nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒06‒25
fourteen papers chosen by
Martin Berka
Victoria University of Wellington

  1. On the Solvency of Nations: Cross-Country Evidence on the Dynamics of External Adjustment By C. Bora Durdu; Enrique G. Mendoza; Marco E. Terrones
  2. Persistence in Real Exchange Rate Convergence By Thanasis Stengos; M. Ege Yazgan
  3. The Dollar and its Discontents By Jeanne, Olivier
  4. Commodity Windfalls, Polarization, and Net Foreign Assets:Panel Data Evidence on the Voracity Effect By Rabah Arezki; Markus Bruckner
  5. Macroeconomic transmission of eurozone shocks to emerging economies By Bilge Erten
  6. Country Size, Currency Unions, and International Asset Returns By Hassan, Tarek
  8. "Natural hedging" of exchange rate risk: The role of imported input prices By Fauceglia, Dario; Shingal, Anirudh; Wermelinger, Martin
  9. Effects of international monetary integration on inflation, economic growth and current account By Stanisic, Nenad
  10. The changing international transmission of US monetary policy shocks: is there evidence of contagion effect on OECD countries By Irfan Akbar Kazi; Hakimzadi Wagan; Farhan Akbar
  11. The impact of the real exchange rate on non-oil exports. Is there an asymmetric adjustment towards the equilibrium? By Fakhri Hasanov
  12. The Oil price-Macroeconomy Relationship since the Mid- 1980s: A global perspective By Claudio Morana
  13. A remark on arbitrage free prices in multi-period economy By Bernard Cornet; Abhishek Ranjan
  14. Exchange Rate, External Orientation of Firms and Wage Adjustment. By Francesco Nucci; Alberto Franco Pozzolo

  1. By: C. Bora Durdu (Federal Reserve Board); Enrique G. Mendoza (University of Maryland & NBER); Marco E. Terrones (International Monetary Fund)
    Abstract: We test the hypothesis that net foreign asset positions are consistent with external solvency and examine the dynamics of external adjustment using data for 50 countries over the 1970-2006 period. Our analysis adapts Bohn’s (2007) error-correction reaction function approach—which tests for a negative long-run relationship between net exports (NX) and net foreign assets (NFA) as a sufficiency condition for the intertemporal budget constraint to hold—to a dynamic panel framework. Pooled Mean Group (PMG) and Mean Group error-correction estimation yield evidence of a statistically significant, negative response of NX to NFA. Moreover, we cannot reject the hypothesis that the response is largely homogeneous across countries. Our sensitivity analysis shows that the countries with relatively weaker fundamentals need to respond more strongly to the changes in NFA to keep their NFAs on a sustainable path.
    Keywords: global imbalances, external solvency, debt sustainability, Pooled Mean Group estimation.
    JEL: F41 F32 E66
    Date: 2012–06
  2. 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: 2012–06
  3. By: Jeanne, Olivier
    Abstract: Has the US dollar delivered the benefits that the rest of the world is expecting from its holdings of international liquidity? US government debt has been liquid and safe, and it is supplied in sufficient quantity. But it has given a low return to the countries that accumulated the most reserves, especially when those returns are measured in terms of the countries' own consumption. I argue in this paper that the countries that accumulate the most reserves should expect a low return in terms of their own consumption, and that there is little that international monetary reform can do to change that fact.
    Keywords: dollar; foreign exchange reserves; international monetary system; Triffin dilemma
    JEL: F36 F43
    Date: 2012–06
  4. By: Rabah Arezki; Markus Bruckner
    Abstract: This paper examines the effects that windfalls from international commodity price booms have on net foreign assets in a panel of 145 countries during the period 1970-2007. The main finding is that windfalls from international commodity price booms lead to a significant increase in net foreign assets, but only in countries that are ethnically homogeneous. In highly ethnically polarized countries, net foreign assets significantly decreased. To explain this asymmetry, the paper shows that in ethnically polarized countries commodity windfalls lead to large increases in government consumption expenditures and political corruption. The paper's findings are consistent with theoretical models of the current account that have a built-in voracity effect.
    Keywords: Commodity Windfalls, net foreign asseets, polarization
    JEL: F32 Q33 Z10
    Date: 2012
  5. By: Bilge Erten
    Abstract: This paper analyzes the robustness of emerging economies growth performance to a number of external demand shocks using a Bayesian vector autoregressive (BVAR) model with informative priors on the steady state. Using quarterly data from 1993 to 2011 for global financial conditions and external demand variables, it examines the magnitude of the shocks from a deepening Eurozone recession on China, emerging Asia, and emerging Latin America, and the factors that influence the transmission of these shocks. It finds that more than fifty percent of the variation in real GDP growth of Latin American emerging economies is explained by external factors, while it is slightly less than fifty percent for emerging Asia and China. Conditional forecasts of different scenarios indicate that a deepening of the Eurozone recession would create a severe and persistent contraction for emerging economies, depending on the response of the U.S. growth to this shock. Finally, forecasts suggest that a sharp slowdown in China’s growth would have a significant negative impact on emerging economies’ growth, and that the Latin American countries would be more severely hit than the Asian ones.
    Keywords: Eurozone recession, transmission of shocks, Bayesian vector autoregression, emerging economies, growth spillovers
    JEL: F43 F44 F47
    Date: 2012–06
  6. By: Hassan, Tarek
    Abstract: Differences in real interest rates across developed economies are puzzlingly large and persistent. I propose a simple explanation: Bonds issued in the currencies of larger economies are expensive because they insure against shocks that affect a larger fraction of the world economy. I show that differences in the size of economies indeed explain a large fraction of the cross-sectional variation in currency returns. The data also support a number of additional implications of the model: The introduction of a currency union lowers interest rates in participating countries and stocks in the non-traded sector of larger economies pay lower expected returns.
    Keywords: carry trade; country size; currency unions; International return differentials; market segmentation; uncovered interest parity
    JEL: F3 G0
    Date: 2012–05
  7. By: Yang, Jun; Zhang, Wei; Tokgoz, Simla
    Abstract: There has been contentious debate surrounding the issue of undervaluation of the Chinese Renminbi, with continuous international political pressure on China to appreciate its currency and the Chinese government resisting significant changes in its policy. A key question underlining the debate is whether a Renminbi appreciation would deliver substantial gains for exports and employment as the United States has argued or a significant slowdown of Chinese economy as feared by the Chinese government, and if so to what extent. This paper analyzes the ex-ante, short-term impacts of the Chinese Renminbi appreciation on the Chinese and world economies using the novel approach of modeling nominal exchange rate adjustment in the Global Trade Analysis Project, a global computable general equilibrium model. Scenario results show that the Chinese economy will be affected negatively, with lower real gross domestic product, lower employment rates, and a decline in the trade surplus. Chinese currency appreciation has a positive impact on the GDP of the major countries and regions, but by a small margin. With a higher Chinese exchange rate, trade balances for other trading partner countries, with the exception of the United States, improve.
    Keywords: China, computable general equilibrium model, economic impacts, exchange rate, Renminbi appreciation, Financial Economics, International Relations/Trade,
    Date: 2012–06–07
  8. By: Fauceglia, Dario; Shingal, Anirudh; Wermelinger, Martin
    Abstract: Using disaggregated quarterly trade data for Switzerland over 2004-2011, we study exchange rate pass through (ERPT) into imported intermediate input prices and its role in the price setting behaviour of exporters. We explicitly include disaggregated proxies for imported input prices in our analyses to investigate whether Swiss ex-porters may have “naturally hedged” exchange rate risks by sourcing inputs from abroad, especially during periods of strong CHF appreciation. Our results indicate high ERPT into imported input prices in all sectors and strong sectoral ERPT heterogeneity on the export side in both the short and long-run. They also suggest the use of “natural hedging” as an effective strategy to reduce exchange rate risks. Significantly however, Swiss exporters may not have adjusted export pricing practice in response to a strong CHF in the wake of the Euro crisis, which questions central bank intervention during that period.
    Keywords: Exchange rates; exchange-rate-pass-through; international trade; prices
    JEL: F4 F31
    Date: 2012–06–04
  9. By: Stanisic, Nenad
    Abstract: There are various benefits which countries could derive from the renouncement of a national currency hallmarked by unstable external and internal values. The most evident one is the reduction of a long-term inflation rate. The objective of this paper is to test the hypothesis of the positive influence which monetary integration exerts on monetary stability and economic growth. On the other hand, monetary integration can also cause certain economic problems to countries economies, such as the one of the balance-of-payments adjustment. Hence this paper surveys its influence on the current account balance of national economies. The hypotheses are tested empirically by examining the sample of 42 countries from different regions and of different development levels. The results suggest that the monetary integration influences the inflation reduction in developing countries, but not the achieved economic growth rates. At the same time, the results indicate that monetary integration contributes to an increase in the current account deficit of developing countries, but not of developed ones.
    Keywords: international monetary integration; economic growth; inflation; current account
    JEL: F15 E31 F41 F31
    Date: 2012–02–06
  10. By: Irfan Akbar Kazi; Hakimzadi Wagan; Farhan Akbar
    Abstract: We study the changing international transmission of US monetary policy shocks to 14 major OECD countries over the period 1981Q1-2010Q4. We use a time-varying parameter factor augmented VAR approach to study the effective federal funds rate shocks together with a large data set of 265, major financial, macroeconomic and trade variables. Our main findings are as follows. First, negative US monetary policy shocks have considerable negative impact on GDP growth in the US, Canada, Japan and Sweden whereas there is positive impact on GDP growth in the most of the other member countries. Second, the transmission to GDP growth has increased in OECD countries since the early 1980s. Third, the transmission of US monetary policy shocks to major economic and financial variables varies in magnitude during financial turmoil periods than normal periods such as the gross fixed capital formation residential, turned most negative over the second quarter after the initial shock in the US, Canada, Germany, Japan, Switzerland and New Zealand mainly during 2008Q4. Asset prices, interest rates and trade channel seem to play major role in propagation of monetary policy shocks.
    Keywords: Monetary policy shocks, financial markets, international transmission channels, global integration, turmoil periods, time-varying parameter factor augmented VAR.
    JEL: F1 F4 F15 C3 C5
    Date: 2012
  11. By: Fakhri Hasanov (George Washington University)
    Abstract: This study investigates the impact of the real exchange rate on the non-oil exports of the Republic of Azerbaijan in the framework of cointegration and an asymmetric error correction. Threshold and Momentum Threshold Autoregressive methods are applied over the quarterly period 2000Q1-2010Q4. The main finding of the study is that there is a long-run relationship between the variables with symmetric rather than asymmetric adjustment towards the equilibrium level.
    Date: 2012–05
  12. By: Claudio Morana (Università di Milano Bicocca, CeRP-Collegio Carlo Alberto, Italy, Fondazione Eni Enrico Mattei, Italy and International Centre for Economic Research, ICER)
    Abstract: In this paper the oil price-macroeconomy relationship is investigated from a global perspective, by means of a large scale macro-financial-econometric model. In addition to real activity, fiscal and monetary policy responses and labor and financial markets are considered as well. We find that oil market shocks would have contributed to slowing down economic growth since the first Persian Gulf War episode. Among oil market shocks, supply side disturbances were the largest contributor to macro-financial fluctuations, accounting for up to 12% of real activity variance. The latter shocks would have exercised recessionary effects during the first and second Persian Gulf War and 2008 oil price episodes; preferences, speculative and volatility shocks would have also contributed to exacerbate the recessionary episodes. As long as oil supply will keep expanding at a lower pace than required by demand conditions, a recessionary bias, determined by higher and more uncertain real oil prices, may then be expected to persist also in the near future.
    Keywords: Oil Price, Oil Price-Macroeconomy Relationship, Macro-finance Interface, International Business Cycle, Factor Vector Autoregressive Models
    JEL: C22 E32 G12
    Date: 2012–05
  13. By: Bernard Cornet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Abhishek Ranjan (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: We study the convexity property of the set of arbitrage-free prices for a multi-period financial exchange economy. We provide sufficient conditions for the set of arbitrage-free prices to be a convex cone, which includes 2-date model. Further we show that a financial exchange economy with the set of arbitrage-free prices neither convex nor cone can be equivalent to a financial exchange economy with the convex cone set of arbitrage-free prices.
    Keywords: Financial exchange economy, arbitrage-free prices, equivalent financial structure.
    Date: 2012–04
  14. By: Francesco Nucci (La Sapienza University of Rome); Alberto Franco Pozzolo (Universita' degli Studi del Molise)
    Abstract: We estimate the effect of exchange rate movements on firm-level wages, using a representative panel of manufacturing firms. We show that the direction and size of wage adjustment is shaped by the international exposure of each firm on both the sale and cost side of the balance sheet, similar to the response of employment documented in Nucci and Pozzolo (2010). Through the revenue side, wages tend to rise after a currency depreciation and the effect is more pronounced the higher is the firmÕs exposure to sales from exports. Through the expenditure side, a depreciation induces a cut in the firmÕs wages, and the effect is larger the higher is the incidence of imported inputs in total production costs. For a given degree of external orientation, both these effects are larger for firms with a lower market power. Moreover, we document that the effect of exchange rates on wages is shaped by (i) the extent of sectoral import penetration in the domestic market; (ii) the proportion of newly hired workers in each firm in a given year; and (iii) the composition of the firmÕs workforce by occupational category..
    Keywords: Exchange Rate, FirmsÕ Foreign Exposure, Wages.
    JEL: E24 F16 F31
    Date: 2012

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