nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2018‒11‒05
eight papers chosen by
Martin Berka
University of Auckland

  1. What Remains of Cross-Country Convergence? By Johnson, Paul; Papageorgiou, Chris
  2. Optimal capital controls and real exchange rate policies: a pecuniary externality perspective By Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R.
  3. More Amazon Effects: Online Competition and Pricing Behaviors By Alberto Cavallo
  4. Productivity, the real exchange rate and the aggregate demand: an empirical exercise applied to brazil from 1960 to 2011 By Douglas Alcantara Alencar; Frederico Gonzaga Jayme Jr.; Gustavo Britto
  5. The Monetary Model of CIP Deviations By Ibhagui, Oyakhilome
  6. Investigating Properties of Commodity Price Responses to Real and Nominal Shocks By Kim, Hyeongwoo; Zhang, Yunxiao
  7. Global Trends in Interest Rates By Del Negro, Marco; Giannone, Domenico; Giannoni, Marc; Tambalotti, Andrea
  8. The Role of Fundamentals in Global Imbalances By Uri Dadush

  1. By: Johnson, Paul; Papageorgiou, Chris
    Abstract: We examine the record of cross-country growth over the past 50 years and ask if developing countries have made progress on closing income gap between their per capita incomes and those in the advanced economies. We conclude that, as a group, they have not and then survey the literature on absolute convergence with particular emphasis on that from the last decade or so. That literature supports our conclusion of a lack of progress in closing the income gap between countries. We close with a brief examination of the recent literature on cross-individual distribution of income which finds that, despite the lack of progress on cross-country convergence, global inequality has tended to fall since 2000.
    Keywords: Economic growth, convergence, catching up, global inequality
    JEL: E01 E13 F41 O11 O47
    Date: 2018–08
  2. By: Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R.
    Abstract: A new literature studies the use of capital controls to prevent financial crises. Within this new framework, we show that when exchange rate policy is costless, there is no need for capital controls. However, if exchange rate policy entails efficiency costs, capital controls become part of the optimal policy mix. When exchange rate policy is costly, the optimal mix combines prudential capital controls in tranquil times with policies that limit exchange rate depreciation in crisis times. The optimal mix yields more borrowing, fewer and less severe financial crises, and much higher welfare than with capital controls alone.
    Keywords: capital controls; exchange rate policy; financial frictions; financial crises; financial stability; optimal taxation; macro-prudential policies
    JEL: N0 F3 G3
    Date: 2016–12–01
  3. By: Alberto Cavallo
    Abstract: I study how online competition, with its algorithmic pricing technologies and the transparency of the Internet, can change the pricing behavior of large retailers and affect aggregate inflation dynamics. In particular, I show that online competition has raised both the frequency of price changes and the degree of uniform pricing across locations in the U.S. over the past 10 years. These changes make retail prices more sensitive to aggregate ``nationwide" shocks, increasing the pass-through of both gas prices and nominal exchange rate fluctuations.
    JEL: E31 E5
    Date: 2018–10
  4. By: Douglas Alcantara Alencar (UFPA); Frederico Gonzaga Jayme Jr. (Cedeplar-UFMG); Gustavo Britto (Cedeplar-UFMG)
    Abstract: This research analyses, from a Post-Kaleckian perspective, the interactions among the aggregate demand, the real exchange rate, productivity and real wages in the Brazilian economy from 1960 to 2011. It adopts the longstanding perspective that demand is the driver of capital accumulation and economic growth. The research comprises the following steps: i) a critical assessment of the growth regime literature, with a particular emphasis on issues related to productivity and the real exchange rate; ii) understanding the relationship between the real exchange rate and the productivity and growth regimes; iii) proposing a theoretical model that relates the real exchange rate, productivity and the growth regime; and iv) an empirical test of the interaction between the real exchange rate, productivity and the growth regime. Theoretically the study develops a model showing the interactions between the aggregate demand, the real exchange rate, productivity and real wages. Furthermore, this research attempts to address the lack of theoretical and empirical studies about the relationship between the aggregate demand, the real exchange rate, productivity and real wages.
    Keywords: Post-Kaleckian, aggregate demand, real exchange rate, productivity, real wages.
    JEL: O11 O15 O41
    Date: 2018–10
  5. By: Ibhagui, Oyakhilome
    Abstract: A large amount of currencies has over time exhibited persistent deviations from covered interest rate parity, resulting in non-zero cross-currency basis swap spreads. The relationship between these deviations and standard macroeconomic variables, however, remains unknown. In this paper, we document a long-run relationship between cross-currency basis swap spreads and macroeconomic variables (relative money supply and relative real output). After presenting a simple model where we relax the no-arbitrage CIP assumption in a monetary model framework, we empirically show that, in the long run, tighter cross-currency basis swap spreads are associated with higher relative real output for non-European currencies, while a rise in relative money supply does not widen the cross-currency basis swap spreads associated with European currencies. Our main results are robust to different estimation techniques and the inclusion of control variables. We also perform an error-correction analysis which suggests that the mechanism governing the adjustment to equilibrium is not the same for European and non-European currencies. More generally, we show that, when there is a move away from equilibrium, it is mostly the cross-currency basis swap spreads that adjust to ensure a return to equilibrium, across all maturities and samples.
    Keywords: Monetary fundamentals, covered interest rate parity, cross-currency basis swap spreads
    JEL: F31
    Date: 2018–10–21
  6. By: Kim, Hyeongwoo; Zhang, Yunxiao
    Abstract: This paper studies dynamic adjustments of 49 world commodity prices in response to innovations in the nominal exchange rate and the world real GDP. After we estimate the dynamic elasticity of the prices with respect to these shocks, we obtain the kernel density of our estimates to establish stylized facts on the adjustment process of the commodity price toward a new equilibrium path. Our empirical findings imply, on average, that the law of one price holds in the long-run, whereas the substantial degree of short-run price rigidity was observed in response to the nominal exchange rate shock. The real GDP shock tends to generate substantial price fluctuations in the short-run because adjustments of the supply can be limited, but have much weaker effects in the long-run as the supply eventually counterbalances the increase in the demand. Overall, we report persistent long-lasting effects of the nominal exchange rate shock on commodity prices relative to those of the real GDP shock.
    Keywords: Commodity Prices; Price Stickiness; Dynamic Elasticity; Vector Autoregression; Impulse-Response Function; Kernel Density
    JEL: E31 F31 Q02
    Date: 2018–10
  7. By: Del Negro, Marco (Federal Reserve Bank of New York); Giannone, Domenico (Federal Reserve Bank of New York); Giannoni, Marc (Federal Reserve Bank of Dallas); Tambalotti, Andrea (Federal Reserve Bank of New York)
    Abstract: The trend in the world real interest rate for safe and liquid assets fluctuated close to 2 percent for more than a century, but has dropped significantly over the past three decades. This decline has been common among advanced economies, as trends in real interest rates across countries have converged over this period. It was driven by an increase in the convenience yield for safety and liquidity and by lower global economic growth.
    Keywords: World Interest Rate; Convenience Yield; Interest Rate Parity; VAR with Common Trends
    JEL: E43 E44 F31 G12
    Date: 2018–10–16
  8. By: Uri Dadush
    Abstract: The concern over global imbalances has become an effort to systematically reduce current account deficits and surpluses, feeding the protectionist narrative. However, global imbalances are driven predominantly by domestic policies and conditions, not external factors. We do not know enough about the determinants of current account balances to set out precise numerical norms. Policy-makers should pay more attention to establishing the conditions that make current account deficits and surpluses – and their mirror image, international capital flows – sustainable.
    Date: 2018–09

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