nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒02‒03
seven papers chosen by
Martin Berka
Victoria University of Wellington

  1. Currency Crises in Reverse: Do Large Real Exchange Rate Appreciations Matter for Growth? By Bussière, Matthieu; Lopez, Claude; Tille, Cédric
  2. The Impact of Market Regulations on Intra-European Real Exchange Rates. By Agnès Bénassy-Quéré; Dramane Coulibaly
  3. Exchange rate pass-through and inflation: a nonlinear time series analysis By Mototsugu Shintani; Akiko Terada-hagiwara; Tomoyoshi Yabu
  4. The Importance of Trade and Capital Imbalances in the European Debt Crisis By Andrew Hughes Hallett; Juan Carlos Martinez Oliva
  5. Hot Tip: Nominal Exchange Rates and Inflation Indexed Bond Yields By Richard H. Clarida
  6. South East Asian Monetary Integration: New Evidences from Fractional Cointegration of Real Exchange Rates By Gilles de Truchis; Benjamin Keddad
  7. Trend Growth and Learning About Monetary Policy Rules in a Two-Block World Economy By Eric Schaling; Mewael F. Tesfaselassie

  1. By: Bussière, Matthieu; Lopez, Claude; Tille, Cédric
    Abstract: While currency crises have been extensively studied, the opposite phenomenon, large appreciations, has been far less researched. We fill this gap by providing an empirical exploration of historical episodes of large real exchange rate appreciations, using a sample of 28 advanced and 25 emerging market economies, with annual data going back to 1970. We focus on the impact of large appreciations on output growth. Our first finding is that countries experiencing large real exchange rate appreciations display distinct patterns: large appreciations significantly lower export growth and boost import growth on impact. Strikingly, however, output growth is higher, on average, despite the adverse impact on exports. Our second finding is that these aggregate numbers hide substantial heterogeneity, which we link to the nature of the shocks that cause the appreciation. In particular, appreciations associated with so-called “capital flow bonanzas” have a marked downward effect on growth. This pattern is consistent with the insights from a simple model that contrasts the impact of productivity shocks with that of capital inflows shocks. Higher productivity in the traded sector leads to a boom in traded output and a current account surplus, while higher foreign lending leads to a boom in non-traded output and an external deficit as traded output falls and consumption increases.
    Keywords: exchange rate, currency crises, endaka, international trade, international capital flows, lending booms, small open economy macroeconomics
    JEL: F10 F30 F41
    Date: 2013–01
  2. By: Agnès Bénassy-Quéré (Centre d'Economie de la Sorbonne - Paris School of Economics et CESIfo); Dramane Coulibaly (EconomiX - Université de Paris Ouest)
    Abstract: We study the contribution of market regulations in the dynamics of the real exchange rate within the European Union. Based on a model proposed by De Gregorio et al. (1994a), we show that both product market regulations in montradable sectors and employment protection tend to inflate the real exchange rate. We then carry out an econometric estimation for European countries over 1985-2006 to quantify the contributions of the pure Balassa-Samuelson effect and those of market regulations in real exchange-rate variations. Based on this evidence and on a counter-factual experimient, we conclude that the relative evolution of product market regulations and employment protection across countries play a very significant role in real exchange-rate variations within the European Union and especially within the Euro area, through theirs impacts on the relative price of nontradable goods.
    Keywords: Real exchange rate, Balassa-Samuelson effect, product market regulations, employment protection.
    JEL: F41 J50 L40
    Date: 2013–01
  3. By: Mototsugu Shintani (Deaprtment of Economics, Vanderbilt University); Akiko Terada-hagiwara (Economics and Research Department, Asian Development Bank); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University)
    Abstract: This paper investigates the relationship between the exchange rate pass-through (ERPT) and inflation by estimating a nonlinear time series model. Based on a simple theoretical model of ERPT determination, we show that the dynamics of ERPT can be well approximated by a class of smooth transition autoregressive (STAR) models using the past inflation rate as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to US domestic prices. The estimation result suggests that declines in the ERPT during the 1980s and 1990s are associated with lowered inflation.
    Keywords: import prices, inflation indexation, pricing-to-market, smooth transition autoregressive models, sticky prices.
    JEL: N0
    Date: 2012–12–09
  4. By: Andrew Hughes Hallett (George Mason University); Juan Carlos Martinez Oliva (Peterson Institute for International Economics)
    Abstract: The current debate on the European crisis has highlighted the role of fiscal imbalances in explaining the turmoil that has dominated Europe in the past few years. This paper adopts a different point of view by suggesting that intra-European payments imbalances are crucial for the survival of the Economic and Monetary Union (EMU). Indeed, payment imbalances between the North and South have contributed to the accumulation of large stock of foreign debt, while flows of foreign capital ceased to finance productive investments that might have contributed to debt repayments--being used instead to finance consumption and real estate. The dynamic interplay between current account imbalances and the accumulation of foreign debt reveals that, once the system is driven into disequilibrium by a real exchange rate misalignment, the longer a payments imbalance persists and the harder the eventual adjustment will be. Capital reversals, by shifting portfolio balances, then lead the system toward instability, sovereign default, and the collapse of the exchange rate regime. Replacing private with public creditors can temporarily help us to stay away from the point where the system breaks down. But this is only a temporary expedient because the underlying imbalances will need continuing and increasing financing until equilibrium is restored by other means. One permanent solution is the European Central Bank’s (ECB) official monetary transactions program, if the potential expansions to the central bank’s balance sheet can be tolerated.
    Keywords: external debt, trade space, real exchange rate adjustments, official financing, OMT
    JEL: F32 F41 G12 H63
    Date: 2013–01
  5. By: Richard H. Clarida
    Abstract: This paper derives a structural relationship between the nominal exchange rate, national price levels, and observed yields on long maturity inflation - indexed bonds. This relationship can be interpreted as defining the fair value of the exchange rate that will prevail in any model or real world economy in which inflation indexed bonds are traded. An advantage of our derivation is that it does not require restrictive assumptions on financial market equilibrium to be operational. We take our theory to a dataset spanning the period January 2001 – February 2011 and study a daily , real time decompositions of pound, euro, and yen exchange rates into their fair value and risk premium components. The relative importance of these two factors varies depending on the sub sample studied. However, sub samples in which we find correlations of 0.30 to 0.60 between daily exchange rate changes and daily changes in fair value are not uncommon. We also show empirically and justify theoretically that a 1 percent rise in the foreign currency risk premium is on average contemporaneously associated with a 50 basis point rise in the inflation indexed bond return differential in favor of the foreign country and an 50 basis point appreciation of the dollar
    JEL: F3 F31
    Date: 2013–01
  6. By: Gilles de Truchis; Benjamin Keddad
    Abstract: We study the long-run relationship of real exchanges rates (RERs) among the ASEAN-5 countries by testing the theory of Generalized Purchasing Power Parity (G-PPP) from the new perspective of fractional cointegration. The long-run co-movements of the RERs are examined by applying a recent estimator of fractional cointegration that consists of a frequency Whittle approximation of the cointegrating system’s likelihood function. The contribution of the fractional cointegration study is justified by identifying several weak fractional cointegration relationships that signal that deviations of RERs from their long-run equilibrium are highly persistent. These findings contrast with all previous studies that restrict their investigation to the traditional I(1)/I(0) cointegration. Our results support further monetary integration among different sub-groups of the ASEAN-5 countries as they share long-run comovements with each others. However, a full-fledged monetary union embracing all ASEAN-5 members is still limited from the perspective of the G-PPP theory.
    Keywords: Monetary Union, Fractional Cointegration, Generalized purchasing power parity, ASEAN
    JEL: F31 F33
    Date: 2012–10–01
  7. By: Eric Schaling; Mewael F. Tesfaselassie
    Abstract: Available evidence supports the view that growth is faster in more open economies. In order to analyze the implications of openness and growth on determinacy and learnability of worldwide rational expectations equilibria we develop a two-country New Keynesian model with growth. We analyze these issues for contemporaneous data and expectations-based monetary policy rules. Our results highlight how growth matters for the overall effect of opening an economy to more trade, as we find that (i) under the contemporaneous data policy rule the conditions for determinacy and learnability become more stringent on account of openness but less stringent on account of growth, so that growth weakens the effect of openness, (ii) under the expectations-based policy rule the conditions for determinacy and learnability also become more stringent on account of openness while on account growth the conditions for determinacy become \emph{more} stringent (thus reinforcing the effect of openness) but those for learnability become \emph{less} stringent (thus weakening the effect of openness). As in \citet{BS09} the elasticity of intertemporal substitution is key to our result but within a framework that is consistent with long-run labor supply and balanced growth facts
    Keywords: trend growth,open economy,monetary policy rules,determinacy,learning
    JEL: E58 E61 F31 F41
    Date: 2013–01

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