nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒05‒11
seven papers chosen by
Martin Berka
Victoria University of Wellington

  1. Pledgability and Liquidity By Randall Wright; Vaidyanathan (Venky) Venkateswaran
  2. A Bargaining Theory of Trade Invoicing and Pricing By Linda Goldberg; Cédric Tille
  3. On the Role of Financial Depth in Determining the Asymmetric Impact of Monetary Policy By Mustafa Caglayan; Ozge Kandemir Kocaaslan; Kostas Mouratidis
  4. International Consumption Risk Is Shared After All: An Asset Return View By Edith Liu; Karen Lewis
  5. International to domestic price transmission in fourteen developing countries during the 2007-08 food crisis By Baltzer, Kenneth
  6. Mixture distribution hypothesis and the impact of a Tobin tax on exhange rate volatility : a reassessment. By Olivier Damette
  7. Sovereign Default Risk and Uncertainty Premia By Ignacio Presno; Demian Pouzo

  1. By: Randall Wright (U Wisconsin); Vaidyanathan (Venky) Venkateswaran (Penn State University)
    Abstract: This paper models the role of assets in facilitating intertemporal exchange: because limited commitment precludes unsecured credit, buyers need to pledge assets as collateral. We develop a general equilibrium model where assets differ in terms of pledgability, and put it to work in applications to finance and macroeconomics. The framework nests standard growth and asset pricing models as special cases. We can price at currency as well as real assets, and analyze how monetary policy affects interest rates, generalizing Fishers approach. We also deliver a Tobin effect of inflation on capital accumulation. We study liquidity differentials along both extensive and intensive margins, making pledgability endogenous, while determining the terms of trade in a general way that captures standard pricing mechanisms as special cases.
    Date: 2012
  2. By: Linda Goldberg; Cédric Tille
    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 fluctuations. We find that the choice of price and invoicing currency reflects 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 effective bargaining weight when it is large or more risk tolerant. A higher effective 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 specific 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
    JEL: F30 F40
    Date: 2013–04
  3. By: Mustafa Caglayan (School of Management and Languages, Heriot-Watt University, UK); Ozge Kandemir Kocaaslan (Department of Economics, Hacettepe University, Ankara, Turkey); Kostas Mouratidis (Department of Economics, University of Sheffield, UK)
    Abstract: This paper examines the asymmetric impact of monetary policy shocks on real output growth considering the role of financial depth. We carry out our examination using quarterly US data over 1980:q1-2011:q4 and implement an instrumental variables Markov regime switching methodology to account for the endogeneity between monetary policy and output growth. Our investigation shows that the impact of monetary policy shocks on output growth is stronger during recessions than expansions. More interestingly, we show that financial depth dampens the real effects of monetary policy shocks. We show that the results are robust to several alternative financial depth measures.
    Keywords: Output growth; asymmetric effects; monetary policy; financial depth; Markov switching; instrumental variables
    JEL: E32 E52
    Date: 2013
  4. By: Edith Liu (Cornell University); Karen Lewis (University of Pennsylvania)
    Abstract: International consumption risk sharing studies have largely ignored their models' counter-factual implications for asset returns although these returns incorporate direct market measures of risk. In this paper, we modify a canonical risk-sharing model to generate more plausible asset return behavior and then consider the effects on welfare gains. Matching the mean and variance of equity returns and the risk-free rate requires persistent consumption risk, leading to three main findings: (1) risk-sharing gains decrease as the ability to diversify persistent consumption risk decreases; (2) the international correlation of equity returns is high relative to the correlation of consumption and dividends, implying low diversification potential for persistent consumption risk; and (3) increasing persistent consumption risk reduces the gains. Taken together, our findings suggest that asset returns imply more international risk sharing than previously thought.
    Date: 2012
  5. By: Baltzer, Kenneth
    Abstract: This paper synthesizes the evidence on price transmission from international maize, rice and wheat markets to domestic markets in fourteen developing countries during the global food crisis in 2007-08. A great variation in the price transmission patterns
    Keywords: Price transmission, global food crisis, cereal prices
    Date: 2013
  6. By: Olivier Damette
    Abstract: From Olsen Financial Studies data on the Euro-Dollar currency pair (2008-2010), we conduct a time-series analysis to explain the role of trading volume on exchange rate volatility (Mixture Distribution Hypothesis), taking into account non-linearity. We find evidence that the MDH holds in turbulent periods, during which spreads and volume trading are high. When spreads and the volume are high, the relationship between trading volume and volatility tends to increase. Linking this result with the Tobin tax debate implies that a Tobin tax would be effective for curbing speculation and reducing exchange rate volatility, even in turbulent periods. This paper provides the first empirical corroboration of this proposition and seems to confirm some previous theoretical papers in the vein of Tobin. All in all, two main results emerged. First, the abundant literature on the MDH, but exclusively based on linear econometrics, should take into account non-linearities. Second, the effect of a Tobin tax on volatility would be slightly context-dependent and always negative. A Tobin tax would have been stabilizing and effective in the 2008 crisis when spreads, volume and volatility were very high.
    Keywords: Tobin Tax, exchange rate volatility, STR models, non-linearity, Mixture Distribution Hypothesis.
    JEL: E44 F31 C22
    Date: 2013
  7. By: Ignacio Presno (Federal Reserve Bank of Boston); Demian Pouzo (UC at Berkeley)
    Abstract: This paper develops a general equilibrium model of sovereign debt with endogenous default. Foreign lenders fear that the probability model which dictates the evolution of the endowment of the borrower is misspecied. To compensate for the risk and uncertainty-adjusted probability of default, they demand higher returns on their bond holdings. In contrast with the existing literature on sovereign default, we are able to match the average bond spreads observed in the data together with the standard empirical regularities of emerging economies. The technical contribution of the paper lies in extending the methodology of McFadden (1981) to compute equilibrium allocations and prices using the discrete state space (DSS) technique in the context of risk and uncertainty aversion on the lenders' side.
    Date: 2012

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