nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒09‒30
twelve papers chosen by
Martin Berka
Victoria University of Wellington

  1. Capital Account Policies and the Real Exchange Rate By Olivier Jeanne
  2. Nonlinear Mechanism of the Exchange Rate Pass-Through: Does Business Cycle Matter? By Nidhaleddine Ben Cheikh
  3. House Prices Booms and Current Account Deficits By Andrea Ferrero
  4. Revisiting the effective exchange rates of the Euro By Martin Schmitz; Maarten De Clercq; Michael Fidora; Bernadette Lauro; Cristina Pinheiro
  5. Revisiting the theory of optimum currency areas: Is the CFA franc zone sustainable? By Cécile Couharde; Issiaka Coulibaly; David Guerreiro; Valérie Mignon
  6. International channels of the Fed’s unconventional monetary policy By Michael D. Bauer; Christopher J. Neely
  7. International relative price levels: a look under the hood By Jaime Marquez; Charles Thomas; Corinne Land
  8. History, gravity and international finance By Livia Chiţu; Barry Eichengreen; Arnaud Mehl
  9. The interest rate - exchange rate nexus: exchange rate regimes and policy equilibria By Christoph Himmels; Tatiana Kirsanova
  10. The Case For Temporary Inflation in the Eurozone By Schmitt-Grohé, Stephanie; Uribe, Martín
  11. Price transmission from international to domestic markets By Friederike Greb; Nelissa Jamora; Carolin Mengel; Stephan von Cramon-Taubadel; Nadine Würriehausen
  12. An Estimate for the Real Foreign Exchange Rate in Iran By Naghshineh-Pour, Amir

  1. By: Olivier Jeanne
    Abstract: This paper presents a simple model of how a small open economy can undervalue its real exchange rate using its capital account policies. The paper presents several properties of such policies, and proposes a rule of thumb to assess their welfare cost. The model is applied to an analysis of Chinese capital account policies.
    JEL: F31 F32 F36
    Date: 2012–09
  2. By: Nidhaleddine Ben Cheikh (CREM - Centre de Recherche en Economie et Management - CNRS : UMR6211 - Université de Rennes I - Université de Caen Basse-Normandie)
    Abstract: This paper examines the presence of nonlinear mechanism in the exchange rate pass-through (ERPT) to CPI inflation for 12 euro area (EA) countries. Using logistic smooth transition models, we explore the existence of nonlinearity with respect to economic activity along the business cycle. Our results provide a strong evidence of nonlinearity in 6 out of 12 EA countries with significant differences in the degree of ERPT between the periods of expansion and recession. However, we find no clear direction in this regime-dependence of pass-through to business cycle. In some countries, ERPT is higher during expansions than in recessions; however, in other countries, this result is reversed. These cross-country differences in the nonlinear mechanism of pass-through would have important implications for the design of monetary policy and the control of inflation in the EA context.
    Keywords: Exchange Rate Pass-Through; Inflation; Smooth Transition Regression
    Date: 2012–09–10
  3. By: Andrea Ferrero (Federal Reserve Bank of New York)
    Abstract: One of the most striking features of the period before the Great Recession of 2007-2009 is the strong positive correlation between house price appreciation and current account deficits in countries that have subsequently experienced the highest degree of financial turmoil. A progressive relaxation of credit constraints can rationalize this empirical observation. Lower collateral requirements facilitate access to external funding and drive up house prices. Households increase their leverage borrowing from the rest of the world so that the current account turns negative. Several pieces of evidence support this view. The paper further compares this mechanism with the role of monetary policy, the exchange rate regime and foreign saving shocks in accounting for the evidence.
    Date: 2011
  4. By: Martin Schmitz (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Maarten De Clercq (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Michael Fidora (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Bernadette Lauro (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Cristina Pinheiro (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: This paper describes in detail the methodology currently used by the European Central Bank (ECB) to determine the nominal and real effective exchange rate indices of the euro. Building on the work of Buldorini et al. (2002), it shows how the ECB’s techniques for calculating effective exchange rates have been updated over time and explains the related theoretical foundations. In particular, the paper discusses the use and development of trade weights based on trade in manufactured goods (taking account of third market effects), the trading partners selected, and the choice of deflators for constructing the real effective exchange rate indices. In addition, it presents evidence on exchange rate and competitiveness developments for both the euro area as a whole and individual Member States. While the growing importance of China is reflected in the updated trade weights of euro effective exchange rates, it appears that the increasing integration of the euro area with other European economies accounts for the largest variation in trade weights. The US dollar, an anchor currency for a number of large emerging markets, continues to play an important role for the effective exchange rate of the euro and euro area competitiveness. Overall, euro area competitiveness has improved slightly since the introduction of the single currency, despite significant heterogeneity within the euro area. JEL Classification: F10, F30, F31, F40
    Keywords: competitiveness, effective exchange rate (EER), harmonised competitiveness indicator (HCI), nominal effective exchange rate (NEER), real effective exchange rate (REER), trade weights
    Date: 2012–06
  5. By: Cécile Couharde; Issiaka Coulibaly; David Guerreiro; Valérie Mignon
    Abstract: This paper aims at explaining why the CFA countries have successfully maintained a currency union for several decades, despite failing to meet many of optimum currency area criteria. We suggest that the CFA zone, while not optimal, has been at least sustainable. We test this sustainability hypothesis by relying on the Behavioral Equilibrium Exchange Rate (BEER) approach. In particular, we assess and compare the convergence process of real exchange rates towards equilibrium for the CFA zone countries and a sample of other sub-Saharan African (SSA) countries. Our findings evidence that internal and external balances have been fostered and adjustments facilitated in the CFA zone as a whole—compared to other SSA countries—as well as in each of its member countries.
    Keywords: Equilibrium exchange rates, CFA zone, Optimum Currency Areas, currency union sustainability
    JEL: F31 F33 C23
    Date: 2012
  6. By: Michael D. Bauer; Christopher J. Neely
    Abstract: Previous research has established that the Federal Reserve large scale asset purchases (LSAPs) significantly influenced international bond yields. This paper analyzes the channels through which these effects occurred. We use dynamic term structure models to decompose international yield changes into changes in term premia and expected short rates. The conclusions for most countries are model dependent. Models that impose a unit root tend to imply large signaling effects for Australia, Canada, Germany and the United States. Models that do not restrict persistence imply negligible signaling effects for any country. Our preferred bias-corrected model implies large signaling effects for Canada and the United States. The idea that LSAP announcements signal information about Canadian rates is intuitively attractive because conventional US monetary policy shocks strongly predict Canadian rates.
    Keywords: Monetary policy ; Bonds ; International finance
    Date: 2012
  7. By: Jaime Marquez; Charles Thomas; Corinne Land
    Abstract: This paper examines the structure of international relative price levels using purchasing power parities (PPP) at the product-level from the 2005 World Bank’s International Comparison Program (ICP). Our examination is motivated by questions arising from two applications using economy-wide PPPs: the measurement of real effective exchange rates (REERs) and the correlation between prices and development. Specifically, how would our view on competitiveness be affected if one were to use PPP measures that exclude non-tradable categories? Is it the case that an increase in per-capita income raises the prices of non-tradable categories? These questions are not new. What is new here is the use of relative price levels (as opposed to indexes) at the product level for 144 countries that differ greatly in their level of development.
    Date: 2012
  8. By: Livia Chiţu (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.); Barry Eichengreen (University of California, Berkeley, 603 Evans Hall, Berkeley, CA 94720, USA.); Arnaud Mehl (European Central Bank, Kaiserstraße 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: We analyze persistence in patterns of bilateral financial investment using data on US investors’ holdings of foreign bonds. We document a “history effect” in which the pattern of holdings seven decades ago continues to influence holdings today. 10 to 15% of the cross-country variation in US investors’ foreign bond holdings is explained by holdings 70 years ago, plausibly reflecting fixed costs of market entry and exit. This effect is twice as large for bonds denominated in currencies other than the dollar, suggesting the existence of even higher fixed costs of initiating US foreign investment in currencies other than the dollar. Our findings point to history and path dependence as key sources of financial market segmentation. JEL Classification: F30, N20
    Keywords: Gravity model, international finance, geography of asset holdings, persistence, hysteresis, international role of the dollar
    Date: 2012–09
  9. By: Christoph Himmels; Tatiana Kirsanova
    Date: 2012
  10. By: Schmitt-Grohé, Stephanie; Uribe, Martín
    Abstract: Since the onset of the great recession in peripheral Europe, nominal hourly wages have not fallen much from the high levels they had reached during the boom years in spite of widespread increases in unemployment. This observation evokes a well-known narrative in which nominal downward wage rigidity is at the center of the current unemployment problem. We embed downward nominal wage rigidity into a small open economy with tradable and nontradable goods and a fixed exchange-rate regime. In this model, negative external shocks cause involuntary unemployment. We analyze a number of national and supranational policy options for alleviating the unemployment problem caused by the combination of downward nominal wage rigidity and a fixed exchange-rate regime. We argue that, in spite of the existence of a battery of domestic policies that could be effective in solving the unemployment problem, it is unlikely that a solution will come from within national borders. This leaves supranational monetary stimulus as the most compelling avenue out of the crisis. Our model predicts that full employment in peripheral Europe could be restored by raising the Euro-area annual rate of inflation to about 4 percent for the next five years.
    Keywords: currency pegs; downward wage rigidity; inflation; monetary union
    JEL: E31 E62 F41
    Date: 2012–09
  11. By: Friederike Greb (Georg-August-University Göttingen); Nelissa Jamora (Georg-August-University Göttingen); Carolin Mengel (Georg-August-University Göttingen); Stephan von Cramon-Taubadel (Georg-August-University Göttingen); Nadine Würriehausen (Georg-August-University Göttingen)
    Date: 2012–09–12
  12. By: Naghshineh-Pour, Amir
    Abstract: An examination and close observation of currency exchange fluctuations in Iran reveals that over the years, problems and crises have occurred in connection with the exchange rate, which have brought about complications in the country’s currency exchange market and hence the economy. Such problems and crises continue to exist today. The developments of the currency exchange crisis during the last few months provide clear proof for such contention. Up until the late 90's, currency exchange restrictions and deficits in the balance of payments mainly due to low oil prices laid the ground for surges in foreign exchange rates in the free market. In the year 2000, owing to the improved situation of the foreign exchange market as a result of economic stability due increases in oil prices, the unified exchange rate policy was re-implemented after many years of a multi-rate regime. Over the past decade until Spring 2011, Iran’s Central Bank, which channels more than 90 percent of hard currency into the local market, had employed a “managed float system” to support a single rate against hard currencies, whereby the Central Bank managed the market and pegged the rates to the target rates by relying upon its foreign currency reserves and buying and selling foreign currency in the free market. In the 2000's, after the adoption of this policy, the official exchange rates (the foreign currency sold by the government in the interbank market) and the free market rates (e.g. at currency exchanges) were unified in practice and the slight difference between these two rates reflected the profit margin for the traders of foreign currencies in the free market. Around mid-March 2011, however, due to the pressures caused by rising inflationary expectations created by considerable surges in the amount of liquidity, the targeted subsidy plan and growing international pressures on Iran because of its nuclear program, the tendency to arbitrage in the foreign currency market escalated and for the first time in 10 years, it led to a significant gap between the official interbank exchange rate and the free mark rate, creating polarity in the foreign exchange market. Today, the gap has widened more than a whopping amount of 1,000 tomans per dollar. It should be noted that reviewing the developments of the foreign currency exchange rate over the years shows that many times, there has always coexisted a free market rate along with the official rate announced by the Central Bank. Hence, since a long time ago, the multi-currency regime has always dominated the country’s economy and it is not limited only to the recent years or even months. This further points to the fact that even in those years, the market suffered from instability. In addition to the developments related to the exchange rate, examining the trend of foreign exchange revenues indicate the fact that in spite of huge foreign exchange revenues mainly from oil exports, the Iranian economy has not witnessed any significant improvement in its economic indicators such as GDP growth. Therefore, not having enough economic growth in proportion to the amount of liquidity injected by the government in the economy, inflationary expectations have grown significantly and; therefore, stray capital has been trying to find refuge in other safe assets such as gold and foreign currency in order to safeguard its value. This is the main cause of surges in foreign currency rates in the past 17 months.
    Keywords: Iran; economy; foreign exchange rate; dollar; rial; toman;exchange rate; real exchange rate
    JEL: A1 E50 E00 E40 G01
    Date: 2012–09–17

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