nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒06‒16
fourteen papers chosen by
Martin Berka
Victoria University of Wellington

  1. The Future of the Currency Union By Frankel, Jeffrey
  2. The Global Decline of the Labor Share By Loukas Karabarbounis; Brent Neiman
  3. Credit Ratings and the Pricing of Sovereign Debt during the Euro Crisis By Joshua Aizenman; Mahir Binici; Michael M. Hutchison
  4. Financial Globalization and Monetary Transmission By Meier, Simone
  5. Carry Trade, Reserve Accumulation, and Exchange-Rate Regimes By Laura Alfaro; Fabio Kanczuk
  6. Multi-Product Firms and Exchange Rate Fluctuations. By Arpita Chatterjee; Rafael Dix-Carneiro; Jade Vichyanond
  7. International liquidity rents By Eden, Maya
  8. On the International Spillovers of US Quantitative Easing By Marcel Fratzscher; Marco Lo Duca; Roland Straub
  9. Brazil and the EU in the Global Economy By Gros, Daniel; Alcidi, Cinzia; Giovannini, Alessandro
  10. On the Determinants of Exchange Rate Misalignments By Jamel Saadaoui; Jacques Mazier; Nabil Aflouk
  11. The European Crisis in the Context of the History of Previous Financial Crises By Michael D. Bordo; Harold James
  12. How Did Exchange Rates Affect Employment in US Cities? By Huang, Haifang; Tang, Yao
  13. Bayesian Analysis of Nonlinear Exchange Rate Dynamics and the Purchasing Power Parity Persistence Puzzle By Ming Chien Lo; James Morley
  14. How did the Financial Crisis affect the Real Interest Rate Dynamics in Europe? By Aslanidis, Nektarios; Demiralp, Selva

  1. By: Frankel, Jeffrey (Harvard University)
    Abstract: This note attempts a concise yet comprehensive overview of the crisis still facing the eurozone, in the areas of competitiveness, fiscal policy, and banking. The euro's founding documents enshrined such principles as fiscal constraints, the "no bailout clause," and assignment to the ECB of the goal of low inflation to the exclusion of monetizing national debts. Those principles have been permanently compromised. On the one hand, German taxpayers cannot be expected to agree to bailouts of profligate euro members without end. On the other hand, if they were to insist on those founding principles, the euro would not survive. It is especially important to recognize that the (predictable) impact of fiscal austerity has been to reduce output in the periphery countries, not raise it, and thereby to raise debt/GDP ratios, not lower them. The leaders have finally taken some steps in the right direction over the last year: movement toward a banking union; more adjustment time for Greece, Portugal and Spain; and ECB bond purchases. But for the countries that are to remain in the euro, much adjustment still lies ahead: more debt-reduction (painful for the creditor North) and more internal devaluation (even more painful for the uncompetitive South). As to a long-run fiscal regime that addresses the now-exacerbated problem of moral hazard, the Fiscal Compact is not enough in itself. Two innovations favored by the author are the red-bonds/blue-bonds proposal and the delegation of forecasting to independent fiscal agencies.
    JEL: F41
    Date: 2013–05
  2. By: Loukas Karabarbounis; Brent Neiman
    Abstract: The stability of the labor share of income is a key foundation in macroeconomic models. We document, however, that the global labor share has significantly declined since the early 1980s, with the decline occurring within the large majority of countries and industries. We show that the decrease in the relative price of investment goods, often attributed to advances in information technology and the computer age, induced firms to shift away from labor and toward capital. The lower price of investment goods explains roughly half of the observed decline in the labor share, even when we allow for other mechanisms influencing factor shares such as increasing profits, capital-augmenting technology growth, and the changing skill composition of the labor force. We highlight the implications of this explanation for welfare and macroeconomic dynamics.
    JEL: E21 E22 E25
    Date: 2013–06
  3. By: Joshua Aizenman; Mahir Binici; Michael M. Hutchison
    Abstract: This paper investigates the impact of credit rating changes on the sovereign spreads in the European Union and investigates the macro and financial factors that account for the time varying effects of a given credit rating change. We find that changes of ratings are informative, economically important and highly statistically significant in panel models even after controlling for a host of domestic and global fundamental factors and investigating various functional forms, time and country groupings and dynamic structures. Dynamic panel model estimates indicate that a credit rating upgrade decreases CDS spreads by about 45 basis points, on average, for EU countries. However, the association between credit rating changes and spreads shifted markedly between the pre-crisis and crisis periods. European countries had quite similar CDS responses to credit rating changes during the pre-crisis period, but that large differences emerged during the crisis period between the now highly-sensitive GIIPS group and other European country groupings (EU and Euro Area excluding GIIPS, and the non-EU area). We also find a complicated non-linear pattern dependent on the level of the credit rating. The results are robust to the including credit “outlook” or “watch” signals by credit rating agencies. In addition, contagion from rating downgrades in GIIPS to other euro countries is not evident once own-country credit rating changes are taken into account.
    JEL: F30 F34 G01 G24 H63
    Date: 2013–06
  4. By: Meier, Simone
    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’ (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: 2013–06
  5. By: Laura Alfaro; Fabio Kanczuk
    Abstract: Carry-trade activity and foreign participation in local-currency-bond markets in emerging countries have increased dramatically over the past decade. In light of these trends, we revisit the question of the optimal exchange-rate regime when developing countries can borrow internationally with local-currency-denominated debt. We find that, as local-currency-bond markets develop, a “pseudo-flexible regime,” whereby a country accumulates reserves in conjunction with debt, to be the policy that most effectively stabilizes fluctuations under real external shocks for emerging nations.
    JEL: F31 F34
    Date: 2013–06
  6. By: Arpita Chatterjee (School of Economics, University of New South Wales); Rafael Dix-Carneiro (University of Maryland); Jade Vichyanond (International Monetary Fund)
    Abstract: This paper studies the effect of exchange rate shocks on export behavior of multi-product firms. We provide a theoretical framework illustrating how rms adjust their prices, quantities, product scope, and sales distribution across products in the event of exchange rate fluctuations. In response to a real exchange rate depreciation, firms increase markups for all products, but markup increases decline with firm-product-specic marginal costs of production. We find robust evidence for our theoretical predictions using Brazilian customs data containing destination-specic and product-specic export sales and quantities. The sample period covers the years 1997-2006, during which Brazil experienced a series of drastic currency fluctuations.
    Keywords: Multi-product firms, exchange rate pass-through, product ladder, local distribution costs.
    JEL: F12 F41
    Date: 2012–04
  7. By: Eden, Maya
    Abstract: This paper presents a model of global liquidity shortages. Liquid claims are enforceable promises that play a transaction role. Since developed economies have a comparative advantage in creating liquidity, they export liquid claims to emerging economies, resulting in a permanent current account deficit. This model suggests that unrestricted liquidity flows are (a) welfare reducing for emerging economies and (b) Pareto inefficient. The inefficiency results both from excessive investment for the purpose of creating collateral-backed liquid claims, and from excessive global fragility with respect to collateral shocks.
    Keywords: Currencies and Exchange Rates,Economic Theory&Research,Debt Markets,Emerging Markets,Bankruptcy and Resolution of Financial Distress
    Date: 2013–05–01
  8. By: Marcel Fratzscher; Marco Lo Duca; Roland Straub
    Abstract: The paper analyses the global spillovers of the Federal Reserve's unconventional monetary policy measures. First, we find that Fed measures in the early phase of the crisis (QE1), but not since 2010 (QE2), were highly effective in lowering sovereign yields and raising equity markets in the US and globally across 65 countries. Yet Fed policies functioned in a procyclical manner for capital flows to emerging markets (EMEs) and a counter-cyclical way for the US, triggering a portfolio rebalancing across countries out of EMEs into US equity and bond funds under QE1, and in the opposite direction under QE2. Second, the impact of Fed operations, such as Treasury and MBS purchases, on portfolio allocations and asset prices dwarfed those of Fed announcements, underlining the importance of the market repair and liquidity functions of Fed policies. Third, we find no evidence that FX or capital account policies helped countries shield themselves from these US policy spillovers, but rather that responses to Fed policies are related to country risk. The results thus illustrate how US unconventional measures have contributed to portfolio reallocation as well as a re-pricing of risk in global financial markets.
    Keywords: Monetary policy, quantitative easing, portfolio choice, capital flows, Federal Reserve, United States, policy responses, emerging markets, panel data
    JEL: E52 E58 F32 F34 G11
    Date: 2013
  9. By: Gros, Daniel; Alcidi, Cinzia; Giovannini, Alessandro
    Abstract: The structure of the world economy has been changing quickly during the last decade. The emerging global economy is much more fragmented than in the past and characterised by different global actors, each one with specific features and roles. In this setting, both Brazil and the European Union play role. This paper, without pretending to provide a full analysis of the European and Brazilian economies, offers a description of their main international economic features to understand their current and future role in the global order. Section 1 looks at the macroeconomics: it first focuses on Brazil and assesses arguments that international exchange rate misalignments represent a real grievance for Brazilian policy-makers in their struggle to get the economy onto a satisfactory trajectory. The attention is then turned to Europe, and especially to the euro area, with a focus on the still-unresolved crisis and its position vis-à-vis the rest of the world. Section 2 analyses the place of the euro area in the international financial institution system. It assesses how far it may be both overrepresented in terms of the weight of the sum of its member states, while being underrepresented as such institutionally as a major monetary union. While this issue may be seen as relevant only for Europe, the analysis shows that it has significant implications for emerging economies, Brazil included. The conclusions explore macro-policy options for improving the EU-Brazil partnership and suggest that a new initiative launched by them would be economically desirable.
    Date: 2013–02
  10. By: Jamel Saadaoui (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Jacques Mazier (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234); Nabil Aflouk (CEPN - Centre d'Economie de l'Université Paris Nord - Université Paris XIII - Paris Nord - CNRS : UMR7234)
    Abstract: The literature on exchange rate misalignments (ERM) is very extensive as well as the literature on exchange rate determinants. To our knowledge, however, no study has analysed the determinants of exchange rate misalignments. With the increasing movements of capital flows observed since the climax of the crisis, the ERM are became a crucial issue for policy makers. For a large panel of emerging and industrialized countries and on the period 1982-2008, we identify, empirically, the main determinants of ERM obtained by a Fundamental Equilibrium Exchange Rate (FEER) approach. Our analysis put forward trade openness, financial openness and regional specialization as determinant variables of ERM.
    Keywords: Exchange rate misalignments; Trade openness; International specialization, Exchange rate regime, Financial liberalization
    Date: 2013–06–04
  11. By: Michael D. Bordo; Harold James
    Abstract: There are some striking similarities between the pre 1914 gold standard and EMU today. Both arrangements are based on fixed exchange rates, monetary and fiscal orthodoxy. Each regime gave easy access by financially underdeveloped peripheral countries to capital from the core countries. But the gold standard was a contingent rule—in the case of an emergency like a major war or a serious financial crisis --a country could temporarily devalue its currency. The EMU has no such safety valve. Capital flows in both regimes fueled asset price booms via the banking system ending in major crises in the peripheral countries. But not having the escape clause has meant that present day Greece and other peripheral European countries have suffered much greater economic harm than did Argentina in the Baring Crisis of 1890.
    JEL: E00 N1
    Date: 2013–06
  12. By: Huang, Haifang (University of Alberta, Department of Economics); Tang, Yao (Bowdoin College)
    Abstract: We estimate the effects of real exchange rate movements on employment in US cities between 2003 and 2010. We explore the differences in the composition of local industries to construct city-specific changes in exchange rates and estimate their effects on local employment in manufacturing industries and in nonmanufacturing industries. Controlling for year and city fixed effects, we find that a depreciation of the US dollar increased local employment in the manufacturing industries, our proxy for the tradable sector. The depreciation also increased employment in the nonmanufacturing industries, the nontradable sector. Furthermore, the effects on nonmanufacturing employment were stronger in cities that had a higher fraction of manufacturing employment, indicating the exchange rate movements’ indirect effects through the manufacturing industries. We also consider an alternative definition of the tradable sector that is broadened to include five service industries. The findings are similar.
    Keywords: exchange rate; employment; US cities
    JEL: F16 F31 J23
    Date: 2013–05–01
  13. By: Ming Chien Lo (Department of Economics, St. Cloud State University); James Morley (School of Economics, the University of New South Wales)
    Abstract: We investigate the persistence of real exchange rates using Bayesian methods. First, an algorithm for Bayesian estimation of nonlinear threshold models is developed. Unlike standard grid-based estimation, the Bayesian approach fully captures joint parameter uncertainty and uncertainty about complicated functions of the parameters, such as the half-life measure of persistence based on generalized impulse response functions. Second, model comparison is conducted via marginal likelihoods, which reflect the relative abilities of models to predict the data given prior beliefs about model parameters. This comparison is conducted for a range of linear and nonlinear models and provides a direct evaluation of the importance of nonlinear dynamics in modeling exchange rates. The marginal likelihoods also imply weights for a modelaveraged measure of persistence. The empirical results for real exchange rate data from the G7 countries suggest general support for nonlinearity, but the strength of the evidence depends on which country pair is considered. However, the model-averaged estimates of half-lives are uniformly smaller than for the linear models alone, suggesting that the purchasing power parity persistence puzzle is less of a puzzle than previously thought.
    Keywords: Bayesian Analysis, Real Exchange Rate Dynamics, Purchasing Power Parity, Nonlinear Threshold Models, Bayesian Model Averaging; Half lives
    JEL: C11 C22 F31
    Date: 2013–05
  14. By: Aslanidis, Nektarios; Demiralp, Selva
    Abstract: We investigate the effects of the financial crisis on the stationarity of real interest rates in the Euro Area. We use a new unit root test developed by Peseran et al. (2013) that allows for multiple unobserved factors in a panel set up. Our results suggest that while short-term and long-term real interest rates were stationary before the financial crisis, they became nonstationary during the crisis period likely due to persistent risk that characterized financial markets during that time. JEL codes: E43, C23. Keywords: Real interest rates, Euro Area, financial crisis, panel unit root tests, cross-sectional dependence.
    Keywords: Tipus d'interès, Anàlisi de dades de panel, Crisi financera global, 2007-2009, Eurozona, 33 - Economia,
    Date: 2013

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