The potential trade effects of an FTA between the EU and Russia

The Potential Trade Effects of an FTA between the EU and Russia.- This paper analyzes some of the potential economic effects of free trade agreements between the EU and Russia and the other European CIS countries using standard indicators of trade patterns. It confirms that it would not be feasible for the EU to conclude such an agreement with Russia alone. It is also shown that, if the current high tariff levels are maintained in the CIS countries, they may not benefit from an agreement with the EU. More generally, the authors question the economic motivation for countries such as Russia in seeking free trade agreements with industrial countries which already have low levels of external protection.     

The fundamental determinants of financial integration in the European Union

The Fundamental Determinants of Financial Integration in the European Union. — This paper focuses on the fundamental determinants of the degree of financial integration in the European Union over the period 1974–1993. Using closed interest rate differentials to measure the intensity of capital controls and applying a pooled cross-section time-series approach, the authors find realized inflation, government instability and gross fixed capital formation to have a strong and significantly positive effect on the intensity of capital export controls. In addition, they expect the influence of economic and financial market structure on closed interest rate differentials to increase in the future.     

Regional specialization and shocks in Europe: Some evidence from regional data

Regional Specialization and Shocks in Europe: Some Evidence from Regional Data. —The authors address the issue of the European Monetary Union (EMU), focusing on a comparison between EC countries and EC regions. They identify a number of homogeneous economic regions and show that in the period 1978–1989 asymmetric shocks in Europe have been regional rather than national. This derives from the fact that regional specialization in Europe is strongly diversified. They argue that cross-border regional diversification can cushion the net effects of differentiated sectoral shocks, reducing national instability. In addition, the costs of EMU associated with the loss of the exchange rate are likely to be smaller than usually thought.     

Real interest rate parity in East Asian countries based on China with flexible Fourier stationary test

This study applies stationary test with a flexible Fourier function proposed by Enders and Lee (2012) to test the validity of long-run real interest rate parity (RIRP) to assess the non-stationary properties of the real interest rate convergence relative to China for ten East Asian countries. We find that our approximation has higher power to detect U-shaped breaks and smooth breaks than linear method if the true data generating process of interest rate convergence is in fact a stationary non-liner process. We examine the validity of RIRP from the non-linear point of view and provide robust evidence clearly indicate that RIRP holds true for ten East Asian countries. It implies that the choices and effectiveness of the monetary and fiscal policies in the East Asian economies will be highly influenced external factors originating from China. Also, our findings point out their real interest rate convergence relative to China is mean reversion towards RIRP equilibrium values in a non-linear way.     

Assessing convergence to purchasing power parity: A panel study for ten OECD countries

Assessing Convergence to Purchasing Power Parity: A Panel Study for 10 OECD Countries. — The paper analyzes whether post-Bretton Woods real exchange rates of ten OECD countries are nonstationary so that long-run purchasing power parity (PPP) can be considered to hold. A test procedure is proposed which treats the various real exchange rates as a panel but still allows to assess the rate of convergence to PPP for each pair of currencies separately. It is shown that long-run (tradables-) PPP holds between all countries analyzed. Rates of convergence to PPP, however, are found to be quite different across countries. For most of the OECD countries convergence takes place faster than previously indicated.     

SHORT‐RUN AND LONG‐RUN DETERMINANTS OF THE REAL EXCHANGE RATE IN MEXICO

This paper explores the real exchange rate behavior in Mexico from 1960 until 2005. Since the empirical analysis reveals that the real exchange rate is not mean reverting, we propose that economic fundamental variables affect its evolution in the long run. Therefore, based on equilibrium exchange rate paradigms, we propose a simple model of real exchange rate determination, which includes the relative GDP per capita, the real interest rates, and the net foreign assets over a long period of time. Our analysis also considers the dynamic adjustment in response to shocks through impulse response functions derived from the multivariate vector autoregressive (VAR) model.     

Inequality and Unemployment Patterns in Europe: Does Integration Lead to (Real) Convergence?

The economic convergence criteria adopted in the Maastricht Treaty and the fiscal discipline of the Stability and Growth Pact enforced nominal convergence, leaving aside real convergence indicators. In this paper, we use cluster analysis to examine the convergence patterns of income inequality, absolute redistribution (a measure of governments’ effectiveness in correcting for inequality) and unemployment. The expected outcome after years of economic integration was, ex-ante, convergence to a single cluster. Our results, however, uncover a variety of groups, implying that economic integration has not led to real economic convergence. Moreover, the existence of different patterns suggests: (i) that traditional classifications (Anglo-Saxon, Continental European, European Periphery, and Nordic models) remain broadly valid; (ii) that there is no unemployment-inequality trade-off to be exploited in terms of economic policy; and (iii) that the redistributive capacity of governments plays a pivotal role in coping with inequality without negative effects in terms of unemployment.     

Misalignments of real exchange rates and the credibility of nominal currency bands

Misalignments of Real Exchange Rates and the Credibility of Nominal Currency Bands. — This paper analyzes a sticky-price target zone model in which realignment risk is modeled endogenously as a function of the degree of real exchange rate misalignments. The implications of the model are used to investigate the credibility of selected nominal ERM exchange rate bands. We find that a lack of credibility of the ERM currency bands occurs mostly in countries with substantial swings and persistent misalignments of real exchange rates. These findings suggest that the major real appreciations in some European bilateral real exchange rates between 1987 and 1992 have been pivotal in triggering the ERM currency crises of 1992 and 1993.     

Real exchange rate misalignment and business cycle fluctuations in the Asia-Pacific

Real exchange rate (RER) misalignment, which is the deviation between the actual real exchange rate from its equilibrium, occurs frequently among developing countries. Studies have shown that RER misalignment may have negative economic implications, such as a decline in economic growth, exports, and export diversification and an increased risk of currency crises and political instability. Using quarterly data for 22 sample countries from 1990 to 2018, this paper investigates the impact of RER misalignment on business cycles in the Asia-Pacific by employing a panel vector autoregression involving consumer price index (CPI) inflation, output gap, short-term interest rates, and RER misalignment. We find that RER overvaluation may reduce CPI inflation and short-term interest rates. We also find that the Asia-Pacific region is highly heterogeneous in that the output gaps of some countries, particularly from the Southeast Asian region, are more susceptible to RER misalignment shocks.     

Volatility transmission along the money market yield curve

Volatility Transmission along the Money Market Yield Curve. - The authors model the volatility of money market interest rates — and the transmission of volatility - along the money market yield curve in the UK, Germany, France and Spain. They find a significant volatility transmission from overnight to longer-term money market rates in France, Spain and the U.K. They also find that the countries with lower (higher) reserve requirements tend to have higher (lower) interbank interest rate volatility. However, reserve requirements generate a perverse seasonal effect at the end of the maintenance period.     

ON THE RAND: DETERMINANTS OF THE SOUTH AFRICAN EXCHANGE RATE

This paper is an econometric investigation of the determinants of the real value of the South African rand over the period 1984‐2007. The results show a relatively good fit. As always with exchange rate equations, there is substantial weight on the lagged exchange rate, which can be attributed to a momentum component. Nevertheless, economic fundamentals are significant and important. This is especially true of an index of the real prices of South African mineral commodities, which even drives out real income as a significant determinant. An implication is that the 2003‐2006 real appreciation of the rand can be attributed to the Dutch Disease. In other respects, the rand behaves like currencies of industrialised countries with well‐developed financial markets. In particular, high South African interest rates raise international demand for the rand and lead to real appreciation, controlling also for a forward‐looking measure of expected inflation and a measure of default risk or country risk.     

International trade and economic growth: evidence from a panel ARDL-PMG approach

The purpose of this work is to study the impact of trade openness on the economic growth of the countries bordering the Mediterranean using a panel of eight countries from 1975 to 2016. We apply ARDL panel which is a technique recently developed. We study the effects of openness to international trade on economic growth while incorporating economic policy variables. The results show that the variables of commercial and financial openness favor economic growth. The free trade agreements that the European Union has signed with certain countries in the Mediterranean basin are designed above all to encourage greater regional economic integration and an increase in their potential growth. Therefore, our findings show that the financial sector is slow to affect economic growth in these countries. This study reveals that human capital and the investment rate support the economic growth of our sample. In addition, we conclude that a process of economic convergence has begun in these countries. A causal analysis was carried out we found an unidirectional causality ranging from economic growth to trade openness.

     

IMPLICATIONS OF REAL EXCHANGE RATE MISALIGNMENT IN DEVELOPING COUNTRIES: THEORY,EMPIRICAL EVIDENCE AND APPLICATION TO GROWTH PERFORMANCE IN ZIMBABWE

The influence of exchange rate signals in an economy is very powerful and often pervasive. Moreover, sustained real exchange rate overvaluation will, by distorting resource allocation away from productive activities, eventually lead to drastic adjustments of relative prices and reduction of aggregate economic growth. However, the direct theoretical and empirical link between exchange rate misalignment and macroeconomic indicators still remains to be fully understood. Nonetheless, empirical studies continue to make attempts to understand this relationship by exploring relationships that incorporate different measures of exchange rate misalignment in traditional growth regression models. Based on a behavioural equilibrium exchange rate derived measure exchange rate misalignment, this paper presents an empirical analysis of the relationship between real gross domestic product growth and real exchange rate misalignment for Zimbabwe. After controlling for other structural and policy variables, the main findings demonstrate that exchange rate misalignment exerts a negative and highly statistically significant impact on growth. Overall, the results lend support to the hypothesis that chronic real exchange rate overvaluation was a key fundamental behind the post‐2000 economic growth contraction in Zimbabwe.     

New evidence on sources of macroeconomic fluctuations in sub-Saharan African countries

Following a global vector autoregressive (GVAR) approach, this paper presents new evidence on the validity of international transmission of economic shocks from key trading partners as sources of macroeconomic fluctuations in sub-Saharan African (SSA) countries. The GVAR model was estimated for 21 SSA countries grouped into three country classes—oil-rich, other-resources-rich and non-resource-based economies, to account for output shocks from crucial trading partner countries—United States, United Kingdom, China and Europe. Furthermore, the generalized forecast error variance decompositions results reveal that output shocks from key trading partners constitute significant contributors to changes in key macroeconomic indicators—real gross domestic product, inflation, exchange rate and short-term interest rate, in the SSA region. The generalized impulse response functions indicate that these economic shocks have more significant impacts on oil-rich countries than on other country groups. A key recommendation from this study is that SSA countries, especially the resource-rich economies, need to strengthen and diversify their economic structure, including the trade basket.     

The economics of convergence: Towards monetary union in Europe

The Economics of Convergence: Towards Monetary Union in Europe. —In this paper, the literature on monetary integration has been surveyed in order to discover the economic rationale of the Maastricht convergence requirements. The traditional theory of optimum currency areas is silent on the need for Maastricht-type convergence requirements. Similarly, the “new” view of monetary integration using credibility concepts cannot easily be used to justify these convergence requirements. It is also argued that the dynamics of the convergence requirements will almost certainly lead to a “Great Divide” of the European Union. The paper concludes that less emphasis should be put on prior convergence conditions and more on strengthening the functioning of the future monetary institutions in the Union.     

A Note on Deficit,Implicit Debt,and Interest Rates

This short note revisits the long-standing issue of the relationship between government borrowings and interest rates using vector autoregression (VAR) models. In particular, we consider the dynamic impacts of both official deficit and implicit debt on the interest rates. Two measures of unfunded Social Security obligations (implicit debt) are examined. The recently developed generalized forecast error variance decompositions, which are invariant to the ordering of variables in VARs, are adopted. We find that temporary shocks to the official deficit do not cause real interest rate changes in the short term but do cause moderate changes in the long term. They have significant impact on nominal interest rates in both short and long horizons. The implicit debt also appears to have some moderate influence on real interest rates at long horizons.     

Voting Behaviour in the European Parliament and Economic Governance Reform: Does Nationality Matter?

This paper analyses MEPs’ voting behaviour on all regulations and directives forming the Six-Pack and the Two-Pack together with the key vote required to establish the European Stability Mechanism (ESM). Whereas scholarly work has traditionally showed MEPs voting behaviour to be primarily driven by ideology (more specifically, by the MEP’s party group affiliation), we expect to find MEPs’ national origins to play a counterbalancing role and – at least partially – weaken intra-party position on key economic governance matters, where a conflict of interest might exist between creditor and debtor member countries. Findings confirm that national interests and country-level economic variables can predict MEPs’ votes in a considerable number of cases, opening new avenues for future research on territorial cleavages in the European Parliament.     

Testing the Marshall–Lerner Condition in Kenya

In this paper we examine the Marshall–Lerner (ML) condition for the Kenyan economy. In particular, we use quarterly data on the log of real exchange rates, export/import ratio and relative (US) income for the time period 1996q1‐2011q4, and employ techniques based on the concept of long memory or long‐range dependence. Specifically, we use fractional integration and cointegration methods, which are more general than standard approaches based exclusively on integer degrees of differentiation. The results indicate that there exists a well‐defined, cointegrating relationship linking the balance of payments to the real exchange rate and relative income, and that the ML condition is satisfied in the long run, although the convergence process is relatively slow. They also imply that a moderate depreciation of the Kenyan shilling may have a stabilising influence on the balance of trade through the current account without the need for high interest rates.     

Cointegration and the PPP and the UIP hypotheses: An application to the Spanish integration in the EC

The aim of this paper is to find some empirical evidence on Purchasing Power Parity (PPP) and Uncovered Interest Parity (UIP) in the Spanish case vis à vis the European Community for the period 1980–89. The main contribution of the paper is the aggregation of the variables corresponding to the countries that participate in the exchange rate mechanism of the European Monetary System. The results support the importance of the interest differential as an explanatory variable for the short-term adjustment to the PPP. The results follow from powerful estimation techniques, applied in the framework of a multivariate error-correction model using the maximum-likelihood procedure as developed by Johansen and Juselius (1992).     

ESTIMATING EXCHANGE RATE AND BILATERAL TRADE BALANCE RELATIONSHIPS: THE EXPERIENCE OF SUB-SAHARAN AFRICAN COUNTRIES

This paper examines the effects of exchange rate changes on the bilateral trade balance of ten African countries vis‐à‐vis the US using annual data over period 1977‐2002. Both the Johansen and panel cointegration tests find cointegration among the series. The country FMOLS results show that real exchange rate depreciation improves the trade balance in six of ten countries in contrast to Tanzania in which it worsens the trade balance, with no effect found in Ghana, Morocco and Senegal. Foreign real income improves the trade balance in two countries but worsens it in another three. Finally, domestic real income negatively affects the trade balance in four countries but improves it in another three. The three‐panel coefficients are correctly signed and significant at the 1% level.