HOW IMPORTANT ARE TERMS‐OF‐TRADE SHOCKS?

According to conventional wisdom, terms‐of‐trade shocks represent a major source of business cycles in emerging and poor countries. This view is largely based on the analysis of calibrated business‐cycle models. We argue that the view that emerges from empirical structural vector autoregression (SVAR) models is strikingly different. We estimate country‐specific SVARs using data from 38 countries and find that terms‐of‐trade shocks explain less than 10% of movements in aggregate activity. We then estimate key structural parameters of a three‐sector business‐cycle model country by country and find a disconnect between the importance assigned to terms‐of‐trade shocks by theoretical and SVAR models.     

The effects of foreign shocks when interest rates are at zero

In a two‐country DSGE model, the effects of foreign demand shocks on the home country are greatly amplified if the home economy is constrained by the zero lower bound on policy interest rates. This result applies even to countries that are relatively closed to trade such as the United States. Departing from many of the existing closed‐economy models, the duration of the liquidity trap is determined endogenously. Adverse foreign shocks can extend the duration of the trap, implying more contractionary effects for the home country. The home economy is more vulnerable to adverse foreign shocks if the neutral rate is low—consistent with “secular stagnation”—and trade openness is high.     

Trade integration and synchronization of shocks*

According to the European Commission (1990 ), closer integration leads to less frequent asymmetric shocks and to more synchronized business cycles between countries. However, for Krugman (1993 ) closer integration implies higher specialization and, thus, higher risks of idiosyncratic shocks. Drawing on the evidence from a group of transition countries, this paper tries to determine whose argument is supported by the data. This is done by confronting estimated time‐varying coefficients of supply and demand shock asymmetry with indicators of trade intensity and exchange rates. We find that (i) an increase in trade intensity leads to higher symmetry of demand shocks: the effect of integration on supply shock asymmetry varies from country to country; and (ii) a decrease in exchange rate volatility has a positive effect on demand shock convergence. The results confirm ‘The European Commission view’ and also the argument by Kenen (2001 ) according to which the impact of trade integration on shock asymmetry depends on the type of shock.     

Aggregate Fluctuations with National and International Returns to Scale*

Cyclical movements in aggregate output, factor inputs, and productivity are all positively correlated across countries. This article proposes a model in which positive cross‐country correlations of these variables result from increasing returns to the world‐wide variety of intermediate goods even if technology shocks are purely country‐specific. The model also accounts for the observed positive relationship between bilateral trade volume and international comovements. Positive comovements can also arise with constant returns to variety, but only if technology shocks are themselves strongly correlated. The combination of constant returns and common shocks, however, tends to generate procyclical fluctuations of the trade balance.     

Output volatility,composition of trade,and transmission of economic shocks across countries

In this paper we investigate how supply and demand shocks in one country affect output volatility in other countries. While the evidence for cross‐country transmission of demand shocks is mixed, we find that volatile supply in one country leads to larger imports and output volatility in other countries. As a result, the effect of trade openness on output volatility is highly heterogeneous across countries and depends on the composition of their trade. Those countries whose imports originate in economies with volatile supply experience a greater impact of trade on output volatility.     

Financial frictions,interest rate dynamics,and international business cycle synchronization

A two‐country real business cycle model with national endogenous borrowing constraints and working capital requirements can account for the high level of international co‐movements. The effects of technology shocks are transmitted internationally through the dynamics of the interest rate. Specifically, the borrowing mechanism brings about a wedge between the real interest rate and the expected marginal product of capital, such that interest rates fall following positive technology shocks. A lower interest rate induces more investment by Foreign firms, which in turn contribute to greater synchronization of economic activities across countries. Moreover, terms of trade amplify the effects of technology shocks.     

The international wealth channel: a global error-correcting analysis

This article investigates empirically whether shocks to asset prices transmit into the trade balance through consumption and investment for a group of five of the world??s most industrialized countries. We refer to this transmission channel as the international wealth channel and estimate a GVAR model including 29 countries with quarterly data over the period 1981Q1?C2006Q4. Generalized impulse response functions show that after a negative stock price shock US and UK consumption decreases, followed by an improving trade balance. This pattern is also visible for France, but not for Germany and Japan. Stock price decreases are only associated with decreasing investment and an improving trade balance in the UK. For housing, we do find that a negative shock to UK housing prices decreases domestic investment and improves the trade balance. However, this pattern is not visible in the other countries. Finally, a domestic negative real exchange rate shock only has a significantly positive impact on the US trade balance.     

MACROECONOMIC VOLATILITY AND INTERNATIONAL INTEGRATION

This paper explores the effects that varying degrees of international openness have on macroeconomic volatility. The analysis is conducted for a two‐symmetric‐country world under three levels of international integration: that of a closed economy, a financial autarky, and full financial integration. Different degrees of trade openness are considered in the form of home biases, while the economy is left vulnerable to total factor productivity and innovation shocks. Full financial integration is found to reduce firm‐size volatility and volatility in the mass of operative firms following a productivity shock and to increase them after an innovation shock. Moreover, the interaction between international sharing of profits and terms of trade transmissions determines the non‐linear behaviour of consumption‐to‐output ratio volatility found in empirical studies.     

International risk sharing and commodity prices

Abstract Cole and Obstfeld (1991) exposited a classic result where equilibrium movements in the terms of trade could make ex ante risk‐sharing arrangements unnecessary: a unity elasticity of substitution across goods and production specialization. This paper extends their model to N countries and M commodities (N > M). Here the terms of trade provides insurance against commodity‐specific shocks, not country‐specific shocks. Using commodity‐level production data at the national level and world commodity prices, we document significant terms of trade variability and positive responses of nation‐specific production to terms of trade improvements. The endogenous terms of trade insurance mechanism highlighted in CO is virtually non‐existent.     

Labor immobility and the transmission mechanism of monetary policy in a monetary union

It is believed that a common monetary policy in a monetary union will have identical effects on different countries as long as these countries have identical fundamentals. We show that, when there is specialization in production, the terms of trade react to the shock. The transmission mechanism of a monetary shock has in this case an additional channel, the terms of trade. This is the case even if state contingent assets can be traded across countries. For a reasonable parametrization, the differential on the transmission across countries is quantitatively significant when compared with the effect on the union's aggregates. Monetary shocks create cycles with higher volatility in “poor” countries than in “richer” ones.     

Should Smaller Countries Be More Protectionist? The Diversification Motive for Tariffs

This paper examines the diversification motive for tariffs under trade‐related uncertainty when there is incomplete international and domestic risk sharing. In the context of a two‐country Ricardian continuum‐of‐sectors model with shocks to foreign technologies or preferences, tariffs allow a country to mitigate external risk by diversifying across sectors. Given sufficiently high risk and risk aversion, the optimality of tariffs depends primarily on a country's ability to diversify, rather than its market power, such that small countries gain most.     

Inflation in Open Economies with Complete Markets

This paper uses an overlapping generations model to analyze monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country’s terms of trade of securities, central banks choose to commit to costly inflation in favorable states of nature. In equilibrium the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation.     

The Cyclical Behavior of Net Exports: Temporary and Persistent Movements

This paper explores the empirical relationship of net exports, domestic output, and foreign output. It presents evidence supporting a consumption-smoothing motive for trade in goods. Classical models of the international macroeconomy typically allow for trade in claims on both home and foreign output. This paper lends empirical support to this setup by showing that highly transitory shocks to output cause net exports from the country experiencing the shock to rise. Persistent shocks have opposite effects—a result consistent with the role persistent shocks play in signaling future investment opportunities.     

Asymmetric Monotone Comparative Statics for the Industry Compositions

Within a standard model of international trade with heterogenous firms and two asymmetric countries, we derive sufficient conditions for monotone comparative statics (MCS) for the industry composition. This model outcome is defined as first‐order stochastic dominance shifts in the equilibrium distributions of all activities across active firms. MCS for the industry composition occurs in a country that experiences a decline in its costs of serving the foreign market and meanwhile experiences an increase in its level of competition. In the other country, the industry‐level implications are exactly opposite. These clear industry‐level results hold while firms respond asymmetrically to the trade shock.     

资本账户开放与国际金融冲击的传导——基于DSGE模型的分析

本文在动态随机一般均衡的框架下,建立了一个包括贸易部门和非贸易部门的小型开放经济模型,系统研究和比较资本管制与资本账户开放两种情况下,国外金融冲击、出口需求冲击对中国经济的不同影响和传导机制,并检验资本账户开放情形下应对国际冲击时不同货币政策规则的有效性。结果发现：当资本账户开放时,一国受到国外冲击的波动幅度远大于资本管制的情况;资本管制和资本账户开放对国际金融冲击传导机制的关键差异在于贸易部门与非贸易部门的互动关系,具体表现为劳动力转移的差异;在资本账户开放后,面对不同形式的国际冲击,货币数量型规则和混合型规则均能有效熨平经济波动。     

Spillover effects of fiscal policy in a monetary union: Why do fiscal instruments matter?

Using a two‐country DSGE model, we analyse the spillover effects of fiscal policy in a monetary union. Based on a non‐Walrasian labour market with a labour force participation decision and involuntary unemployment and a detailed fiscal sector, we focus on the relative cross‐border effects of different kinds of fiscal shocks (government expenditure and tax shocks). Among the major lessons from this analysis, five general and striking results are worth highlighting : (1) spillover effects differ widely according to the fiscal instrument, (2) all fiscal instruments produce positive spillover effects on foreign GDP except a rise in government consumption, (3) the response of unemployment is not always negatively correlated with the response of output (4) the different fiscal shocks trigger different effects on foreign inflation and the term of trade, which implies heterogeneous interest‐rate and trade channels, and (5) a more accommodative monetary policy and a scenario of ‘fiscal dominance’ alter greatly the effects of fiscal policy shocks.     

Is the European integration speeding up the economic convergence process of the Central and South-Eastern European countries? A shock perspective

In the current context of continuous reassessment of the sustainability of the single currency and gradual enlargement of the euro area during the last decade, the objective of this research is to obtain new insights into the factors that determine the synchronisation of shocks in the Central and South-Eastern European countries vis-à-vis the euro area. The research contributes to the previous work by making a novel use of error correction model in a dynamic panel context which is extended by adding several important omitted variables related to the trade structure and policy coordination. We find that an increase in trade intensity, intra-industry trade and financial integration leads to less frequent asymmetric shocks. On the other hand, divergent fiscal policies are estimated in some model specifications to increase the shock divergence process, although the estimated impact is rather small to counteract the positive effects associated with trade and financial integration. The identified relationships in this research are affected by the significant trade and growth slowdown in the crisis period; while the global economic turmoil has boosted a demand shock convergence, its impact on the supply shocks is in the opposite (diverging) direction.     

Optimal Monetary Policy with Vertical Production and Trade*

This paper explores the optimal monetary policy response to domestic and foreign technology shocks in an open economy with vertical structure of production and trade. We find that any stage‐specific productivity shock in one country may have a transborder spillover effect on the other country via the vertical trade. So when choosing optimal monetary rules, each monetary authority should respond to both home and foreign productivity shocks. Also, the flexible exchange rate cannot replicate the flexible price equilibrium, even under producer currency pricing, due to price stickiness in multiple stages. We also find that the existence of a transborder spillover effect depends on the currencies of price setting. Finally, vertical trade may affect the value of exchange rate flexibility under PCP and LCP setting.     

An Estimation of the Impact of Oil Shocks on Crude Oil Exporting Economies and Their Trade Partners

This research evaluates the impact of oil price shocks on oil producing and consuming economies; we used a simultaneous equation framework for different countries with business relations. As expected, we found that oil-producers (here, Iran and Russia) benefit from oil price shocks. However contrary to previous findings, they also benefit from the indirect effect through their trade partners. For oil-consuming economies, the effects are more diverse. In some countries, output falls in response to an oil price shock, while some others seem to be relatively immune. Generally, those countries which trade more with oil producers gain indirect benefits via higher demand from oil-producers. For instance, the Netherlands, Germany, France, Italy, the US, the UK, and China get a negative direct effect and positive indirect effect from oil producing countries. This is exactly the result that we anticipated. India has both negative effects directly and indirectly and seems to suffer more in a positive oil price shock. For Japan, Spain, Switzerland and Turkey the results are reversed. They benefit from an oil shock directly and indirectly.     

Productivity Shocks and Monetary Policy in a Two-Country Model

In this paper, we examine the effects of foreign productivity shocks on monetary policy in a symmetric open economy. Our two-country model incorporates the New Keynesian features of price stickiness and monopolistic competition based on the cost channel of Ravenna and Walsh (2006). In particular, in response to asymmetric productivity shocks, firms in one country achieve a more efficient level of production than those in another economy. Because the terms of trade are directly affected by changes in both economies’ output levels, international trade creates a transmission channel for inflation dynamics in which a deflationary spiral in foreign producer prices reduces domestic output. When there is a decline in economic activity, the monetary authority should react to this adverse situation by lowering the key interest rate. The impulse response function from the model shows that a productivity shock can cause a real depreciation of the exchange rate when economies are closely integrated through international trade.