nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2013‒10‒02
seven papers chosen by
Martin Berka
Victoria University of Wellington

  1. Quality, Trade, and Exchange Rate Pass-Through By Chen, Natalie; Juvenal, Luciana
  2. Distributional Incentives in an Equilibrium Model of Domestic Sovereign Default By Pablo D'Erasmo; Enrique G. Mendoza
  3. Demography and Low Frequency Capital Flows By David Backus; Thomas Cooley; Espen Henriksen
  4. An extended structural economic dynamics approach to balance-of-payments constrained growth: level of the real exchange rate and endogenous elasticities By Fabrício Misso; Ricardo Araújo Azevedo; Frederico Jayme Jr
  5. Productivity and the Welfare of Nations By Basu, Susanto; Pascali, Luigi; Schiantarelli, Fabio
  6. Testing Twin Deficits and Saving-Investment Nexus in Turkey By Ferda, HALICIOGLU; Kasim, EREN
  7. Long-run interest rate convergence in Poland and the EMU By Łukasz Goczek; Dagmara Mycielska

  1. By: Chen, Natalie (University of Warwick, CAGE and CEPR); Juvenal, Luciana (International Monetary Fund)
    Abstract: This paper investigates the heterogeneous response of exporters to real exchange rate ‡uctuations due to product quality. We combine a unique data set of highly disaggregated Argentinean …rm-level wine export values and volumes between 2002 and 2009 with experts wine ratings as a measure of quality. In response to a real depreciation, we …nd that …rms signi…cantly increase more their markups and less their export volumes for higher quality products, but only when exporting to high income destination countries. These results remain robust to di¤erent measures of quality, samples, speci…cations and to the potential endogeneity of quality. To motivate our …ndings we extend the model of Corsetti and Dedola (2005) with local distribution costs and allow …rms to export multiple products with heterogeneous levels of quality. The model shows that the elasticity of demand perceived by exporters decreases with a real depreciation and with quality, leading to more pricing-to-market and to a smaller response of export volumes to a real depreciation for higher quality goods. Overall our results help to explain the low exchange rate pass-through that is typically observed in aggregate data.
    Keywords: Exchange rate pass-through, pricing-to-market, quality, unit values, exports, …rms, wine.
    Date: 2013
  2. By: Pablo D'Erasmo; Enrique G. Mendoza
    Abstract: International historical records on public debt show infrequent episodes of outright default on domestic debt. Reinhart and Rogoff (2008) document these events and argue that they constitute a “forgotten history” in Macroeconomics. This paper develops a theory of domestic sovereign default in which distributional incentives, interacting with default costs, make default part of the optimal policy of a utilitarian social planner. The model supports equilibria with debt subject to default risk in which rising wealth inequality reduces the optimal debt and increases default probabilities and spreads. A quantitative experiment calibrated to European data shows that, in the observed range of inequality in the distribution of bond holdings, the model accounts for 1/3rd of the average debt and spreads of about 400 basis points. Default risk reduces sharply the sustainable debt, except when the weights in the government’s payoff function value the utility of bond holders more than their share of the wealth distribution. If the former is sufficiently larger than the latter, the model supports debt ratios similar to European averages exposed to low default probabilities.
    JEL: E44 E6 F34 H63
    Date: 2013–09
  3. By: David Backus; Thomas Cooley; Espen Henriksen
    Abstract: We consider the causes of international capital flows. Since capital flows are extremely persistent, we argue that their drivers must be persistent, too. We think the most compelling candidates are demographic trends, tfp differences and financial frictions. In this paper we focus primarily on the role of demography in a multi-country overlapping generations model in which saving decisions are tied to agents' life expectancy. Capital flows reflect differences between saving and investment across countries. Demographic changes affect the aggregate accumulation of assets in two ways: by changing life expectancy which changes individual household saving behavior, and by changing the age distribution of the population by which individual household decisions are aggregated. The most important drivers turn out to be increases in life expectancy caused by decreases in adult mortality.We use a quantitative version of the model to illustrate the impact of demography on capital flows and net foreign assets in China, Germany, Japan, and the United States.
    JEL: J11
    Date: 2013–09
  4. By: Fabrício Misso (UFMT); Ricardo Araújo Azevedo (UNB); Frederico Jayme Jr (Cedeplar-UFMG)
    Abstract: The aim of this paper is to show that the level of the real exchange rate affects the rate of economic growth. More specifically, we extend the model developed by Araujo and Lima (2007) to derive a balance-of-payments equilibrium growth rate analogous to Thirlwall’s Law based on a Pasinettian multi-sector macrodynamic framework in which income elasticities are endogenous to the level of the real exchange. Furthermore, the model is built to relate growth, the real exchange rate and sectoral heterogeneity. We thus demonstrate the effect of the level of real exchange rates on the generation of technological progress, from a cumulative causation perspective, and how these rates also impact the growth of the whole economy via a balance-of-payments constraint approach. Hence, we show that an undervalued real exchange rate has positive effects on economic growth in developing countries.
    Keywords: Real exchange rate, cumulative causation, Balance-of-Payments constraint and growth.
    JEL: O14 O19 F12
    Date: 2013–09
  5. By: Basu, Susanto (Boston College and NBER); Pascali, Luigi (Department of Economics, University of Warwick); Schiantarelli, Fabio (Boston College and IZA)
    Abstract: We show that the welfare of a country’s infinitely-lived representative consumer is summarized, to a firrst order, by total factor productivity (TFP) and by the capital stock per capita. These variables suffice to calculate welfare changes within a country, as well as welfare di¤erences across countries. The result holds regardless of the type of production technology and the degree of product market competition. It applies to open economies as well, if TFP is constructed using domestic absorption, instead of gross domestic product, as the measure of output. Welfare relevant TFP needs to be constructed with prices and quantities as perceived by consumers, not firms. Thus, factor shares need to be calculated using after-tax wages and rental rates, and will typically sum to less than one. These results are used to calculate welfare gaps and growth rates in a sample of advanced countries with high-quality data on output, hours worked, and capital. We also present evidence for a broader sample that includes both advanced and developing countries. JEL classification: Productivity ; Welfare ; TFP ; Solow Residual JEL codes: D24 ; D90 ; E20 ; O47
    Date: 2013
  6. By: Ferda, HALICIOGLU; Kasim, EREN
    Abstract: This paper provides fresh evidence on the validity of twin deficit and the Feldstein-Horioka hypotheses for Turkey during the period of 1987-2004 using bounds testing approach to cointegration. In order to explain the main determinants of the current account deficits in the long-run, the fiscal balance and the domestic investments are used in an econometric model.The cointegration tests indicate the presence of a long-run relationship between the current account and budget deficits as well as the domestic investments during the estimation period. As a result, it is concluded that the twin deficit hypothesis and the Feldstein-Horioka puzzle are present and Turkey appeared to be integrated in the world capital market with a low degree of capital mobility as less than 1/5 of its domestic investment is financed through external funds. The augmented Granger-causality tests suggest no causality between the current account and budget deficits, both in the short-run and the long-run. The post-sample variance decompositions suggest that the domestic investments are the main cause of current deficits in the long-run. The paper also discusses the policy implications of the empirical results.
    Keywords: twin deficits, Feldstein-Horioka hypotheses, cointegration, Turkey
    JEL: C22 F32 F36
    Date: 2013
  7. By: Łukasz Goczek (Faculty of Economic Sciences, University of Warsaw); Dagmara Mycielska (Faculty of Economic Sciences, University of Warsaw)
    Abstract: The aim of the article is to examine the degree of the long-run interest rate convergence in the context of Poland's joining the EMU. In this perspective, it is frequently argued that the expectations of Poland's participation in the EMU should manifest themselves in long-run interest rate convergence. This should be visible in the long-run fall of interest rate risk premium in Poland. In contrast, the paper raises the question of the actual speed of such convergence and questions the existence of this phenomenon in Poland. Confirmation of the hypothesis concerning slow convergence in the risk premium is essential to the analysis of costs of the Polish accession to the EMU. The main hypothesis of the article is verified using a Vector Error-Correction Mechanism model of an Uncovered Interest Rate Parity and several parametric hypotheses concerning the speed and asymmetry of adjustment.
    Keywords: empirical analysis, Eurozone, interest rate convergence, monetary union
    JEL: E43 E52 E58 F41 F42 C32
    Date: 2013

This nep-opm issue is ©2013 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.