecast a rebound to 7.2 percent of GDP by 2016. This policy brief examines whether the moderate 2011 surplus was a transitory aberration or a sign of a new trend. A statistical model explains the bulk of the reduction in the surplus as the consequence of the real exchange rate appreciation of about 20 percent that occurred from 2005–06 to 2009–10. Slow global growth, a rising oil deficit, and erosion in the capital income balance were additional causes. Projections based on this model and another used by the author indicate that if the exchange rate remains unchanged, the surplus is likely to be in a range of 2–4 percent of GDP in 2012–14 but rebound to 4 to 5 percent of GDP by 2017. If instead the government continues real appreciation at the 3 percent annual rate pursued since June 2010, by 2017 the current account would be approximately in balance. |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:iie:pbrief:pb12-7&r=opm |
| By: | Eden, Maya; Nguyen, Ha |
| Abstract: | This paper studies the issue of real exchange rate misalignment and the difficulties in settling international real exchange rate disputes. The authors show theoretically that determining when a country should be sanctioned for real exchange rate"manipulations"is difficult: in some situations a country's real exchange rate targeting can be beneficial to other countries, while in others it is not. Regardless, it is difficult to establish whether a misaligned real exchange rate is intentionally manipulated rather than unintentionally caused by other policies or by various distortions in the economy. The paper continues by illustrating the difficulty in measuring real exchange rate misalignment, and provides a critical assessment of existing methodologies. It concludes by proposing a new method for measuring real exchange rate misalignment based on differences in marginal products between producers of tradable and non-tradable goods. |
| Keywords: | Currencies and Exchange Rates,Economic Stabilization,Debt Markets,Macroeconomic Management,Economic Theory&Research |
| Date: | 2012–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6045&r=opm |
| By: | Dong He (Hong Kong Monetary Authority and Hong Kong Institute for Monetary Research); Lillian Cheung (Hong Kong Monetary Authority); Wenlang Zhang (Hong Kong Monetary Authority); Tommy Wu (Hong Kong Monetary Authority) |
| Abstract: | In this paper we study the determinants of gross capital flows, project the size of China's international investment positions in 2020 and analyse the implications for the renminbi real exchange rates. We assume in this exercise that the renminbi will have largely achieved capital account convertibility by the end of this decade, a timetable consistent with recent proposals by the People's Bank of China. Our analysis shows that China's gross international investment positions would grow significantly, and inflows and outflows would become much more balanced. The private sector would turn its net liability position into a balanced position, and the official sector would reduce its net asset position significantly, relative to the country¡¦s GDP. Because of the increasing importance of private sector foreign claims and the decreasing importance of official foreign reserves, China would be able to earn higher net investment incomes from abroad. Overall, China would continue to be a net creditor, with the net foreign asset position as a share of GDP remaining largely stable through this decade. These findings suggest that the renminbi real exchange rate would not be particularly sensitive to capital account liberalisation as capital flows are expected to be two-sided. The renminbi real exchange rate would likely be on a path of moderate appreciation as China is expected to maintain a sizeable growth differential with its trading partners. |
| Keywords: | Capital Account Liberalisation, Net Foreign Asset Position, Exchange Rates |
| JEL: | F21 F31 F37 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:092012&r=opm |
| By: | Oviedo, P. Marcelo; Singh, Rajesh |
| Abstract: | This paper studies a two country model with economies disaggregated into traded and nontraded sectors and in which investment goods as in practice are produced by combining inputs from all sectors. The model also accounts for nontraded distribution services employed in retailing traded goods to consumers. The results show that the model with multiple input investments outperforms the standard model in which sectoral output also serves as its capital. In particular, it substantially improves (a) the movements of trade balance and relative prices, (b) within country comovements of sectoral and aggregate quantities, and (c) cross-country comovements of output vis-Ã -vis consumption. |
| JEL: | F F32 F34 F41 |
| Date: | 2012–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:isu:genres:35096&r=opm |
| By: | Piyusha Mutreja; B. Ravikumar; Raymond Riezman; Michael J. Sposi |
| Abstract: | In this paper we show that price equalization alone is not sufficient to establish that there are no barriers to international trade. There are many barrier combinations that deliver price equalization, but each combination implies a different volume of trade. Therefore, in order to make statements about trade barriers it is necessary to know the trade flows. We demonstrate this first in a simple two-country model. We then extend the result to a multi-country model with two sectors. We show that for the case of capital goods trade, barriers have to be large in order to be consistent with the observed trade flows. Our model also implies that capital goods prices look similar across countries, an implication that is consistent with data. Zero barriers to trade in capital goods will deliver price equalization in capital goods, but cannot reproduce the observed trade flows in our model. |
| Keywords: | Purchasing power parity ; International trade |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2012-010&r=opm |
| By: | Nidhaleddine Ben Cheikh |
| Abstract: | This paper examines the extent and evolution of exchange rate pass-through (ERPT) using panel cointegration approach. For 27 OECD countries, we provide a strong evidence of incomplete ERPT in sample of 27 OECD countries. Both FM-OLS and DOLS estimators show that pass-through elasticity does not exceed 0.70%. When considering individual estimates, we note a cross-country differences in the long run ERPT. We find that inflation regime and exchange rate volatility are potential macroeconomic sources of this long-run heterogeneity. When focusing on the subsample of 12 European Monetary Union (EMU) countries, our results show a steady decline in the degree of ERPT throughout the different exchange rate arrangements: pass-through elasticity was close to unity during the "snake-in-the tunnel" period while it is about 0.50% since the formation of the euro area. The observed decline in ERPT to import prices was synchronous to the shift towards reduced inflation regime. |
| Keywords: | Exchange Rate Pass-Through, Import Prices, Nonstationary Panel data |
| JEL: | C23 E31 F31 F40 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:wpaper:y:2012:i:078&r=opm |
| By: | Antonakakis, Nikolaos |
| Abstract: | This paper examines the synchronization of business cycles across the G7 countries during US recessions since the 1870's. Using a dynamic measure of business cycle synchronization, results depend on the globalisation period under consideration. On average, US recessions have significantly positive effects on business cycle co-movements only in the period following the breakdown of the Bretton Woods system of fixed exchange rates, while strongly decoupling effects among the G7 economies are documented during recessions that occurred under the classical Gold Standard. During the 2007-2009 recession, business cycles co-movements increased to unprecedented levels. |
| Keywords: | Dynamic conditional correlation; Business cycle synchronization; Recession; Globalisation |
| JEL: | F4 E32 N10 F41 E3 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:38341&r=opm |
| By: | Juan Carlos Cuestas (Department of Economics, The University of Sheffield) |
| Abstract: | This paper analyses the sustainability of the current accounts of a group of Central and Eastern European countries. Given the link between national savings (public and private) and investment, current account may yield stabilities in the former fundamental macroeconomic variables. Hence, this analysis is of paramount importance given the 2008-2011 debt crises faced by many European economies, and the addition of new EU countries to the EMU. By means of unit root tests and fractional integration it shows that, in general, the ratio of current account to gross domestic product is a stationary and mean reverting process, although in some cases shocks tend to have long lasting effects, implying that there is no evidence of a potential debt default in this group of countries. |
| Keywords: | unit roots; fractional integration; current account; EU |
| JEL: | C32 E24 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2012011&r=opm |
| By: | Ansgar Belke; Matthias Göcke; Martin Günther |
| Abstract: | A non-linear model is applied where suddenly strong spurts of exports occur when changes of the exchange rate go beyond a zone of inaction. We call the latter a "play" area - analogous to mechanical play and implement an algorithm describing path-dependent playhysteresis into a regression framework. The hysteretic impact of real exchange rates on German exports is then estimated based on quarterly data from 1995Q1 to 2010Q3. For some of the main export partners of Germany outside the euro area and some of the most important tradable sectors we find significant hysteretic effects for a part of the German exports. |
| Keywords: | exchange rate movements, play-hysteresis, modelling techniques, switching/spline regression, export demand |
| JEL: | F14 C51 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1203&r=opm |