nep-opm New Economics Papers
on Open Economy Macroeconomics
Issue of 2023‒09‒25
seven papers chosen by
Martin Berka, Massey University

  1. Why Global and Local Solutions of Open-Economy Models with Incomplete Markets Differ and Why it Matters By Oliver de Groot; Ceyhun Bora Durdu; Enrique G. Mendoza
  2. Cross-country price and inflation dispersion: Retail network or national border By Messner, Teresa; Rumler, Fabio; Strasser, Georg
  3. Real Exchange Rates and the Earnings of Immigrants By Dustmann, Christian; Ku, Hyejin; Surovtseva, Tetyana
  4. Global Capital Allocation By Florez-Orrego, Sergio; Maggiori, Matteo; Schreger, Jesse; Sun, Ziwen; Tinda, Serdil
  5. The Distribution of Sectoral Price Changes and Recent Inflation Developments By Christopher D. Cotton; Vaishali Garga; Giovanni P. Olivei; Viacheslav Sheremirov
  6. Why Hours Worked Decline Less after Technology Shocks? By Olivier Cardi; Romain Restout
  7. Service Trade, Regional Specialization, and Welfare By Han, Yuancheng; Miranda-Pinto, Jorge; Tanaka, Satoshi

  1. By: Oliver de Groot; Ceyhun Bora Durdu; Enrique G. Mendoza
    Abstract: Global and local methods used to study open-economy incomplete-markets models yield different cyclical moments, impulse responses, spectral densities and precautionary savings. Endowment and RBC model solutions obtained with first-order, higher-order, and risky-steady-state local methods are compared with fixed-point-iteration global solutions. Analytic and numerical results show that the differences are due to the near-unit-root nature of net foreign assets under incomplete markets and inaccuracies of local methods in computing their autocorrelation. In a Sudden Stops model, quasi-linear methods that handle occasionally binding constraints understate the size of credit constraint multipliers, financial premia and macroeconomic responses.
    JEL: F41 F44 G01 G15
    Date: 2023–08
  2. By: Messner, Teresa (Oesterreichische Nationalbank); Rumler, Fabio (Oesterreichische Nationalbank); Strasser, Georg (European Central Bank)
    Abstract: (Why) do prices and inflation rates differ within the euro area? We study the relevance of a national border for grocery prices in the otherwise homogenous and highly integrated border region of Austria and Germany. Using transaction data on prices and quantities from a large household panel, we compare the prices of identical products within a narrow band along the border. We find large assortment and price differences between these two regions. Even within multinational retail chains the prices of identical products on the two sides of the border differ on average by about 21%. These price differences are not very persistent over time indicating little arbitrage gain from undifferentiated cross-border shopping. Ensuing product-level inflation rates differ for only half of the chains between the two countries. The results highlight the importance of the history-dependent evolution of distribution networks and of the structure of the sales organisation as a driver of price and inflation heterogeneity.
    Keywords: Price discrimination, goods market integration, border effect, cross-border arbitrage, market power
    JEL: D12 E31 D43 F15 F4
    Date: 2022–12
  3. By: Dustmann, Christian (University College London); Ku, Hyejin (University College London); Surovtseva, Tetyana (New York University, Abu Dhabi)
    Abstract: We relate origin-destination real price differences to immigrants' reservation wages and their career trajectories, exploiting administrative data from Germany and the 2004 enlargement of the European Union. We find that immigrants who enter Germany when a unit of earnings from Germany allows for larger consumption at home settle for lower entry wages, but subsequently catch up to those arriving with less favourable exchange rates, through transition to better-paying occupations and firms. Similar patterns hold in the US data. Our analysis offers one explanation for the widespread phenomenon of immigrants' downgrading, with new implications for immigrant cohort effects and assimilation profiles.
    Keywords: real exchange rate, reservation wage, immigrant downgrading, earnings assimilation
    JEL: J24 J31 J61 O15 O24
    Date: 2023–08
  4. By: Florez-Orrego, Sergio; Maggiori, Matteo; Schreger, Jesse; Sun, Ziwen; Tinda, Serdil
    Abstract: We survey the literature on global capital allocation. We begin by reviewing the rise of cross-border investment, the shift towards portfolio investment, and the literature focusing on aggregate patterns in multilateral and bilateral positions. We then turn to the recent literature that uses micro-data to document patterns in global capital allocations. We focus on the importance of the currency of denomination of assets in international portfolios and the role that tax havens and offshore financial centers play in intermediating global capital. We conclude with directions for future research in this area.
    Date: 2023–08–18
  5. By: Christopher D. Cotton; Vaishali Garga; Giovanni P. Olivei; Viacheslav Sheremirov
    Abstract: Inflation has declined across many sectors so far in 2023, but the distribution of sectoral price changes still shows atypical features, such as bimodality in which substantial masses of sectors record price changes both below and above the Federal Reserve’s 2 percent inflation target. Such bimodality was not typical before the pandemic, suggesting that sector-specific price adjustments are now playing a more important role in inflation developments. The recent slowdown in inflation was partly caused by a larger-than-normal share of the consumption basket being located in the left tail of the distribution. However, current estimates of inflation persistence at the sectoral level are relatively low, and thus the beneficial effect of deflation in a few sectors could prove short-lived. These findings suggest that uncertainty around underlying inflation may now be higher than in the years immediately preceding the pandemic.
    Keywords: inflation persistence; bimodality; sectoral price change distribution; underlying inflation
    JEL: E31 E52
    Date: 2023–08–30
  6. By: Olivier Cardi; Romain Restout
    Abstract: The contractionary effect of aggregate technology shocks on hours worked has shrunk over time in OECD countries. Our estimates suggest that this finding can be attributed to the increasing share of the variance of technology improvements driven by asymmetric technology shocks across sectors. While technology improvements uniformly distributed across sectors are found empirically to give rise to a dramatic decline in total hours worked, asymmetric technology shocks do the opposite. By depreciating non-traded prices, symmetric technology shocks generate a contractionary effect on non-traded labor and thus on total hours. In contrast, by appreciating non-traded prices, technological change concentrated toward traded industries puts upward pressure on wages which has a strong expansionary effect on total hours worked. A two-sector open economy model with frictions into the movements of inputs can reproduce the time-increasing response of both total and sectoral hours worked we estimate empirically once we allow for factor-biased technological change and we let the share of asymmetric technology shocks increase over time. A model with endogenous technology decisions reveals that two-third of the progression of asymmetric technology shocks is driven by greater exposition of traded industries to the international stock of knowledge.
    Keywords: ector-biased technology shocks, Endogenous technological change, Factor-augmenting efficiency, Open economy, Labor reallocation, CES production function, Labor income share
    JEL: E25 E62 F11 F41 O33
    Date: 2023
  7. By: Han, Yuancheng; Miranda-Pinto, Jorge; Tanaka, Satoshi
    Abstract: How much does trade in services affect regional production specialization and welfare? Using unique Canadian trade data, we document that the size of inter-provincial service trade is comparable to that of good trade, and that net exports of services are highly correlated with the value-added share of tradable services across provinces. With a spatial model featuring domestic and international trade, we quantify the effects of service trade. Our results highlight that domestic service trade significantly promotes regional specialization, with heterogeneous welfare gains that reduce regional disparities. Conversely, international service trade generates more uniform welfare gains across provinces.
    Date: 2023–08–13

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