nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒05‒29
fifteen papers chosen by
Martin Berka
Victoria University of Wellington

  1. Current Account Imbalances in Europe By Lane, Philip R.; Pels, Barbara
  2. Estimates of Fundamental Equilibrium Exchange Rates, May 2012 By William R. Cline; John Williamson
  3. Managing Currency Pegs By Stephanie Schmitt-Grohé; Martín Uribe
  4. Prudential Policy for Peggers By Schmitt-Grohé, Stephanie; Uribe, Martín
  5. A Model of Transfer Problem with Application to LDCs By Mouhamadou Sy; Hamidreza Tabarraei
  6. The impact of external shocks on the eurozone: a structural VAR model By Jean-Baptiste Gossé; Cyriac Guillaumin
  7. Global Imbalances and Capital Account Openness: an Empirical Analysis By Jamel Saadaoui
  8. On the link between distribution's margins and exchange rates: the role of globalization By Cédric Durand; Antonia Lòpez-Villavicencio
  9. Real Exchange Rate and Economic Growth: Evidence from Chinese Provincial Data (1992 - 2008) By Jinzhao Chen
  10. On the international transmission of shocks : micro-evidence from mutual fund portfolios By Raddatz, Claudio; Schmukler, Sergio L.
  11. Are the "ASEAN Plus Three" Countries Coming Closer to an OCA? By KAWASAKI Kentaro
  12. Can Leading Indicators Assess Country Vulnerability? Evidence from the 2008-09 Global Financial Crisis By Frankel, Jeffrey A.; Saravelo, George
  13. The missing wealth of nations: Are Europe and the U.S. net debtors or net creditors? By Gabriel Zucman
  14. Global Banks, Financial Shocks and International Business Cycles: Evidence from an Estimated Model By Kollmann, Robert
  15. Monetary and Fiscal Policy Interactions in an Emerging Open Economy Exposed to Sudden Stops Shock: A DSGE Approach By Aliya Algozhina

  1. By: Lane, Philip R.; Pels, Barbara
    Abstract: The European crisis is partly attributable to the sharp increase in external imbalances across Europe during the pre-crisis period. We examine current account imbalances in Europe over 1995-2007, together with the underlying saving and investment rates (and their subcomponents). We find that the discrete expansion in current account imbalances during the 2002-2007 period can be attributed to a strengthening in the link between growth forecasts and current account balances. A striking pattern was that greater optimism about future growth was associated with lower savings and higher construction investment, rather than investment in productive capital.
    Keywords: current account; EMU; Europe
    JEL: E63 F41
    Date: 2012–05
  2. By: William R. Cline (Peterson Institute for International Economics); John Williamson (Peterson Institute for International Economics)
    Abstract: Cline and Williamson calculate a new set of fundamental equilibrium exchange rates (FEERs) based on the new round of International Monetary Fund (IMF) projections in the spring 2012 World Economic Outlook. These show that on a trade-weighted basis the US dollar is now overvalued by 3–4 percent, while the Chinese renminbi is undervalued 3–4 percent. Both misalignments are much lower than in previous years (6 percent overvaluation and 16 percent undervaluation respectively a year ago). Because of the large roles of China and the United States in global imbalances, the GDP-weighted absolute value of divergence from FEERs has fallen from 8.4 percent in 2009 to 2.6 percentage points in April 2012. In contrast, large imbalances and misalignments have persisted in a number of smaller economies, including Australia, New Zealand, South Africa, and Turkey on the deficit side and Hong Kong, Malaysia, Singapore, Sweden, Switzerland, and Taiwan on the surplus side.
    Date: 2012–05
  3. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: The combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity. In turn, this real rigidity makes the economy prone to involuntary unemployment during external crises. This paper presents a graphical analysis of alternative policy strategies aimed at mitigating this source of inefficiency. First- and second-best monetary and fiscal solutions are analyzed. Second-best solutions are found to be prudential, whereas first-best solutions are not.
    JEL: F41
    Date: 2012–05
  4. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    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 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.
    Keywords: capital controls; currency pegs; downward wage rigidity; pecuniary externality
    JEL: E31 E62 F41
    Date: 2012–05
  5. 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: 2012–05
  6. By: Jean-Baptiste Gossé (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Cyriac Guillaumin (CREG - Centre de recherche en économie de Grenoble - Université Pierre Mendès-France - Grenoble II : EA4625)
    Abstract: This paper studies the impact of the main external shocks which the eurozone and member states have undergone since the start of the 2000s. Such shocks have been monetary (drop in global interest rates), financial (two stock market crises) and real (rising oil prices and an accumulation of global current account imbalances). We have used a structural VAR (SVAR) methodology, on the basis of which we have defined four structural shocks: external, supply, demand and monetary. The estimates obtained using SVAR models enabled us to determine the impact of these shocks on the eurozone and its member countries. The study highlights the diversity of reactions inside the eurozone. The repercussions of the oil and monetary shocks were fairly similar in all eurozone countries - excepting the Netherlands and the United Kingdom - but financial crises and global imbalances have had very different effects. External shocks explain one-fifth of the growth differential and current account balance variance and about one-third of fluctuations in the real effective exchange rate in Europe. The impact of the oil crisis was particularly large, but it pushed the euro down. Global imbalances explain a large proportion of exchange rate fluctuations but drove the euro up. Furthermore the response functions to financial and monetary crises are similar, except for current account functions. A financial crisis seems to result in the withdrawal of larger volumes of assets than a monetary crisis. The study thus highlights the diversity of the reactions in the eurozone and shows that external shocks do more to explain variations in the real effective exchange rate than in the growth differential or current account, while underlining the particularly important part played by global imbalances in European exchange rate fluctuations.
    Keywords: global imbalances, current account, eurozone, structural VAR model, contemporary and long-term restrictions, external shock, exogeneity hypothesis.
    Date: 2011–06–25
  7. By: Jamel Saadaoui (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234)
    Abstract: We investigate if capital account openness has played a major role in the evolution of global imbalances on the period 1980-2003. We estimate, with panel regression techniques, the impact of capital account openness on medium run current account imbalances for industrialized and emerging countries by using a de jure measure of capital account openness (the Chinn-Ito index of capital account openness, 2002, 2006) and a de facto measure of capital account openness (the gross foreign assets measured as the sum of foreign assets and foreign liabilities). By increasing the opportunities of overseas investments, the relative capital account openness has had positive impact on medium run current account balances of industrialized countries (because of downward pressures on domestic investment rates). Conversely, the relative capital account openness has had negative impact on medium run current account balances of emerging countries (because of upward pressures on domestic investment rates). The evolutions of domestic and foreign capital account openness have allowed increasing medium run current account balances in absolute value during this period.
    Keywords: Global Imbalances; Capital Account Openness; Chinn-Ito index
    Date: 2011–11–15
  8. By: Cédric Durand (CEMI - Centre d'étude des modes d'industrialisation - Ecole des Hautes Etudes en Sciences Sociales (EHESS), CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Antonia Lòpez-Villavicencio (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234)
    Abstract: In this paper, we analyze the differences in the sensibility of the distribution and transportation margin to exchange rate variations among different sectors in several European countries between 1995 and 2007. On the one hand, we provide new evidence that the margin reacts to exchange rate movements, a fact that may help to explain the still unresolved puzzle concerning the incomplete pass-through of the exchange rate to consumer prices. On the other hand, we look for indications of the characteristics of global value chains governance through the evolution of distributional margins. In addition, in order to draw more subtle conclusions, one original feature of this work is that we empirically allow for asymmetrical reactions of distributional margins to depreciations or appreciation, an effect that was previously ignored in the literature.
    Keywords: Distribution's margin, globalization, asymmetries, exchange rate
    Date: 2011–05–20
  9. 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
  10. By: Raddatz, Claudio; Schmukler, Sergio L.
    Abstract: Using micro-level data on mutual funds from different financial centers investing in equity and bonds, this paper analyzes how investors and managers behave and transmit shocks across countries. The paper shows that the volatility of mutual fund investments is quantitatively driven by investors through injections of capital into, or redemptions out of, each fund, and by managers changing the country weights and cash in their portfolios. Both investors and managers respond to returns and crises, and substantially adjust their investments accordingly. These mechanisms generated large capital reallocations during the global financial crisis. Their behavior tends to be pro-cyclical, reducing their exposure to countries experiencing crises and increasing it when conditions improve. Managers actively change country weights over time, although there is significant short-run"pass-through,"meaning that price changes affect country weights. Consequently, capital flows from mutual funds do not seem to stabilize markets and instead expose countries to foreign shocks.
    Keywords: Mutual Funds,Debt Markets,Emerging Markets,Investment and Investment Climate,Currencies and Exchange Rates
    Date: 2012–05–01
  11. By: KAWASAKI Kentaro
    Abstract: After the global financial crisis, it has become more recognized that the policy dialogues among both emerging and advanced economies on the exchange rate is necessary to prevent competitive devaluation. In this context, East Asian countries should also choose an adequate exchange rate system. However, there still exists a variety of exchange rate regimes in this area, which might suggest a possibility of coordination failure. To avoid this, the establishment of stable exchange rate linkages and the enhancement of monetary policy credibility in East Asia are needed. These discussions on common regional exchange rate policy are often related to the "Optimum Currency Area (OCA) theory" because stabilized exchange rates in the global economies are only assured by a "one size fits all" monetary policy in the end. Hence, the main purpose of this paper is to investigate whether East Asian countries—ASEAN5, China, Korea, and Japan—have developed into matching an OCA in recent years or not. While developing the earlier generalized purchasing power parity (G-PPP) model into an up-to-date non-linear econometric model and considering the adoption of the Asian monetary unit (AMU) into this area, this paper could have positive empirical results which suggest for forming a common currency in East Asia.
    Date: 2012–05
  12. By: Frankel, Jeffrey A.; Saravelo, George
    Abstract: This paper investigates whether leading indicators can help explain the cross-country incidence of the 2008-09 financial crisis. Rather than looking for indicators with specific relevance to the current crisis, the selection of variables is driven by an extensive review of more than eighty papers from the previous literature on early warning indicators. The review suggests that central bank reserves and past movements in the real exchange rate were the two leading indicators that had proven the most useful in explaining crisis incidence across different countries and crises in the past. For the 2008-09 crisis, we use six different variables to measure crisis incidence: drops in GDP and industrial production, currency depreciation, stock market performance, reserve losses, and participation in an IMF program. We find that the level of reserves in 2007 appears as a consistent and statistically significant leading indicator of who got hit by the 2008-09 crisis, in line with the conclusions of the pre-2008 literature. In addition to reserves, recent real appreciation is a statistically significant predictor of devaluation and of a measure of exchange market pressure during the current crisis. So is the exchange rate regime. We define the period of the global financial crisis as running from late 2008 to early 2009, which probably explains why we find stronger results than earlier papers such as Obstfeld, Shambaugh and Taylor (2009, 2010) and Rose and Spiegel (2009a,b) which use annual data.
    Date: 2011
  13. By: Gabriel Zucman (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 shows that official statistics substantially underestimate the net foreign asset positions of rich countries because they fail to capture most of the assets held by households in offshore tax havens. Drawing on systematic anomalies in portfolio investment positions and a unique Swiss dataset, I find that 8% of the global financial wealth of households is held in tax havens, 6% of which goes unrecorded. On the basis of plausible assumptions, accounting for unrecorded assets turns the eurozone, officially the world's second largest net debtor, into a net creditor. It also reduces the U.S. net debt significantly. The results shed new light on global imbalances and challenge the widespread view that, after a decade of poor-to-rich capital flows, external assets are now in poor countries and debts in rich countries. I provide concrete proposals to improve international investment statistics.
    Keywords: Tax havens ; International investment positions ; Global imbalances
    Date: 2012–03
  14. By: Kollmann, Robert
    Abstract: This paper estimates a two-country model with a global bank, using US and Euro Area (EA) data, and Bayesian methods. The estimated model matches key US and EA business cycle statistics. Empirically, a model version with a bank capital requirement outperforms a structure without such a constraint. A loan loss originating in one country triggers a global output reduction. Banking shocks matter more for EA macro variables than for US real activity. During the Great Recession (2007-09), banking shocks accounted for about 20% of the fall in US and EA GDP, and for more than half of the fall in EA investment and employment.
    Keywords: Bayesian econometrics; financial crisis; global banking; investment; real activity
    JEL: E44 F36 F37 G21
    Date: 2012–05
  15. By: Aliya Algozhina
    Abstract: The monetary and fiscal policy interactions have gained a new research interest after the 2008 crisis due to the global increase of fiscal debt. This paper constructs a macroeconomic model of joint fiscal and monetary policy for an emerging open economy taking into account its structural uniqueness. In particular, the two instruments of monetary policy, interest rate and foreign exchange intervention; the two instruments of fiscal policy, government consumption and government investment; and a sudden stops shock through the collateral constraint of foreign borrowings are modeled here in a single DSGE framework. The parameters are calibrated for the case of Hungary using data over 1995Q1-2011Q3. The impulse response functions show that government consumption is unproductive and increases fiscal debt as opposed to government investment, foreign exchange intervention positively affects net exports but does not stimulate an economy per se causing inflation, and a negative shock to the upper bound of leverage ratio in the collateral constraint of foreign borrowings generates a sudden stops crisis for the emerging world. Monetary and fiscal policy intimately interact in the short and medium run such that there is an immediate response of monetary instruments to fiscal shocks, while fiscal instruments adjust to monetary shocks in the medium run.
    Keywords: Monetary Policy, Fiscal Policy, Emerging Open Economy, Sudden Stops, Collateral Constraint
    JEL: E63 F41 G01
    Date: 2012–05

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