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on Open Economy Macroeconomic |
| By: | Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga |
| Abstract: | We introduce the real exchange rate volatility curve as a useful device to understand the role of price stickiness in accounting for deviations from the Law of One Price at the sector level. In the presence of both nominal and real shocks, the theory predicts that the real exchange rate volatility curve is a U-shaped function of the degree of price stickiness. Using sector-level European real exchange rate data and frequency of price changes, we estimate the volatility curve. The results are consistent with the predominance of real effects over nominal effects. Nonparametric analysis suggests the curve is convex and negatively sloped over the majority of its range. Good-by- good variance decompositions show that the relative contribution of nominal shocks is smaller at the sector level than what previous studies have found at the aggregate level. We conjecture that this is due to significant averaging out of good-specific real microeconomic shocks in the process of aggregation. |
| Keywords: | Real exchange rates, Law of One Price, Sticky prices, Nonparametric test for monotonicity |
| JEL: | E31 F31 D40 |
| URL: | http://d.repec.org/n?u=RePEc:kue:dpaper:e-10-004&r=opm |
| By: | Eric van Wincoop (University of Virginia); Philippe Bacchetta (University of Lausanne) |
| Abstract: | While the 2008-2009 financial crisis originated in the United States, we witnessed steep declines in output, consumption and investment of similar magnitude around the globe. This synchronicity is surprising in the context of both existing theory and past business cycle experience. Theory implies that perfect co-movement can only happen when countries are perfectly integrated, in sharp contrast to the observed home bias in goods and financial markets. We develop a two-country model that allows for self-fulfilling business cycle panics and is consistent with high internationl co-movements and the worldwide increase in perceived uncertainty. We show that limited integration of goods and financial markets is sufficient for business cycle panics to be perfectly synchronized across countries. Moreover, a panic is more likely with tight credit, low interest rates, and unresponsive fiscal policy. We argue that the world was particularly vulnerable to such global panics in 2008. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:413&r=opm |
| By: | Andrew K. Rose |
| Abstract: | In contrast to earlier recessions, the monetary regimes of many small economies have not changed in the aftermath of the global financial crisis. This is due in part to the fact that many small economies continue to use hard exchange rate fixes, a reasonably durable regime. However, most of the new stability is due to countries that float with an inflation target. Though a few have left to join the Eurozone, no country has yet abandoned an inflation targeting regime under duress. Inflation targeting now represents a serious alternative to a hard exchange rate fix for small economies seeking monetary stability. Are there important differences between the economic outcomes of the two stable regimes? I examine a panel of annual data from more than 170 countries from 2007 through 2012 and find that the macroeconomic and financial consequences of regime-choice are surprisingly small. Consistent with the literature, business cycles, capital flows, and other phenomena for hard fixers have been similar to those for inflation targeters during the Global Financial Crisis and its aftermath. |
| JEL: | E58 F33 |
| Date: | 2013–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19632&r=opm |
| By: | Kamber, Gunes;; Thoenissen, Christoph (Reserve Bank of New Zealand) |
| Abstract: | This paper analyzes the transmission mechanism of banking sector shocks in an international real business cycle model with heterogeneous bank sizes. We examine to what extent the financial exposure of the banking sector affects the transmission of foreign banking sector shocks. In our model, the more exposed domestic banks are to the foreign economy via lending to foreign firms, the greater are the spillovers from foreign financial shocks to the home economy. The model highlights the role of openness to trade and the dynamics of the terms of trade in the international transmission mechanism of banking sector shocks Spillovers from foreign banking sector shocks are greater the more open the home economy is to trade and the less the terms of trade respond to foreign shocks. |
| JEL: | E32 J6 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2013/06&r=opm |
| By: | Breton, Régis; Rojas Breu, Mariana; Bignon, Vincent |
| Abstract: | This paper analyzes a two-country model of money and banks to examine the conditions under which the creation of a monetary union between two countries is optimal. Is is shown that if agents resort to banks to adjust their monetary holdings through borrowing and if nobody can force them to repay their debts, it may be optimal for both countries to set up two different currencies, along with strictly positive conversion costs. A necessary condition for this is that credit market integration is limited. This arises even though both countries are perfectly identical. |
| Keywords: | Monetary union; credit; default; limited commitment; |
| JEL: | E42 G21 |
| Date: | 2013–06 |
| URL: | http://d.repec.org/n?u=RePEc:dau:papers:123456789/11719&r=opm |
| By: | Jacob, Punnoose; Peersman, Gert (Reserve Bank of New Zealand) |
| Abstract: | In an estimated two-country DSGE model, we find that shocks to the marginal efficiency of investment account for more than half of the forecast variance of cyclical fluctuations in the US trade balance. Both domestic and foreign marginal efficiency shocks generate a strong effect on the variability of the imbalance, through shifts in international relative absorption. On the other hand, shocks to uncovered interest parity and foreign export prices, which transmit mainly via the terms of trade and exchange rate, have a strong influence at short forecast-horizons, before the investment disturbances begin their dominance. |
| JEL: | C11 F41 |
| Date: | 2013–01 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2013/04&r=opm |
| By: | Juan Carlos Cuestas (University of Sheffield); Paulo José Regis (Xi'an Jiaotong-Liverpool University) |
| Abstract: | The role the real exchange rate plays in determining current account balances has gathered momentum as East and Southeast Asian countries have seen increasingly positive current account balances. This paper analyses the evolution of current accounts in the region. A cointegrating relationship between the real effective exchange rate and the ratio of the current account balance of the GDP is tested, based on both linear and nonlinear models. The half-life of current account imbalances is relatively short, implying high capital mobility. Results poin to the existence of a long-run relationship, and in most cases the causality runs from the exchange rate to the current account. |
| Keywords: | emerging markets, current account, half-life, East and Southeast Asia |
| JEL: | C22 E32 F15 |
| Date: | 2013–10 |
| URL: | http://d.repec.org/n?u=RePEc:aee:wpaper:1308&r=opm |
| By: | Hiroaki Sasaki |
| Abstract: | This paper focuses on productivity growth differentials between manufacturing and services, deindustrialization, and changes in the real exchange rate. Using a Ricardian trade model with a continuum of goods that introduces nontraded services, the paper investigates these interrelationships. The main results are as follows: (i) if deindustrialization proceeds in both home and foreign countries, then the ratio of home manufacturing employment share to foreign manufacturing employment share and the real exchange rate move in the same direction; (ii) even if the productivity growth dierential in the home country is greater than that in the foreign county, the extent of deindustrialization in the home country is not necessarily larger than that in the foreing country. On the contrary, it is possible that the foreign deindustrialization exceeds the home deindustrialization; and (iii) even if the productivity growth dierential in the home country is greater than that in the foreign county, the real exchange rate of the home country can depreciate contrary to the expectaion of the Balassa-Samuelson effect. |
| Keywords: | Productivity growth differentials, Deindustrialization, Real exchange rate, Shift in specialization patterns |
| JEL: | F10 F31 O14 |
| URL: | http://d.repec.org/n?u=RePEc:kue:dpaper:e-10-015&r=opm |
| By: | Zhiwei XU (HKUST); Yi Wen (Federal Reserve Bank of St. Louis); pengfei Wang (Hong Kong University of Science and Technology) |
| Abstract: | Financial capital and fixed capital tend to flow in opposite directions between poor and rich countries. Why? What are the implications of such two-way capital flows for global trade imbalances and welfare in the long run? This paper introduces frictions into a standard two-country neoclassical growth model to explain the pattern of two-way capital flows between emerging economies (such as China) and the developed world (such as the United States). We show how underdeveloped credit markets in China can lead to abnormally high rate of returns to fixed capital but excessively low rate of returns to financial capital relative to the U.S., hence driving out household savings (financial capital) on the one hand while simultaneously attracting foreign direct investment (FDI) on the other. When calibrated to match China's high marginal product of capital and low real interest rate, the model is able to account for the observed rising trends of China's financial capital outflows and FDI inflows as well as its massive trade imbalances. Despite double heterogeneity in households and firms and a less than 100% capital depreciation rate, our two-country model is analytically tractable with closed form solutions at the micro level, which permits exact aggregation by the law of large numbers, so the general equilibrium of the model can be solved by standard log-linearization or higher order perturbation methods without the need of using numerical computation methods. Our model yield, among other things, three implications that stand in sharp contrast with the existing literature: (i) Global trade imbalances between emerging economies and the developed world are sustainable even in the steady state. (ii) There exists an immiserization effect of FDI---namely, FDI is beneficial for the sourcing country but harmful to the recipient country under financial frictions. (iii) Our quantitative results cast doubts on the conventional wisdom that the "saving glut" of emerging economies is responsible for the low world interest rate. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed013:406&r=opm |