nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒06‒24
twelve papers chosen by
Martin Berka
Victoria University of Wellington

  1. The Pass-Through of Exchange Rate in the Context of the European Sovereign Debt Crisis By Nidhaleddine Ben Cheikh
  2. Democratization and real exchange rates By Benjamin Furlan; Martin Gächter; Bob Krebs; Harald Oberhofer
  3. Merchanting and Current Account Balances By Elisabeth Beusch; Barbara Döbeli; Andreas M. Fischer; Pinar Yesin
  4. Do Policy-Related Shocks Affect Real Exchange Rates of Asian Developing Countries? By Taya Dumrongrittikul; Heather M. Anderson
  5. Systematic consumption risk in currency returns By Mathias Hoffmann; Rahel Suter
  6. How Do Terms of Trade Affect Productivity? The Role of Monopolistic Output Markets By Llosa, Luis-Gonzalo
  7. International capital flows and development: financial openness matters By Reinhardt, Dennis; Ricci, Luca Antonio; Tressel, Thierry
  8. The Effects of Exchange Rates on Employment in Canada By Huang, Haifang; Pang, Ke; Tang, Yao
  9. A Non-parametric Approach to Modeling Exchange Rate Pass-through in Basic Commodity Markets By Önel, Gülcan; Goodwin, Barry K.
  10. Partial consumption insurance and financial openness across the world By Hevia, Constantino; Serven, Luis
  11. Terms of Trade and Current Account Fluctuations: a Vector Autoregression Approach By Aquino, Juan Carlos; Espino, Freddy
  12. Prices and Productivity: A France-Germany Comparison By Laurence Nayman

  1. By: Nidhaleddine Ben Cheikh
    Abstract: This paper investigates whether the exchange rate pass-through (ERPT) to CPI inflation is a nonlinear phenomenon for five heavily indebted euro area (EA) countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus German) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed some threshold. For all the GIIPS countries, we reveal that the increasing of macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed a higher sensibility of CPI inflation to exchange rate movements.
    Keywords: Exchange Rate Pass-Through, Inflation, Smooth Transition Regression
    JEL: C22 E31 F31
    Date: 2013–06
  2. By: Benjamin Furlan; Martin Gächter; Bob Krebs; Harald Oberhofer
    Abstract: This paper empirically assesses how democratization affects real exchange rates. By doing this, we combine so far separated strands of the economic literature and argue that democratization reduces currency undervaluation leading to a real exchange rate appreciation. We test this hypothesis empirically for a sample of countries observed from 1980 to 2007 by combining a difference-in-difference (DID) approach with propensity score matching (PSM) estimators. Our results reveal a strong and significant finding: democratization causes real exchange rates to appreciate. Consequently, the ongoing process of democratization observed in a few Arabic and Moslem countries is likely to reduce exchange rate distortions.
    Keywords: Real exchange rates, democratization, difference-in-differencesestimator, matching estimators
    JEL: C21 C23 F02 F31 F59 N20
    Date: 2013–06
  3. By: Elisabeth Beusch; Barbara Döbeli; Andreas M. Fischer; Pinar Yesin
    Abstract: Merchanting is goods trade that does not cross the border of the firm's country of residence. Merchanting grew strongly in the last decade in several small open economies, particularly in Finland, Ireland, Sweden, and Switzerland, and has become an important driver of these countries' current account. Because merchanting firms reinvest their earnings abroad to expand their international activities, this practice raises national savings in the home country without increasing domestic investment. This results in a significantly large current account surplus. To show the empirical links between merchanting and the current account balance, two exercises are performed in this paper using a sample of 53 countries during 1980-2011. The first exercise estimates the savings impact of merchanting countries in empirical models of the medium-term current account and shows that the presence of merchanting activity in a country indeed increases its current account balance by 3% on average. The second exercise shows that merchanting's impact on the country's current account is sensitive to firm mobility.
    Keywords: Merchanting, industry dynamics, current account adjustment
    JEL: F10 F20 F32
    Date: 2013
  4. By: Taya Dumrongrittikul; Heather M. Anderson
    Abstract: This paper examines real exchange rate responses to shocks in exchange rate determinants and monetary policy for eight Asian developing countries. The analysis is based on a panel pseudo-Bayesian structural vector error correction model, and the shocks are identified using sign and zero restrictions. We find that trade liberalization generates permanent depreciation, and higher government consumption causes persistent appreciation. Traded-sector productivity gains induce appreciation but their effects are short-lived. Real exchange rate responses to unexpected monetary tightening are consistent with the Dornbusch overshooting hypothesis and long-run neutrality of monetary policy. The evidence suggests that trade liberalization provides an effective device for driving exchange rate movements.
    Keywords: Real exchange rates, exchange rate determination, vector error correction model, monetary policy shock, sign restrictions, penalty function
    Date: 2013
  5. By: Mathias Hoffmann; Rahel Suter
    Abstract: We sort currencies into portfolios by countries’ consumption growth over the past year. The excess return of the highest-consumption-growth currency portfolio over the portfolio of lowest-consumption-growth currencies is positive on average, compensating investors for large negative returns during world-wide downturns. This return—our consumption carry factor—prices the cross-section of portfolio-sorted and of bilateral currency returns. Our results rest on minimal theoretical restrictions but can be interpreted in a habit formation model: sorting currencies on past consumption growth approximates sorting countries based on risk aversion and low (high) risk-aversion currencies depreciate (appreciate) in times of global turmoil.
    Keywords: Foreign exchange, uncovered interest parity, carry trade returns, consumption risk, asset pricing, habit model
    JEL: E44 F31 F44 G12 G15
    Date: 2013–06
  6. By: Llosa, Luis-Gonzalo (UCLA)
    Abstract: This paper analyzes how terms of trade affect aggregate productivity using a two-country monopolistic competitive business cycle model driven by aggregate technology shocks. The inefficiency of the equilibrium implies that each country’s productivity is affected by the terms of trade. This introduces a novel mechanism for business cycle synchronization. Moreover, for each country, foreign technology shocks have almost the same effects as domestic technology shocks. The paper also shows how terms of trade movements can lead to excess volatility of consumption and highly persistent productivity. On the quantitative side, the model delivers a degree of business cycle synchronization that is close to the actual comovement of the U.S. economy with the rest of the world. The model also implies that for some small open economies, specially emerging economies, foreign shocks can outperform domestic shocks in explaining their business cycles. Finally, the paper provides a quantification of the influence of the terms of trade on emerging countries’ productivity and finds that it can be large.
    Keywords: Imperfect Competition, Input-Output Linkages, Terms of Trade, Business Cycles, Total Factor Productivity
    JEL: C67 E23 F12 F41 F43
    Date: 2013–05
  7. By: Reinhardt, Dennis (Bank of England); Ricci, Luca Antonio (International Monetary Fund); Tressel, Thierry (International Monetary Fund)
    Abstract: Does capital flow from rich to poor countries? We revisit the Lucas paradox and ask whether it results from a lack of capital account openness. We find that, when accounting for such openness, the prediction of neoclassical theory is empirically confirmed: among financially open economies, less-developed countries tend to experience net capital inflows and more-developed countries tend to experience net capital outflows. These results also hold when taking into account private flows, institutions, and numerous controls. We also show that reserve intervention has an effect on the current account only in financially open economies.
    Keywords: Lucas paradox; capital flows; financial openness; economic development
    JEL: F21 F36 O40
    Date: 2013–06–14
  8. By: Huang, Haifang (University of Alberta, Department of Economics); Pang, Ke (Department of Economics, Wilfred Laurier University); Tang, Yao (Department of Economics, Bowdoin College)
    Abstract: Under the flexible exchange rate regime, the Canadian economy is constantly affected by fluctuations in exchange rates. This paper focuses on employment in Canada. We find that appreciations of the Canadian dollar have significant effects on employment in manufacturing industries; such effects are mostly associated with the export-weighted exchange rate and not the import-weighted exchange rate. The export-weighted exchange rate elasticity of employment is -0.52. However, we also find that exchange rate fluctuations have little impact on Canada’s nonmanufacturing employment. Because the manufacturing sector accounts for only about 10% of the employment in Canada, the overall employment effect of exchange rates is small. In addition, we assess the potential employment impact of a boom in the global commodity market, which often leads to appreciations of the Canadian dollar. We find that a 12.21% increase in commodity prices (one standard deviation in the 1994-2007 data) reduces Canada’s manufacturing employment by 0.98%, less than 0.1% of the total industrial employment.
    Keywords: exchange rate; employment in Canada
    JEL: F16 F31 J23
    Date: 2013–06–01
  9. By: Önel, Gülcan; Goodwin, Barry K.
    Keywords: Demand and Price Analysis, International Relations/Trade, Research Methods/ Statistical Methods,
    Date: 2013
  10. By: Hevia, Constantino; Serven, Luis
    Abstract: This paper examines the extent of international consumption risk sharing for a group of 50 industrial and developing countries. The analysis is based on the empirical implementation of a model of partial consumption insurance whose parameters have the natural interpretation of coefficients of partial risk sharing even when the null hypothesis of perfect risk sharing is rejected. Estimation results show that rich countries exhibit higher degrees of risk sharing than developing countries, and that the gap between both country groups appears to have widened over the period of financial globalization. Moreover, the pattern of consumption risk sharing is related to the degree of financial openness: countries with larger stocks of foreign assets or liabilities exhibit larger degrees of risk sharing. Furthermore, countries whose foreign asset stocks are more tilted towards foreign direct investment assets also show higher degrees of consumption risk sharing.
    Keywords: Labor Policies,Financial Intermediation,Insurance&Risk Mitigation,Emerging Markets,Debt Markets
    Date: 2013–06–01
  11. By: Aquino, Juan Carlos (Banco Central de Reserva del Perú); Espino, Freddy (Banco Central de Reserva del Perú)
    Abstract: This paper provides evidence on the Harberger-Laursen-Metzler (HLM) effect for the case of Peru. The HLM effect is the deterioration in the savings level of an economy due to a decline in their terms of trade for a given level of investment. This deterioration is caused by lower revenues which worsen the current account. We estimate VAR models that match up the following variables: terms of trade, export prices, import prices, current account, investment and saving. The results show that an unanticipated-permanent increase in the terms of trade (or export prices) improves the current account and saving rises. However, this effect disappears as investment grows faster than saving. On the other hand, an increase in the price of imports negatively affects the current account.
    Keywords: Current account, terms of trade, HLM effect, vector autoregression
    JEL: F32
    Date: 2013–06
  12. By: Laurence Nayman
    Abstract: This study compares French and German manufacturing price levels in 2007 and investigates in both countries over the 1991-2010 period value added price growth rates in manufacturing and services. Using the ICOP methodology and the data from the Eurostat production surveys, we calculate production price levels in the French and German manufacturing sector. Results show they are quite close to each other. As to growth rates, using national accounts data, while German manufacturing value added prices have been relatively stable between 1995 and 2010, French manufacturing prices have been falling. This relative decrease could be attributed to the relative fall in the French gross margins over the last years. This gap is not replicated in the aggregate value added prices. The latter have been rising more steeply in France than in Germany, and this is due to price fluctuations in services. The increase in the French compensation rate in services has been significantly larger than the hourly labour productivity. In Germany, with falling unit labour costs over the 2005-2007 years in the manufacturing sector, German firms could hoard substantial gross margins that, however, have only been partly allocated to investment.
    Keywords: France;Germany;relative price level;hourly labour productivity;unit labour costs;gross margins;investment
    JEL: E31 J24 J30 L60 O47
    Date: 2013–05

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