nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒12‒08
nine papers chosen by
Martin Berka
University of Auckland

  1. The shocks matter: improving our estimates of exchange rate pass-through By Forbes, Kristin; Hjortsoe, Ida; Nenova, Tsvetelina
  2. Foreign shocks By Drago Bergholt
  3. Why Are Exchange Rates So Smooth? A Segmented Asset Markets Explanation By Chien, YiLi; Lustig, Hanno; Naknoi, Kanda
  4. Sector Specific Inflow of capital, Non-Traded sector and an Increase in Real Exchange Rate By Mandal, Biswajit; Biswas, Anindya
  5. Exchange Rate Fluctuations and Labour Market Adjustments in Canadian Manufacturing Industries By Gabriel Bruneau; Kevin Moran
  6. The grand divergence: global and European current account surpluses By Zsolt Darvas
  7. Unit Roots, Flexible Trends and the Prebisch-Singer Hypothesis By Winkelried, Diego
  8. Quantitative Easing in an Open Economy : Prices, Exchange Rates and Risk Premia By Peiris, M.Udara; Polemarchakis, Herakles
  9. Banking, Currency, Stock Market and Debt Crises: Revisiting Reinhart & Rogoff Debt Analysis in Spain, 1850-1995 By Maixé-Altés, J. Carles; Iglesias, Emma M.

  1. By: Forbes, Kristin (Monetary Policy Committee Unit, Bank of England); Hjortsoe, Ida (Monetary Policy Committee Unit, Bank of England); Nenova, Tsvetelina (Monetary Policy Committee Unit, Bank of England)
    Abstract: A major challenge for monetary policy has been predicting how exchange rate movements will impact inflation. We propose a new focus: incorporating the underlying shocks that cause exchange rate fluctuations when evaluating how these fluctuations ‘pass through’ into import and consumer prices. We show that in a standard open-economy model the relationship between exchange rates and prices depends on the shocks which cause the exchange rate to move. Then we develop an SVAR framework for a small open economy that relies on both short-run and long-run identification restrictions consistent with our theoretical model. Applying this framework to the United Kingdom, we find that the response of both import and consumer prices to exchange rate fluctuations depends on what caused the fluctuations. For example, exchange rate pass-through is relatively large in response to domestic monetary policy shocks, but smaller in response to domestic demand shocks. This framework helps explain why pass-through can change over time, including why sterling’s post-crisis depreciation caused a sharper increase in prices than expected and sterling’s recent appreciation has had a more muted effect.
    Keywords: Exchange rate pass-through; import prices; consumer prices; inflation; vector autoregression.
    JEL: E31 F41
    Date: 2015–12–01
  2. By: Drago Bergholt (Norges Bank)
    Abstract: How and to what extent are small open economies affected by international shocks? I develop and estimate a medium scale DSGE model that addresses both questions. The model incorporates i) international markets for firm-to-firm trade in production inputs, and ii) producer heterogeneity where technology and price setting constraints vary across industries. Using Bayesian techniques on Canadian and US data, I document several macroeconomic regularities in the small open economy, all attributed to international disturbances. First, foreign shocks are crucial for domestic fluctuations at all forecasting horizons. Second, productivity is the most important driver of business cycles. Investment efficiency shocks on the other hand have counterfactual implications for international spillover. Third, the relevance of foreign shocks accumulates over time. Fourth, business cycles display strong co-movement across countries, even though shocks are uncorrelated and the trade balance is countercyclical. Fifth, exchange rate pass-through to aggregate CPI inflation is moderate, while pass-through at the sector level is positively linked to the frequency of price changes. Few of these features have been accounted for by existing open economy DSGE literature, but all are consistent with reduced form evidence. The model presented here offers a structural interpretation of the results.
    Keywords: DSGE, small open economy, international business cycles, Bayesian estimation
    JEL: C11 E30 F41 F44
    Date: 2015–11–25
  3. By: Chien, YiLi (Federal Reserve Bank of St. Louis); Lustig, Hanno (Stanford University); Naknoi, Kanda (University of Connecticut)
    Abstract: Empirical work on asset prices suggests that pricing kernels have to be almost perfectly correlated across countries. If they are not, real exchange rates are too smooth to be consistent with high Sharpe ratios in asset markets. However, the cross-country correlation of macro fundamentals is far from perfect. We reconcile these empirical facts in a two-country stochastic growth model with segmented markets. A large fraction of households either do not participate in the equity market or hold few equities, and these households drive down the cross-country correlation in aggregate consumption. Only a small fraction of households participate in international risk sharing by frequently trading domestic and foreign equities. These active traders are the marginal investors, who impute the almost perfect correlation in pricing kernels. In our calibrated economy, we show that this mechanism can quantitatively account for the excess smoothness of exchange rates in the presence of highly volatile stochastic discount factors.
    Keywords: asset pricing; market segmentation; exchange rate; international risk sharing
    JEL: F10 F31 G12 G15
    Date: 2015–11–27
  4. By: Mandal, Biswajit; Biswas, Anindya
    Abstract: This paper attempts to look at the effect of inflow of foreign capital only in the exportable sector on the factor prices and real exchange rate of the concerned economy. In doing so we frame a blend of Heckscher-Ohlin and Specific Factor model of trade which is popularly known as H-O nugget. We show that consequent upon an inflow of capital specific to exportable sector both the non-traded good production and return to the factor specific to non-traded good are reduced while the exportable production expands. The effect of such an inflow on real exchange rate is unambiguous and it increases.
    Keywords: Foreign capital inflow, Real exchange rate, Developing economies
    JEL: F21 F31
    Date: 2015–01
  5. By: Gabriel Bruneau; Kevin Moran
    Abstract: We estimate the link between exchange rate fluctuations and the labour input of Canadian manufacturing industries. The analysis is based on a dynamic model of labour demand, and the econometric strategy employs a panel two-step approach for cointegrating regressions. Our data are drawn from a panel of 20 manufacturing industries from the KLEMS database and cover a long sample period that includes two full cycles of appreciation and depreciation of the Canadian dollar. Our results indicate that exchange rate fluctuations have significant long-term effects on the labour input of Canada’s manufacturing industries, that these effects are stronger for trade-oriented industries, and that these long-term impacts materialize only gradually following shocks.
    Keywords: Econometric and statistical methods, Exchange rate regimes, Exchange rates, Labour markets, Recent economic and financial developments
    JEL: E E2 E24 F F1 F14 F16 F3 F31 F4 F41 J J2 J23
    Date: 2015
  6. By: Zsolt Darvas
    Abstract: Global current account imbalances widened before the 2007/2008 crisis and have narrowed since. While the post-crisis adjustment of European current account deficits was in line with global developments (though more forceful), European current account surpluses defied global trends and increased. We use panel econometric models to analyse the determinants of medium-term current account balances. Our results confirm that higher fiscal balances, higher GDP per capita, more rapidly aging populations, larger net foreign assets, larger oil rents and better legal systems increase the medium-term current account balance, while a larger growth differential and a higher old-age dependency ratio reduce it. European current account surpluses became excessive during the past twelve years according to our estimates, while they were in line with model predictions in the preceding three decades. Generally, the gap between the actual current account and its fitted value in the model has a strong predictive power for future current account changes. Excess deficits adjust more forcefully than excess surpluses. However, in the 2004-07 period, excess imbalances were amplified, which was followed by a forceful correction in 2008-15, with the exception of European surpluses
    Date: 2015–08
  7. By: Winkelried, Diego (Universidad del Pacífico)
    Abstract: This paper studies the dynamic properties of relative commodity prices, especially the Presbisch-Singer hypothesis on the secular decline in these series, using a new family of unit root tests that is based on the Fourier approximation to the underlying trend in the data. The approximation controls for low-frequency variations such as structural breaks, or such as the long swings induced by hypothesized super cycles in the data. Relative to the extant literature, we find considerably more evidence in favor of trend stationarity in relative commodity prices, and relatively limited support for the Prebisch-Singer hypothesis.
    Keywords: Primary commodity prices, unit roots, long swings, super cycles.
    JEL: C22 O13
    Date: 2015–11
  8. By: Peiris, M.Udara (International College of Economics and Finance, National Research University-Higher School of Economics, Moscow, Russia and Department of Economics, University of Warwick); Polemarchakis, Herakles (Department of Economics, University of Warwick)
    Abstract: Explicit targets for the composition of assets traded by governments are necessary for fiscal-monetary policy to determine the stochastic paths of inflation or exchange rates; this is the case even if fiscal policy is non-Ricardian.Targets obtain with the traditional conduct of monetary policy and Credit Easing, but not with inconventional policy and Quantitative Easing. The composition of the portfolios traded by monetary-fiscal authorities determines premia in asset and currency markets Key words: quantitative easing ; exchange rates JEL classication numbers: E50 ; F41.
    Date: 2015
  9. By: Maixé-Altés, J. Carles; Iglesias, Emma M.
    Abstract: What type of crisis is generated when debt increases? We study the Spanish debt evolution in the 19th and 20th centuries by introducing currency and stock-market crises in the Reinhart and Rogoff (2011) framework. We find their same results for the determinants of banking and debt crises but substituting external and public debt with perpetual debt. Moreover, we find that currency crises depend strongly and positively on financial centers crises and negatively and mildly on perpetual debt. We justify the negative relationship due to an inflation tax. We also find that stock-market crises depend only positively and strongly on financial centers crises.
    Keywords: Austerity, Macroeconomic Policy, Fiscal Policy, Banking Crises, Currency Crises, Stock Market Crises, Debt Crises, Financial History
    JEL: E44 E60 E62 F34 F44 G01 H63 N10 N20
    Date: 2015–12–04

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