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on Open Economy Macroeconomic |
| By: | Michael B Devereux (University of British Columbia, CEPR and NBER); Ozge Senay (University of St Andrews); Alan Sutherland (University of St Andrews and CEPR) |
| Abstract: | Over the past four decades, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a substantial fall in the level and variability of inflation. Many economists have conjectured that financial globalization contributed to the improved performance in the level and predictability of inflation. In this paper, we explore the causal link running in the opposite direction. We show that a monetary policy rule which reduces inflation variability leads to an increase in the size of gross external positions, both in equity and bond portfolios. This appears to be a robust prediction of open economy macro models with endogenous portfolio choice. It holds across different modeling specifications and parameterizations. We also present preliminary empirical evidence which shows a negative relationship between inflation volatility and the size of gross external positions. |
| Keywords: | Nominal stability, Financial Globalization, Country Portfolios |
| JEL: | E52 E58 F41 |
| Date: | 2013–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmawp:1309&r=opm |
| By: | Scott Davis (Federal Reserve Bank of Dallas); Mario Crucini (Vanderbilt University) |
| Abstract: | International business-cycle models assume that home and foreign goods are poor substitutes. International trade models assume they are close substitutes. This paper constructs a model where this discrepancy is due to frictions in distribution. Imports need to be combined with a local non-traded input, distribution capital, which is slow to adjust. As a result, imported and domestic goods appear as poor substitutes in the short run. In the long run this non-traded input can be reallocated, and quantities can shift following a change in relative prices. Thus the observed substitutability between home and foreign goods gets larger as time passes. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:453&r=opm |
| By: | D'Adamo, Gaetano (Universidad de Valencia); Rovelli, Riccardo (University of Bologna) |
| Abstract: | During the last decade, economists have intensively searched for evidence on the importance of the Balassa-Samuelson (B-S) hypothesis in explaining nominal convergence. One general result is that B-S can at best explain only part of the excess inflation observed in the European catching-up countries, which suggests that other factors may be at play. In these and related studies, however, the potential role of the exchange rate regime in affecting price convergence in Europe has been overlooked. In this respect, we claim that the choice of the exchange rate regime has decisively affected the path of nominal convergence. To show this, we first model the (endogenous) choice of the exchange rate regime and, in a second stage, estimate a B-S type of regression for each regime. Our results show that, for countries which pegged to or adopted the euro, the effect of the same increase in the dual productivity growth (that is, the difference in productivity growth between the traded and non-traded sectors) on the dual inflation differential is more than twice as large as that in the "flexible" countries. We conclude that, in a catching-up country, premature euro adoption may foster excess inflation, beyond that which is to be expected as a consequence of productivity convergence on the basis of the B-S effect. |
| Keywords: | exchange rate regimes, Balassa-Samuelson effect, inflation, euro adoption |
| JEL: | C34 E52 F31 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp7627&r=opm |
| By: | Lee, Hyun-Hoon (Kangwon National University); Park, Donghyun (Asian Development Bank) |
| Abstract: | The central objective of this paper is to empirically assess how global imbalances have evolved since the global financial crisis of 2008/09. More specifically, we examine how the security investment positions of major East Asian economies in United States (US) financial markets—equities, bonds, and bank lending—changed after the crisis. Our econometric analysis, which is based on the gravity model to identify the determinants of foreign portfolio investment in the US, finds that the "overinvestment" of most East Asian economies in the US has remained substantial after the global financial crisis, especially in long-term bonds. That is, even after the crisis, most East Asian economies continue to hold excessive amounts of US securities, but the degree of overinvestment appears to have declined for some economies such as the PRC. However, the PRC still has the largest excessive holdings of US securities. We also find that East Asian economies over-invest in US financial markets largely due to excessive savings and foreign exchange reserves. |
| Keywords: | Global financial crisis; global imbalances; US; East Asia; portfolio investment |
| JEL: | F21 F32 F34 F42 |
| Date: | 2013–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbrei:0118&r=opm |
| By: | Jamel Saadaoui |
| Abstract: | The reduction of global imbalances observed during the climax of crisis is incomplete. In this context, currencies realignments are still proposed to ensure global macroeconomic stability. These realignments are based on equilibrium rates derived from equilibrium exchange rate models. Among these models, we have the fundamental equilibrium exchange rate model introduced by Williamson (1994). This approach is often labelled as normative mainly because the equilibrium is not uniquely determined. If the FEER is not related either in the short or in the long to the real exchange rates, we see no clear justification to intervene in foreign exchange markets based on these equilibrium rates. In this case, the FEER does not include any element of long run predictive value and should not be used to reduce global imbalances. This paper provides panel empirical evidences that the FEER is related to real exchange rate in the long run and thus could be a useful tool to prevent the resurgence of large global imbalances and associated risks. |
| Keywords: | Global Imbalances, Equilibrium Exchange Rate, International Monetary Cooperation. |
| JEL: | C23 F31 F32 F33 F41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ulp:sbbeta:2013-14&r=opm |
| By: | Yannick Le Pen; Benoît Sévi |
| Abstract: | We empirically reinvestigate the issue of excess comovement of commodity prices initially raised in Pindyck and Rotemberg (1990) and show that excess comovement, when it exists, can be related to hedging pressure and speculative intensity in commodity futures markets. Excess comovement appears when commodity prices remain correlated even after adjusting for the impact of common factors. While Pindyck and Rotemberg and following contributions examine this issue using a relevant but arbitrary set of control variables, we use recent developments in large approximate factor models so that a richer information set can be considered and “fundamentals” are likely to be adequately modeled. We consider a set of 8 unrelated commodities along with 187 real and nominal macroeconomic variables from which 9 factors are extracted over the period 1993-2010. Our estimates provide evidence of a time-varying excess comovementwhich is only occasionally significant, even after controlling for heteroscedasticity. Interestingly, excess comovement is mostly significant in recent years when a large increase in the trading of commodities is observed and also in crisis periods. However, we show that this increase in trading activity alone has no explanatory power for the excess comovement. Conversely, measures of hedging and speculative activity explain around 50% of the estimated excess comovement thereby showing the strong impact of the financialization process, and more generally the significant influence of the behavior of some categories of traders. |
| Keywords: | commodity excess comovement hypothesis, factors model, heteroscedasticity-corrected correlation,commodity index, futures trading |
| JEL: | C22 C32 G15 E17 |
| Date: | 2013–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:19&r=opm |