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on Open Economy Macroeconomics |
| By: | Güneş Kamber (Reserve Bank of New Zealand and CAMA.); Konstantinos Theodoridis (Bank of England); Christoph Thoenissen (Department of Economics, University of Sheffield) |
| Abstract: | The focus of this paper is on news-driven business cycles in small open economies. We make two significant contributions. First, we develop a small open economy model where the presence of financial frictions permits the replication of business cycle co-movements in response to news shocks. Second, we use VAR analysis to identify news shocks using data on four advanced small open economies. We find that expected shocks about the future Total Factor Productivity generate business cycle co-movements in output, hours, consumption and investment. We also find that news shocks are associated with countercyclical current account dynamics. Our findings are robust across a number of alternative identification schemes. |
| Keywords: | News shocks, business cycles, open economy macroeconomics, financial frictions, VAR |
| JEL: | E32 F4 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2014017&r=opm |
| By: | Yoshino, Naoyuki (Asian Development Bank Institute); Kaji, Sahoko (Asian Development Bank Institute); Asonuma, Tamon (Asian Development Bank Institute) |
| Abstract: | This paper discusses desirable exchange rate regimes and how countries can shift from their current regimes to these regimes over the medium term. We demonstrate the superiority of a basket-peg regime with the basket weight rule over a floating regime with the interest rate rule or the money supply rule in small open economies, during periods when volatility of exchange rates is moderate. Countries which currently have fixed exchange rates would be better moving toward either a basket-peg or a floating regime over the medium term. A shift to a basket-peg regime is preferred when exchange rate fluctuations are large. |
| Keywords: | exchange rate regimes; basket-peg; floating regime; interest rate rules |
| JEL: | E42 F33 F41 F42 |
| Date: | 2014–10–30 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0502&r=opm |
| By: | Alessandria, George (Federal Reserve Bank of Philadelphia); Choi, Horag (Monash University); Kaboski, Joseph P. (University of Notre Dame and NBER); Midrigan, Virgiliu (New York University and NBER) |
| Abstract: | The extent and direction of causation between micro volatility and business cycles are debated. We examine, empirically and theoretically, the source and effects of fluctuations in the dispersion of producer-level sales and production over the business cycle. On the theoretical side, we study the expect of exogenous first- and second-moment shocks to producer-level productivity in a two-country DSGE model with heterogeneous producers and an endogenous dynamic export participation decision. First-moment shocks cause endogenous fluctuations in producer-level dispersion by reallocating production internationally, while second-moment shocks lead to increases in trade relative to GDP in recessions. Empirically, using detailed product-level data in the motor vehicle industry and industry-level data of U.S. manufacturers, we find evidence that international reallocation is indeed important for understanding cross-industry variation in cyclical patterns of measured dispersion. |
| Keywords: | Sunk cost; Establishment heterogeneity; Exporting; Uncertainty; |
| JEL: | E31 F12 |
| Date: | 2014–09–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:14-30&r=opm |
| By: | Eichengreen, Barry (University of California, Berkeley); Livia, Chitu (European Central Bank and Paris School of Economics); Mehl, Arnaud (European Central Bank) |
| Abstract: | We analyze how the role of different national currencies as international reserves was affected by the shift from fixed to flexible exchange rates. We extend data on the currency composition of foreign reserves backward and forward to investigate whether there was a shift in the determinants of the currency composition of international reserves around the breakdown of Bretton Woods. We find that inertia and policy-credibility effects in international reserve currency choice have become stronger post-Bretton Woods, while network effects appear to have weakened. We show that negative policy interventions designed to discourage international use of a currency have been more effective than positive interventions to encourage its use. These findings speak to the prospects of currencies like the euro and the renminbi seeking to acquire international reserve status and others like the U.S. dollar seeking to preserve it. |
| JEL: | F30 N20 |
| Date: | 2014–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:201&r=opm |
| By: | Comunale, Mariarosaria |
| Abstract: | This paper provides an empirical study of the asymmetrical spillovers of the euro-US dollar exchange rate on inflation in the euro zone. We divide the euro zone members in two groups of countries: "core" (closely related to Germany) and "periphery", testing if the euro-US dollar exchange rate is still able to give a different impact on the groups ’ performance as in the past US dollar-deutschmark polarization phenomenon. Using a dynamic panel data framework based on an exchange rate pass-through model, we estimate the elasticities of the two groups by system IV-GMM and the common correlated effects mean group estimator, testing for the asymmetry. Estimating the model with the first type of method, the exchange rate pass-through coefficient is always significant but the asymmetry between the groups is rejected. Using the common correlated effects mean group estimator we find that the coefficient is significantly negative only for core countries and the hypothesis of asymmetry is confirmed. Note that the significance disappears if we control for the first three years of EMU, but the coefficients for core and periphery have opposite sign in any case. Instead, other unobservable factors, representing global events or spillovers effects, play a relevant role in all the specifications. By using the nominal effective exchange rate instead, we found a significant coefficient in case of the whole EMU, while the elasticities for core and periphery are not statistically different from zero. Based on these results, we can conclude that the euro-US dollar is an important factor, but not the only key factor, in determining the asymmetry in inflation between core and periphery. The nominal effective exchange rate instead is a very important driver for the inflation only considering the whole euro zone. Therefore, the EMU seems to not have insulate enough some member countries from shocks coming from outside, as in the case of nominal exchange rate shocks. |
| Keywords: | Exchange Rate Pass-Through, Dynamic Panel Data, Inflation, Exchange Rates,European Monetary Union, Cross-sectional dependence |
| JEL: | C33 E31 F31 F36 F41 |
| Date: | 2014–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:57704&r=opm |
| By: | Pedro Gomis-Porqueras; Timothy Kam; Christopher Waller |
| Abstract: | We study the endogenous choice to accept fiat objects as media of exchange and the implications for nominal exchange rate determination. We consider an economy with two currencies which can be used to settle any transactions. However, currencies can be counterfeited at a fixed cost and the decision to counterfeit is private information. This induces equilibrium liquidity constraints on the currencies in circulation. We show that the threat of counterfeiting can pin down the nominal exchange rate even when the currencies are perfect substitutes, thus breaking the Kareken-Wallace indeterminacy result. We also find that with appropriate fiscal policies we can enlarge the set of monetary equilibria with determinate nominal exchange rates. Finally, we show that the threat of counterfeiting can also help determine nominal exchange rates in a variety of different trading environments. These include a two-country setup with tradable and non-tradable goods sectors, and with an alternative timing of money injections. |
| Keywords: | Multiple Currencies, Counterfeiting Threat, Liquidity, Exchange Rates |
| JEL: | D82 D83 F4 |
| Date: | 2014–10–10 |
| URL: | http://d.repec.org/n?u=RePEc:dkn:econwp:eco_2014_7&r=opm |
| By: | Berka, Martin (University of Auckland); Devereux, Michael B. (University of British Columbia); Engel, Charles (University of Wisconsin) |
| Abstract: | We investigate the link between real exchange rates and sectoral total factor productivity measures for countries in the Eurozone. Real exchange rate patterns closely accord with an amended Balassa-Samuelson interpretation, both in cross-section and time series. We construct a sticky price dynamic general equilibrium model to generate a cross-section and time series of real exchange rates that can be directly compared to the data. Under the assumption of a common currency, estimates from simulated regressions are very similar to the empirical estimates for the Eurozone. Our findings contrast with previous studies that have found little relationship between productivity levels and the real exchange rate among high-income countries, but those studies have included country pairs which have a floating nominal exchange rate. |
| JEL: | F31 F41 |
| Date: | 2014–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:196&r=opm |
| By: | Ben Cheikh, Nidhaleddine; Rault, Christophe |
| Abstract: | This paper investigates whether the exchange rate pass-through (ERPT) to CPI inflation is a nonlinear phenomenon for five heavily indebted euro area (EA) countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus German) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed some threshold. For all the GIIPS countries, we reveal that the increasing of macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed a higher sensibility of CPI inflation to exchange rate movements. |
| Keywords: | Exchange Rate Pass-Through, Inflation, Sovereign spreads, Smooth Transition Regression |
| JEL: | C22 E31 F31 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59484&r=opm |
| By: | Erdal Ozmen (Department of Economics, METU); Mehmet Duygu Yolcu-Karadam (Department of Economics, METU) |
| Abstract: | This study investigates export and import dynamics of Turkey in the context of the main Broad Economic Classification (BEC) sectors. Our results suggest that the trade equations do not remain stable when an endogenously estimated regime change is taken account. According to our results, consistent with the elasticity pessimism literature, real exchange rate elasticities of exports and imports are considerably low in absolute value. Exports and imports are basically determined by world real output and domestic real income, respectively, with substantially high elasticities. Consistent with the fact that Turkish integration to global value chains has substantaily increased during the post-2000 period especially in intermediate and capital goods sectors, the real exchange elasticities of exports and imports decrease (in absolute value) during the recent period. Our results suggesting that the external income elasticity of exports, for all sectors, is substantially higher than the domestic income elasticity of imports support that the Houthakker and Magee findings still remains a puzzle even under case of the higher participation in the global value chains. |
| Keywords: | current account deficits, exports, global value chains, imports, real exchange rates, trade elasticity, Turkey. |
| JEL: | F1 F4 |
| Date: | 2014–11 |
| URL: | http://d.repec.org/n?u=RePEc:met:wpaper:1413&r=opm |
| By: | Jon Frost; Ruben van Tilburg |
| Abstract: | This paper empirically examines the impact of capital flows on credit growth, credit excesses and banking crises using quarterly panel data from 43 advanced (AEs) and emerging market economies (EMEs). Regressions show that gross capital inflows precede credit growth and credit excesses. Both gross inflows and high private domestic credit precede banking crises. Formalized hypotheses allow us to study whether domestic or international drivers more frequently precede banking crises, and thus to evaluate "financial globalization" and the "great financial expansion" as explanations for country vulnerability to banking crises. Our evidence provides support for both narratives as drivers of country vulnerability; financial globalization seems to matter particularly for EMEs. We also provide some ground for caution on the effectiveness of capital controls and the desirability of very high levels of private credit to GDP. |
| Keywords: | Gross capital flows; credit bubbles; financial globalization; banking crises |
| JEL: | E51 F32 G01 G15 |
| Date: | 2014–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:441&r=opm |
| By: | Abhijit SenGupta (Asian Development Bank); Rajeswari Sengupta (Indira Gandhi Institute of Development Research) |
| Abstract: | Gross capital in ows and out ows to and from emerging market economies (EMEs) have witnessed a signilcant increase since early 2000s. This rapid increase in the volume of ows accompanied by sharp swings in volatility has ampliled the complexity of macroeconomic management in EMEs. While capital in ows provide additional financing for productive investment and oker avenues for risk diversication, unbridled ows could also exacerbate lnancial instability. In this paper we focus on the evolution of capital ows in a few select emerging Asian economies, and analyze surge and stop episodes a well as changes in the composition of ows across these episodes. We also provide a comprehensive description of the capital account management policies adopted by the host countries and evaluate the efcacy of these measures by analyzing whether they achieved the desired goals.This kind of an analysis is highly relevant especially a time when EMEs around the world are about to face the repercussions of a potential Quantitative Easing (QE) tapering by the US or launch of fresh QE measures by the Euro-zone, either of which could once again heighten the volatility of cross-border capital ows thereby posing renewed macroeconomic challenges for major EMEs. |
| Keywords: | Capital ows, Exchange market pressure, Impossible Trinity, Sterilized intervention, Capital controls, Global lnancial crisis |
| JEL: | F32 F41 |
| Date: | 2014–09 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2014-040&r=opm |
| By: | BRESSER-PEREIRA, Luiz Carlos; ROSSI, Pedro |
| Abstract: | This paper presents an interpretation of the European crisis based on the balance of payments imbalances within the Eurozone and highlighting the role of the “internal†real exchange rates as a primary cause of the crisis. It explores the structural contradictions that turn the Euro into a “foreign currency†for each individual Eurozone country. These contradictions imply the inability of national central banks to monetize the public and private debts, which makes the Euro crisis a sovereign crisis similar to those typical of emerging countries, but whose solution presents additional obstacles. |
| Date: | 2014–10–29 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:371&r=opm |
| By: | Nicola Kim Rowbotham, Adrian Saville & Douglas Mbululu |
| Abstract: | Increased globalisation, coupled with rising domestic competition, has led a growing number of firms to search beyond their traditional domestic markets for business opportunities in recent years. As a result, export-led economic growth has gained renewed attention amongst policy makers, particularly amongst those in industrialising nations, or so-called efficiency-driven economies. This search for drivers of economic growth has gained further impetus from the economic pressures brought about by the fall in growth in advanced markets following the global financial crisis coupled with the rising competitiveness of other industrialising emerging economies. A common policy proposal amongst countries trying to improve their competitiveness is to weaken the domestic exchange rate as a means to stimulate exports. However, depreciation also increases exchange rate risk. Given the renewed emphasis on this policy lever, this research examines the impact of exchange rate on export performance in a sample of nine efficiency-driven economies over the period 1990 to 2009. These economies that we survey include Brazil, the Dominican Republic, Malaysia, Mauritius, Mexico, Peru, South Africa, Thailand and Turkey, which all have floating exchange rate arrangements during the survey period. Panel data models using a fixed-effects method were used, and it was found that a weakening of the exchange rate does not necessarily improve export performance. To the contrary, for the nine countries surveyed, export growth seems to be associated with stronger exchange rates. Whilst our results suggest that the lag effect of exchange rate movement on export performance is slightly more pronounced, the relationship nevertheless remains statistically insignificant. |
| Keywords: | Exchange rate, export performance, efficiency-driven economy |
| JEL: | F31 F43 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:rza:wpaper:469&r=opm |
| By: | Matthias Gubler |
| Abstract: | In this empirical study, we analyze the relationship between carry trade positions and some key financial as well as macroeconomic variables using a multivariate threshold model. It is often stated that the Swiss franc serves as a funding currency. We therefore focus on carry trades based on the USD/CHF and EUR/CHF currency pairs over the period from 1995 to mid-2008. We conclude that carry trades are driven to a large extent by changes in investors' risk sentiment, movements in stock market prices and exchange rate fluctuations. The adjustments of carry trade positions to unexpected movements in these variables vary between periods of high and low interest-rate differentials (IRD). While a positive shock to the IRD is followed by a rise in carry trade positions during a period of low IRD, it will trigger a decline in these positions during a period of high IRD. These results suggest that the shock to the IRD itself is not enough to compensate investors for the increased foreign exchange risk. Moreover, a positive stock market price shock is associated with a rise in carry trade positions, since investors may use stock portfolios as collateral for liquidity. A sudden unwinding of carry trades leads to significant Swiss franc appreciation. Furthermore, carry trade activities 'Granger-cause' the nominal exchange rate in periods of low IRD. The Granger causality test results further indicate feedback trading. |
| Keywords: | Carry Trades, Multivariate Threshold Model, Tsay Test, Generalized Impulse Response Functions, Bootstrap Method, Granger Causality |
| JEL: | C15 C32 E44 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2014-06&r=opm |
| By: | Chaudhuri, Sarbajit; Biswas, Anindya |
| Abstract: | The paper addresses the question of whether developing countries possess any built-in mechanism that can cope with external terms-of-trade (TOT) shocks. Using a two-sector, full-employment general equilibrium model with endogenous labor market distortion theoretically it shows that such countries possess an inherent shock-absorbing mechanism that stems from their peculiar institutional characteristics and can lessen the gravity of detrimental welfare consequence of exogenous TOT movements. This result has been found to be empirically valid based on a panel dataset of 13 countries from 2000-2012. Our analyses lead to recommendation of an important policy that should be adhered to preserve this in-built system. |
| Keywords: | Terms-of-trade shocks, Labor market imperfection, Welfare, Developing countries, Panel Data. |
| JEL: | D59 D60 F13 F41 F52 J42 |
| Date: | 2014–10–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:59193&r=opm |