nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒08‒01
seven papers chosen by
Martin Berka
University of Auckland

  1. The Carry Trade and UIP when Markets are Incomplete By Lorenzo Garlappi; Jack Favilukis
  2. Hysteresis and the European unemployment problem revisited By Jordi Galí
  3. Agricultural Commodity Prices and Exchange Rates under Structural Change By Hatzenbuehler, Patrick L.; Abbott, Philip C.; Foster, Kenneth A.
  4. Systemic Risk, Aggregate Demand, and Commodity Prices By Javier G. Gómez-Pineda; Dominique Guillaume; Kadir Tanyeri
  5. Multi-product firms, exports and exchange rate policies. Evidence from an emerging economy By Mundaca, Gabriela
  6. An Analysis of the Pass-Through of Exchange Rates in Tropical Forest Product Markets: A Smooth Transition Approach By Guney, Selin
  7. Price Indexes are a Problem for Testing PPP By Wallace, Frederick

  1. By: Lorenzo Garlappi (UBC); Jack Favilukis (University of British Columbia)
    Abstract: We propose a new model to explain the failure of UIP and the profitability of the carry trade and to link these two phenomena to the Balassa-Samuelson effect and the Backus-Smith puzzle. The key features of our model are market incompleteness and partial risk sharing through tradable goods. In the model, carry trade profits are due to two independent channels. First, a purely nominal channel, which works even in complete markets, makes the carry trade risky due to (endogenously) counter-cyclical inflation. Second, a real channel, which, due to imperfect risk sharing, makes the carry trade risky exactly when risk sharing is needed most. The model is consistent with several empirical facts. In particular: (i) real and nominal currency appreciations are positively related to local output growth, (ii) carry trade profits are positively related to output growth and negatively to inflation in the target (high interest rate) country, (iii) ex-ante, target countries are smaller and have higher expected inflation volatility, but there do not appear to be systematic differences between high and low interest rate countries in loadings on world output growth, in expected output growth, or in output volatility. Leading existing models give opposite predictions.
    Date: 2015
  2. By: Jordi Galí
    Abstract: The unemployment rate in the euro area appears to contain a significant nonstationary component, suggesting that some shocks have permanent effects on that variable. I explore possible sources of this nonstationarity through the lens of a New Keynesian model with unemployment, and assess their empirical relevance.
    Keywords: wage stickiness, New Keynesian model, unemployment fluctuations, Phillips curve, insider-outsider model.
    JEL: E24 E31 E32
    Date: 2015–06
  3. By: Hatzenbuehler, Patrick L.; Abbott, Philip C.; Foster, Kenneth A.
    Keywords: agricultural commodity prices, commodity booms, exchange rates, structural change, U.S. agricultural trade, Demand and Price Analysis, International Relations/Trade, Marketing, F14, Q02, Q17,
    Date: 2015
  4. By: Javier G. Gómez-Pineda (Banco de la República de Colombia); Dominique Guillaume; Kadir Tanyeri
    Abstract: The paper presents a global model for analysis and projections. The model features a handful of elements that make it suitable for analyzing three broad sets of topics; first, systemic risk and its transmission to country risk premiums; second, the transmission from country risk premiums to demand-related variables such as the output gap, the trade balance, and unemployment; and third, the transmission from commodity prices to country inflation. The model incorporates one systemic risk channel and two foreign channels, specifically, a foreign aggregate demand channel and a foreign exchange rate channel. The model is estimated with Bayesian methods. In addition, the effect of risk on aggregate demand is calibrated with the aid of a VAR. Among the results are that the episodes of surges in systemic risk identified in the paper were transmitted to country risk premiums and aggregate demand--related variables; that the effect of systemic risk shocks on world economic activity is large, and that the busts in the world output gap correspond with the major financial events identified by the estimated time series for the unobserved systemic risk. In addition, systemic risk shocks are important drivers of output gaps while country risk premium shocks can have important effects on the trade balance. Surprisingly, commodity prices, in particular the price of oil, are shown to be demand driven; hence, demand related factors may play a nontrivial role in explaining noncore inflation. The model performed well at one- and four-quarter horizons compared to a survey of analysts' forecasts. In addition, systemic risk shocks were important at explaining the forecast variance of the world output gap, country output gaps, the price of oil, and country risk premiums. The breath of reach of systemic risk shocks back the efforts for financial surveillance with a systemic focus. Classification JEL: F32, F37, F41, F31, F47, E58
    Keywords: Systemic risk, Financial linkages, Capital flows, Global imbalances Commodity prices
    Date: 2015–07
  5. By: Mundaca, Gabriela
    Abstract: Bulgaria follows a currency board tied to the euro. The analysis of the effects that adopting the euro might have on its export sector is crucial for Bulgaria and other similar Eastern European countries. Bulgaria, a middle-income country has now more multi-product firms (MPFs) than single-product firms (SPFs). Thus, MPFs is not only a characteristic of only high-income countries. The contribution of adding and dropping products within a single firm is important to the export sector and the aggregate economy. MPFs benefit from exporting to EU markets by becoming more productive and encouraged to exporting more product varieties while beating down the costs of producing these new varieties and the cannibalization effect. These MPFs might be in advantage as a result of facing lower exchange rate costs and being better exposed to the acquisition of know-how and technology from participating in EU markets. MPFs cut their product diversity only to non-EU countries to keep core competence and in response to adverse changes in the exchange rate.
    Keywords: exchange rate, exports, MPFs, cannibalization, core competence
    JEL: F12 F14 F31 F33 F41
    Date: 2015–07–23
  6. By: Guney, Selin
    Abstract: This paper assesses exchange rate pass through for forest product prices, namely sawnwood, plywood, lumber spruce and logs prices by incorporating smooth structural changes. The major countries investigated are the USA, Japan (Tokyo), Nigeria (Sapele), Malaysia and Gabon and similar or identical products that are traded are examined. In keeping with Hanninen et al.(2000, 20006), paper examines regime-specific ERPT effects. Results suggest evidence for the convenience of the STAR type models (SETAR and LSTAR) to model deviations from LOP in a nonlinear fashion for tropical forest product markets. Reasonable estimates of the threshold values that may be a representation of transaction costs that are in line with the theoretical arguments in international trade were found. It was also observed that the values of threshold variables vary hugely across different countries and also the impulse responses analysis for each price pairs are also supporting the changing behavior of price ratios in high and low regimes that may be regarded as another justification to use models accounting for structural changes to model LOP and/or ERPT in a nonlinear fashion.
    Keywords: Exchange Rate Pass-Through, Smooth Transition Models, Forest Product Market, Agricultural and Food Policy, Demand and Price Analysis, Production Economics, F10, F30, F41, L16,
    Date: 2014
  7. By: Wallace, Frederick
    Abstract: This note illustrates a problem in purchasing power parity studies that test for stationarity of the real exchange rate. If the real rate series is constructed using price indexes then the real exchange rate may not be stationary even if the law of one price always holds for every good in the indexes.
    Keywords: PPP, real exchange rate, price indexes
    JEL: C22 F31
    Date: 2015–07–27

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