Real exchange rates,asset prices and terms of trade: A theoretical analysis

This paper develops a continuous-time two-country dynamic equilibrium model, in which the real exchange rates, asset prices, and terms of trade are jointly determined in the presence of nontradable goods. The model determines the relation between the financial markets and real goods markets in the world economy and their responses to various shocks under the home bias assumption. A positive domestic supply shock induces a positive return on the domestic asset markets and a deterioration of terms of trade that improves the foreign output and boosts the foreign asset markets. Demand shocks act in the opposite way. This model also analyses the impact of change in the relative price of nontradable to tradable goods on the terms of trade and asset markets. A higher productivity growth in tradable goods than in nontradable goods leads to a higher relative price of nontradable to tradable goods, which appreciates the real exchange rate, deteriorates the terms of trade, and depresses the domestic and foreign asset markets. A lower relative price of nontradable goods depreciates the real exchange rate, improves the terms of trade, and lifts both the domestic and foreign asset markets.     

Aggregate investment expenditures on tradable and nontradable goods

This paper shows that aggregate investment expenditure shares on tradable and nontradable goods are very similar in rich and poor countries, as well as in different regions of the world. Furthermore, the two expenditure shares have remained close to constant over time, with the average expenditure share on nontradables varying between 0.54–0.62 over the 1960–2004 period. The results of this paper offer a new restriction for two-sector models of the aggregate economy. Combined with the fact that the relative price of nontradables correlates positively with income and exhibits large differences across space and time, our findings suggest that tradable and nontradable goods in investment can be modeled using the Cobb–Douglas aggregator.     

Tradable and nontradable directed technical change

ABSTRACT

We wish to reconcile the major trends in wages and the terms of trade using a directed technical change approach in which: (i) tradable and nontradable goods can be substitutes or complements; and (ii) scale effects can be present or can be partially or totally removed. With a lower skilled labour ratio and a higher relative wage in the tradable sector, the price (real exchange rate or terms of trade) mechanism is crucial in determining sectoral productivity differences and thus wage inequality. Along the balanced growth path, the real exchange rate can be negatively related with the relative productivities in horizontal innovation (the Balassa-Samuelson effect) and with the relative labour level, depending on scale effects. The wage premium increases due to an increase in the relative labour level in the nontradable sector under substitutability with scale effects or under complementarity without scale effects. A calibrated version of the model indicates that the model closely replicates the data for Germany. Moreover, while the Balassa-Samuelson effect is quantified, an increase in the relative supply of labour in the tradable sector decreases both terms of trade and inequality.     

NEW MEASURES OF PRICES AND PRODUCTIVITY FOR TRADABLE AND NONTRADABLE GOODS*

Empirical work on the division of real output and prices into tradable and nontradable components has not kept pace with theoretical developments. The conventional proxies of prices and productivity by tradable and nontradable sector are examined and found deficient in several important respects. It is demonstrated that an approach that relies on the long–standing data on gross domestic product by industry of origin can overcome some of these deficiencies. These data are used to construct new annual measures of prices and productivity for tradable and nontradable output for 12 industrial countries over the period 1950–73. While far from precise, the new measures are consistent with the following criteria for distinguishing between tradables and nontradables: the degree of foreign trade participation should be higher for tradables than for nontradables; the degree of international commodity arbitrage, as measured by cross-country correlations of price changes, should be higher for tradables than nontradables; and tradables should be closer substitutes than nontradables for traded goods from other countries (imports). Despite the considerable conceptual advantages of the new measures of prices and productivity over the conventional proxies, correlation analysis indicates that the new and old measures usually move together rather closely in our 12 subject countries. The correlations are higher across the alternative relative productivity measures than for the alternative relative price measures.     

Monetary Shocks and Real Exchange Rate Dynamics: a Reappraisal

This paper proposes a two‐country general‐equilibrium model incorporating a tradable sector with pricing‐to‐market as well as a nontradable sector. In that case, real exchange rate fluctuations arise from two sources: changes in the relative price of traded goods, that exemplify deviations from the law of one price, and movements in the relative price of traded to nontraded goods across countries. Our framework sheds light on the propagation mechanisms through which monetary shocks affect the real exchange rate. More specifically, the two components respond in opposite directions to monetary disturbances, which is consistent with data. Besides, the introduction of nontraded goods does not alter the predictive power of monetary shocks because the presence of nontraded goods magnifies the response of the deviation from the law of one price.     

Overborrowing and Balance of Payments Imbalances in a Monetary Union

The sources of the balance of payments imbalances in the Euro area can be characterized by a combination of four phenomena: (i) the credit imbalances between the core and the periphery of the Economic and Monetary Union (EMU) (ii) the credit misallocation between the tradable and the nontradable sectors in the periphery (iii) the rapid increase in the output and the price of nontradable goods in the periphery since the beginning of the EMU and (iv) the current account imbalances within the EMU. This paper explains all four of these stylized facts within a single model as a result of the interaction between the common monetary policy, inflation heterogeneity and a relaxation of the credit constraint in the nontradable sector of the periphery. When nontradable goods are used as collateral, an increase in their prices can initiate an overborrowing spiral and lead to a balance of payment imbalances. Furthermore, the model endogenizes differences in unit labor costs between the core and the periphery of the Euro area.     

The Differential-Productivity Hypothesis and Purchasing-Power Parties: Some New Evidence*

The structure of prices of goods entering into international trade relative to those that do not plays a key role in the Balassa-Samuelson explanation of why countries ‘exchange rates differ systematically from their currencies’ purchasing power. the B-S analysis leads to the proposition that the tradable-nontradable price difference is lower for rich countries than for poor. This paper examines the gap, using prices collected by the International Comparison Programme. A variety of regressions were run to see if indeed the difference between tradable and nontradable price parities moved with income in the way B-S expected. They did.     

Productivity Growth of the Nontradable Sectors in China

Little is known about the total factor productivity of the nontradable sectors in China. In this paper we estimate productivity growth of the nontradable sectors by studying the relative price movements of the nontradable sectors vis‐à‐vis the tradable sectors, i.e. changes in the internal real exchange rate. We find that prices of the nontradable sectors have risen significantly faster than those of the tradable sectors since China's accession to the WTO, and as a result China's internal real exchange rate has appreciated faster than the renminbi real effective exchange rate. We also find that the nontradable sectors have seen much lower productivity growth than the tradable sectors. We argue that it is important to raise China's productivity growth in the nontradable sectors through policy actions to achieve growth rebalancing and containing inflationary pressures in the medium run.     

Structural transformation and its implications for the Chinese economy

This study examines China's structural transformation under the assumption that its employment structure converges to that in major developed economies in one and a half decades. The required annual output differentials between tradable and nontradable sectors, productivity increment in the nontradable sector, and government expenditure increment are estimated with the goal of employment stability conditional on population ageing. It appears that labour transfer from the tradable sector to the nontradable sector would be accompanied by relatively large aggregate output changes due to population ageing and efficiency changes in the tradable sector. Consumer price and real exchange rates are less affected during structural transformation. Although fiscal deficit would increase, government expenditure as a tool to stabilize employment is welfare improving as long as job switching is not cost prohibitive.     

货币升值的后果——基于中国经济特征事实的理论框架

本文在一个贸易品/非贸易品两部门模型中,讨论了真实汇率外生条件下部门之间全要素生产率变化对产业结构与贸易余额的影响。我们发现,在保持名义有效汇率固定与国内物价水平稳定的货币政策组合下,市场经济体制改革所带来的贸易品部门相对非贸易品部门更快的全要素生产率进步所带来的不仅是经济增长,还会造成(1)工业/服务业产业结构扭曲;(2)贸易顺差扩大;(3)工资水平下降,并阻碍了农村劳动力向城市转移;(4)工资下降与利润率上升,收入分配恶化。解决上述问题的关键在于人民币汇率水平调整与非贸易品部门市场化改革和全要素生产率提高。     

Nontradable sector reform and external rebalancing in monetary union: A model-based analysis

The paper uses the QUEST III model to analyse the question of whether nontradable (service) sector reform would reduce external imbalances in monetary union, notably from the side of surplus countries. It considers an open economy with a positive net foreign asset (net creditor) position and shows that tradable and nontradable sector reforms, understood as reforms that shift the supply curve in the respective sector outward, tend to have similar external balance effects. Namely, supply-side reforms improve the price competitiveness of domestic output and tend to increase the trade and current account balance on impact. In the longer term, competitiveness gains are compensated by additional imports associated with domestic income growth. Starting from a non-zero NFA position, the denominator effect does also contribute significantly to changes in external accounts relative to GDP. The results are robust across modifications of the model.     

Price convergence in the European Union – What has changed?

This paper investigates price convergence in European Union countries using disaggregated price level indices in the period 1999–2016. Our results show that prices of both tradable and nontradable goods had a significantly lower dispersion in 2016 than in 1999. The convergence was faster in the case of countries with price level below the average, which can be interpreted as catching-up. However, further analysis shows that most prices converged only up to 2008. While prices of transport equipment continue to converge across the European Union, several durable consumption categories show price divergence after 2008. We attribute this to the drop in international trade of durable products due to increasing inflation and exchange rates volatility following the global financial crisis. From the monetary policy perspective, the existing price-level gaps, shown in our study, may pose a risk of higher inflation, especially in catching-up economies.     

Output and price effects of enhancing services sector competition in a large open economy

This paper studies the output and price effects of exogenous changes in the degree of competition. It is motivated by initiatives to enhance competition in services in the European Union. The paper shows that a higher degree of competition in the nontradable goods sector may have adverse implications for international price competitiveness. It highlights four channels through which enhanced competition in the non-tradable goods sector affects output and the general price level in a large, open economy (lower monopoly rents, higher wages, lower import prices, international wealth transfer) and assesses their relative importance. The conclusions suggest that the Single Market enhances output and reduces the general price level.     

The Dependent-Economy Model With Both Traded and Nontraded Capital Goods*

Dynamic versions of the dependent-economy model have been criticized for arbitrarily assuming that capital is either tradable or nontradable, and for choosing either the traded or nontraded sector to be capital intensive. Our model incorporates both types of capital and shows that the relative sectoral intensity of nontraded capital determines the dynamic adjustment of the relative price of nontradables. When the traded sector is intensive in nontraded capital, the saddlepath is flat. When the nontraded sector is intensive in nontraded capital, the saddlepath is negatively sloped. the relative sectoral intensity of traded capital primarily affects current-account dynamics.     

Remittances,Exchange Rate Regimes and the Dutch Disease: A Panel Data Analysis

Using disaggregated sectorial data for developing and transition countries, this study shows that rising levels of remittances have spending effects that may lead to real exchange rate appreciation, and resource movement effects that favor the nontradable sector at the expense of tradable goods production. These are two characteristics of the phenomenon known as “Dutch disease”. The results further suggest that resource movement effects that favor the nontradable sector should operate stronger under fixed nominal exchange rate regimes.     

我国地区间相对价格水平收敛性再检验——基于面板门限套利模型的经验研究

本文通过建立面板门限套利模型为地区间相对价格水平收敛的假说提供了理论支持,并为采用面板单位根检验进行收敛性检验提供了理论依据。在此基础上,本文通过测算国内地区间相对价格水平,放松了此前文献通常做出的基准年份各地价格水平相等的前提假设,并综合利用第一、二代面板单位根检验方法考察了1995—2010年我国地区间相对价格水平的收敛性。实证研究找到了较多收敛证据但也发现收敛半衰期较长,驳斥了国内市场分割愈演愈烈的判断,也承认了国内商品市场一体化进程尚未达理想程度的现实。此外,本文发现部分商品分类收敛性与其可贸易性有背离,并推测贸易性瑕疵与政策因素起了关键作用。     

FDI,SECTORAL OUTPUT AND REAL EXCHANGE RATE DYNAMICS UNDER FINANCIAL OPENNESS

This paper adopts an alternative approach to the study of the impact of capital inflow on the real exchange rate by foremost, analysing the effect of FDI inflow on the ratio of tradables to nontradables, and then estimating the relationship between the tradable‐nontradable ratio and the real exchange rate, while accounting for the role of financial openness. Based on data for a group of developing countries, the findings show that an increase in FDI inflow is associated with a decrease in the tradable‐nontradable ratio, and that an increase in the tradable‐nontradable ratio leads to a depreciation of the real exchange rate; this effect being greater with an increase in financial openness. This suggests that an increase in FDI inflow could result in an expansion of the nontradable sector, which would be associated with a greater appreciation of the real exchange rate under a higher level of financial openness.     

The Behaviour of the Real Exchange Rate: Evidence from an Alternative Price Index

Although the long–run purchasing power parity (PPP) hypothesis is expected to hold across tradable goods, all price indices available to researchers for testing the validity of PPP contain some proportion of non–tradable goods prices, which may generate substantial persistence in the real exchange rate. We construct time series for quarterly price indices that minimize the presence of non–tradable goods for six major economies. Applying recently developed nonlinear econometric techniques to the resulting five US dollar real exchange rate series for the recent floating exchange rate regime, we provide evidence that the nonlinear mean reverting properties of these real exchange rate series are stronger than the mean reverting properties of real exchange rate time series constructed using the consumer price index (CPI). In turn, these results have a natural economic interpretation.
(J.E.L.: F31).     

Domestic market integration and the law of one price in Brazil

This article presents the first assessment of domestic market integration in Brazil using the law of one price. The law of one price is tested using two panel unit root methodologies and a unique data set comprising price indices for 51 products across 11 metro-areas. We find that the law holds for most tradable products and, not surprisingly, nontradable products are found to be less likely to satisfy the law of one price. While these findings are consistent with evidence found for other countries, price convergence occurs very slowly in Brazil, suggesting relatively limited domestic market integration.     

Protection and Exchange Rates in a Small Open Economy

In a small‐open‐economy model with two tradables and one nontradable, if a price index of these three goods is stabilized and the exchange rate is flexible, conditions are obtained in the cases of two and of three or more factors for an export subsidy or an import tariff to result in currency appreciation. In the case of three or more factors, conditions are obtained under which either an export‐subsidy or an import‐tariff policy (or a combination) can take the place of a flexible exchange rate in accommodating the necessary resource allocation to an exogenous capital outflow, generalizing Keynes’s 1931 proposition.