nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒05‒15
ten papers chosen by
Martin Berka
Victoria University of Wellington

  1. The Dynamic Effects of Fiscal Stimulus in a Two Sector Open Economy By Ross Guest; Anthony J. Makin
  2. Prudential Policy for Peggers By Stephanie Schmitt-Grohe; Martin Uribe
  3. The Harrod-Balassa-Samuelson effect and endogenous extensive margins By Masashige Hamano
  4. After Two Decades of Integration: How Interdependent are Eastern European Economies and the Euro Area? By Catherine Prettner; Klaus Prettner
  5. Are the current account imbalances between EMU countries sustainable? By Christian Schoder; Christian R. Proaño; Willi Semmler
  6. Financial Regulation and the Current Account By Tomasz Wieladek; Sergi Lanau
  7. International Capital Flows to Emerging and Developing Countries: National and Global Determinants By Byrne, Joseph P.; Fiess, Norbert
  8. Business Cycle Synchronization During US Recessions Since the Beginning of the 1870's By Nikolaos Antonakakis
  9. Explaining Global Financial Imbalances: A Critique of the Saving Glut and Reserve Currency Hypotheses By Thomas I. Palley
  10. Structural Reforms and Regional Convergence By Natasha Xingyuan Che; Antonio Spilimbergo

  1. By: Ross Guest; Anthony J. Makin
    Abstract: In 2009-10 governments around the world implemented unprecedented fiscal stimulus in order to counter the impact of the Global Financial Crisis of 2008-09. This paper analyses the impact of fiscal stimulus using a dynamic open economy, overlapping generations model that allows for feedback effects of fiscal stimulus on private sector expenditure via changes in the tax rate and the interest rate. There are two types of goods – traded (T) and non-traded (N) goods, which differ in their capital intensities. The main qualitative result is that the dynamic output gains from fiscal stimulus depend on the productivity of the initial stimulus spending, on the speed of repayment of debt, on the sensitivities of the interest rate to government debt and of labour supply to the tax rate. Also, the overlapping generations framework allows an intergenerational welfare analysis. Among the biggest winners from stimulus are those about to retire. The biggest losers are those near the start of their working lives when the stimulus is implemented.
    Date: 2011–09
  2. By: Stephanie Schmitt-Grohe; Martin Uribe
    Abstract: This paper shows that in a small open economy model with downward nominal wage rigidity pegging the nominal exchange rate creates a negative pecuniary externality. This peg-induced externality is shown to cause unemployment, overborrowing, and depressed levels of consumption. The paper characterizes the optimal capital control policy in this model and shows that it is prudential in nature. For it restricts capital inflows in good times and subsidizes external borrowing in bad times. Under plausible calibrations of the model, this type of macro prudential policy is shown to lower the average unemployment rate by 10 percentage points, reduce average external debt by more than 50 percent, and increase welfare by over 7 percent of consumption per period.
    JEL: E31 E62 F41
    Date: 2012–05
  3. By: Masashige Hamano (CREA-University of Luxembourg)
    Abstract: In the last few decades, the world economy has witnessed the expansion of trade especially in the number of exchanged varieties, the so-called "extensive margins". In a theoretical model where extensive margins in both traded and non-traded sectors are endogenously determined, it is shown that the HBS effect is amplified. Following an HBS productivity shock, when countries expand their extensive margins rather than scale of production, wages appreciate further. Therefore, the expansion in extensive margins leads to a stronger appreciation in the price of non-traded goods. A panel regression across OECD countries indicates consistency with the theoretical model.
    Keywords: The Harrod-Balassa-Samuelson effect, firm entry, real exchange rate, extensive margin
    JEL: F12 F41 F43
    Date: 2011
  4. By: Catherine Prettner (Department of Economics, Vienna University of Economics and Business); Klaus Prettner (Harvard University, Center for Population and Development Studies)
    Abstract: This article investigates the interrelations between the initial members of the Euro area and five important Central and Eastern European economies. We set up a theoretical open economy model to derive the Purchasing Power Parity, the Interest Rate Parity, the Fisher Inflation Parity, and an output gap relation. After taking convergence into account, they are used as restrictions on the cointegration space of a structural vector error correction model. We then employ generalized impulse response analysis to assess the dynamic effects of shocks in output and interest rates on the respective other area as well as the implications of shocks in the exchange rate and in relative prices on both areas. The results show a high degree of interconnectedness between the two economies. There are strong positive spillovers in output to the respective other region with the magnitude of the impact being similarly strong in both areas. Furthermore, we find a multiplier effect being present in Eastern Europe and some evidence for the European Central Banks’ desire towards price stability.
    Keywords: European Economic Integration, Structural Vector Error Correction Model, Generalized Impulse Response Analysis
    JEL: C11 C32 F41
    Date: 2012–03
  5. By: Christian Schoder; Christian R. Proaño; Willi Semmler
    Abstract: Using parametric and non-parametric estimation techniques, we analyze the sustainability of the recently growing current account imbalances in the euro area and test whether the European Monetary Union has aggravated these imbalances. Two alternative criteria for the as-sessment of external debt sustainability are considered: One based on the Transversality Condition of intertemporal optimization, and the other based on the stationarity properties of the stochastic process of the debt-GDP ratio. Econometric sustainability tests are performed using the pooled mean-group estimator and panel unit root tests, respectively. Variants of both test procedures with varying coefficients using penalized splines estimation are applied. We find empirical evidence suggesting that the introduction of the euro is associated with a regime shift from sustainability to unsustainability of external debt accumulation for the euro area.
    Date: 2012
  6. By: Tomasz Wieladek; Sergi Lanau
    Abstract: This paper examines the relationship between financial regulation and the current account in an intertemporal model of the current account where financial regulation affects the current account through liquidity constraints. Greater liquidity constraints decrease the size and persistence of the current account response to a net output shock. The theory is tested with an interacted panel VAR model where the coefficients are allowed to vary with the degree of financial regulation. The current account reaction to an output shock is 60% larger and substantially more persistent in a country with low financial regulation than in one with high financial regulation.
    Keywords: Current account , Economic models , Liquidity controls ,
    Date: 2012–04–12
  7. By: Byrne, Joseph P.; Fiess, Norbert
    Abstract: This paper examines international capital flows to emerging and developing countries. We assess whether commonalities exist, the permanence of shocks to commonalities and their determinants. Also, we consider individual country coherence with global capital flows and we measure the extent of co-movements in the volatility of capital flows. Our results suggest there are commonalities in capital inflows, although aggregate or disaggregate capital flows respond differently to shocks. We find that the US long run real interest rate is an important determinant of global capital flows, and real commodity prices are relevant but to a lesser extent. We also find a role for human capital in explaining why some countries can successfully ride the wave of financial globalisation.
    Keywords: Capital Flows, Emerging Markets, Developing Countries, Global Factors,
    Date: 2011
  8. By: Nikolaos Antonakakis (Department of Economics, Vienna University of Economics and Business)
    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: E3 E32 F4 F41 N10
    Date: 2012–04
  9. By: Thomas I. Palley
    Abstract: This paper examines three different explanations of the global financial imbalances. It begins with the neoliberal globalization hypothesis that explains the imbalances as the product of the model of globalization implemented over the past thirty years. It then examines the saving glut and reserve currency hypotheses. The paper concludes by arguing that both the saving glut and reserve currency hypotheses are inconsistent with the empirical record and both provide a misleading guide for policy.
    Date: 2011
  10. By: Natasha Xingyuan Che; Antonio Spilimbergo
    Abstract: Which structural reforms affect the speed the regional convergence within a country? We found that domestic financial development, trade/current account openness, better institutional infrastructure, and selected labor market reforms facilitate regional convergence. However, these reforms have mixed effects on the growth of regions closer to the country’s development frontier. We also document that regional income disparity and average income are inversely correlated across countries so that speeding up regional convergence increases national income. We also present a theoretical model to discuss these results.
    Keywords: Cross country analysis , Economic models , Euro Area , Europe , Fiscal reforms , Labor market policy , Labor market reforms ,
    Date: 2012–04–27

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