nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2016‒06‒09
ten papers chosen by
Martin Berka
University of Auckland

  1. The distributional consequences of large devaluations By Javier Cravino; Andrei A. Levchenko
  2. What Do We (and Others) Mean by "The Terms of Trade"? By Alan V. Deardorff
  3. Fiscal Consolidation Under Imperfect Credibility By Lemoine, Matthieu; Lindé, Jesper
  4. Boom Goes the Price: Giant resource discoveries and real exchange rate appreciation By Torfinn Harding; Radoslaw (Radek) Stefanski; Gerhard Toews
  5. Current account and REER misalignments in Central Eastern EU countries: an update using the macroeconomic balance approach By Comunale, Mariarosaria
  6. The Impact of Commodity Price Movements on the New Zealand Economy By Günes Kamber; Gabriela Nodari; Benjamin Wong
  7. A European Disease? Non-tradable inflation and real interest rate divergence By Sophie Piton
  8. Dutch Disease, Real Effective Exchange Rate Misalignments and Their Effect on GDP Growh in the EU By Mariarosaria Comunale
  9. Macroeconomic consequences of the real-financial nexus: Imbalances and spillovers between China and the U.S. By Pang, Ke; Siklos, Pierre L.
  10. The International Impact of Financial Shocks: A Global VAR and Connectedness Measures Approach By Donal Smith

  1. By: Javier Cravino; Andrei A. Levchenko
    Abstract: We study the differential impact of large exchange rate devaluations on the cost of living at different points on the income distribution. Across product categories, the poor have relatively high expenditure shares in tradeable products. Within tradeable product categories, the poor consume lower-priced varieties. Changes in the relative price of tradeables and the relative prices of lower-priced varieties following a devaluation will affect the cost of the consumption basket of the low-income households relative that of the high-income households. We quantify these effects following the 1994 Mexican peso devaluation and show that their distributional consequences can be large. In the two years that follow the devaluation, the cost of the consumption basket of those in the bottom decile of the income distribution rose between 1.46 and 1.6 times more than the cost of the consumption basket for the top income decile. .
    Keywords: Exchange rates, large devaluations, distributional effects, consumption baskets
    JEL: F31 F61
    Date: 2016–02
  2. By: Alan V. Deardorff (University of Michigan)
    Abstract: I explore how the concept of Òthe terms of tradeÓ has been used since it was coined by Marshall. Early writers (Taussig, Viner, Dorrance) constructed variations on the relative price of traded goods that Marshall was concerned with, but most of these variations have been left behind in modern uses of the term, which today almost always refer to a relative price of exports and imports. However, when authors have wanted to identify the terms of trade with a particular country and to represent it either symbolically in an economic model or empirically, they have had to choose between defining the terms of trade as the relative price of exports or the relative price of imports. The first to do this was Taussig, who chose the second option, but he was followed by Viner who chose the first, and was followed in this choice by almost all writers for the next several decades. Then, around 1980, TaussigÕs choice came back into fashion among scholars of international finance. I document this contrast in definitions between international trade and international finance, then add slightly to VinerÕs argument for preferring that the terms of trade of a country be defined as the relative price of its exports.
    Keywords: Terms of trade
    JEL: F1
    Date: 2016–05–23
  3. By: Lemoine, Matthieu (Unit of forecasting and macroeconomic studies); Lindé, Jesper (Research Department, Central Bank of Sweden)
    Abstract: This paper examines the effects of expenditure-based fiscal consolidation when credibility as to whether the cuts will be long-lasting is imperfect. We contrast the impact limited credibility has when the consolidating country has the means to tailor mon- etary policy to its own needs, with the impact when the country is a small member of a currency union with a negligible effect on interest rates and on nominal exchange rates of the currency union. We find two key results. First, in the case of an independ- ent monetary policy, the adverse impact of limited credibility is relatively small, and consolidation can be expected to reduce government debt at a relatively low output cost given that monetary policy provides more accommodation than it would under perfect credibility. Second, the lack of monetary accommodation under currency union membership implies that the output cost may be significantly larger, and that progress in reducing government debt in the short and medium term may be limited under imperfect credibility.
    Keywords: Monetary and Fiscal Policy; Front-Loaded vs. Gradual Consolidation; DSGE Model; Sticky Prices and Wages; Currency Union
    JEL: E32 F41
    Date: 2016–05–01
  4. By: Torfinn Harding; Radoslaw (Radek) Stefanski; Gerhard Toews
    Abstract: We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates.The size and plausibly exogenous timing of such discoveries make them ideal for identifying the effects of an anticipated resource boom on prices. We find that a giant discovery with the value of a country's GDP increases the real exchange rate by 14% within 10 years following the discovery. The appreciation is nearly exclusively driven by an appreciation of the prices of non-tradable goods. We show that these empirical results are qualitatively and quantitatively in line with a calibrated model with forward looking behaviour and Dutch disease dynamics.
    Keywords: Oil, resource discoveries, real exchange rate, Dutch disease
    JEL: F22 O15 R11 R15
    Date: 2016
  5. By: Comunale, Mariarosaria
    Abstract: Using the IMF CGER methodology, we make an assessment of the current account and price competitiveness of the Central Eastern European Countries (CEEC) that joined the EU between 2004 and 2014. We present results for the “Macroeconomic Balance (MB)” approach, which provides a measure of current account equilibrium based on its determinants together with mis-alignments in real effective exchange rates. We believe that a more refined analysis of the mis-alignments may useful for the Macroeconomic Imbalance Procedure (MIP). This is especially the case for these countries, which have gone through a transition phase and boom/bust periods since their independence. Because such a history may have influenced a country’s performance, any evaluation must take account of each country’s particular characteristics. We use a panel setup of 11 EU new member states (incl. Croatia) for the period 1994-2012 in static and dynamic frameworks, also controlling for the presence of cross-sectional dependence and checking specifically for the role of exchange rate regimes, capital flows and global factors. We find that the estimated coefficients of the determinants meet with expectations. Moreover, the foreign capital flows, the oil balance, and relative output growth seem to play a crucial role in explaining the current account balance. Some global factors such as shocks in oil prices or supply might have played a role in worsening the current account balances of the CEECs. Having a pegged exchange rate regime (or being part of the euro zone) affects the current account positively. The real effective exchange rates behave in accord with the current account gaps, which clearly display cyclical behaviour. The CAs and REERs come close to equilibria in 2012 in most of the countries and the rebalancing is completed for some countries that were less misaligned in the past, such as Poland and Czech Republic, but also for Lithuania. When Foreign Direct Investment (FDI) is introduced as a determinant for these countries, the misalignments are larger in the boom periods (positive misalignments) whereas the negative misalignments are smaller in magnitude.
    Keywords: real effective exchange rate, Central Eastern European Countries, EU new member states, fundamental effective exchange rate, current account
    JEL: F31 F32 C23
    Date: 2015–10–07
  6. By: Günes Kamber; Gabriela Nodari; Benjamin Wong (Reserve Bank of New Zealand)
    Abstract: We estimate the macroeconomic effects of changes in commodity prices on the New Zealand economy. Our analysis suggests that an increase in commodity prices has similar characteristics to demand driven macroeconomic fluctuations. GDP expenditure subcomponents such as consumption and investment tend to rise in response to higher commodity prices. Business investment appears to respond more than consumption, highlighting its importance in the transmission of a commodity price movements. In line with higher demand pressures, non-tradable inflation is estimated to increase persistently. We find that the real exchange rate appreciates, and tradable inflation decreases accordingly. Possibly due to the divergent patterns of tradable and non-tradable inflation, the interest rate does not respond to higher commodity prices in the very short-run but is estimated to increase over longer horizons.
    Date: 2016–05
  7. By: Sophie Piton (Paris School of Economics - Centre d'Economie de la Sorbonne)
    Abstract: This paper studies the contribution of real interest rate divergence to the dynamics of the relative price of non-tradables within Europe. Based on a model by De Gregorio et al. (1994), it shows that the real interest rate fall in the Euro Area (EA) periphery following the single currency's inception induced an increase in the relative price of non-tradable goods. using a new dataset, it documents the dynamics of the tradable and the non-tradable sectors over 1995-2013 and the expansion of the non-tradable sector in the periphery before the euro crisis. it then carries out an econometric estimation for 11 EA countries over 1995-2013 and quantifies the contribution of the pure Balassa-Samuelson effect and the impact of the interest rate on non-tradable relative prices. Diverging evolution in the interest rate impacted greatly the evolution of non-tradable relative prices within the euro area over the period. In Greece, the fall in the real interest rate over 1995-2008 could explain almost half of the non-tradable price increase relative to the EA average, while in Germany the increase in the real interest rate might have contributed up to 7% of the decrease of the non-tradable price relative to the average of the EA
    Keywords: Non-tradable prices; Balassa-Samuelson effect; Real interest rate
    JEL: F41 F45 E43
    Date: 2016–05
  8. By: Mariarosaria Comunale (Economics Department, Bank of Lithuania)
    Abstract: In this article we study the impact of real effective exchange rate misalignments, based on determinants, including different types of foreign capital inflows, on GDP growth in the EU. This can provide a useful contribution to understanding the causal link between inflows, real effective exchange rate disequilibria and GDP growth during both the boom and the crisis period. For this analysis, we use a panel of 27 EU countries for the period 1994–2012, with annual frequency. We find that the core countries have been mostly undervalued from the crisis onwards, while the periphery (excluding Ireland) were overvalued starting from 2003–2004, as expected. Concerning the new Member States, these are persistently overvalued for the entire time span. The results seem to be generally driven by the inflows of banking loans more than by FDIs or portfolio investments. In the second stage, we study the influence of exchange rate misalignments and volatilities on growth. We argue that the real effective exchange rate misalignments associated with the inflows have been a further cause for decline in GDP, in a long-run perspective, while they do not play a role in the short run. The exchange rate volatilities and the undervaluation dummy are not robust in affecting GDP growth, while spillovers and global factors seem to matter in all the specifications both in the short and long run.
    Keywords: real effective exchange rate, behavioural effective exchange rate, foreign capital inflows, FDIs, Dutch disease, GDP growth, European Union
    JEL: F31 F43 C23
    Date: 2016–05–23
  9. By: Pang, Ke; Siklos, Pierre L.
    Abstract: ​Relying on quarterly data since 1998 we estimate, for China and the U.S., small scale econometric models that economize on the number of variables employed and yet are rich enough to provide useful insights about spillover effects between the two countries under different maintained assumptions about the exogeneity of the macroeconomic relationship between them. We conclude that inflation in China responds to credit shocks. Indeed, the monetary transmission mechanism in China resembles that of the US even if the channels through which monetary policy affects their respective economies differ. We also find that the monetary policy stance of the PBOC was helpful in mitigating the impact of the global financial crisis of 2008-9. Finally, spillovers from the US to China are significant and originate from both through the real and financial sectors of the US economy. Publication keywords: spillovers, monetary policy in China, dynamic factor models, credit
    JEL: E58 E52 C32
    Date: 2015–01–18
  10. By: Donal Smith
    Abstract: This paper examines the international impact of shocks to a large array of measures of financial frictions and financial stress. The methodology employed in this paper is twofold, it firstly utilities the Global VAR (GVAR) approach and then employs a set of Generalized Connectedness Measures (GCM) to summarise the results of this analysis. These two methodologies provide a way to rank the relative importance of different measures of financial shocks on countries and macroeconomic variables. The methodologies are applied to a data set of 17 countries, over the period 1981Q1 to 2013Q1, with 12 separate measures of financial frictions and financial stress. Utilising connectedness index measures, it is found that financial stress measures constructed from the corporate bond market are the most in uential on global macroeconomic variables and that this result is also consistent across individual countries. It is found that many proposed measures of financial stress are not net transmitters of influence but are more dependent on external factors. The paper finds little evidence to support the use of credit as a financial shock variable as is common in the literature. This variable is found to be a weak transmitter of shocks and highly influenced by shocks to other variables.
    Keywords: Financial Frictions, Financial Shocks, international linkages, macroeconomic connectedness, Generalized Connectedness Measures (GCMs), Financial Stress Indicators
    JEL: C32 C53 E17 F44 F65 G01
    Date: 2016–05

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