nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒03‒27
thirteen papers chosen by
Martin Berka
University of Auckland

  1. An Australian Contribution to International Trade Theory: The Dependent Economy Model By Phillip Edmund Metaxas; Ernst Juerg Weber
  2. Exchange Rate Dynamics and Forecast Errors about Persistently Trending Fundamentals By Josh R. Stillwagon
  3. Cheap but flighty: how global imbalances create financial fragility By Ahnert, Toni; Perotti, Enrico C
  4. Relationship Between Exchange Rates and Stock Prices in Transition Economies Evidence from Linear and Nonlinear Causality Tests By Gunay Akel
  5. Real Effective Exchange Rate Imbalances and Macroeconomic Adjustments: evidence from the CEMAC zone By Asongu, Simplice
  6. Asymmetry in Boom-Bust Shocks: Australian Performance with Oligopoly By Rod Tyers
  7. Financial Liberalization in the Developing Countries and Its Effect on Banking Systems and Banking Crises By Mehmet Okan TaÅŸar; SavaÅŸ Çevik
  8. Balassa–Samuelson Effect in Iran By Saleh Ghavidel; Mahmoud Mahmoudzadeh; Hamideh Radfar
  9. Exchange Rate Exposure and Risk Management: The case of Japanese Exporting Firms By Takatoshi Ito; Satoshi Koibuchi; Kiyotaka Sato; Junko Shimizu
  10. Real Exchange Rate Determination and the China Puzzle By Rod Tyers; Ying Zhang
  11. The role of foreign sentiment in small open economy By Jana Juriová
  12. The Nature of Shocks to Turkish exchange rates: what panel approach says? By Ceyhun Can Ozcan; Ahmet Sahbaz; Ugur Adıguzel; Saban Nazlioglu
  13. Reconstructing the Savings Glut: The Global Implications of Asian Excess Saving By Vipin Arora; Rod Tyers; Ying Zhang

  1. By: Phillip Edmund Metaxas (University of Western Australia); Ernst Juerg Weber (University of Western Australia)
    Abstract: This paper details the origin and development of the dependent economy model. The model is also known as the ‘Australian model’ and the ‘Salter-Swan-Corden-Dornbusch model’, but neither title adequately conveys the scope and sequence of contributions that were instrumental to its development. In particular, attention is given to indispensable contributions made by renowned Australian public servant Sir Roland Wilson and British economist James Meade, which preceded those of Trevor Swan, Wilfred Salter, W. Max Corden and Rudiger Dornbusch. It is shown that Wilson and Meade laid much of the theoretical groundwork ahead of the contributions of Swan, Salter, Corden and Dornbusch. Each contribution is analysed in detail and the model’s development is placed in the broader context of the evolution of balance of payments theory. The paper sheds light on several underappreciated (or perhaps unknown) facets of the model and, principally, highlights a broader Australian contribution to international trade theory inherent in it, namely, the identification of the real exchange rate as the critical relative price in balance of payments adjustment.
    Date: 2014
  2. By: Josh R. Stillwagon (Department of Economics, Trinity College)
    Abstract: This paper offers and tests a unique explanation for the exchange rate determination puzzle. It is not that exchange rates are unrelated to fundamentals, but rather when fundamentals undergo persistent changes it becomes important to measure their effect in terms of how they change relative to what was expected. This result is demonstrated with a simple present discounted value model of the exchange rate and then tested for four USD exchange rates using interest rate forecast data from nearly 50 major banks. Using the polynomially cointegrated VAR, or I(2) CVAR, the interest rate forecast errors are found to have a large and statistically significant impact on the exchange rate even independent of the level and change in the relative interest rate (with t-values in the double digits for all four samples). Further, this effect is greater in the samples with stronger evidence of persistent changes in the interest rate differential.
    Keywords: Exchange Rates, Determination Puzzle, Survey Data, Forecast Errors, I(2) Cointegration
    JEL: F31 G12 G15
    Date: 2015–02
  3. By: Ahnert, Toni; Perotti, Enrico C
    Abstract: Can a wealth shift to emerging countries explain instability in developed countries? Investors exposed to political risk seek safety in countries with better property right protection. This induces private intermediaries to offer safety via inexpensive demandable debt, and increases lending into marginal projects. Because safety conscious foreigners escape any risk by running also in some good states, cheap foreign funding leads to larger and more frequent runs. Beyond some scale, foreign runs also induce domestic runs in order to avoid dilution. When excess liquidation causes social losses, a domestic planner may limit the scale of foreign inflows or credit volume.
    Keywords: absolute safety; capital flows; safe haven; unstable funding
    JEL: F3 G2
    Date: 2015–03
  4. By: Gunay Akel (Necmettin Erbakan University)
    Abstract: The existence of causation linkage between stock prices and exchange rates is one of the popular debate especially since the beginning of 1990s. The aim of this paper is to investigate the nature of the causal transmission mechanism between foreign exchange and stock markets in 9 transition countries (i.e., Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Russia) for the periods of 1995-2011. The results of the paper show that uni-directional linear Granger causality running from exchange rates to stock prices for 4 countries (i.e., Czech Republic, Hungary, Poland, and Romania) and a feedback exists between two markets for only Russia when both linear and nonlinear Granger causality are used.
    Keywords: Exchange Rates, Stock Prices, Transition Economies, Linear and Nonlinear Causality Tests
    JEL: C22 F31
    Date: 2014–07
  5. By: Asongu, Simplice
    Abstract: We assess the behavior of real effective exchange rates (REERs) of members of the CEMAC zone with respect to their long-term equilibrium paths. A reduced form of the fundamental equilibrium exchange rate (FEER) model is estimated and associated misalignments are derived for the period 1980 to 2009. Our findings suggest that for majority of countries, macroeconomic fundamentals have the expected associations with the exchange rate fluctuations. The analysis also reveals that, only the REER adjustments of Cameroon and Gabon are significant in restoring the long-term equilibrium in event of a shock. The Cameroonian economic fundamentals of terms of trade, government expenditure and openness have different long-term relations with the REER in comparison to those of other member states. Ultimately, there is no need for an adjustment in the level of the peg based on the present quantitative analysis of REER paths.
    Keywords: Exchange rate; Macroeconomic impact; CEMAC zone
    JEL: F31 F33 F42 O55
    Date: 2014–01–14
  6. By: Rod Tyers (Business School, University of Western Australia)
    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.
    Date: 2014
  7. By: Mehmet Okan TaÅŸar (Selcuk University, Faculty of Economics and Administrative Sciences); SavaÅŸ Çevik (Selcuk University, Faculty of Economics and Administrative Sciences)
    Abstract: Financial deregulations or financial liberalization can be referred to a variety of changes in the law which allows financial institutions more freedom in how they compete. Whether deregulations are beneficial or harmful to the economy has been widely debated.This paper investigates the effect of financial globalization on the incidence of systemic bank crises in developing countries by using measures of the financial openness. The liberalization trend in the global scale starting with the Washington Consensus has been influential on financial markets and the banking sector. Financial liberalization and uncontrolled expansion of international capital movements has led to the diversification and acceleration of the global financial crisis. Thus, “financial deregulations†which offered as a solution to the debt crisis experienced in the 1980s has led to a new financial crisis in 2010's. An increase in foreign debt liabilities contributes to an increase in the incidence of crises, but foreign direct investment and portfolio equity liabilities have also the opposite effect. This paper discusses how financial liberalization could contribute to financal crises and macroeconomic instabilitiy in the developing countries. For this aim, we analyze empirically a database from developing countries to test the effect of financial openness on macroeconomic indicators. As the dependent variable, we use a variable which take the value of one in the year of a banking crisis. To estimate the indicators of financial crises, main explanatory variables which are employed in the specifications are financial openness, current account balances, exchange rate regime, inflation, trade openness and percent change in GDP. In the introduction to this paper examines the process of liberalization. Second part; banking system and its features are analyzed during the Global financial Crisis. In the third section the historical development of financial crisis and measure of financial liberalization are discussed.In the final part of the paper of financial liberalization and financial crisis the relationship between macro-economic indicators are examined.
    Keywords: Financial deregulations, financial openness, banking crisis, global financial crisis,
    JEL: G01 F43 E44
    Date: 2014–10
  8. By: Saleh Ghavidel (Firoozkooh Branch, Islamic Azad University, Firoozkooh, Iran); Mahmoud Mahmoudzadeh (Firoozkooh Branch, Islamic Azad University, Firoozkooh, Iran); Hamideh Radfar (Firoozkooh Branch, Islamic Azad University, Firoozkooh, Iran)
    Abstract: Deviations from purchasing power parity because a deviation of productivity is Balassa–Samuelson effect. The Balassa–Samuelson effect depends on inter-country differences in the relative productivity of the tradable and non-tradable sectors. According to this hypothesis, Imai (2010) make a model and measurement Balassa–Samuelson effect in Japan during 1970-1955 when exchange rate in Japan is fixed. In this paper we measurement Balassa–Samuelson effect in Iran economic. The result shows that Balassa–Samuelson effect in Iran is -2.1. Then devaluation of the national currency in Iran according to Balassa–Samuelson effect would be equal to 2.1 in annual, while devaluation of the national currency in Iran 13% in a year.
    Keywords: Balassa–Samuelson effect; purchasing power parity; productivity gap; tradable and non-tradable sectors
    JEL: D24 E31 F31
    Date: 2014–10
  9. By: Takatoshi Ito; Satoshi Koibuchi; Kiyotaka Sato; Junko Shimizu
    Abstract: This paper investigates the relationship between the Japanese firms’ exposure to the exchange rate risk and risk management, such as choice of invoicing currency, and financial and operational hedge. The firm’s exposure to the exchange rate risk is estimated by co-movements of the stock prices and exchange rates, following Dominguez (1998) and others. Data on risk management measures—financial and operational hedging, the choice of invoice currency and the price revision strategy (pass-through)—were collected from a questionnaire survey covering all Tokyo Stock Exchange listed firms in 2009. Results show the followings: First, firms with greater dependency on sales in foreign markets have greater foreign exchange exposure. Second, the higher the US dollar invoicing share, the greater is the foreign exchange exposure. But, risk is reduced by both financial and operational hedging. Third, yen invoicing reduces foreign exchange exposure. These findings indicate that Japanese firms use the combination of risk management tools to mitigate the degree of the exchange rate risk.
    JEL: F31 G15 G32
    Date: 2015–03
  10. By: Rod Tyers (Business School, University of Western Australia); Ying Zhang (Business School, University of Western Australia)
    Abstract: While there is much controversy over exchange rates, particularly between the large, advanced economic regions, arguably more important real exchange rates receive comparatively little attention. Traditionally, these are seen to be influenced in the long run by forces that return economies to purchasing power parity (PPP) and by differences in productivity growth across sectors and across regions, as per the Balassa-Samuelson Hypothesis (BSH). Minor and realistic relaxations of the assumptions underlying the BSH greatly generalise the set of possible influences over real exchange rates, however. This paper surveys the literature on real exchange rate determination, as well as that addressing the puzzles over the trends in China’s real exchange rate. While this was widely expected to appreciate against the advanced economies after China’s first growth surge in the mid-1990s, it actually depreciated slightly until the early 2000s. Then, after 2005, its rate of appreciation was more rapid than expected. These puzzles are resolved by accounting for the effects of the trade liberalisations associated with WTO accession, China’s excess saving and the tightening of rural labour markets.
    Date: 2014
  11. By: Jana Juriová (VÅ B - Technical University of Ostrava)
    Abstract: The role of foreign sentiment is researched for explaining macroeconomic fluctuations in small open economy. The main goal is to find out whether the domestic variables react significantly to the shocks in the foreign sentiment. For this purpose a structural vector autoregression model is constructed for the Czech Republic and the Slovak Republic including relations between foreign environment and domestic variables. Both small open economies considered are highly dependent on foreign demand from euro area. Therefore the foreign development is represented by real GDP in euro area and alternatively is explored the possibility to replace foreign real GDP by economic sentiment indicator of euro area as sentiment indicators are available in advance. The impact of foreign shocks is examined by impulse response functions on the following domestic variables – real gross domestic product, consumer prices and effective exchange rate against euro area trading partners. The study confirms that foreign economic sentiment can be used for explaining fluctuations of domestic variables of a small open economy.
    Keywords: economic sentiment indicator, structural vector autoregression, variance decomposition, impulse response functions
    JEL: C51 E32
    Date: 2014–12
  12. By: Ceyhun Can Ozcan (Necmettin Erbakan University); Ahmet Sahbaz (Gaziantep University); Ugur Adıguzel (Cumhuriyet University,); Saban Nazlioglu (Pamukkale University)
    Abstract: This paper investigates the behavior of Turkish exchange rates within the context of purchasing power parity (PPP) hypothesis, -employing ten Turkish real exchange rates during January 2002-May 2012-, by means of recent developments in panel unit root testing procedures. When we account for nonlinearity, smooth structural shifts, and cross-section dependency, the empirical analysis supports that PPP hypothesis is valid for Eurozone and European countries (Denmark, Norway, Sweden, Switzerland, and United Kingdom), while it does not hold for non-European trading partners (Canada, Japan, Saudi Arabia, and USA). From the empirical results, we can conclude that PPP hypothesis is hold in the countries which have the free trade agreement, while it is violated in the countries in which there are trade barriers and greater distance. The findings therefore provide important policy implications for Turkey about determining equilibrium exchange rates with Eurozone and other European Union countries.
    Keywords: Purchasing power parity, Turkey, panel unit root
    JEL: C23 F31
    Date: 2014–07
  13. By: Vipin Arora (United States Energy Information Administration, Washington DC); Rod Tyers (Business School, University of Western Australia); Ying Zhang (Business School, University of Western Australia)
    Abstract: East Asian, and primarily Chinese and Japanese, excess saving has been comparatively large and controversial since the 1980s. That it has contributed to the decline in the global “natural” rate of interest is consistent with Bernanke’s much debated “savings glut” hypothesis for the decade after 1998, empirical explorations of which have proved unconvincing. In this paper it is argued that the comparatively integrated global market for long bonds is suggestive of trends in the “world” natural rate and that the longer term evidence supports a leading role for Asia’s contribution to the expansion of ex ante global saving in explaining the declining trend in real long yields. Evidence is presented that trends in US 10 year bond yields are indeed representative of those in the “world” natural rate. The relationship between these yields and excess saving in China and Japan is then explored using a VECM that accounts for US monetary policy. The results support a negative long term relationship between 10-year yields and the current account surpluses of China and Japan. Projections using the same model then suggest that a feasible range of future pathways for those current accounts could cause the path of long rates to deviate by 330 basis points over the next decade.
    Date: 2014

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