nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒07‒05
ten papers chosen by
Martin Berka
Victoria University of Wellington

  1. Real Estate Valuation, Current Account and Credit Growth Patterns, Before and After the 2008-9 Crisis By Joshua Aizenman; Yothin Jinjarak
  2. Debt dilution and sovereign default risk By Leonardo Martinez; Cesar Sosa Padilla; Juan Hatchondo
  3. Real Exchange Rate and Economic Growth: new empirical evidence By Fabrício Missio; Frederico Jayme Jr; Gustavo Britto; José Luis Oreiro
  4. The Impact of Yuan Internationalization on the Euro-Dollar Exchange Rate By Agnès Bénassy-Quéré; Yeganeh Forouheshfar
  5. International Business Cycles with Complete Markets By Alexandre Dmitriev; Ivan Roberts
  6. Liquidity effects on asset prices, financial stability and economic resilience By Dimitrios Tsomocos; Juan Francisco Martinez Sepulveda
  7. Sovereign debt markets in turbulent times: Creditor discrimination and crowding-out effects By Fernando Broner; Aitor Erce; Alberto Martin; Jaume Ventura
  8. Cross-Border Price Differentials and Goods Market Integration in East Asia By Moon, Woosik
  9. Commodity and Asset Pricing Models: An Integration By Gonzalo Cortazar; Ivo Kovacevic; Eduardo S. Schwartz
  10. Trade and productivity: The family connection redux By Prettner, Klaus; Strulik, Holger

  1. By: Joshua Aizenman; Yothin Jinjarak
    Abstract: This paper explores the stability of the key conditioning variables accounting for the real estate valuation before and after the crisis of 2008-9, in a panel of 36 countries, for the period of 2005:I -2012:IV, recognizing the crisis break. Our paper validates the robustness of the association between real estate valuation of lagged current account patterns, both before and after the crisis. The most economically significant variable in accounting for real estate valuation changes turned out to be the lagged real estate valuation appreciation (real estate inflation minus CPI inflation), followed by changes of the current account deficit/GDP, domestic credit/GDP, and equity market valuation appreciation (equity market appreciation minus CPI inflation). The first three effects are economically substantial: a one standard deviation increase in lagged real estate appreciation is associated with a 10 % increase in the present real estate appreciation, much larger than the impact of a one standard deviation increase in the current account deficit (5%) and of the domestic credit/GDP growth (3%). Thus, the results are supportive of both current account and credit growth channels, with the animal-spirits and momentum channels playing the most important role in the boom and bust of real estate valuation.
    JEL: F15 F21 F32 R21 R31
    Date: 2013–06
  2. By: Leonardo Martinez (International Monetary Fund); Cesar Sosa Padilla (University of Maryland); Juan Hatchondo (Federal Reserve Bank of Richmond)
    Abstract: We measure the effects of debt dilution on sovereign default risk and show how these effects can be mitigated with debt contracts promising borrowing-contingent payments. First, we calibrate a baseline model `a la Eaton and Gersovitz (1981) to match features of the data. In this model, bondsâ values can be diluted. Second, we present a model in which sovereign bonds contain a covenant promising that after each time the government borrows it it pays to the holder of each bond issued in previous periods the difference between the bond market price that would have been observed absent current-period borrowing and the observed market price. This covenant eliminates debt dilution by making the value of each bond independent from future borrowing decisions. We quantify the effects of dilution by comparing the simulations of the model with and without borrowing-contingent payments. We find that dilution accounts for 84% of the default risk in the baseline economy. Similar default risk reductions can be obtained with borrowing-contingent payments that depend only on the bond market price. Using borrowing-contingent payments is welfare enhancing because it reduces the frequency of default episodes.
    Date: 2012
  3. By: Fabrício Missio (UFMT); Frederico Jayme Jr (Cedeplar-UFMG); Gustavo Britto (Cedeplar-UFMG); José Luis Oreiro (UNB)
    Abstract: The goal of this paper is to empirically analyse the relationship between the real exchange rate and the growth rate of output. Firstly, we calculate an index of real exchange rate undervaluation, following the relevant literature. Then, using unbalanced (balanced) panel data techniques, we estimate the effect of this index on the rate of output growth for a sample of 103 (63) countries over the 1978-2007 period. Afterwards, we investigate the existence of a nonlinear relationship (quadratic) between these variables, as well as the possibility of there being different patterns for different groups of countries. We employ various tests and econometric methods, including the technique of quantile regressions, to ensure the robustness of the results. The conclusions indicate that maintaining a competitive level for the real exchange rate has positive effects on the growth rate, especially for developing countries in Latin America. Moreover, this effect tends to be nonlinear, i.e., it is positive for moderate levels of undervaluation.
    Keywords: Real Exchange Rate, Nonlinearity and Growth.
    JEL: F43 O19 E12
    Date: 2013–06
  4. By: Agnès Bénassy-Quéré; Yeganeh Forouheshfar
    Abstract: We study the implication of a multipolarization of the international monetary system on cross-currency volatility. More specifically, we analyze whether the internationalization of the yuan could modify the impact of asset supply and trade shocks on the euro-dollar exchange rate, within a three-country, three-currency portfolio model. Our static model shows that the internationalization of the yuan (defined as a rise in the yuan in international portfolios) would be either neutral or stabilizing for the euro-dollar rate, whatever the exchange-rate regime of China. Moving to a dynamic, stock-flow framework, we show that the internationalization of the yuan would make exchange-rate variations more efficient to stabilize net foreign asset positions after a trade shock.
    Keywords: China;yuan;exchange-rate regime;euro;dollar
    JEL: F31 F33
    Date: 2013–05
  5. By: Alexandre Dmitriev (University of Tasmania); Ivan Roberts (Reserve Bank of Australia)
    Abstract: Kehoe and Perri (2002) show that a two-country business cycle model with endogenously incomplete markets helps to resolve the 'international co-movement puzzle' (Baxter 1995) and the 'quantity anomaly' (Backus, Kehoe and Kydland 1992, 1995). We claim that a similar performance can be achieved without resorting to market incompleteness. We show that a model with complete markets driven by productivity shocks alone can account for the 'international co-movement puzzle'. Our model features time non-separable preferences that allow arbitrarily small changes in wealth to affect the supply of labour. It matches the data by predicting (i) positive cross-country correlations of investment and hours worked; and (ii) realistic cross-country correlations of consumption. It reduces the gap between international correlations of output and consumption, but fails to change their order. Unlike models with restricted international markets, ours shows little sensitivity to the parameterisation of the forcing process.
    Keywords: time non-separable preferences; wealth effects; international business cycles
    JEL: E32 F41 G15
    Date: 2013–06
  6. By: Dimitrios Tsomocos (University of Oxford); Juan Francisco Martinez Sepulveda (University of Oxford)
    Abstract: This paper analyzes the different channels of shock transmission in an economy affected by financial frictions. We distinguish between the liquidity and default effects on asset prices. Furthermore, we develop a framework in which we can assess financial stability policy under financial frictions. We introduce a simplified model of trade and financial intermediation that captures the effects of shocks on financial and real variables of the economy. Our results suggest that financial stability and economic resilience to adverse shocks should take into account default in the credit market as well as the liquidity of goods traded in the commodity market.
    Date: 2012
  7. By: Fernando Broner; Aitor Erce; Alberto Martin; Jaume Ventura
    Abstract: In 2007, countries in the Euro periphery were enjoying stable growth, low deficits, and low spreads. Then the financial crisis erupted and pushed them into deep recessions, raising their deficits and debt levels. By 2010, they were facing severe debt problems. Spreads increased and, surprisingly, so did the share of the debt held by domestic creditors. Credit was reallocated from the private to the public sectors, reducing investment and deepening the recessions even further. To account for these facts, we propose a simple model of sovereign risk in which debt can be traded in secondary markets. The model has two key ingredients: creditor discrimination and crowding-out effects. Creditor discrimination arises because, in turbulent times, sovereign debt offers a higher expected return to domestic creditors than to foreign ones. This provides incentives for domestic purchases of debt. Crowding-out effects arise because private borrowing is limited by financial frictions. This implies that domestic debt purchases displace productive investment. The model shows that these purchases reduce growth and welfare, and may lead to self-fulfilling crises. It also shows how crowding-out effects can be transmitted to other countries in the Eurozone, and how they may be addressed by policies at the European level.
    Keywords: sovereign debt, rollover crises, secondary markets, economic growth.
    JEL: F32 F34 F36 F41 F43 F44 G15
    Date: 2013–06
  8. By: Moon, Woosik (Asian Development Bank Institute)
    Abstract: As cross-border movements of goods, capital, and labor are intensifying, it is likely that goods markets in East Asia will become increasingly integrated. This study investigates the current state of goods market integration in East Asia by measuring the extent of cross-border price differentials. Specifically, this study shows that compared with the European Union, East Asian markets are neither sufficiently integrated nor are they showing any price convergence over time.
    Keywords: market integration; east asia; cross-border price differentials; price convergence; regionalization; exchange rate fluctuation; income gap
    JEL: F15 F36
    Date: 2013–06–27
  9. By: Gonzalo Cortazar; Ivo Kovacevic; Eduardo S. Schwartz
    Abstract: We present a simple methodology that integrates commodity and asset pricing models. Given current evidence on the financialization of commodity markets, valuable information about commodity risk premiums can be extracted from asset pricing models and used to substantially improve the estimates of expected spot prices provided by current commodity price models. The methodology can be used with any pair of commodity and asset pricing models. An implementation of the methodology is presented using the Schwartz and Smith (2000) two-factor commodity price model and the CAPM. Reasonable expected spot prices are obtained without negative consequences in the model’s fit to futures prices.
    JEL: G12 G13
    Date: 2013–06
  10. By: Prettner, Klaus; Strulik, Holger
    Abstract: We investigate the effects of demographic change and human capital accumulation on trade and productivity of domestic firms. In so doing we integrate a micro-founded education and fertility decision of households into a model of international trade with firm heterogeneity. Our framework leads to four testable implications: i) the export share of a country increases in the education level of its population, ii) the export share of a country decreases in the birth rate of its population, iii) the average profitability of firms increases in the education level of a country, iv) the average profitability of firms decreases in the birth rate of a country. We find that all four implications are supported by empirical evidence for a panel of OECD countries from 1960 to 2010. Our results suggest that investments in human capital accumulation, especially in higher education, are an important determinant of a country's international competitiveness. Furthermore, falling birth rates need not be a serious concern with respect to productivity and international competitiveness of countries. --
    Keywords: firm heterogeneity,international competitiveness,education,fertility decline
    JEL: F12 F14 I20 J11
    Date: 2013

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