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on Open Economy Macroeconomic |
| By: | Blaise Gnimassoun; Valérie Mignon |
| Abstract: | This paper aims at studying current-account imbalances by paying a particular attention to exchange-rate misalignments. We rely on a nonlinear model linking the persistence of current account imbalances to the deviation of the exchange rate to its equilibrium value. Estimating a panel smooth transition regression model on a sample of 22 industrialized countries, we show that persistence of current-account imbalances strongly depends on currency misalignments. More specifically, while there is no persistence in cases of currency undervaluation or weak overvaluation, persistence tends to augment for overvaluations higher than 11%. In addition, whereas disequilibria are persistent even for very low overvaluations in the euro area, persistence is observed only for overvaluations higher than 14% for non-eurozone members. |
| Keywords: | Current-account imbalances;current-account persistence;exchange-rate misalignments;panel smooth transition regression models |
| JEL: | F32 F31 C33 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2013-29&r=opm |
| By: | Linda S. Goldberg |
| Abstract: | International financial linkages, particularly through global bank flows, generate important questions about the consequences for economic and financial stability, including the ability of countries to conduct autonomous monetary policy. I address the monetary autonomy issue in the context of the international policy trilemma: countries seek three typically desirable but jointly unattainable objectives: stable exchange rates, free international capital mobility, and monetary policy autonomy oriented toward and effective at achieving domestic goals. I argue that global banking entails some features that are distinct from broad issues of capital market openness captured in existing studies. In principal, if global banks with affiliates established in foreign markets can reduce frictions in international capital flows then the macroeconomic policy trilemma could bind tighter and interest rates will exhibit more co-movement across countries. However, if the information content and stickiness of the claims and services provided are enhanced relative to a benchmark alternative, then global banks can weaken the trilemma rather than enhance it. The result is a prediction of heterogeneous effects on monetary autonomy, tied to the business models of the global banks and whether countries are investment or funding locations for those banks. Empirical tests of the trilemma support this view that global bank effects are heterogeneous, and also that the primary drivers of monetary autonomy are exchange rate regimes. |
| JEL: | E44 F36 G32 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19497&r=opm |
| By: | YOSHIDA Yushi |
| Abstract: | Our dataset is unique and allows us to control for market share among competing exporters with the same nationality. Using a sample from January 1988 to December 2005 on exports of five Japanese major ports to six destination countries, we examine the effect of market share (with respect to competitors from the same country) on exchange rate pass-through (ERPT). We provide empirical evidence that market share among the same nationality on exchange rate pass-through matters and is consistent with the findings of Feenstra et al. (1996), which show a non-linear relationship between market share and exchange rate pass-through. The result remains robust when the market share of the country is also included in the regression. Quantifying the economic significance of the market share effect, our evidence shows that the shifts in the ERPT of Japanese exports are more pronounced in Asian countries whereas the ERPT has been relatively stable over the last two decades for the United States. Our evidence implies that Japanese exports do not account for the observed recent decline in the ERPT of U.S. imports whereas Japanese exports' ERPT declined more substantially in China. |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:13084&r=opm |
| By: | Raphael S. Schoenle (Economics Department, Brandeis University); Raphael A. Auer (Swiss National Bank) |
| Abstract: | In this paper, we first document that two predictions of the heterogeneous firm version of the Dornbusch (1987) pricing model are confirmed in micro data on US import prices: while the rate at which a firm reacts to changes in its own cost is U-shaped in market share, the rate at which it reacts to competitors’ prices is hump-shaped in market share. Second, using the theory as a guidance, we present an expression for price changes in industry equilibrium that can be broken down into a component due to the direct cost response at the firm level, and another one due to price complementarities faced by the firm at the industry level. We show empirically that taking into account a sector’s market structure and the interplay of heterogeneity in reaction to own cost and reaction to the competition can substantially improve our understanding of the variation in pass-through rates across sectors and trade partners. The direct imperfect cost pass-through channel and the indirect price complementarity channel play approximately equally important roles in determining pass-through but partly offset each other. Including only one of these channels in an empirical analysis results in a failure to explain variation in the aggregate equilibrium rate of pass-through. |
| Keywords: | Exchange Rate Pass-Through, U.S. Import Prices, Market Structure, Price Complementarities |
| JEL: | E3 E31 F41 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:brd:wpaper:62&r=opm |
| By: | Eichengreen, Barry; Gupta, Poonam |
| Abstract: | This paper considers the determinants of exports of modern services and traditional services. It considers the growth of export volumes as well as export surges, that is, the periods of rapid sustained export growth. It asks whether the determinants of export growth rates and export surges differ between merchandise, traditional services, and modern services and whether developing countries are different. It confirm the importance of the real exchange rate for export growth. The paper finds that the effect of the real exchange rate is even stronger for exports of services than for exports of goods and that it is especially strong for exports of modern services. The results suggest that in the course of their development, as developing countries shift from exporting commodities and merchandise to exporting traditional and modern services, appropriate policies toward the real exchange rate become even more important. |
| Keywords: | Macroeconomic Management,Economic Theory&Research,Economic Stabilization,Emerging Markets,Achieving Shared Growth |
| Date: | 2013–09–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6629&r=opm |
| By: | Matsuyama, Kiminori (Department of Economics, Northwestern University, Evanston, USA) |
| Abstract: | This paper studies theoretically how the cross-country differences in the institutional quality (IQ) of the domestic credit markets shape the patterns of international capital flows when such IQ differences cause productivity differences across countries. IQ affects productivity by changing productivity-agency cost trade-offs across heterogeneous investment projects, which have opposite effects on the investment and capital flows from exogenous productivity differences. The overall effect of IQ could generate U-shaped responses of the investment and capital flows. This means that capital could flow from middle-income to low-income and high-income countries; and starting from a low IQ, a country could experience both growth and a current account surplus after an institutional reform. More generally, the results here offer some cautions when interpreting the evidence on the role of productivity and institutional differences on capital flows and question the validity of using financial frictions as a proxy for the quality of financial institutions. |
| Keywords: | Credit composition, domestic financial frictions, endogenous productivity, institutional quality, intertemporal trade, pledgeability, productivity-agency cost trade-off, reverse capital flows, U-shaped patterns |
| JEL: | E22 F49 O16 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:ihs:ihsesp:301&r=opm |
| By: | Julian Di Giovanni; Andrei A. Levchenko; Isabelle Méjean |
| Abstract: | This paper uses a database covering the universe of French firms for the period 1990- 2007 to provide a forensic account of the role of individual firms in generating aggregate fluctuations. We set up a simple multi-sector model of heterogeneous firms selling to multiple markets to motivate a theoretically-founded decomposition of firms' annual sales growth rate into different components. We find that the firm-specific component contributes substantially to aggregate sales volatility, mattering about as much as the components capturing shocks that are common across firms within a sector or country. We then decompose the firm-specific component to provide evidence on two mechanisms that generate aggregate fluctuations from microeconomic shocks highlighted in the recent literature: (i) when the firm size distribution is fat-tailed, idiosyncratic shocks to large firms directly contribute to aggregate fluctuations; and (ii) aggregate fluctuations can arise from idiosyncratic shocks due to input-output linkages across the economy. Firm linkages are approximately three times as important as the direct effect of firm shocks in driving aggregate fluctuations. |
| Keywords: | Aggregate Fluctuations, Firm-Level Shocks, Large Firms, Linkages. |
| JEL: | E32 F12 F41 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1387&r=opm |
| By: | Magali Dauvin |
| Abstract: | This paper investigates the relationship between energy prices and the real effective exchange rate of commodity-exporting countries. We consider two sets of countries: 10 energy-exporting and 23 commodity-exporting countries over the period 1980-2011. Estimating a panel cointegrating relationship between the real exchange rate and its fundamentals, we provide evidence for the existence of "energy currencies". Relying on the estimation of panel smooth transition regression (PSTR) models, we show that there exists a certain threshold beyond which the real effective exchange rate of both energy and commodity exporters reacts to oil prices, through the terms-of-trade. More specifically, when oil price variations are low, the real effective exchange rates are not determined by terms-of-trade but by other usual fundamentals. Nevertheless, when the oil market is highly volatile, currencies follow an "oil currency" regime, terms-of-trade becoming an important driver of the real exchange rate. |
| Keywords: | energy prices;terms-of-trade;exchange rate;commodity-exporting countries;panel cointegration;nonlinear model;PSTR |
| JEL: | C33 F31 O13 Q43 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2013-28&r=opm |
| By: | Jean-Pierre Allegret; Cécile Couharde; Dramane Coulibaly; Valérie Mignon |
| Abstract: | Oil-exporting countries usually experience large current account improvements following a sharp increase in oil prices. In this paper, we investigate this oil price-current account relationship on a sample of 27 oil-exporting economies. Relying upon the estimation of panel smooth transition regression models over the 1980-2010 period, we provide evidence that refines the traditional interpretation of oil price effects on current accounts. While current accounts are positively affected by oil price variations, this effect is nonlinear and depends critically on the degree of financial development of oil-exporting economies. More specifically, oil price variations exert a positive impact on the current account position for less financially developed countries, while this influence tends to diminish when the degree of financial deepness augments. |
| Keywords: | current account; oil price; financial development; panel smooth transition regression models |
| JEL: | F32 C33 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2013-29&r=opm |
| By: | Ángel Estrada; Jordi Galí; David López-Salido |
| Abstract: | We study the extent of macroeconomic convergence/divergence among euro area countries. Our analysis focuses on four variables (unemployment, inflation, relative prices and the current account), and seeks to uncover the role played by monetary union as a convergence factor by using non-euro developed economies and the pre-EMU period as control samples. |
| Keywords: | macroeconomic convergence, labor markets, competitiveness, inflation differentials, current account imbalances, relative prices |
| JEL: | E24 F31 O47 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:722&r=opm |
| By: | Heericourt, Jerome; Poncet, Sandra |
| Abstract: | This paper studies how firm-level export performance is affected by Real Exchange Rate (RER) volatility and investigates whether this effect depends on existing financial constraints. The empirical analysis relies on export data for more than 100,000 Chinese exporters over the 2000-6 period. The results confirm a trade-deterring effect of RER volatility. Firms'decision to begin exporting and the exported value decrease for destinations with higher exchange rate volatility; besides, this effect is magnified for financially vulnerable firms. As expected, financial development seems to dampen this negative impact, especially on the intensive margin of export. These results provide micro-founded evidence suggesting that the existence of well-developed financial markets allows firms to hedge exchange rate risk. The results also support a key role of financial constraints in determining the macro impact of RER volatility on real outcomes. |
| Keywords: | Emerging Markets,Economic Conditions and Volatility,Currencies and Exchange Rates,Debt Markets,Fiscal&Monetary Policy |
| Date: | 2013–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6638&r=opm |
| By: | Salvatore Dell’Erba, Ricardo Hausmann, Ugo Panizza (IHEID, The Graduate Institute of International and Development Studies, Geneva) |
| Abstract: | This paper studies the relationship between sovereign spreads and the interaction between debt composition and debt levels in advanced and emerging market countries. It finds that in emerging market countries there is a significant correlation between spreads and debt levels. This correlation, however, is not statistically significant in countries where most public debt is denominated in local currency. In advanced economies, the magnitude of the correlation between debt levels and spreads is about one fifth of the corresponding correlation for emerging market economies. In Eurozone countries, however, the correlation between spreads and debt ratios is similar to that of emerging market countries. The paper also shows that the financial crisis amplified the relationship between spreads and debt levels within the Eurozone but had no effect on the relationship between spreads and debt in standalone countries. Finally, the paper shows that the relationship between debt levels and spreads is amplified by the presence of large net foreign liabilities. This amplifying effect of net foreign liabilities is larger in the Eurozone than in standalone advanced economies. The paper concludes that debt composition matters and corroborates the original sin hypothesis that, rather than being a mere reflection of institutional weaknesses, the presence of foreign currency debt increases financial fragility and leads to suboptimal macroeconomic policies. |
| Keywords: | Spreads, Public debt, Original Sin, Euro |
| Date: | 2013–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp12-2013&r=opm |
| By: | Òscar Jordà; Moritz HP. Schularick; Alan M. Taylor |
| Abstract: | Two separate narratives have emerged in the wake of the Global Financial Crisis. One speaks of private financial excess and the key role of the banking system in leveraging and deleveraging the economy. The other emphasizes the public sector balance sheet over the private and worries about the risks of lax fiscal policies. However, the two may interact in important and understudied ways. This paper studies the co-evolution of public and private sector debt in advanced countries since 1870. We find that in advanced economies financial stability risks have come from private sector credit booms and not from the expansion of public debt. However, we find evidence that high levels of public debt have tended to exacerbate the effects of private sector deleveraging after crises, leading to more prolonged periods of economic depression. Fiscal space appears to be a constraint in the aftermath of a crisis, then and now. |
| JEL: | C14 C52 E51 F32 F42 N10 N20 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19506&r=opm |
| By: | Christoph Zwick (Karl-Franzens University of Graz) |
| Abstract: | This paper deals the ongoing current account adjustment process in the southern Euro - area countries. It applies an extended version of the Obstfeld/Rogoff (2005) model to Euro-Zone- imbalances and provides an interpretation of the results. I develop a five-region-version of the model, consisting of a EMU – deficit (GIPS)- and a EMU – surplus region besides the United States, Asia and OPEC. The model also allows for changes in the relative size of the tradable- to the non- tradable sector, induced by changes in the relative prices of tradable- to non-tradable goods. The paper shows the approximated sizes and the directions of price movements, which are implied by the current account adjustment process that started in the GIPS countries after the financial crisis. It argues, that declines in output and employment during the adjustment process follow intuitively from the model results. These output losses result from sticky prices in combination with a limited nominal depreciation of the common currency and the importance of intra-EMU adjustment. The paper further shows that supply-side changes, global rebalancing issues and the time horizon of the rebalancing process have an important impact on the size of the price movements. Despite the discussed weaknesses of the model, the analysis clearly suggests unfinished real effective exchange rate adjustment in Greece, Spain and Portugal implying further negative economic consequences on these economies by the rebalancing process. Italy might be an exception. |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:grz:wpaper:2013-08&r=opm |
| By: | Bignon, V.; Breton, R.; Rojas Breu, M. |
| Abstract: | This paper analyzes a two-country model of currency, banks and endogenous default to study whether impediments to credit market integration across jurisdictions impact the desirability of a currency union. We show that when those impediments induce a higher cost for banks to manage cross-border credit compared to domestic credit, welfare may not be maximal under a regime of currency union. But a banking union that would suppress hurdles to banking integration restores the optimality of that currency arrangement. The empirical and policy implications in terms of banking union are discussed. |
| Keywords: | banks, currency union, credit, default, limited commitment. |
| JEL: | E42 E50 F3 G21 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:450&r=opm |
| By: | Stefan Ederer; Peter Reschenhofer |
| Abstract: | This paper aims to identify different growth patterns in the EU which led to the emergence of macroeconomic imbalances. It provides a detailed statistical picture of the evolution of various macroeconomic variables on the demand as well as on the supply side, before, in and after the financial and economic crisis of 2008/09. It investigates the causes and discusses various ’channels’ which led to macroeconomic imbalances by means of a descriptive analysis of the key determinants of macroeconomic developments, such as wage and price developments, productivity growth etc. Special emphasis is given to developments of the share of labour in national income, the real interest rate and the real exchange rate. The analysis of this data set provides a comprehensive picture of the underlying causes for the specific growth patterns as well as a first assessment of their role in the development of macroeconomic imbalances within the EU. It derives tentative conclusions as to how macroeconomic imbalances can arise in a monetary union and how they can be addressed properly by economic policy. |
| Keywords: | EU integration, European economic policy, European governance, European Monetary Union, Macroeconomic disequilibria |
| JEL: | E61 F41 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:feu:wfewop:y:2013:m:9:d:0:i:42&r=opm |
| By: | Julian Di Giovanni; Andrei A. Levchenko; Jing Zhang |
| Abstract: | This paper evaluates the global welfare impact of China's trade integration and technological change in a multi-country quantitative Ricardian-Heckscher-Ohlin model. We simulate two alternative growth scenarios: a "balanced" one in which China's productivity grows at the same rate in each sector, and an "unbalanced" one in which China's comparative disadvantage sectors catch up disproportionately faster to the world productivity frontier. Contrary to a well-known conjecture (Samuelson 2004), the large majority of countries experience significantly larger welfare gains when China's productivity growth is biased towards its comparative disadvantage sectors. This finding is driven by the inherently multilateral nature of world trade. |
| Keywords: | China, productivity growth, international trade |
| JEL: | F11 F43 O33 O47 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1388&r=opm |