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on Open Economy Macroeconomic |
| By: | Samuel Wills |
| Abstract: | Monetary policy can play an important role in managing oil discoveries. Ideally governments will use fiscal policy to smooth consumption of oil income. In practice this often does not happen, as governments delay spending until oil revenues are received. This induces changes in the economy, both at discovery and when spending begins. In this paper we consider how monetary policy should respond.The paper makes three contributions. The first is to show that an oil discovery causes the real exchange rate to appreciate twice: when forward-looking households and then the government increase their consumption. This can cause a recession under standard monetary regimes, as firms anticipate the second appreciation. The second contribution is to micro-found the objective of monetary policy. The central bank should stabilise inflation, the output gap and the fiscal gap. It will also try to appreciate the non-oil terms of trade, to exploit the asymmetry from owning oilwealth. The third is to derive a closed form for optimal monetary policy, which willrespond in advance to expected changes in government demand. This will delay the second real appreciation until the government can take up the slack left by private demand. Optimal policy significantly improves welfare relative to standard monetary regimes, and is well approximated by a simple Taylor rule that responds to expected changes in the natural level of output. |
| Keywords: | Natural resources, oil, optimal monetary policy, small open economy, anticipated windfall |
| JEL: | E52 E62 F41 O13 Q30 Q33 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:oxcrwp:121&r=opm |
| By: | Filippo Brutti; Philip Ulrich Sauré |
| Abstract: | The Euro Crisis has stopped the process of the European financial integration and triggered a strong repatriation of debt from foreign to domestic investors. We investigate this empirical pattern in light of competing theories of cross-border portfolio allocation. Three empirical regularities stand out: i) repatriation of debt occurred mainly in crisis countries; ii) repatriation affected mainly public debt; iii) public debt of crisis countries was reallocated to politically influential countries within the Euro Area. Standard theories are in line with pattern (i) at best. We argue that the full picture constitutes evidence for the "secondary market theory" of sovereign debt. |
| Keywords: | Debt Repatriation, Sovereign Risk, Secondary Markets, Euro Crisis, Portfolio Home-Bias |
| JEL: | F34 F36 G01 G11 G21 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2014-03&r=opm |
| By: | Tovonony Razafindrabe |
| Abstract: | This paper develops an estimated multi-country open economy dynamic stochastic gen- eral equilibrium (DSGE) model with incomplete Exchange Rate Pass-Through (ERPT) for the Euro-area. It is designed to model global international linkages and to assess inter- national transmission of shocks under an endogenous framework and incomplete ERPT assumption. On the one hand, we relax the small open economy framework (SOEF) but derive a canonical representation of the equilibrium conditions to maintain analytical tractability of the complex international transmission mechanism underlying the model. Namely, the model considers economies of di¤erent size that are open and endogenously related. On the other hand, in order to take into account international linkages, possible cointegration relationships within domestic variables and between domestic and foreign variables, and the role of common unobserved and observed global factors such as the oil price, we use the Global VAR model to estimate the steady state of observed endoge- nous variables of the multi-country DSGE model. Namely, steady states are computed as long-horizon forecasts from a reduced-form cointegrating GVAR model. ERPT analysis conducted from the estimated multi-country DSGE model for the Euro-area in relation with its …ve main trade partners which are the United Kingdom, the United States, China, Japan and Switzerland yields the following results. First, exchange rate volatility contributes to a large part of import price in‡ation variation of the Euro-area in contrast to foreign mark-up shocks. Second, deviation from in‡ation objective of the foreign trade partners contributes to another source of the Euro-area import price variability. Third, nominal rigidity induces a persistent but a lower impact of the exchange rate changes on import in‡ation. |
| Date: | 2014–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-083&r=opm |
| By: | Prettner, Catherine; Prettner, Klaus |
| Abstract: | This article investigates the interrelations between the Euro area and five Central and Eastern European economies. Using an open economy framework, we derive theoretical restrictions to be imposed on the cointegration space of a structural vector error correction model. We employ generalized impulse response analysis to assess the effects of shocks in output, interest rates, the exchange rate, and relative prices on both areas. The results show strong international spillovers in output with the magnitude being similarly strong in both areas. Furthermore, we find multiplier effects in Central and Eastern Europe and some evidence for the European Central Bank´s desire toward price stability. -- |
| Keywords: | European Economic Integration,Structural Vector Error Correction Model,Generalized Impulse Response Analysis,International Transmission of Shocks |
| JEL: | C11 C32 F41 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cegedp:187&r=opm |
| By: | Jean-Louis Combes (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I); Alexandru Minea (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I); Mousse Ndoye SOW (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I) |
| Abstract: | We revisit the link between crises and exchange rate regimes (ERR). Using a panel of 90 developed and developing countries over the period 1980-2009, we find that corner ERR are not more prone to crises compared to intermediate ERR. This finding holds for different types of crises (banking, currency and debt), and is robust to a wide set of alternative specifications. Consequently, we clearly break down the traditional bipolar view: countries that aim at preventing crisis episodes should focus less on the choice of the ERR, and instead implement sound structural macroeconomic policies. |
| Keywords: | exchange rate regimes;economic crises;bipolar view |
| Date: | 2014–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00944372&r=opm |
| By: | Byrne, Joseph P; Korobilis, Dimitris; Ribeiro, Pinho J |
| Abstract: | An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction. |
| Keywords: | Exchange Rate Forecasting; Taylor Rules; Time-Varying Parameters; Bayesian Methods. |
| JEL: | C53 E52 F31 F37 G17 |
| Date: | 2014–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53684&r=opm |
| By: | Mohamed Arouri; Arif Billah Dar; Niyati Bhanja; Aviral Kumar Tiwari; FrédéricTeulon |
| Abstract: | The study analyzes the dynamic interlinkage between India’s real effective exchange rate and real current account deficit using standard VAR and structural VAR (SVAR). The empirical analysis suggests that a real currency appreciation leads to an improvement in the current account deficit, thereby highlighting the occurrence of permanent shocks such as technical innovations, productivity shocks, and changes in tastes and preferences. A positive shock to the current account deficit leads to an appreciation in the real exchange rate. Moreover, both current account and real exchange rates are found to be affected by the changes in these variables themselves rather than changes in the other variables in the system. |
| Keywords: | Real Exchange Rate, Current Account, India, VAR, SVAR |
| Date: | 2014–02–12 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-088&r=opm |
| By: | Mulatu F. Zerihun (Department of Economics, University of Pretoria); Marthinus C. Breitenbach (Department of Economics, University of Pretoria); Francis Kemegue (Department of Economics, University of Pretoria, and Framingham University, USA) |
| Abstract: | The theory of purchasing power parity implies that real exchange rate series should be stationary. However, conventional unit root tests on the Southern African Development community (SADC) real exchange rates confirm the existence of a unit root. Such deficiencies in the investigation of the dynamics of real exchange rates in the region calls for nonlinear methods like the method used in this study to be pursued, which may better explain the dynamics of real exchange rates in SADC. In this paper two nonlinearity tests are employed: the nonparametric test developed by Brock, Dechert, and Scheinkman - known as the BDS test and the Fourier stationarity test. The BDS test detects the independent and identically distribute (iid) assumption of the time series used in the analysis while the Fourier approximation mimics a wide variety of breaks and other types of nonlinearities. Both tests confirm the non-linear nature of real exchange series in SADC. The result from the Fourier stationarity test further provides strong evidence of an OCA among the 11 SADC countries included in the study. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201406&r=opm |