nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒04‒23
ten papers chosen by
Martin Berka
University of Auckland

  1. Barriers to price convergence By Marina Glushenkova; Andros Kourtellos; Marios Zachariadis
  2. On the Origins of Moral Hazard: Politics, International Finance and the Latin American Debt Crisis of 1982 By Altamura, Carlo Edoardo; Flores Zendejas, Juan
  3. In Search of the Transmission Mechanism of Fiscal Policy in the Euro Area. By P. Fève; J.-G. Sahuc
  4. Estimating Border Effects: The Impact of Spatial Aggregation By Coughlin, Cletus C.; Novy, Dennis
  5. Competitiveness and current account adjustments in the euro area By Böing, Tobias; Stadtmann, Georg
  6. Deep habits and exchange rate pass-through By Punnoose Jacob; Lenno Uuskula
  7. Growth Patterns and Trade Imbalances in the EMU. A Global Value Chain Analysis By Stefan Ederer; Peter Reschenhofer
  8. Exports, Exchange Rates, and Productivity: An analysis of the Japanese manufacturing sectors By KATO Atsuyuki
  9. Impacts of Oil Shocks on Exchange Rates and Macroeconomic Variables: A multi-country analysis By IWAISAKO Tokuo; NAKATA Hayato
  10. Monetary Policy Transmission in an Open Economy: New Data and Evidence from the United Kingdom By Ambrogio Cesa-Bianchi; Gregory Thwaites; Alejandro Vicondoa

  1. By: Marina Glushenkova; Andros Kourtellos; Marios Zachariadis
    Abstract: This paper investigates the existence of convergence clubs in the cross-country price mechanism for 96 individual goods retail price levels across 40 countries available semi-annually for 1990-2010, using a nonlinear factor model and threshold regression tools. To our knowledge, this is the first paper to find strong evidence for club convergence of retail prices. These clubs emerge due to the interaction of traded and non-traded factors. For example, countries that are physically closer to potential trade partners converge faster than countries in the high distance regime as long as they have low initial labor productivity or low initial income. Moreover, being behind the technology frontier appears to be more conducive to price convergence for countries with relatively small physical distance from potential trade partners. We interpret our findings as evidence of a local law of one price due to barriers to price convergence that influence the duration of the effect of price shocks.
    Keywords: convergence clubs; micro prices; nonlinear factor model; threshold regression; law of one price; local convergence
    JEL: F4
    Date: 2016–03
  2. By: Altamura, Carlo Edoardo; Flores Zendejas, Juan
    Abstract: A consensus has not been reached in the ongoing debate on the effects of lender of last resort functions by the IMF, given the contradictory results from macroeconomic analyses that depend upon samples and periods. This paper sheds new light on the relationship between international banks and their home governments, the IMF and international regulators during the years that preceded the debt crisis of 1982. Based on new archival evidence, we find that commercial banks’ decisions to lend were largely based on home governments’ preferences, competition, and the assumption that home governments and international organizations would provide lending of last resort functions to support borrowing governments. These factors also influenced loan pricing. While previous works suggest that the 1982 debt crisis was unexpected, we show that banks reacted to the deteriorating macroeconomic situation in many emerging economies once the role of international organizations as lenders of last resort became uncertain.
    Keywords: Sovereign debt markets, Sovereign defaults, International finance, Moral hazard, Country risk
    JEL: F3 N2 F5
    Date: 2016
  3. By: P. Fève; J.-G. Sahuc
    Abstract: This paper applies the DSGE-VAR methodology to assess the size of fiscal multipliers in the data and the relative contributions of two transmission mechanisms of government spending shocks, namely hand-to-mouth consumers and Edgeworth complementarity. Econometric experiments show that a DSGE model with Edgeworth complementarity is a better representation of the transmission mechanism of fiscal policy as it yields dynamic responses close to those obtained with the flexible DSGE-VAR model (i.e. an impact output multiplier larger than one and a crowding-in of private consumption). The estimated share of hand-to-mouth consumers is too small to replicate the positive response of private consumption.
    Keywords: Fiscal multipliers, hand-to-mouth, Edgeworth complementarity, DSGE-VAR, Euro area, Bayesian econometrics.
    JEL: C32 E32 E62
    Date: 2016
  4. By: Coughlin, Cletus C.; Novy, Dennis
    Abstract: Trade data are typically reported at the level of regions or countries and are therefore aggregates across space. In this paper, we investigate the sensitivity of standard gravity estimation to spatial aggregation. We build a model in which initially symmetric micro regions are combined to form aggregated macro regions. We then apply the model to the large literature on border effects in domestic and international trade. Our theory shows that larger countries are systematically associated with smaller border effects. The reason is that due to spatial frictions, aggregation across space increases the relative cost of trading within borders. The cost of trading across borders therefore appears relatively smaller. This mechanism leads to border effect heterogeneity and is independent of multilateral resistance effects in general equilibrium. Even if no border frictions exist at the micro level, gravity estimation on aggregate data can still produce large border effects. We test our theory on domestic and international trade flows at the level of U.S. states. Our results confirm the model's predictions, with quantitatively large effects.
    Keywords: Borders; Geography; Gravity; Heterogeneity; Home Bias; Modifiable Areal Unit Problem (MAUP); Spatial Attenuation; Trade Costs
    JEL: F10 F15 R12
    Date: 2016–04
  5. By: Böing, Tobias; Stadtmann, Georg
    Abstract: We empirically assess the impact of competitiveness measured by unit labor costs for current account balances in the Euro area. For this purpose, we estimate a panel with annual observations from 2000 to 2013. Our findings confirm the importance of competitiveness: Higher unit labor costs growth leads to lower current account balances. By splitting up unit labor costs growth in wage growth and productivity growth, we find wage growth and productivity growth to have a significantly negative and positive effect, respectively. However, the effect of unit labor costs is mainly driven by productivity growth, so that wage cuts are relatively ineffective and painful to fight current account deficits. But pushing productivity is also likely to be ineffective, since its positive effect for the current account may be offset by its effect on wages and GDP, which decreases current account balances.
    Keywords: Euro Area,Competitiveness,Unit Labor Costs,Wage Growth,Labor Productivity Growth,Current Account,Panel
    JEL: F32 E69 C33
    Date: 2016
  6. By: Punnoose Jacob; Lenno Uuskula
    Abstract: Habit persistence at the level of individual goods varieties can explain incomplete exchange rate pass-through to international prices. Deep habits give rise to a dynamic import demand function that leads to import price markup adjustments, independently of nominal pricing frictions. Augmenting a standard New Keynesian two-country model with deep habits, we obtain low exchange rate pass-through to import prices even when local currency prices are relatively flexible. As prices become more rigid, the presence of deep habits further reduces the pass-through of exchange rate fluctuations. Without deep habits, the model requires implausibly high degrees of price stickiness to match the pass-through dynamics triggered by an exchange rate shock in a vector autoregression.
    Keywords: Exchange Rate Pass-through, Deep Habits, Sticky Prices, Price Markups, Local Currency Pricing
    JEL: F41 E31
    Date: 2016–04
  7. By: Stefan Ederer (WIFO); Peter Reschenhofer (WIFO)
    Abstract: This paper assesses whether or to what extent the macroeconomic imbalances, which emerged in the "North" and "South" of the European Monetary Union before the financial and economic crisis of 2008-09, are symmetric. First, we show that the imbalances stemmed from different growth patterns and quantify the contributions of foreign and domestic demand to GDP growth in the EMU countries. Second, we calculate bilateral exports and imports between all EU countries, applying the concept of "trade in value added", and discuss their role in the emergence of trade surpluses and deficits. Third, we quantify to what extent an increase in domestic demand in the North and a decrease in the South would support the elimination of these imbalances. Finally, we calculate a hypothetical scenario in which final demand expands to such extent that all intra-EMU trade is balanced. We thereby evaluate whether or to what extent the macroeconomic imbalances can be eliminated by demand adjustments in the EMU countries.
    Keywords: European Monetary Union, macroeconomic imbalances, global value chains, input-output analysis
    Date: 2016–01–21
  8. By: KATO Atsuyuki
    Abstract: This paper examines the effects of exchange rate changes and productivity on manufacturing exports. Using the dataset of Japanese manufacturing firms during the period 2002-2012, we discuss whether exchange rate fluctuations deter export activities and whether productivity and markup differences affect them. For this study, we estimate both firm specific productivity and markups by the production function based approaches and incorporate them into the Heckman sample selection model. Our results show exchange rates are important factors to affect firm-level exports as a whole while temporal aggregation should be carefully considered. In addition, this study also reveals that productivity and markups give different impacts on firm-level exports across industries. In the transportation equipment industry, the negative effects of appreciation on exports are partly mitigated by higher productivity. Markups are positively related to exports in the electronics industry while negatively related in the transportation equipment. Neither productivity nor markup absorbs the impact of exchange rate changes in the machinery industry. Those findings imply that stability of exchange rates is very important while the effective trade policy may vary across industries following their trade structure.
    Date: 2016–03
  9. By: IWAISAKO Tokuo; NAKATA Hayato
    Abstract: This paper provides a quantitative assessment of the relative importance of exogenous shocks related to oil price determination on countries' exchange rates and outputs within the same framework of the structural vector autoregression (VAR) model. Because we are interested in the effect of oil price changes on energy exporters and importers, we chose Australia, Canada, Japan, Norway, and the United Kingdom as the sample countries. We assume four structural shocks: (i) oil supply shocks, (ii) global demand shocks, (iii) oil price fluctuations unrelated to supply and demand, and (iv) pure exchange rate fluctuations unrelated to other structural shocks. Differing responses to structural shocks explain the correlation structure of these currencies, while pure exchange rate shocks are the main sources of exchange rate volatilities. We also examine the roles of structural shocks in explaining macro variables, taking Australia and Japan as examples. We find evidence that global demand shocks and nonfundamental oil price fluctuations have a strong impact on gross domestic product (GDP) and export growth for both countries, while pure exchange rate shocks are relatively unimportant in explaining Japan's macroeconomic variables.
    Date: 2016–03
  10. By: Ambrogio Cesa-Bianchi (Bank of England; Centre for Macroeconomics (CFM)); Gregory Thwaites (Bank of England; Centre for Macroeconomics (CFM)); Alejandro Vicondoa (European University Institute)
    Abstract: This paper constructs a new series of monetary policy surprises for the United Kingdom and estimates their effects on macroeconomic and financial variables, employing high-frequency identification methods. Using direct projections, monetary policy is found to have persistent effects on real interest rates and expected inflation at long horizons. We use our series of surprises as an instrument in a SVAR and show that monetary policy affects economic activity, prices, the exchange rate, and the trade balance. Exploiting the availability of the narrative series of monetary policy shocks computed by Cloyne and Huertgen (2014), we propose a test of overidentifying restrictions and find no evidence that either set of shocks contains any 'endogenous' response to macroeconomic variables.
    Keywords: Monetary Policy Transmission, External Instrument, High-Frequency Identification, Structural VAR, Local Projections
    JEL: E31 E32 E43 E44 E52 E58
    Date: 2016–04

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