nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2014‒09‒29
thirteen papers chosen by
Martin Berka
University of Auckland

  1. Does nominal rigidity mislead our perception of the exchange rate passthrough? By Olivier de Bandt; Tovonony Razafindrabe
  2. Cross-border banking and global liquidity By Valentina Bruno; Hyun Song Shin
  3. Productivity Growth and International Competitiveness By Gu, Wulong; Yan, Beiling
  4. Risk shocks and divergence between the Euro area and the US By Thomas Brand; Fabien Tripier
  5. Improving Income Stabilisation in EMU: An Analytical Exploration By Nicolas Carnot; Phil Evans; Serena Fatica; Gilles Mourre
  6. Hong Kong's Growth Synchronisation with China and the U.S.: A Trend and Cycle Analysis By Dong He; Wei Liao; Tommy Wu
  7. On the Individual Optimality of Economic Integration By Rui CASTRO; Nelnan KOUMTINGUÉ
  8. Exchange Rate Predictability in a Changing World By Byrne, Joseph P.; Korobilis, Dimitris; Ribeiro, Pinho J.
  9. The Portuguese real exchange rate, 1995-2010: competitiveness or price effects? By Miguel Lebre de Freitas; Miguel de Faria e Castro
  10. Traditional and matter-of-fact financial frictions in a DSGE model for Brazil: the role of macroprudential instruments and monetary policy By Fabia A. de Carvalho; Marcos R. Castro; Silvio M. A. Costa
  11. Exchange Rates Contagion in Latin America By Rubén Albeiro Loaiza Maya; José Eduardo Gómez-González; Luis Fernando Melo Velandia
  12. The Nexus between Oil price and Russia's Real Exchange rate: Better Paths via Unconditional vs Conditional Analysis By Jamal BOUOIYOUR; Refk SELMI; Muhammad SHAHBAZ; Aviral Kumar TIWARI
  13. How Non-traded Goods May Generate Quasi-quadratic Costs for Capital Adjustment By Kerk L. Phillips

  1. By: Olivier de Bandt; Tovonony Razafindrabe
    Abstract: Relying on a novel dataset of detailed micro-data on import prices, this paper explores the close link that exists between nominal import price rigidity and the extent of exchange rate pass-through (ERPT). We show that previous evidence in favor of incomplete and low value of ERPT in the empirical literature may be explained by two factors: the relative importance of small variations in the exchange rate and, mainly, nominal rigidity. Once nominal rigidity is taken into account, we …nd for French manufacturers that ERPT may be incomplete in the short run, but with relatively high value, and complete in the long run. In addition, assessing non-linearity and asymmetry issues, we provide evidence that the shape of the import price reaction function is distorted by the presence of nominal rigidity. Indeed, the linearity assumption is veri…ed once nominal rigidity is taken into account. However, in the case where it is rejected, the import price reaction function is concave rather than convex, indicating that …rms aim at protecting market shares. As a consequence, the common belief that "prices rise faster than they fall" is the results of nominal import price rigidity as far as ERPT is concerned.
    Keywords: Exchange rate pass-through, nominal rigidity, import price
    JEL: F31 E31 C23
    Date: 2014–09–01
  2. By: Valentina Bruno; Hyun Song Shin
    Abstract: We investigate global factors associated with bank capital flows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of financial conditions across borders through banking sector capital flows. A distinctive prediction of the model is that local currency appreciation is associated with higher leverage of the banking sector, thereby providing a conceptual bridge between exchange rates and financial stability. In a panel study of 46 countries, we find support for the key predictions of our model.
    Keywords: Cross-border banking flows, bank leverage, global banks
    Date: 2014–08
  3. By: Gu, Wulong; Yan, Beiling
    Abstract: This paper presents estimates of effective multifactor productivity (MFP) growth for Canada, the United States, Australia, Japan and selected European Union (EU) countries, based on the EU KLEMS productivity database and the World Input-Output Tables. Effective MFP growth captures the impact of the productivity gains in upstream industries on the productivity growth and international competitiveness of domestic industries, thereby providing an appropriate measure of productivity growth and international competitiveness in the production of final demand products such as consumption, investment and export products. A substantial portion of MFP growth, especially for small, open economies such as Canada?s, is attributable to gains in the production of intermediate inputs in foreign countries. Productivity growth tends to be higher in investment and export products than for the production of consumption products. Technical progress and productivity growth in foreign countries have made a larger contribution to production growth in investment and export products than in consumption products. The analysis provides empirical evidence consistent with the hypothesis that effective MFP growth is a more informative relevant indicator of international competitiveness than is standard MFP growth.
    Keywords: Economic accounts, International trade, Productivity accounts
    Date: 2014–09–09
  4. By: Thomas Brand; Fabien Tripier
    Abstract: Why have the Euro area and the US diverged since 2011 while they were highly synchronized during the recession of 2008-2009? To explain this divergence, we provide a structural interpretation of these episodes through the estimation of a business cycle model with financial frictions for both economies. Our results show that risk shocks, measured as the volatility of idiosyncratic uncertainty in the financial sector, have played a crucial role in the divergence with the absence of risk reversal in the Euro area. Risk shocks have stimulated US credit and investment growth since the trough of 2009 whereas they have been at the origin of the double-dip recession in the Euro area. A companion website is available at vergence.
    Keywords: Great recession;Business cycles;Uncertainty;Divergence;Risk Shocks
    JEL: E3 E4 G3
    Date: 2014–07
  5. By: Nicolas Carnot; Phil Evans; Serena Fatica; Gilles Mourre
    Abstract: This paper explores whether collective insurance schemes of various kinds could improve the degree of cyclical income stabilisation and the operation of fiscal stabilisers in the European Economic and Monetary Union (EMU). We review the potential issues, the underlying trade-offs and the necessary conditions for such schemes to be workable. The paper discusses "good" design features, which raise the potential efficiency and acceptability of these mechanisms. It argues that such schemes would preferably focus on large shocks, moderate the boom times as well as cushion adverse shocks, and include a degree of budgetary prudence to cater for real-time uncertainty in assessing business cycles. It carries out retrospective simulations using both "ex post" and "real-time" data. The results suggest that all the schemes considered would have provided non-negligible income stabilisation over the past 10-20 years, although somewhat less so when operating on the basis of data available in real time. The stabilisation schemes reviewed do not require particularly large or persistent payments into or out of them.
    Keywords: Risk-sharing; income smoothing; fiscal stabilisers; transfer scheme; output gap
    JEL: E61 E62 F36 F42 H77
    Date: 2014–09–03
  6. By: Dong He (Hong Kong Monetary Authority); Wei Liao (International Monetary Fund); Tommy Wu (Hong Kong Monetary Authority)
    Abstract: This paper investigates the synchronisation of Hong Kong's economic growth with mainland China and the US. We identify trends of economic growth based on the permanent income hypothesis. Specifically, we first confirm whether real consumption in Hong Kong and mainland China satisfies the permanent income hypothesis, at least in a weak form. We then identify the permanent and transitory components of income of each economy using a simple state-space model. We use structural vector autoregression models to analyse how permanent and transitory shocks originating from mainland China and the US affect the Hong Kong economy, and how such influences evolve over time. Our main findings suggest that transitory shocks from the US remain a major driving force behind Hong Kong's business cycle fluctuations. On the other hand, permanent shocks from mainland China have a larger impact on Hong Kong's trend growth.
    JEL: E21 F44
    Date: 2014–07
  7. By: Rui CASTRO; Nelnan KOUMTINGUÉ
    Abstract: Which countries find it optimal to form an economic union? We emphasize the risk-sharing benefits of economic integration. Consider an endowment world economy model, where international financial markets are incomplete and contracts not enforceable. A union solves both frictions among member countries. We uncover conditions on initial incomes and net foreign assets of potential union members such that forming a union is welfare-improving over standing alone in the world economy. Consistently with evidence on economic integration, unions in our model occur (i) relatively infrequently, and (ii) emerge more likely among homogeneous countries, and (iii) rich countries.
    Keywords: incomplete markets, endogenous borrowing constraints, risk sharing, economic integration
    JEL: F15 F34 F36 F41
    Date: 2014
  8. 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,
    Date: 2014
  9. By: Miguel Lebre de Freitas (Universidade de Aveiro and NIPE); Miguel de Faria e Castro (New York University)
    Abstract: We disentangle the extent to which the real exchange rate appreciation in Portugal during 1995-2010 reflected the emergence of wage-productivity misalignments or, instead, changes in the relative price of tradable and non-tradable goods. The available data suggests that the latter effect dominated at the aggregate level. The evidence is consistent with the view that the external imbalance that characterized the Portuguese economy during the 1990s and early 2000s was triggered by the liberalization of capital flows, and not by dysfunctional wage setting institutions. Using the Fundamental Equilibrium Exchange Rate approach, we find that recent oil price shocks played an important role in explaining the real exchange rate overvaluation in Portugal.
    Keywords: real exchange rate; FERER; unit labor costs
    Date: 2014
  10. By: Fabia A. de Carvalho; Marcos R. Castro; Silvio M. A. Costa
    Abstract: This paper investigates the transmission channel of macroprudential instruments in a closed economy DSGE model with a rich set of nancial frictions. Banks' decisions on risky retail loan concessions are based on borrowers' capacity to settle their debt with labor income. We also introduce frictions in banks' optimal choices of balance sheet composition to better reproduce banks'strategic reactions to changes in funding costs, in risk perception and in the regulatory environment.The model is able to reproduce not only price effects from macroprudential policies, but also quantity effects. The model is estimated with Brazilian data using Bayesian techniques. Unanticipated changes in reserve requirements have important quantitative effects, especially on banks' optimal asset allocation and on the choice of funding. This result holds true even for required reserves deposited at the central bank that are remunerated at the base rate. Changes in required core capital substantially impact the real economy and banks' balance sheet. When there is a lag between announcements and actual implementation of increased capital requirement ratios, agents immediately engage in anticipatory behavior. Banks immediately start to retain dividends so as to smooth the impact of higher required capital on their assets, more particularly on loans. The impact on the real economy also shifts to nearer horizons. Announcements that allow the new regulation on required capital to be anticipated also improve banks' risk positions, since banks achieve higher capital adequacy ratios right after the announcement and throughout the impact period. The effects of regulatory changes to risk weights on bank assets are not constrained to impact the segment whose risk was reassessed. We compare the model responses with those generated by models with collateral constraints traditionally used in the literature. The choice of collateral constraint is found to have important implications for the transmission mechanisms.
    Keywords: Collateral, productivity, small open economy
    Date: 2014–09
  11. By: Rubén Albeiro Loaiza Maya; José Eduardo Gómez-González; Luis Fernando Melo Velandia
    Abstract: A regular vine copula approach is implemented for testing for contagion among the exchange rates of the six largest Latin American countries. Using daily data from June 2005 through April 2012, we find evidence of contagion among the Brazilian, Chilean, Colombian and Mexican exchange rates. However, there are interesting differences in contagion during periods of large exchange rate depreciation and appreciation. Our results have important implications for the response of Latin American countries to currency crises originated abroad. Classification JEL: C32, C51, E421.
    Date: 2014–09
  12. By: Jamal BOUOIYOUR; Refk SELMI; Muhammad SHAHBAZ; Aviral Kumar TIWARI
    Abstract: The Nexus between Oil price and Russia's Real Exchange rate: Better Paths via Unconditional vs Conditional Analysis
    Date: 2014–09
  13. By: Kerk L. Phillips (Department of Ecobomics, Brigham Young University)
    Abstract: This paper shows that a two-tiered production structure with both traded and non-traded intermediate goods and non-traded final goods can generate a cost of capital adjustment that is very similar to the quadratic adjustment cost often assumed in single good macroeconomic models. This implies that while a quadratic loss function may seem like an ad hoc adjustment, it can be rationalized by sound theory from a more detailed model.
    Keywords: nontraded goods, adjustment costs, quadratic, capital accumulation
    JEL: E22 F10 F47
    Date: 2014–08

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