nep-opm New Economics Papers
on Open Economy Macroeconomic
Issue of 2014‒03‒30
thirteen papers chosen by
Martin Berka
Victoria University of Wellington

  1. Commodity-Price Comovement and Global Economic Activity By Ron Alquist; Olivier Coibion
  2. The crisis of the sovereign debts in the Eurozone: an overview By Frederic Teulon; Zied Ftiti; Khaled Guesmi
  3. Effects of Commodity Price Shocks on Inflation: A Cross Country Analysis By Atsushi Sekine; Takayuki Tsuruga
  4. Anatomy of a Credit Crunch: From Capital to Labor Markets By Francisco J. Buera; Roberto Fattal-Jaef; Yongseok Shin
  5. Monetary and macroprudential policy in an estimated DSGE model of the Euro Area By Quint, Dominic; Rabanal, Pau
  6. Exchange Rate Volatility, Financial Constraints and Trade: Empirical Evidence from Chinese Firms By Sandra Poncet; Jérôme Héricourt
  7. A Global View of Cross-Border Migration By Julian di Giovanni; Andrei A. Levchenko; Francesc Ortega
  8. Finding Stability in a Time of Crisis: Lessons of East Asia for Eastern Europe By Paul D. McNelis
  9. Firm Exit and Exchange Rates: An Examination with Turkish Firm-Level Data By Nazli Karamollaoglu; M. Ege Yazgan
  10. Nonlinearities in Sovereign Risk Pricing: The Role of CDS Index Contracts By Anne-Laure Delatte; Julien Fouquau; Richard Portes
  11. Are All Sovereigns Equal? A Test of the Common Determination of Sovereign Spreads in the Euro Area By Heather D. Gibson; Stephen G. Hall; George S. Tavlas
  12. How Strongly are Business Cycles and Financial Cycles Linked in the G7 Countries? By Nikolaos Antonakakis; Max Breitenlechner; Johann Scharler
  13. The Feldstein –Horioka Puzzle and structural breaks: Evidence from the largest countries of Asia. By Ketenci, Natalya

  1. By: Ron Alquist; Olivier Coibion
    Abstract: Guided by the predictions of a general-equilibrium macroeconomic model with commodity prices, we apply a new factor-based identification strategy to decompose the historical sources of changes in commodity prices and global economic activity. The model yields a factor structure for commodity prices in which the factors have an economic interpretation: one factor captures the combined contribution of all aggregate shocks that affect commodity markets only through general equilibrium effects while other factors represent direct shocks to commodity markets. The model also provides identification conditions to recover the structural interpretation from a factor decomposition of commodity prices. We apply these methods to a cross-section of real commodity prices since 1968. The theoretical restrictions implied by the model are consistent with the data and thus yield a structural interpretation of the common factors in commodity prices. The analysis indicates that commodity-related shocks have contributed only modestly to global business cycle fluctuations.
    JEL: E3 F4
    Date: 2014–03
  2. By: Frederic Teulon; Zied Ftiti; Khaled Guesmi
    Abstract: The public debt crisis threatening the survival of the euro area. This crisis could appear as a byproduct of the global financial crisis. In fact, it refers to structural problems specific to Europe and the question of optimal currency area which has been in place since 1999. The sovereign debt crisis highlights a number of inconsistencies and difficulties faced by the rescue measures in European countries "devices". This crisis has its roots in the European construction itself, a Stability Pact that guaranteed nothing in the debt sustainability in the absence of political solutions and with enlargements precipitates. It opens the way to several options: issuing eurobonds, fiscal federalism or separation of the euro area.
    Keywords: Public debt; Fiscal deficit; Default risk; EMU.
    JEL: H5 H6 E6
    Date: 2014–02–25
  3. By: Atsushi Sekine; Takayuki Tsuruga
    Abstract: Using local projections, this paper investigates eects of commodity price shocks on in ation. We estimate impulse responses of the consumer price indexes (CPIs) to a commodity price shock, based on a monthly panel consisting of 120 countries. Our results from the local projections suggest that the CPIs are almost fully adjusted within a year in response to a commodity price shock and thus eects of commodity price shocks are transitory. We then explore the possibility that the responses of the CPIs may be dependent on the in ation regimes. Based on the smooth transition autoregressive models that use the past in ation rate as a transition variable, we nd that commodity price shocks have more persistent eects on in ation in the low in ation regime than in the high in ation regime. Our analysis also shows that, in the high in ation regime, there are (i) stabilizing roles of the exchange rate on consumer prices; and (ii) large dierences in price responses between developed and developing countries. However, these eects are not detected in the low in ation regime. Our ndings suggest that business cycle factors may play an important role in understanding eects of commodity price shocks on the CPIs.
    Keywords: Labor demand; Commodity prices, in ation, pass-through, local projections, smooth transition autoregressive models
    JEL: E31 E37 Q43
  4. By: Francisco J. Buera; Roberto Fattal-Jaef; Yongseok Shin
    Abstract: Why are financial crises associated with a sustained rise in unemployment? We develop a tractable model with frictions in both credit and labor markets to study the aggregate and micro-level implications of a credit crunch--i.e., a tightening of collateral constraints. When we simulate a credit crunch calibrated to match the observed decline in the ratio of debt to non-financial assets of the United States business sector following the 2007-8 crisis, our model generates a sharp decline in output--explained by a drop in aggregate total factor productivity and investment--and a protracted increase in unemployment. We then explore the micro-level impact by tracking the employment dynamics for firms of different sizes and ages. The credit crunch causes a much larger reduction in the net employment growth rate of small, young establishments relative to that of large, old producers, consistent with the recent empirical findings in the literature.
    JEL: E24 E44 L25
    Date: 2014–03
  5. By: Quint, Dominic; Rabanal, Pau
    Abstract: In this paper, we study the optimal mix of monetary and macroprudential policies in an estimated two-country model of the euro area. The model includes real, nominal and ?nancial frictions, and hence both monetary and macroprudential policy can play a role. We ?nd that the introduction of a macroprudential rule would help in reducing macroeconomic volatility, improve welfare, and partially substitute for the lack of national monetary policies. Macroprudential policy would always increase the welfare of savers, but their e¤ects on borrowers depend on the shock that hits the economy. In particular, macroprudential policy may entail welfare costs for borrowers under technology shocks, by increasing the countercyclical behavior of lending spreads. --
    Keywords: Monetary Policy,EMU,Basel III,Financial Frictions
    JEL: C51 E44 E52
    Date: 2014
  6. By: Sandra Poncet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris); Jérôme Héricourt (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris 1 - Panthéon-Sorbonne, CEPII - Centre d'Etudes Prospectives et d'Informations Internationales - Centre d'analyse stratégique, EQUIPPE - ECONOMIE QUANTITATIVE, INTEGRATION, POLITIQUES PUBLIQUES ET ECONOMETRIE - Université Lille I - Sciences et technologies - Université Lille II - Droit et santé - Université Lille III - Sciences humaines et sociales - PRES Université Lille Nord de France)
    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. Our empirical analysis relies on export data for more than 100,000 Chinese exporters over the 2000-2006 period. We confirm a trade-deterring effect of RER volatility. We find that the value exported by firms, as well as their probability of entering new export markets, decrease for destinations with a higher exchange rate volatility and that 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 that financial constraints may play a key role in determining the macro impact of RER volatility on real outcomes.
    Keywords: Exchange rate volatility ; Financial development ; Exports
    Date: 2013–03
  7. By: Julian di Giovanni; Andrei A. Levchenko; Francesc Ortega
    Abstract: This paper evaluates the global welfare impact of observed levels of migration using a quantitative multi-sector model of the world economy calibrated to aggregate and firm-level data. Our framework features cross-country labor productivity differences, international trade, remittances, and a heterogeneous workforce. We compare welfare under the observed levels of migration to a no-migration counterfactual. In the long run, natives in countries that received a lot of migration – such as Canada or Australia – are better off due to greater product variety available in consumption and as intermediate inputs. In the short run the impact of migration on average welfare in these countries is close to zero, while the skilled and unskilled natives tend to experience welfare changes of opposite signs. The remaining natives in countries with large emigration flows – such as Jamaica or El Salvador – are also better off due to migration, but for a different reason: remittances. The welfare impact of observed levels of migration is substantial, at about 5 to 10% for the main receiving countries and about 10% in countries with large incoming remittances. Our results are robust to accounting for imperfect transferability of skills, selection into migration, and imperfect substitution between natives and immigrants.
    JEL: F12 F15 F22 F24
    Date: 2014–03
  8. By: Paul D. McNelis (Fordham University and Hong Kong Institute for Monetary Research)
    Abstract: This paper examines the options of small open economies in Eastern Europe pegged to the Euro, in a time of crisis. Specifically, should Bosnia and Herzegovina, Bulgaria, Latvia and Lithuania move to full Euro area accession, as Estonia, Slovakia, and Slovenia have done, or follow the examples of Poland, the Czech Republic, and Hungary and opt out of the Euro area? This paper argues that going forward to full monetary union offers benefits over a pure fixed exchange-rate regime. Specifically, the experience of Hong Kong at the time of the Asian crisis in the late 1990's, illustrates the benefits of a credible currency link during a time of crisis.
    JEL: E52 E62 F41
    Date: 2014–03
  9. By: Nazli Karamollaoglu (MEF University, Turkey); M. Ege Yazgan (Istanbul Bilgi University)
    Abstract: Micro-level empirical research has begun to obtain important results on the effects of currency variations on firms' survival. To date, the literature has lacked detailed analysis of the effects of exchange rates on firms' survival behavior in emerging markets due to a scarcity of firm level information. Using a unique firm-level dataset, we test the impact of currency appreciation on the survival behavior of Turkish firms in manufacturing industries for 2002-2009. The results suggest that real exchange rate appreciation decreases the probability of survival in manufacturing industries. We also find that high (low) productivity firms have higher (lower) probability of survival than low (high) productivity firms as a result of domestic exchange rate appreciation. This evidence indicates that economic events/policies leading to appreciation in domestic currency should be cautiously managed, especially in a resource constrained emerging market economy such as Turkey.
    Keywords: Exchange rate, firm-level, export, emerging markets, survival.
    JEL: F14 F31 F41
    Date: 2014–03
  10. By: Anne-Laure Delatte; Julien Fouquau; Richard Portes
    Abstract: Is the pricing of sovereign risk linear during bearish episodes? Or can initial shocks on economic fundamentals be exacerbated by endogenous factors that create nonlinearities? We test for nonlinearities in the sovereign bond market of European peripheral countries during the debt crisis and explain them. Our estimates based on a panel smooth threshold regression model during January 2006 to September 2012 show four main findings: 1) Peripheral sovereign spreads are subject to significant nonlinear dynamics. 2) The deterioration of market conditions for financial names changes the way investors price risk of the sovereigns. 3) The spreads of European peripheral countries have been priced above their historical values, given fundamentals, because of amplification effects. 4) Two CDS indices on financial names unambiguously stand out as leading drivers of these amplification effects.
    JEL: C23 E44 F34 G12 H63
    Date: 2014–03
  11. By: Heather D. Gibson; Stephen G. Hall; George S. Tavlas
    Abstract: With the outbreak of the Greek financial crisis in late 2009, spreads on Greek (and other) sovereigns reached unprecedented levels. Using a panel data of euro-area countries, we test whether the markets treated all euro-area countries in an equal manner over the period 1998:m1 to 2012:m6. In a F-test of the pooling assumptions suggests that Greece, Ireland and Portugal were not part of the overall pool. In a separate test on the individual coefficients we find that the coefficients on these three countries moved in a similar direction away from the pool, suggesting that markets treated these three countries more acutely than the rest of the pool.
    Keywords: euro area financial crisis, sovereign spreads, panel data tests
    JEL: C33 G12 E63
    Date: 2014–03
  12. By: Nikolaos Antonakakis; Max Breitenlechner; Johann Scharler
    Abstract: In this study we examine the dynamic interactions between credit growth and output growth using the spillover index approach of Diebold and Yilmaz (2012). Based on quarterly data on credit growth and GDP growth over the period 1957Q1-2012Q4 for the G7 countries we find that: i) spillovers between credit growth and GDP growth evolve rather heterogeneously over time and across countries, and increase during extreme economic events. ii) Spillovers between credit growth and GDP growth are of bidirectional nature, indicating bidirectional causation between the financial and real sectors. iii) In the period shorty before and on the onset of the global financial crisis, the link between credit growth and GDP growth becomes more pronounced. In particular, the financial sector plays a dominant role during the early stages of the crisis, while the real sector quickly takes over as the dominant source of spillovers. iv) Interestingly, credit growth in the US is the dominant transmitter of shocks internationally, and especially to other countries' real sectors in the run up period to (and during) the global financial crisis. Overall, our results suggest feedback effects between the financial and the real sectors that create rippling effects within and between the G7 countries during the global financial crisis.
    Keywords: Business cycles, Financial cycles, Spillovers, Crisis, Recession
    JEL: C32 E32 E44 E51 F42
    Date: 2014–03
  13. By: Ketenci, Natalya
    Abstract: The purpose of this paper is to investigate the level of capital mobility in the largest economies of Asia by testing the Feldstein-Horioka puzzle. Panel estimations using quarterly data for the period from 1995 to 2011 have been made for the seven largest economies of Asia, specifically Russia, Japan, South Korea, Turkey, India, Indonesia and China. This group of countries has gained significant economic power in the world over the last decade. Specifically, the growth rates of the sample has for a long period of time exceeded the growth rates of most developed countries. The total GDP adjusted for PPP is far above of the GDP of the EU and NAFTA groups and very close to the G7 group. The paper examines changes in investment savings relationships when the presences of structural shifts – where such exist – are taken into account. Recently developed panel techniques are employed to examine the investment savings relationship and estimate saving-retention coefficients. As a result of these estimations, countries were divided into two groups consisting of stable and unstable economies. This division of countries allows for more precise estimates of capital mobility. The empirical findings reveal that the Feldstein-Horioka puzzle exists in the groups. The saving-retention coefficient is estimated at 0.804 and 0.839 for the stable and unstable samples, respectively, which indicates a relatively higher level of capital mobility among stable countries. Results indicate that countries with high capital mobility are exposed to the negative effects of international market fluctuations.
    Keywords: Feldstein-Horioka puzzle, saving-investment association, capital mobility, cointegration, structural breaks, Asia.
    JEL: F32
    Date: 2014

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