nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2015‒12‒20
six papers chosen by
Martin Berka
University of Auckland

  1. Short-Term Pain for Long-Term Gain: Market Deregulation and Monetary Policy in Small Open Economies By Cacciatore, Matteo; Duval, Romain; Fiori, Giuseppe; Ghironi, Fabio
  2. The Effect of Exchange Rate Fluctuations on Employment in a Segmented Labor Market By YOKOYAMA Izumi; HIGA Kazuhito; KAWAGUCHI Daiji
  3. Oil currencies in the face of oil shocks: What can be learned from time-varying specifications? By Jean-Pierre Allegret; Cécile Couharde; Valérie Mignon; Tovonony Razafindrabe
  4. Secular drivers of the global real interest rate By Rachel, Lukasz; Smith, Thomas
  5. Foreign Exchange Interventions, Capital Controls and Monetary Policy: The Case of China By Hao Jin
  6. Nonlinear time series and neural-network models of exchange rates between the US dollar and major currencies By Allen, D.E.; McAleer, M.J.; Peiris, S.; Singh, A.K.

  1. By: Cacciatore, Matteo; Duval, Romain; Fiori, Giuseppe; Ghironi, Fabio
    Abstract: This paper explores the effects of labor and product market reforms in a New Keynesian, small open economy model with labor market frictions and endogenous producer entry. We show that it takes time for reforms to pay off, typically at least a couple of years. This is partly because the benefits materialize through firm entry and increased hiring, both of which are gradual processes, while any reform-driven layoffs are immediate. Some reforms---such as reductions in employment protection---increase unemployment temporarily. Implementing a broad package of labor and product market reforms minimizes transition costs. Importantly, reforms do not have noticeable deflationary effects, suggesting that the inability of monetary policy to deliver large interest rate cuts in their aftermath---either because of the zero bound on policy rates or because of membership in a monetary union---may not be a relevant obstacle to reform. Alternative simple monetary policy rules do not have a large effect on transition costs.
    Keywords: employment protection; firm entry; product market regulation; structural reforms; unemployment benefits
    JEL: E24 E32 E52 F41 J64 L51
    Date: 2015–12
  2. By: YOKOYAMA Izumi; HIGA Kazuhito; KAWAGUCHI Daiji
    Abstract: How do exchange rate fluctuations affect the employment of regular and non-regular workers in a segmented labor market? We investigate the effect of exchange rate fluctuations on the employment adjustment of regular and non-regular workers using heterogeneous dependence on international trade across firms for identification. The analysis of Japanese firm-level panel data reveals that appreciation of the yen decreases the employment of exporting firms. The adjustment elasticity of non-regular employment is about five times greater than that of regular employment. Regular employment reacts more to the permanent exchange rate shocks extracted by the Beverage and Nelson decomposition, whereas non-regular employment reacts less. The estimation results suggest a significant difference in adjustment costs between regular and non-regular employment in the segmented Japanese labor market.
    Date: 2015–12
  3. By: Jean-Pierre Allegret; Cécile Couharde; Valérie Mignon; Tovonony Razafindrabe
    Abstract: While the oil currency property is clearly established from a theoretical viewpoint, its existence is less clear-cut in the empirical literature. We investigate the reasons for this apparent puzzle by studying the time-varying nature of the relationship between real effective exchange rates of five oil exporters and the real oil price in the aftermath of the oil price shocks of the last two decades. Accordingly, we rely on a time-varying parameter VAR specification which allows the responses of real exchange rates to different oil price shocks to evolve over time. We find that the reason of the mixed results obtained in the empirical literature is that oil currencies follow different hybrid models in the sense that oil countries' real exchange rates may be driven by one or several sources of oil price shocks that furthermore can vary over time. In addition to structural changes affecting oil countries, structural changes arising from the oil market itself through the various, time-varying sources of oil price shocks are found to be crucial.
    Keywords: oil currencies, oil shocks, Time-Varying Parameter VAR model.
    JEL: C32 F31 Q43
    Date: 2015
  4. By: Rachel, Lukasz (Bank of England); Smith, Thomas (Bank of England)
    Abstract: Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall. Although there is huge uncertainty, under plausible assumptions we think we can account for around 400 basis points of the 450 basis points fall. Our quantitative analysis highlights slowing global growth as one force that may have pushed down on real rates recently, but shifts in saving and investment preferences appear more important in explaining the long-term decline. We think the global saving schedule has shifted out in recent decades due to demographic forces, higher inequality and to a lesser extent the glut of precautionary saving by emerging markets. Meanwhile, desired levels of investment have fallen as a result of the falling relative price of capital, lower public investment, and due to an increase in the spread between risk-free and actual interest rates. Moreover, most of these forces look set to persist and some may even build further. This suggests that the global neutral rate may remain low and perhaps settle at (or slightly below) 1% in the medium to long run. If true, this will have widespread implications for policymakers — not least in how to manage the business cycle if monetary policy is frequently constrained by the zero lower bound.
    Keywords: Equilibrium interest rate; long-term yields; global saving and investment; global trend growth.
    JEL: E02 E10 E20 E40 E50 E60 F00 F41 F42 F47 J11 O30 O40
    Date: 2015–12–11
  5. By: Hao Jin (Indiana University)
    Abstract: China has maintained a closed capital account to the private sector and channeled capital flows through the public sector by foreign exchange interventions. This paper presents an open economy model that incorporates this capital account policy configuration in order to study whether foreign exchange interventions can improve welfare in the presence of capital controls, compared to an open capital account. Furthermore, I analyze how these interventions affect the conduct of monetary policy. I find that optimal interventions improve welfare by strategically managing the terms of trade. In the presence of domestic nominal rigidity, interventions increase welfare even if monetary policy is set optimally. I find monetary policy effectively eliminates domestic price distortions, while foreign exchange interventions efficiently correct terms-of-trade externalities.
    Keywords: Foreign Exchange Interventions; Capital Controls; Monetary Policy; Chinese Economy; Welfare
    Date: 2015–10
  6. By: Allen, D.E.; McAleer, M.J.; Peiris, S.; Singh, A.K.
    Abstract: This paper features an analysis of major currency exchange rate movements in relation to the US dollar, as constituted in US dollar terms. Euro, British pound, Chinese yuan, and Japanese yen are modelled using a variety of non- linear models, including smooth transition regression models, logistic smooth transition regressions models, threshold autoregressive models, nonlinear autoregressive models, and additive nonlinear autoregressive models, plus Neural Network models. The results suggest that there is no dominating class of time series models, and the different currency pairs relationships with the US dollar are captured best by neural net regression models, over the ten year sample of daily exchange rate returns data, from August 2005 to August 2015.
    Keywords: non linear models, time series, non-parametric, smooth-transition regression models, neural networks, GMDH shell
    JEL: C45 C53 F3 G15
    Date: 2015–11–01

This nep-opm issue is ©2015 by Martin Berka. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.