nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒07‒20
seven papers chosen by
Martin Berka
Victoria University of Wellington

  1. External Adjustment, Global Imbalances and Valuation Effects By Pierre-Olivier Gourinchas; Hélène Rey
  2. Slow Moving Debt Crises By Guido Lorenzoni; Ivan Werning
  3. Currency excess returns and global downside market risk By Victoria Galsband; Thomas Nitschka
  4. Sharing Risk Within and Across Countries: The Role of Labor Market Institutions. By Lo Prete, Anna
  5. Is the Relationship Between Prices and Exchange Rates Homogeneous? By Stephen Hall; George Hondroyiannis; Amangeldi Kenjegaliev; P.A.V.B. Swamy; George S. Tavlas
  6. Do euro area countries respond asymmetrically to the common monetary policy? By Matteo Barigozzi; Antonio M. Conti; Matteo Luciani
  7. Price Convergence in Euroland. Evidence from micro data without noise By Sophie-Charlotte Meyer; Ronald Schettkat

  1. By: Pierre-Olivier Gourinchas; Hélène Rey
    Abstract: We provide an overview of the recent developments of the literature on the determinants of long term capital flows, global imbalances and valuation effects. We present the main stylized facts of the new international financial landscape in which external balance sheets of countries have grown in size and discuss implications for the international monetary and financial system.
    JEL: F21 F3 F33 F36 F4 F41 G01 G15
    Date: 2013–07
  2. By: Guido Lorenzoni; Ivan Werning
    Abstract: What circumstances or policies leave sovereign borrowers at the mercy of self-fulfilling increases in interest rates? To answer this question, we study the dynamics of debt and interest rates in a model where default is driven by insolvency. Fiscal deficits and surpluses are subject to shocks but influenced by a fiscal policy rule. Whenever possible the government issues debt to meet its current obligations and defaults otherwise. We show that low and high interest rate equilibria may coexist. Higher interest rates, prompted by fears of default, lead to faster debt accumulation, validating default fears. We call such an equilibrium a slow moving crisis, in contrast to rollover crises where investor runs precipitate immediate default. We investigate how the existence of multiple equilibria is affected by the fiscal policy rule, the maturity of debt, and the level of debt.
    JEL: E6 F3 F34
    Date: 2013–07
  3. By: Victoria Galsband; Thomas Nitschka
    Abstract: We take the perspective of a US investor to assess cross-sectional differences in 19 bilateral, conditional currency excess returns in an empirical model that distinguishes between US-specific and global risks, conditional on US bull (upside) or bear (downside) markets. At first glance, our results suggest that global downside risk is compensated in average bilateral currency excess returns. Further analysis, however, reveals that downside risk and financial market volatility exposures are closely related. Moreover, the downside risk evidence is mostly driven by emerging markets' currencies. We conclude that downside risk models do not fully address the issue of foreign currency excess returns being largely unrelated to standard risk factors.
    Keywords: CAPM, downside risk, exchange rate, forward premium puzzle, uncoveredinterest rate parity, upside risk
    JEL: F31 G15
    Date: 2013
  4. By: Lo Prete, Anna (University of Turin)
    Abstract: This paper studies the effect of labor market institutions on within- and cross-country risk-sharing using a model of international trade in risky assets modified to include a subset of agents, labor-owners, who do not access financial markets, and employment security provisions. Labor market institutions, by promoting within-country risk-shifting arrangements between agents with or without access to financial markets, reduce the fluctuations of non-tradable labor incomes and amplify the fluctuations of capital incomes. Capital flows become more volatile across countries, and if the configuration of labor markets differs across countries, capital-owners bear the burden of systematic undiversifiable world aggregate uncertainty.
    Date: 2013–05
  5. By: Stephen Hall; George Hondroyiannis; Amangeldi Kenjegaliev; P.A.V.B. Swamy; George S. Tavlas
    Abstract: Empirical tests of purchasing power parity (PPP) are implicitly based on the conditions of symmetry and proportionality of the price coefficients. We investigate a separate condition, which we term homogeneity. Specifically, while there may be factors that drive a wedge between prices and exchange rates, when these factors are held constant we would expect a change in exchange rates to be associated with a proportional, or homogeneous, change in prices. To test for the existence of homogeneity in prices, we conduct two experiments. First, we apply a time-varying-coefficient procedure to nine euro-area countries as well as the euro area as a whole during the (monthly) sample period, 1999: M1 to 2011:M3. Second we apply the same procedure to the same group of countries, plus Canada, Japan and Mexico, over the longer period, 1957:M4 to 2011:M3. We find that averages of the price coefficients, corrected for specification biases, are uniformly homogeneous in the long run, providing strong support for PPP.
    Keywords: Purchasing power parity, symmetry, proportionality, homogeneity, generalized cointegration, time-varying coefficients.
    JEL: C32 F31
    Date: 2013–07
  6. By: Matteo Barigozzi (London School of Economics and Political Science); Antonio M. Conti (Bank of Italy); Matteo Luciani (European Center for Advanced Research in Economics and Statistics, Université libre de Bruxelles)
    Abstract: We investigate the possible existence of asymmetries among Euro Area countriesÂ’ reactions to the European Central Bank monetary policy. Our analysis is based on a Structural Dynamic Factor model estimated on a large panel of Euro Area quarterly variables. Although the introduction of the euro has changed the monetary transmission mechanism in the individual countries towards a more homogeneous response, we nevertheless find that differences remain between Northern and Southern Europe in terms of prices and unemployment. These results are the consequence of country specific structures, not of European Central Bank policies.
    Keywords: monetary policy transmission, asymmetric effects, European Monetary Union, Structural Dynamic Factor model
    JEL: C32 E32 E52
    Date: 2013–07
  7. By: Sophie-Charlotte Meyer (University of Wuppertal); Ronald Schettkat (University of Wuppertal)
    Abstract: Analyzing prices of truly homogenous consumer goods sold in Euroland, we find significant price convergence after the Euro cash changeover in 2002. The deviation of national log prices from the mean log price of the same product is much narrower with the Euro than before. We observe Sigma and Beta convergence, i.e. prices do not differ systematically between countries. Our result is in contrast to some other findings stating divergence rather than convergence but which do not control perfectly for heterogeneity of products. Because of information and transportation costs arbitrage is unlikely to occur in consumer items and reasons for convergence must therefore be sought in competition and advantages on the supplier’s side. If suppliers would minimize menu costs, price for the same item should be identical, which we do not observe.
    Keywords: convergence, price setting, law of one price, Euro, homogenous products
    JEL: D4 E31 F36
    Date: 2013–07

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