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on Open Economy Macroeconomic |
| By: | Hale, Galina (Federal Reserve Bank of San Francisco); Obstfeld, Maurice (University of California Berkeley,) |
| Abstract: | Greater financial integration between core and peripheral EMU members had an effect on both sets of countries. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. The result has been asset-price bubbles and collapses in some of the peripheral countries, area-wide banking crisis, and sovereign debt problems. We analyze the geography of international debt flows using multiple data sources and provide evidence that after the euro’s introduction, Core EMU countries increased their borrowing from outside of EMU and their lending to the EMU periphery. |
| Keywords: | international debt; EMU; international banking; global imbalances; euro crisis |
| JEL: | F32 F34 F36 |
| Date: | 2014–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2014-10&r=opm |
| By: | José Anson (Asian Development Bank Institute (ADBI)); Mauro Boffa; Matthias Helble |
| Abstract: | The information and communication technology (ICT) revolution of the past 3 decades has transformed the world into an integrated marketplace. Today, producers and consumers alike are able to compare the prices of local businesses and worldwide sellers. For an increasing number of tradable goods, they can take advantage of arbitrage opportunities between online and offline transactions. One of the key exogenous elements behind this arbitrage is exchange rate movements. The existing literature on exchange rates has concluded that nominal prices can be assumed to be rigid, which thus opens the door to short-term international arbitrage. However, empirical evidence of international short-term arbitrage has so far been lacking due to data constraints. In this paper, we first present a new dataset that holds records on daily international exchanges of goods, namely those sent through the international postal logistics network. We then combine this data set with daily data on international exchange rate movements to test the hypothesis of international arbitrage. Applying different econometric techniques, we show that in an environment of floating exchange rates, almost instantaneous short-term international arbitrage is indeed occurring and that it has a persistent effect. The effect seems to be particularly pronounced in the developed countries of Asia and the Pacific. |
| Keywords: | exchange rate, international trade, Australia, New Zealand, Japan, international arbitrage |
| JEL: | F14 F31 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:24048&r=opm |
| By: | Hakan Yilmazkuday (Department of Economics, Florida International University); Mario J. Crucini (Department of Economics, Vanderbilt University) |
| Abstract: | A unique panel of retail prices spanning 123 cities in 79 countries from 1990 to 2005 is used to uncover the novel properties of long-run international price dispersion. At the PPP level, almost all of price dispersion is attributed to unskilled wage dispersion. At the level of individual goods and services, the average contribution of these wages is signi?cantly reduced, ref?ecting that good-speci?c sources of price dispersion, such as trade costs and good-specifi?c markups, tend to average out across goods. At the LOP level, borders and distance contribute about equally to price dispersion that is rising in the distribution share. |
| Keywords: | Real exchange rates; Purchasing Power Parity; Law of One Price; Dynamic panel |
| JEL: | E31 F31 D40 |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:fiu:wpaper:1407&r=opm |
| By: | Eswar Prasad (Asian Development Bank Institute (ADBI)) |
| Abstract: | This paper evaluates the prospects for the renminbi’s role as an international currency and the implications for global financial markets. Although the People’s Republic of China (PRC) does not have either an open capital account or a flexible exchange rate, the renminbi has attained considerable traction as an international currency on account of the PRC’s rising shares of global trade and gross domestic product. Through bilateral swaps that the People’s Bank of China has established with other countries’ central banks, the renminbi is also becoming more prominent in international finance. However, the renminbi is unlikely to become a major reserve currency in the absence of capital account convertibility, a flexible exchange rate, and better-developed financial markets. The renminbi’s rising prominence—if it is accompanied by significant economic reforms within the PRC—could add to the stability of Asian and global financial systems. |
| Keywords: | renminbi, Capital account liberalization, the people's bank of China, global financial markets, International currency |
| JEL: | F3 F4 E5 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:24046&r=opm |
| By: | Zhang, Zhibai |
| Abstract: | We find an example where real exchange rate (RER) is stationary and the nominal exchange rate and the price levels are cointegrated but purchasing power parity (PPP) does not hold, which reveals a fault of the unit root and cointegration tests in this use. We argue that the distribution of an RER misalignment can be used in testing absolute PPP. Then we apply this new test and the coefficient restriction test to study the validity of absolute PPP in 40 main countries and areas (versus the US) in light of the Harrod-Balassa-Samuelson effect. The econometric proofs show that absolute PPP holds or closely holds in most countries when their averaged relative GDP per capita (GDPPs, against the US with the US = 1) are greater than 0.7. And it does not hold in almost all countries when their averaged GDPPs are smaller than 0.7. Thus, a rule of thumb for the theory to hold is that the GDPP should be above 0.7. |
| Keywords: | Absolute purchasing power parity; Real exchange rate; RER misalignment distribution test; Harrod-Balassa-Samuelson effect |
| JEL: | F30 F31 |
| Date: | 2014–04–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:55338&r=opm |
| By: | G. C. Lim (Melbourne Institute of Applied Economic and Social Research, The University of Melbourne); Paul D. McNelis (Department of Finance, Graduate School of Business Administration, Fordham University) |
| Abstract: | This paper examines the relationships between the Gini coefficient, trade-openness, foreign aid and foreign direct investment flows. Panel data estimates show that trade openness can be effective for changing income inequality, but its effectiveness depends on the stage of development. Simulation results show that the Gini and openness can be negatively or positively correlated — it depends on the capital intensity and on the degree of openness. Overall, the results suggest that trade and financial openness can be effective policies for reducing inequality in low income countries, if they significantly increase the marginal productivity of labour through capital intensive methods of production. |
| Keywords: | Gini coefficient, openness |
| JEL: | E10 F41 |
| Date: | 2014–03 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2014n07&r=opm |
| By: | Andres Elberg (Facultad de Economía y Empresa, Universidad Diego Portales) |
| Abstract: | Estimates of speed of convergence towards the Law of One Price (LOP) are potentially afflicted by three sources of bias: temporal aggregation; aggregation across goods; and short samples. I empirically assess the importance of temporal aggregation bias (while accounting for the other two sources of bias) using a novel dataset of weekly-sampled retail prices. I find that temporal aggregation can severely bias estimates of persistence in relative prices. Using quarterly aggregated data can overestimate the half-life of deviations from the LOP by a factor exceeding 2. In contrast, I do not find evidence that aggregation across goods biases persistence estimates. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:ptl:wpaper:53&r=opm |
| By: | SHIMIZU Junko; SATO Kiyotaka |
| Abstract: | The sharp depreciation of the yen from the end of 2012 was expected to have a positive impact on the Japanese trade balance, since Japan had recorded large trade deficits since the Great East Japan Earthquake in March 2011. Trade balance tends to deteriorate at the beginning due to the J-curve effect. However, the Japanese trade balance has not shown any signs of improvement, even though one year has passed since the start of the yen depreciation. There is a growing concern that Japanese firms might lose export competitiveness in the global market. This paper empirically shows that Japanese firms expanded overseas production after the sharp appreciation of the yen from 2008 to 2012, which resulted in the increase in Japanese imports of intermediate inputs as well as finished products. The empirical result of an auto-regressive distributed lag (ARDL) model also indicates that the long-run impact of yen depreciation has weakened in recent years. It is demonstrated that Japanese manufacturing export prices in terms of the contract (invoice) currency have not changed in response to the large exchange rate fluctuations of the yen, which is empirically confirmed by the exchange rate pass-through analysis. Finally, a comparative analysis of the industry-specific exchange rate between Japan and Korea shows that the recent depreciation of the yen has improved the export price competitiveness of the Japanese manufacturing sectors. |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:rdpsjp:14022&r=opm |