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on Open Economy Macroeconomics |
| By: | Masao Ogaki; Bruce E. Hansen; Ippei Fujiwara; Hyeongwoo Kim |
| Abstract: | It is well-known that there is a large degree of uncertainty around Rogoff's (1996) consensus half-life of the real exchange rate. To obtain a more efficient estimator, we develop a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. Further, we propose a median unbiased estimator for the system method based on the generalized method of moments with nonparametric grid bootstrap confidence intervals. Applying the method to real exchange rates of 18 developed countries against the US dollar, we find that most half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals. Our Monte Carlo simulation results are consistent with an interpretation of these results that the true half-lives are short but long half-life estimates from single equation methods are caused by the high degree of uncertainty of these methods. |
| JEL: | C32 E52 F31 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:csg:ajrcwp:05&r=opm |
| By: | Davide Romelli; Cristina Terra; Enrico Vasconcelos (Université de Cergy-Pontoise, THEMA and ESSEC Business School; Université de Cergy-Pontoise, THEMA and CEPII; Banco Central do Brasil) |
| Abstract: | In the transfer problem debate with Keynes, Ohlin suggests that income eects should lessen relative price variations necessary to pro- duce trade surpluses, and that that impact is related to the degree of openness of the economy. We illustrate this mechanism in a sim- ple model, and take it to the data. First, using data for developed and emerging economies for the period 1970{2011, we identify events of sudden stops of capital ows and of abrupt real exchange rate de- preciations. Then, we investigate the relationship between openness to trade, real exchange rate depreciations, and changes in current account and trade balances during these events. We nd that, controlling for real exchange rate changes, more open economies experience a larger increase in current account and trade balances. In other words, our results indicate that improvements in current account and trade bal- ances are accompanied by a smaller real exchange rate depreciation in more open economies. |
| Keywords: | trade openness, sudden stops, real exchange rate depre- ciation. |
| JEL: | F32 F37 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:ema:worpap:2014-10&r=opm |
| By: | Rodrigo Caputo; Gustavo Leyva; Michael Pedersen |
| Abstract: | We assess the role of real and nominal shocks on the real exchange rate (RER) dynamics for a set of small open economies. In doing so, we estimate a SVAR model for five inflation targeting countries: Australia, Canada, Chile, Israel and Norway. In sharp contrast with the existing empirical evidence, we find that in most countries demand shocks tend to explain a small proportion of RER volatility for the period 1986-2011. In that period nominal shocks are relatively more important in explaining RER fluctuations. When we perform a subsample analysis, however, we can reconcile the empirical findings in the literature with our results. In particular, we conclude that the relative importance of demand shocks has been declining substantially over time. In contrast, the relative importance of nominal shocks, and in particular exchange rate shocks, increased importantly in the last decade. |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:730&r=opm |
| By: | Yuki Teranishi; Ippei Fujiwara |
| Abstract: | Do financial frictions call for policy cooperation? This paper investigates the implications of financial frictions for monetary policy in the open economy. Welfare analysis shows that there are long-run gains which result from cooperation, but, dynamically, financial frictions per se do not require policy cooperation to improve global welfare over business cycles. In addition, inward-looking financial stability, namely eliminating inefficient fluctuations of loan premiums in the home country, is the optimal monetary policy in the open economy, irrespective of the existence of policy coordination. |
| JEL: | E50 F41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:csg:ajrcwp:06&r=opm |
| By: | Agnès Bénassy-Quéré (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, CESifo - CESifo, CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne); Dramane COULIBALY (EconomiX - CNRS : UMR7166 - Université Paris X - Paris Ouest Nanterre La Défense) |
| Abstract: | We study the contribution of market regulations in the dynamics of the real exchange rate within the European Union. Based on a model proposed by De Gregorio et al. (1994a), we show that both product market regulations in nontradable sectors and employment protection tend to inflate the real exchange rate. We then carry out an econometric estimation for European countries over 1985-2006 to quantify the contributions of the pure Balassa-Samuelson effect and those of market regulations in real exchange-rate variations. Based on this evidence and on a counter-factual experiment, we conclude that the relative evolution of product market regulations and employment protection across countries play a very significant role in real exchange-rate variations within the European Union and especially within the Euro area, through theirs impacts on the relative price of nontradable goods. |
| Keywords: | Real exchange rate ; Balassa-Samuelson effect ; Product market regulations ; Employment protection |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:gmonwp:hal-00961713&r=opm |
| By: | Mark Aguiar; Manuel Amador; Emmanuel Farhi; Gita Gopinath |
| Abstract: | We characterize fiscal and monetary policy in a monetary union with the potential for rollover crises in sovereign debt markets. Member-country fiscal authorities lack commitment to repay their debt and choose fiscal policy independently. A common monetary authority chooses inflation for the union, also without commitment. We first describe the existence of a fiscal externality that arises in the presence of limited commitment and leads countries to over borrow; this externality rationalizes the imposition of debt ceilings in a monetary union. We then investigate the impact of the composition of debt in a monetary union, that is the fraction of high-debt versus low-debt members, on the occurrence of self-fulfilling debt crises. We demonstrate that a high-debt country may be less vulnerable to crises and have higher welfare when it belongs to a union with an intermediate mix of high- and low-debt members, than one where all other members are low-debt. This contrasts with the conventional wisdom that all countries should prefer a union with low-debt members, as such a union can credibly deliver low inflation. These findings shed new light on the criteria for an optimal currency area in the presence of rollover crises. |
| JEL: | E0 F0 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20277&r=opm |
| By: | Raphael A Auer; Aaron Mehrotra |
| Abstract: | Some observers argue that increased real integration has led to greater comovement of prices internationally. We examine the evidence for cross-border price spillovers among economies participating in the pan-Asian cross-border production networks. Starting with country-level data, we find that both producer price and consumer price inflation rates move more closely together between those Asian economies that trade more with one another, ie that share a higher degree of trade intensity. Next, using a novel data set based on the World Input-Output Database (WIOD), we examine the importance of the supply chain for cross-border price spillovers at the sectoral level. We document the increasing importance of imported intermediate inputs for economies in the Asia-Pacific region and examine the impact on domestic producer prices of changes in costs of imported intermediate inputs. Our results suggest that real integration through the supply chain matters for domestic price dynamics in the Asia-Pacific region. |
| Keywords: | globalisation, inflation, Asian manufacturing supply chain, price spillovers |
| Date: | 2014–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:447&r=opm |
| By: | Yuki Teranishi; Nao Sudo; Tomoyuki Nakajima; Ippei Fujiwara |
| Abstract: | How should monetary policy respond to a global liquidity trap, where the two countries may fall into a liquidity trap simultaneously? Using a two-country New Open Economy Macroeconomics model, we first characterise optimal monetary policy, and show that the optimal rate of inflation in one country is affected by whether or not the other country is in a liquidity trap. We next examine how well the optimal monetary policy is approximated by relatively simple monetary policy rules. The interest-rate rule targeting the producer price index performs very well in this respect. |
| JEL: | E52 E58 F41 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:csg:ajrcwp:04&r=opm |
| By: | Carvalho, Carlos (Departamento de Economia, Pontifícia Universidade Católica do Rio de Janeiro); Nechio, Fernanda (Federal Reserve Bank of San Francisco) |
| Abstract: | We study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Our analytical and quantitative results show that the source of interest rate persistence – policy inertia or persistent policy shocks – is key. When the monetary policy rule has a strong interest rate smoothing component, these models fail to generate high real exchange rate persistence in response to monetary shocks, as policy inertia hampers their ability to generate a hump-shaped response to such shocks. Moreover, in the presence of persistent monetary shocks, increasing policy inertia may decrease real exchange rate persistence. |
| Keywords: | real exchange rates; monetary policy; interest rate smoothing; PPP puzzle; persistence |
| JEL: | E0 F3 F41 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2014-17&r=opm |
| By: | Tarek A. Hassan; Rui C. Mano |
| Abstract: | We decompose violations of uncovered interest parity into a cross-currency, a between-time-and-currency, and a cross-time component. We show that most of the systematic violations are in the cross-currency dimension. By contrast, we find no statistically reliable evidence that currency risk premia respond to deviations of forward premia from their time- and currency-specific mean. These results imply that the forward premium puzzle (FPP) and the carry-trade anomaly are separate phenomena that may require separate explanations. The carry trade is driven by static differences in interest rates across currencies, whereas the FPP appears to be driven primarily by cross-time variation in all currency risk premia against the US dollar. Models that feature two symmetric countries thus cannot explain either of the two phenomena. Once we make the appropriate econometric adjustments we also cannot reject the hypothesis that the elasticity of risk premia with respect to forward premia in all three dimensions is smaller than one. As a result, currency risk premia need not be correlated with expected changes in exchange rates. |
| JEL: | F31 G12 G15 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:20294&r=opm |
| By: | Rod Tyers |
| Abstract: | Australia’s comparatively small and open economy is subject to boom-bust shocks that centre on its exporting mining and agricultural industries which, in average years, are minor contributors to its GDP. The associated real exchange rate effects, however, have important implications for overall performance and its distribution between traded industries and largely non-traded services, the latter contributing four-fifths of its GDP with much of it dominated by oligopolies. A common inference concerning the recent “China” boom has been that the following bust will be seriously contractionary, indirectly implying symmetry in economic responses. This paper explores this issue using an economy-wide approach that represents oligopoly behaviour and its regulation explicitly. The results show considerable asymmetry, with booms having proportionally larger effects on performance than busts. This is shown to be affected by oligopoly but to have its roots in neoclassical behaviour. Key implications are that busts do not place all boom gains at risk. Tight regulatory control of pure profits raises and better distributes gains during booms but it prevents pure losses or exits during busts and so exacerbates downturns. |
| Keywords: | Dutch disease, China boom, regulation, oligopoly, services, price caps, privatisation, general equilibrium, mining, secondary services boom, three speed boom |
| JEL: | C68 D43 D58 F41 F47 L13 L43 L51 L80 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2014-50&r=opm |
| By: | Daron Acemoglu; Gino Gancia; Fabrizio Zilibotti |
| Abstract: | We study the short- and long-run implications of offshoring on innovation, technology adoption, wage and income inequality in a Ricardian model with directed technical change. In our model, profit maximization determines both the extent of offshoring and the direction of technological progress. A fall in the cost of offshoring induces technical change with an ambiguous factor bias. When the initial offshoring cost is high, an increase in offshoring opportunities triggers a transition with falling real wages for unskilled workers in the West, skill-biased technical change and rising skill premia worldwide. When the offshoring cost is sufficiently low, instead, further increases in offshoring opportunities induce technical change biased in favor of the unskilled workers and may lower the skill premium. Although offshoring improves the welfare of workers in the East, it may benefit or harm unskilled workers in the West depending on parameters, the level of offshoring and the equilibrium growth rate. |
| Keywords: | China, directed technical change, offshoring, productivity growth, skill premium |
| JEL: | F43 O31 O33 |
| Date: | 2014–06 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:768&r=opm |
| By: | Hashem Pesaran; Ambrogio Cesa-Bianchi; Alessandro Rebucci |
| Abstract: | The 2007-2008 global _financial crisis and the subsequent anemic recovery have rekindled academic interest in quantifying the impact of uncertainty on further assume that these common factors affect volatility and economic activity with a time lag of at least a quarter. Under these assumptions, we show analytically that volatility is forward looking and that the output equation of a typical VAR estimated in the literature is mis-specified as least squares estimates of this equation are inconsistent. Empirically, we document a statistically significant and economically sizable impact of future output growth on current volatility, and no effect of volatility shocks on business cycles, over and above those driven by the common factors. We interpret this evidence as suggesting that volatility is a symptom rather than a cause of economic instability. |
| Keywords: | Uncertainty, Realized volatility, GVAR, Great Recession, Identication,Business Cycle, Common Factors. |
| JEL: | E44 F44 G15 |
| Date: | 2014–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:1407&r=opm |