nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒07‒14
six papers chosen by
Martin Berka
Victoria University of Wellington

  1. A Germans’ dilemma: save the euro or preserve their socio-economic model By Luigi Bonatti; Andrea Fracasso
  2. Two-way capital flows and global imbalances: a neoclassical approach By Pengfei Wang; Yi Wen; Zhiwei Xu
  3. The Signaling Effect of Exchange Rates: pass-through under dispersed information By Waldyr Areosa; Marta Areosa
  4. Global Banks and Crisis Transmission By Sebnem Kalemli-Ozcan; Elias Papaioannou; Fabrizio Perri
  5. Interest rates and business cycles in emerging economies: The role of financial frictions By Fernández, Andrés; Gulan, Adam
  6. Risk Aversion in the Euro area By Jonathan Benchimol

  1. By: Luigi Bonatti; Andrea Fracasso
    Abstract: The first part of this paper describes some peculiar features of the German socio-economic model and argues that there is a widespread consent in Germany on preserving it in the face of global, European and national challenges. Essential components of this model are the export-oriented manufacturing sectors specialized in the production of those capital goods and consumer durables in which Germany has traditionally enjoyed a comparative advantage. Painful reforms were implemented in the first half of the 2000s, a period in which Germany exhibited lower GDP growth than the countries of the euro-periphery (with the exception of Italy) with a view to strengthening the international competitiveness of these sectors and the German ability to penetrate the fast growing emerging markets. The second part of the paper treats the intra-euro imbalances and discusses the thesis according to which the creation of the euro ended up acting as an asymmetric shock that put in motion a process of real divergence between the member countries, exacerbating the historical core-periphery divide. Paradoxically, this divergence was fed by the optimistic conviction that the elimination of the nominal exchange rate as an instrument of adjustment within the euro area would have forced the peripheral European countries with a history of higher price and wage inflation to uniform their price and wage dynamics to the more disciplined core countries like Germany. Indeed, it was this expectation that convinced the financial markets to neglect country-specific default risks, thus leading the interest-rate spreads between core and periphery securities at record low levels. In its turn, the availability of cheap and abundant credit permitted the peripheral countries to postpone the structural reforms necessary for long-lasting convergence in productivity levels and competitiveness, to interrupt the effort aimed at lowering the public debt-GDP ratio, and to expand domestic demand to the benefit of importers and non-tradable sectors of the economy (in particular, of the construction sector). The elimination of significant intra-euro interest differentials facilitated the large capital outflows affecting Germany from the introduction of the euro, which are deemed to be among the main culprit of the stagnant real wages and low growth characterizing the country in the first half of the 2000s. Part three addresses some implications of the crisis that broke up in Europe after that the revelation concerning the true entity of Greece’s public deficit had provoked a drastic change in market sentiment and a more pessimistic assessment of the default risk inherent in the debt of peripheral countries. In particular, this part discusses the economic rationale underlying the popularity among German commentators and public opinion of the moral hazard issue related to the bailing-out of the peripheral countries. This discussion allows us to outline the dilemma faced by the German authorities in dealing with the choice between incurring the relevant costs implied by the virtual renunciation to the no-bailout principle and the dissolution of the euro. To shed some light on the terms of this dilemma, the paper seeks to clarify how the German objective to remain also in the future a leading player in the world economy and to preserve its socio-economic model may be compatible with the political need to accommodate the requests of its stagnating euro-periphery partners and save the euro. The concluding remarks summarize and elaborate more on the implications of the dilemma mentioned above.
    Keywords: European imbalances, Macroeconomic divergence and adjustment, Germany; Political economy of structural change, Social market economy.
    JEL: F41 F42 F43 F51
    Date: 2012
  2. By: Pengfei Wang; Yi Wen; Zhiwei Xu
    Abstract: Financial capital and fixed capital tend to flow in opposite directions between poor and rich countries. Why? What are the implications of such two-way capital flows for global trade imbalances and welfare in the long run? This paper introduces frictions into a standard two- country neoclassical growth model to explain the pattern of two-way capital flows between emerging economies (such as China) and the developed world (such as the United States). We show how underdeveloped credit markets in China can lead to abnormally high rate of returns to fixed capital but excessively low rate of returns to financial capital relative to the U.S., hence driving out household savings (financial capital) on the one hand while simultaneously attracting foreign direct investment (FDI) on the other. When calibrated to match China’s high marginal product of capital and low real interest rate, the model is able to account for the observed rising trends of China’s financial capital outflows and FDI inflows as well as its massive trade imbalances. Despite double heterogeneity in households and firms and a less than 100% capital depreciation rate, our two-country model is analytically tractable with closed form solutions at the micro level, which permits exact aggregation by the law of large numbers, so the general equilibrium of the model can be solved by standard log-linearization or higher order perturbation methods without the need of using numerical computation methods. Our model yield, among other things, three implications that stand in sharp contrast with the existing literature: (i) Global trade imbalances between emerging economies and the developed world are sustainable even in the steady state. (ii) There exists an immiserization effect of FDI --- namely, FDI is beneficial for the sourcing country but harmful to the recipient country under financial frictions. (iii) Our quantitative results cast doubts on the conventional wisdom that the "saving glut" of emerging economies is responsible for the low world interest rate.>
    Keywords: Capital movements ; International trade ; International finance
    Date: 2012
  3. By: Waldyr Areosa; Marta Areosa
    Abstract: We examine exchange-rate pass-through (ERPT) to prices in a model of dispersed information in which the nominal exchange rate imperfectly conveys information about the underlying fundamentals. If the information is complete, ERPT is also complete. Under dispersed information, we derive conditions under which our model displays three properties that are consistent with the stylized facts of pass-through. First, ERPT lies between 0 and 1 (incomplete ERPT). Second, ERPT is usually higher for imported goods prices than for consumer prices (exchange rate-consumer price puzzle). Third, there is a link between ERPT and macroeconomic stability.
    Date: 2012–06
  4. By: Sebnem Kalemli-Ozcan; Elias Papaioannou; Fabrizio Perri
    Abstract: We study the effect of financial integration (through banks) on the transmission of international business cycles. In a sample of 20 developed countries between 1978 and 2009 we find that, in periods without financial crises, increases in bilateral banking linkages are associated with more divergent output cycles.This relation is significantly weaker during financial turmoil periods, suggesting that financial crises induce co-movement among more financially integrated countries. We also show that countries with stronger, direct and indirect, financial ties to the U.S. experienced more synchronized cycles with the U.S. during the recent 2007-2009 crisis. We then interpret these findings using a simple general equilibrium model of international business cycles with banks and shocks to banking activity. The model suggests that the relation between integration and synchronization depends on the type of shocks hitting the world economy, and that shocks to global banks played an important role in triggering and spreading the 2007-2009 crisis.
    JEL: E32 F15 F36
    Date: 2012–07
  5. By: Fernández, Andrés (Research Department, Inter-American Development Bank); Gulan, Adam (Bank of Finland Research)
    Abstract: Countercyclical country interest rates have been shown to be both a distinctive characteristic and an important driving force of business cycles in emerging market economies. In order to account for this, most business cycle models of emerging market economies have relied on ad hoc and exogenous countercyclical interest rate processes. We embed a financial contract à la Bernanke et al. (1999) into a standard small open economy business cycle model that endogenously delivers countercyclical interest rates. We then take the model to the data. For this purpose we build a novel panel dataset for emerging economies that includes financial data, namely sovereign and corporate interest rates as well as leverage. We show that the model accounts well not only for countercyclical interest rates, but also for other stylized facts of emerging economies' business cycles, including the dynamics of leverage.
    Keywords: business cycle models; emerging economies; financial frictions
    JEL: E32 E44 F41
    Date: 2012–06–18
  6. By: Jonathan Benchimol (Economics Department - ESSEC Business School, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon Sorbonne)
    Abstract: We propose a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model where a risk aversion shock enters a separable utility function. We analyze five periods, each one lasting twenty years, to follow over time the dynamics of several parameters (such as the risk aversion parameter), the Taylor rule coefficients and the role of this risk aversion shock on output and real money balances in the Eurozone. Our analysis suggests that risk aversion was a more important component of output and real money balance dynamics between 2006 and 2011 than it had been between 1971 and 2006, at least in the short run.
    Keywords: Risk aversion; Output; Money; Euro area; New Keynesian DSGE models; Bayesian estimation;
    Date: 2012–06–28

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