nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2012‒10‒20
nine papers chosen by
Martin Berka
Victoria University of Wellington

  1. Financial Reforms and Capital Flows: Insights from General Equilibrium By Alberto Martin; Jaume Ventura
  2. On the (in)effectiveness of fiscal devaluations in a monetary union By Anna Lipinska; Leopold von Thadden
  3. Firms' entry, monetary policy and the international business cycle By Cavallari, Lilia
  4. Exchange rate pass-through, monetary policy, and variability of exchange rates By Konstantin Styrin; Oleg Zamulin
  5. “Pass-through in dollarized countries: should Ecuador abandon the U.S. Dollar?” By María Lorena Marí del Cristo; Marta Gómez-Puig
  6. A Real Exchange Rate Based Phillips Curve By Konstantin Styrin; Oleg Zamulin
  7. Sovereign default risk and commitment for fiscal adjustment By Gonçalves, Carlos Eduardo; Guimarães, Bernardo
  8. When Credit Bites Back: Leverage, Business Cycles and Crises By Oscar Jorda; Moritz Schularick; Alan Taylor
  9. Current Account Benchmarks for Turkey By Oliver Röhn

  1. By: Alberto Martin; Jaume Ventura
    Abstract: As a result of debt enforcement problems, many high-productivity firms in emerging economies are unable to pledge enough future profits to their creditors and this constrains the financing they can raise. Many have argued that, by relaxing these credit constraints, reforms that strengthen enforcement institutions would increase capital flows to emerging economies. This argument is based on a partial equilibrium intuition though, which does not take into account the origin of any additional resources that flow to high-productivity firms after the reforms. We show that some of these resources do not come from abroad, but instead from domestic low-productivity firms that are driven out of business as a result of the reforms. Indeed, the resources released by these low-productivity firms could exceed those absorbed by high-productivity ones so that capital flows to emerging economies might actually decrease following successful reforms. This result provides a new perspective on some recent patterns of capital flows in industrial and emerging economies.
    JEL: F34 F36 G15 O19 O43
    Date: 2012–10
  2. By: Anna Lipinska; Leopold von Thadden
    Abstract: This paper explores the fiscal devaluation hypothesis in a model of a monetary union characterised by national fiscal policies and supranational monetary policy. We show that a unilateral tax shift towards indirect taxes in one of the countries produces small but non-negligible long run effects on output and consumption within and between the two countries only when international financial markets are perfectly integrated. In contrast to the existing literature, we find that short-run effects are not always amplified by nominal wage rigidities. We document also how short-run effects of the tax shift depend on the choice of the inflation index stabilized by the central bank and on whether the tax shift is anticipated.
    Date: 2012
  3. By: Cavallari, Lilia
    Abstract: This paper provides a theory of the international business cycle grounded on firms' entry and sticky prices. It shows that under simple monetary rules pro-cyclical entry and counter-cyclical markups can generate fluctuations in macroeconomic aggregates and trade variables as large as those observed in the data while at the same time providing positive international comovements. Both firms' entry and sticky prices are essential for reproducing the synchronization of the business cycles found in the data.
    Keywords: firm entry; international business cycle; international comovements; variable markup; Taylor rule; exchange rate regimes
    JEL: E32 E52 F41
    Date: 2012–07
  4. By: Konstantin Styrin (New Economic School); Oleg Zamulin (National Research University – Higher School of Economics)
    Abstract: We document that contribution of identified US monetary shock to exchange rate variability differs across currencies and is inversely related to the degree of a country’s US dollar exchange rate pass-through into import prices. We explore this empirical pattern under the assumption that each central bank, when choosing its monetary policy, takes into account in which currency its country’s exports and imports are denominated. The choice of imports invoicing currency will affect both the degree of exchange rate pass-through and the monetary policy response. Different shape of monetary policy reaction function will result in different contribution of monetary shocks to the exchange rate dynamics. We illustrate this mechanism using a simple general equilibrium model.
    Keywords: Exchange rate; pass-through; invoicing currency; monetary policy; monetary shocks; variance decomposition
    JEL: F41 F42
    Date: 2012–05
  5. By: María Lorena Marí del Cristo (Faculty of Economics, University of Barcelona); Marta Gómez-Puig (Faculty of Economics, University of Barcelona)
    Abstract: In this article we examine the convenience of dollarization for Ecuador today. As Ecuador is strongly integrated financially and commercially with the United States, the exchange rate pass-through should be zero. However, we sustain that rising rates of imports from trade partners other than the United States and subsequent real effective exchange rate depreciations are causing the pass-through to move away from zero. Here, in the framework of the Vector Error Correction Model, we analyse the impulse response function and variance decomposition of the inflation variable. We show that the developing economy of Ecuador is importing inflation from its main trading partners, most of them emerging countries with appreciated currencies. We argue that if Ecuador recovered both its monetary and exchange rate instruments it would be able to fight against inflation. We believe such an analysis could be extended to other countries with pegged exchange rate regimes.
    Keywords: Pass-through, shocks, dollarized countries, structural VECM JEL classification: E31; F31; F41
    Date: 2012–10
  6. By: Konstantin Styrin (New Economic School); Oleg Zamulin (National Research University – Higher School of Economics)
    Abstract: It has been noted in many papers that primary commodity exporting economies and developing countries frequently respond to movements in the real exchange rate as part of their monetary policies. For many central banks, this variable is the primary indicator of real activity. At the same time, smoothing the real exchange rate fluctuations has certain inflationary costs. In a way, this trade-off between inflation and the real exchange rate is identical to a standard Phillips curve. This paper derives an exact theoretical expression for this “real exchange rate based Phillips curve,” and finds empirical support for its existence in the data for a number of primary commodity exporting economies such as Australia, Canada, New Zealand and others. It turns out that the correct right-hand-side variable in the Phillips curve is not the real exchange rate itself, but rather its deviation from the fundamental value, which is a function of the international price of exported commodities. The empirical counterpart of the fundamental real exchange rate is obtained from a cointegrating equation for the real exchange rate and the countryspecific price index of exported commodities. As is frequently found in other Phillips curve studies, empirical tests point towards the accelerationist specification, which can be rationalized by dominance of adaptive expectations in price-setting behavior.
    Keywords: Real exchange rate; inflation; Phillips curve; commodity currencies
    JEL: E31 E32 F31
    Date: 2012–10
  7. By: Gonçalves, Carlos Eduardo; Guimarães, Bernardo
    Abstract: This paper studies fiscal policy in a model of sovereign debt and default. A time-inconsistency problem arises: since the price of past debt cannot be affected by current fiscal policy and governments cannot credibly commit to a certain path of tax rates, debtor countries choose suboptimally low fiscal adjustments. An international lender of last resort, capable of designing an implicit contract that coax debtors into a tougher fiscal stance via the provision of cheap (but senior) lending in times of crisis, can work as a commitment device and improve social welfare.
    Keywords: fiscal adjustment; IMF; sovereign debt; sovereign default; time inconsistency
    JEL: F33 F34
    Date: 2012–10
  8. By: Oscar Jorda; Moritz Schularick; Alan Taylor (Department of Economics, University of California Davis)
    Abstract: This paper studies the role of credit in the business cycle, with a focus on private credit overhang. Based on a study of the universe of over 200 recession episodes in 14 advanced countries between 1870 and 2008, we document two key facts of the modern business cycle: financial-crisis recessions are more costly than normal recessions in terms of lost output; and for both types of recession, more credit-intensive expansions tend to be followed by deeper recessions and slower recoveries. In additional to unconditional analysis, we use local projection methods to condition on a broad set of macroeconomic controls and their lags. Then we study how past credit accumulation impacts the behavior of not only output but also other key macroeconomic variables such as investment, lending, interest rates, and inflation. The facts that we uncover lend support to the idea that financial factors play an important role in the modern business cycle.
    Keywords: leverage, booms, recessions, financial crises, business cycles, local projections.
    JEL: C14 C52 E51 F32 F42 N10 N20
    Date: 2012–10–05
  9. By: Oliver Röhn
    Abstract: Turkey’s current account deficit widened to almost 10% of GDP in 2011 and has been narrowing only gradually since. An important question is to what extent Turkey’s current account deficit is excessive. To explore this issue, one needs to establish benchmarks. In this paper current account benchmarks are derived using the external sustainability as well as the macroeconomic balance approach. However, the standard macroeconomic balance approach ignores the uncertainty inherent in the model selection process given the relatively large number of possible determinants of current account balances. This paper therefore extends the macroeconomic balance approach to account for model uncertainty by using Bayesian Model Averaging techniques. Results from both approaches suggest that current account benchmarks for the current account deficit lie in the range of 3% to 5½ per cent of GDP, which is broadly in line with previous estimates but substantially below recent current account deficit levels. This Working Paper relates to the 2012 OECD Economic Survey of Turkey (<P>Des repères pour la balance courante en Turquie<BR>Le déficit de la balance des opérations courantes de la Turquie s'est creusé pour atteindre près de 10 % du PIB en 2011 et n’a rétréci que très graduellement depuis. Il importe de déterminer dans quelle mesure ce déficit est excessif. Pour explorer la question, des repères doivent être établis. Ce document de travail calcule et propose de tels repères, à partir des méthodes de viabilité de la balance courante, et d’équilibre macroéconomique. La méthode standard d’équilibre macroéconomique ne tient cependant pas compte de l’incertitude inhérente au processus de sélection du modèle, vu le nombre important de déterminants possibles de la balance des opérations courantes. Ce document élargit la méthode d’équilibre macroéconomique afin de tenir compte de cette incertitude, en utilisant les techniques de choix de modèles par estimateur Bayesien. Les résultats obtenus à partir des deux méthodes suggèrent que les repères de balance courante pour la Turquie pourraient se situer entre 3% et 5½ pour cent du PIB, en ligne avec les estimations précédentes mais nettement en-dessous des récents niveaux de déficit du compte courant. Ce Document de travail se rapporte à l’Étude économique de l’OCDE de la Turquie, 2012 (
    Keywords: Turkey, current account, Bayesian model averaging, model uncertainty, external sustainability, current account benchmarks, Turquie, balance courante, choix de modèles par estimateur Bayésien, incertitude des modèles, viabilité des comptes extérieurs, repères pour la balance courante
    JEL: C11 F32 F41
    Date: 2012–09–14

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