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on Open Economy Macroeconomic |
| By: | Linda Goldberg, Cedric Tille (IHEID, The Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | We develop a theoretical model of international trade pricing in which individual exporters and importers bargain over the transaction price and exposure to exchange rate uctuations. We nd that the choice of price and invoicing currency reects the full market structure, including the extent of fragmentation and the degree of heterogeneity across importers and across exporters. Our study shows that a party has a higher e¤ective bargaining weight when it is large or more risk tolerant. A higher e¤ective bargaining weight of importers relative to exporters in turn translates into lower import prices and greater exchange rate pass-through into import prices. We show the range of price and invoicing outcomes that arise under alternative market structures. Such structures matter not only for the outcome of speci c exporter-importer transactions, but also for aggregate variables such as the average price, the average choice of invoicing currency, and the correlation between invoicing currency and the size of trade transactions. |
| Keywords: | currency, invoicing, exchange rate |
| Date: | 2013–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp09-2013&r=opm |
| By: | Hoffmann, Mathias; Krause, Michael U.; Laubach, Thomas |
| Abstract: | Since 1991, survey expectations of long-run output growth for the U.S. relative to the rest of the world exhibit a pattern strikingly similar to that of the U.S. current account, and thus also to global imbalances. We show that this finding can to a large extent be rationalized in a two-region stochastic growth model simulated using expected trend growth filtered from observed productivity. In line with the intertemporal approach to the current account, a major part of the buildup of the U.S. current account deficit appears to be driven by the optimal response of households and firms to improved growth prospects. -- |
| Keywords: | open economy,stochastic trend growth,Kalman filter,news shocks |
| JEL: | F32 E13 E32 D83 O40 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:102013&r=opm |
| By: | Adam, Klaus; Grill, Michael |
| Abstract: | When is it optimal for a government to default on its legal repayment obligations? We answer this question for a small open economy with domestic production risk in which contracting frictions make it optimal for the government to finance itself by issuing non-contingent debt. We show that Ramsey optimal policies occasionally deviate from the legal repayment obligation and repay debt only partially, even if such deviations give rise to significant 'default costs'. Optimal default improves the international diversification of domestic output risk, increases the efficiency of domestic investment and - for a wide range of default costs - significantly increases welfare relative to a situation where default is simply ruled out from Ramsey optimal plans. We show analytically that default is optimal following adverse shocks to domestic output, especially for very negative international wealth positions. A quantitative analysis reveals that for empirically plausible wealth levels, default is optimal only in response to disaster-like shocks to domestic output, and that following such shocks default can be Ramsey optimal even if the net foreign asset position is positive. -- |
| Keywords: | Fiscal Policy,Sovereign Risk |
| JEL: | E62 F34 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:092013&r=opm |
| By: | William D. Craighead (Department of Economics, Wesleyan University); Pao-Lin Tien (Department of Economics, Wesleyan University) |
| Abstract: | This paper employs structural vector autoregression methods to examine the contribution of real and nominal shocks to real exchange rate movements using two hundred and seventeen years of data from Britain and the United States. Shocks are identified with long-run restrictions. The long time series makes possible an investigation of how the role of nominal shocks has evolved over time due to changes in the shock processes or to structural changes in the economy which might alter how a shock is transmitted to the real exchange rate. The sample is split at 1913, which is the end of the classical gold standard period, the last of the monetary regimes of the 19th century. The earlier subsample (1795-1913) shows a much stronger role for nominal shocks in explaining real exchange rate movements than the later subsample (1914-2010). Counterfactual analysis shows that the difference between the two periods is mainly due to the size of the nominal shocks rather than structural changes in the economy. |
| Keywords: | ector autoregression; monetary shocks, exchange rate movements, longrun identifying restrictions |
| JEL: | F31 F41 N10 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:wes:weswpa:2013-002&r=opm |
| By: | Richard Fabling; Lynda Sanderson (The Treasury) |
| Abstract: | Using comprehensive, shipment-level merchandise trade data, we examine the extent to which New Zealand exporters maintain stable New Zealand dollar prices by passing on exchange rate changes to foreign customers. We find that the extent to which firms absorb exchange rate fluctuations in the short run is significantly related to both invoice currency choice and exporter characteristics when these are analysed separately. However, when jointly accounted for, the role of exporter characteristics largely disappears. That is, some firm types are more inclined to invoice in the New Zealand dollar, while others use either the importer or a third currency. In the short run, this translates into differences in exchange rate pass through because of price rigidity in the invoice currency. Differences across invoice currencies diminish, but do not disappear, over time as prices adjust to reflect bilateral exchange rate movements. |
| Keywords: | Exchange rate pass-through; Firm performance |
| JEL: | D21 F14 F31 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:nzt:nztwps:13/03&r=opm |
| By: | Simone Meier |
| Abstract: | This paper analyzes the way in which international financial integration affects the transmission of monetary policy in a New Keynesian open economy framework. It extends Woodford's (2010) analysis to a model with a richer financial markets structure, allowing for international trading in multiple assets and subject to financial intermediation costs. Two different forms of financial integration are considered, in particular an increase in the level of gross foreign asset holdings and a decrease in the costs of international asset trading. The simulations in the calibrated model show that none of the analyzed forms of financial integration undermine the effectiveness of monetary policy in influencing domestic output and inflation. Under realistic parameterizations, monetary policy is more, rather than less, effective as the positive impact of strengthened exchange rate and wealth channels more than offsets the negative impact of weakened interest rate channels. The paper also analyzes the interaction of financial integration with trade integration, varying both the importance of trade linkages and the degree of exchange rate pass-through. These interactions show that the positive effects of financial integration are amplified by trade integration. Overall, monetary policy is most effective in parameterizations with the highest degree of both financial and real integration. |
| Keywords: | Monetary policy transmission, International financial integration |
| JEL: | E52 F41 F42 F47 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2013-03&r=opm |
| By: | Guglielmo Maria Caporale; Luis A. Gil-Alana; Yuliya Lovcha |
| Abstract: | This paper examines the PPP hypothesis analysing the behaviour of the real exchange rates vis-à-vis the US dollar for four major currencies (namely, the Canadian dollar, the euro, the Japanese yen and the British pound). An innovative approach based on fractional integration in a multivariate context is applied to annual data from 1970 to 2011. Long memory is found to characterise the Canadian dollar, the British pound and the euro, but in all four cases the results are consistent with the relative version of PPP. |
| Keywords: | PPP, long memory, multivariate fractional integration |
| JEL: | C22 F31 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1288&r=opm |
| By: | Olivier Cardi; Romain Restout |
| Abstract: | This paper investigates the relative price and relative wage effects of a higher productivity in the traded sector compared with the non traded sector in a two-sector open economy model with imperfect substitutability in hours worked across sectors. The Balassa- Samuelson model predicts that a rise in the sectoral productivity ratio by 1% raises the relative price of non tradables by 1% while leaving unchanged the non traded wage-traded wage ratio. Applying cointegration methods to a panel of fourteen OECD countries over the period 1970-2007, our estimates show that the relative price rises by only 0.78% while the relative wage falls by 0.27%. Hence, our first set of empirical ¯ndings cast doubt on the quantitative predictions of the Balassa-Samuelson model. A second set of empirical findings highlights the role of imperfect labor mobility: interacting the ratio of sectoral labor share-adjusted total factor productivities with an index of labor mobility across sectors, we find that the relative price responds more to a productivity differential between tradables and non tradables while the reaction of the relative wage is more muted as the degree of labor mobility increases. We show that the ability of the two-sector model to account for our evidence quantitatively relies upon two ingredients: i) imperfect mobility of labor across sectors, and ii) physical capital accumulation. Finally, our numerical results are robust to the introduction of i) non-separability in preferences between consumption and labor, and ii) traded investment. |
| Keywords: | Relative price of non tradables, Sectoral wages, Productivity growth, Sectoral labor reallocation, Investmen. |
| JEL: | E22 F11 F41 F43 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2013-04&r=opm |
| By: | Eickmeier, Sandra; Kühnlenz, Markus |
| Abstract: | We apply a structural dynamic factor model to a large quarterly dataset covering 38 countries between 2002 and 2011 to analyze China's role in global inflation dynamics. We identify Chinese supply and demand shocks and examine their contributions to global price dynamics and the transmission mechanism. Our main findings are: (i) Chinese supply and demand shocks affect prices in other countries significantly. Demand shocks matter slightly more than supply shocks. Producer prices tend to be more strongly affected than consumer prices by Chinese shocks. The overall share of international inflation explained by Chinese shocks is notable (about 5 percent on average over all countries but not more than 13 percent in each region); (ii) Direct channels (via import and export prices) and indirect channels (via greater exposure to foreign competition and commodity prices) seem both to matter; (iii) Differences in trade (overall and with China) and in commodity exposure help explaining crosscountry differences in price responses. -- |
| Keywords: | global inflation,China,international business cycles,structural dynamic factor model,sign restrictions |
| JEL: | F41 E31 C3 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:072013&r=opm |
| By: | Fung, Kwok-Chiu (Asian Development Bank Institute); Garcia-Herrero, Alicia (Asian Development Bank Institute); Ng, Francis (Asian Development Bank Institute) |
| Abstract: | This paper focuses on the pricing behavior of Japanese and United States firms selling their identical products in New York City, Chicago, Osaka, and Tokyo. The authors utilize some simple models of international price dispersion and market segmentation that generate predictions about testable prices. The dataset, which consists of prices of identical products in the Japanese and American cities, was collected and accepted by both governments. Using this data, versions of international price dispersion theories are tested and some empirical evidence to support the view that simple international price dispersion models can partly explain the observed prices is found. |
| Keywords: | pricing behavior; price dispersion; price dispersion theories; international price dispersion |
| JEL: | F12 F14 L11 L13 |
| Date: | 2013–04–19 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0417&r=opm |
| By: | Syed Abul, Basher |
| Abstract: | While many commentators have been openly critical of China's currency policy on the basis of an undervalued renminbi, despite a similar surge in GCC's (Gulf Cooperation Council) balance of payment surpluses in the first decade of this century, the vast majority of the commentators have maintained a stony silence on the undervalued Gulf currencies. This underscores the geopolitics of currencies as a form of asymmetric warfare and the consequences of dollar, euro or renminbi diplomacy. This paper makes two main additions to the literature on Gulf monetary union. First, it emphasizes that the creation of a fiscal union is necessary for the Gulf monetary union to succeed. Second, it proposes some alternatives to pegging to the dollar, which would allow the GCC to absorb large swings in global commodity prices (oil, food) in the short to medium run. The proposed exchange rate regimes are not conditional on the formation of the Gulf monetary union, and can be implemented individually or collectively. |
| Keywords: | Fixed exchange rate; Currency basket; Fiscal union; Monetary union; Gulf Cooperation Council. |
| JEL: | E52 F36 F4 |
| Date: | 2013–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46486&r=opm |