Non-Traded Goods and Real Exchange Rate Fluctuations: A Structural VAR Analysis

Real exchange rate variance decompositions indicate that only a small fraction of real exchange rate movements can be attributed to changes in the relative price between traded and non-traded goods. This paper argues that those exercises, by ignoring the nature of the shocks behind real exchange rate changes, may be inadequate to measure the relative importance of non-traded goods prices. Instead, it proposes using a structural vector autoregression (SVAR) model to study the effects of shocks to the relative supply and relative demand for non-traded goods on the real exchange rate. The SVAR model is identified via long-run restrictions and is estimated for a group of advanced economies. The results indicate that for some countries, relative supply shocks can be a significant source of real exchange rate fluctuations.     

Real exchange rate dynamics in the presence of non-traded goods and transaction costs

This paper studies the role of non-traded goods and transaction costs in accounting for the puzzling behavior of real exchange rates. We show that introducing the transaction costs and non-traded goods in an otherwise standard competitive model dramatically improves its ability to rationalize observed real exchange rate dynamics.     

Effect of World Fertility Scenarios on International Living Standards

This paper applies a two good, multi-region Ramsey-Solow model of the world economy to determine the impact that alternative world fertility rates would have on international capital markets and living standards. Notable features of the model include: relative consumption demands and relative employment efficiencies that vary by age, traded and non-traded goods, vintage technology, outward-looking reference consumption, a proportion of non-optimising rule-of-thumb consumers and imperfect capital mobility due to asymmetric information. The model suggests that projected demographic change will imply a flow of international capital from the ageing regions to the younger regions; and that the world interest rate will fall. The lower world interest rate will cause a loss in living standards for ageing regions, the lenders, and a gain for the younger regions, who are borrowers.     

Stolper-Samuelson-Rybczynski in the Pacific: Real wages and real exchange rates in the Philippines, 1956–1978

The paper attempts to explain movements of real wages in the Philippines in terms of the standard trade-theoretic Stolper-Samuelson-Rybczynski model. In view of the factor intensities in the Philippines, commodities are aggregated into two composite goods — traded and non-traded — whose relative price — the so-called ‘real exchange rate’ — is shown to have been an important determinant, with changes in relative factor supplies of less importance in determining real wages. A conventional two-sector model is set out, which distinguishes between the short and long run effects in terms of the ‘quasi-fixity’ of sector specific capital. A simple regression model is estimated and seems to provide a fairly good explanation of what has hitherto appeared to be a puzzling feature of post-war Philippines economic performance — high growth rates of output and employment, accompanied by declining real wages (in turn being associated with a rising incidence of poverty) in at least two periods.     

Purchasing power parity and uncovered interest parity: The Spanish case

This paper examines whether the purchasing power parity (PPP) hypothesis holds in the long run when traded and non-traded goods are distinguished. Moreover, this hypothesis is analyzed jointly with the uncovered interest parity (UIP). The period from January 1986 to December 1995 was studied using monthly data corresponding to the consumer price index, short- and long-term interest rates, and spot exchange rates for Portugal, France, Italy, Germany, and Great Britain with each relative to Spain. Using Johansen's multi-equational cointegration technique, it was found that PPP does not hold even with the explicit consideration of the distinction between traded and non-traded goods as well as the difference between domestic and foreign interest rates. Furthermore, these two factors generate a systematic deviation between exchange rates and PPP.     

关税、货币政策与中国实际均衡汇率

加入WTO后 ,降低进口品关税等措施将影响人民币均衡汇率水平 ,同时开放经济下国内货币政策、财政政策等宏观经济政策调整也会改变均衡汇率水平。本文运用动态一般均衡的方法 ,探讨中国在加入世界贸易组织之后 ,关税税率调整、货币供应量增长率改变、财政政策调整等措施对实际均衡汇率的长期效应。把货币引入生产函数和消费者的效用函数 ,我们扩展了由Turnovsky提出的两商品资本积累模型 ,利用参数赋值(calibration)的方法进行了均衡状态下的比较静态分析。研究发现降低进口品关税使人民币面临贬值压力 ,而政府增加税收 ,减少对贸易品的消费则有利于人民币的保值和升值。实证研究结果表明 :国外实际利率水平下降 ,实际货币供应量增长率降低都将引起人民币均衡汇率贬值。     

Short-term policy in open semi-industrialized economies: The narrow limits of the possible

This paper develops a model to analyze short-term policy alternatives in semi-industrialized countries. The major points raised are the following: (i) There are two sectors, producing traded and non-traded goods. The latter is characterized by a fairly low elasticity of substitution and a high relative labor share. If the elasticity of substitution in the traded goods sector has an econometrically reasonable value, then short-run improvements in both the labor share and real income may well call for revaluation of the exchange rate and an increase in home good's price (prices of both goods being measured in wage units). (ii) If excess supply functions have Walrasian stability, such price changes will lead to deterioration in the balance of payments: On the other hand, devaluation-induced improvement in the balance of payments (with constant government expenditure) can lead to an improvement in real income, but reduces the labor share. (iii) If the economy is formally unstable, due to capitalists and laborers concentrating their expenditure demands respectively on the goods intensive in factor payments to themselves, then balance of payments improvement in a comparative static analysis may entail reductions in both real income and the labor share. (iv) If the additional realistic assumption is made that elasticities of excess supply functions for the two goods with respect to the interest rate are quite low, then in general improvement of all three targets (real income, balance of payments, and income distribution) will be unattainable. If in addition the government cannot finance expenditure changes by anything but money supply changes, then in general only one target variable can be attained. (v) Numerical sensitivity analysis based on Chilean data indicates that these (and other) rather pessimistic results hold for fairly wide ranges of ‘plausible’ parameter values, as long as the model's short-run Keynesian assumptions are maintained.     

Taylor rules and equilibrium determinacy in a two-country model with non-traded goods

We analyze a relation between interest rate controls and equilibrium determinacy using a two-country model featuring traded and non-traded goods. In addition, parameters of preference and production may differ between the two countries. We find that macroeconomic stability strongly depends on such heterogeneity including monetary policy, and that it is easier to generate determinate equilibrium under perfect liberalization of the economy, but to operate monetary policy in the economy with non-traded goods.     

The ‘real’ explanation of the PPP puzzle

This article shows that global financial markets cannot, by themselves, achieve net transfers of financial capital and real interest rate equalization across countries and that the integration of both global financial markets and global goods markets is needed to achieve net transfers of capital and real interest rate equalization across countries. Thus, frictions (barriers to mobility) in one or both of these markets can impede the net transfer of capital between countries, produce the Feldstein and Horioka (1980) finding of high-saving-investment correlations and prevent real interest rates from being equalized across countries. Moreover, frictions in global goods markets can explain why real exchange rates deviate from purchasing power parity (PPP) for extended periods of time and can therefore also explain the PPP puzzle. Consequently, we are able to resolve two of Obstfeld and Rogoff’s (2000) ‘6 major puzzles in macroeconomics’ with essentially the same explanation.     

Reconsidering Real Interest Parity for Traded and Nontraded Goods

The goal of this paper is to examine the hypothesis of real interest rate parity by contrasting real interest rates across traded and nontraded goods under flexible exchange rates. We employ panel unit root tests to investigate the stationarity of real interest rate differentials. In particular, empirical results support the mean‐reverting property of real interest rate differentials for interest rates measured in terms of traded goods.     

The Optimal Tariff Formula in a Two-Period Economy

The optimal tariff formula is derived for a large country trading both consumption goods and an investment good in a two-period economy. The formula greatly simplifies the results of the standard one-period economy where both consumption goods and real capital are traded with or without a non-traded good; in particular, the results do not depend on the relative intensities of the two goods.
JEL Classification Numbers: D11, F11, F34.     

International migration,non-traded goods and economic welfare in a two-class economy: A reply

This paper sketches a formal model of an economy producing traded and non-traded goods in which two classes of individuals are differentiated, each owning different endowments of capital and labor and allocating different proportions of their income to the consumption of each commudity. The effects of emigration on prices, income distribution and the real income of each class is then examined.     

Can Sticky Price Models Generate Volatile and Persistent RealExchange Rates?

The central puzzle in international business cycles is that fluctuations in real exchange rates are volatile and persistent. We quantify the popular story for real exchange rate fluctuations: they are generated by monetary shocks interacting with sticky goods prices. If prices are held fixed for at least one year, risk aversion is high, and preferences are separable in leisure, then real exchange rates generated by the model are as volatile as in the data and quite persistent, but less so than in the data. The main discrepancy between the model and the data, the consumption–real exchange rate anomaly , is that the model generates a high correlation between real exchange rates and the ratio of consumption across countries, while the data show no clear pattern between these variables.     

State prices,liquidity, and default

We show, in a monetary exchange economy, that asset prices in a complete markets general equilibrium are a function of the supply of liquidity by the Central Bank, through its effect on default and interest rates. Two agents trade goods and nominal assets to smooth consumption across periods and future states, in the presence of cash-in-advance financing costs that have effects on real allocations. We show that higher spot interest rates reduce trade and as a result increase state prices. Hence, states of nature with higher interest rates are also states of nature with higher risk-neutral probabilities. This result, which cannot be found in a Lucas-type representative agent model, implies that the yield curve is upward sloping in equilibrium, even when short-term interest rates are fairly stable and the variance of the (macroeconomic) stochastic discount factor is 0. The risk-premium in the term structure is, therefore, a monetary-cost risk premium.     

INTERNATIONAL BUSINESS CYCLES IN EMERGING MARKETS

I document cyclical behavior of real exchange rates (RERs) in emerging and developed economies: stronger RER procyclicality coincides with larger relative volatility of consumption and more countercyclical trade balance. I then reevaluate the sources of fluctuations in emerging economies using an international business cycle model estimated to match the behavior of the RERs. Interest rate shocks, without any frictions, account for most of output fluctuations. This result is driven by imperfect substitution between domestic and foreign goods, which dampens the impact of trend shocks and accentuates the impact of interest rate shocks on output and consumption.     

Government Spending and Real Interest Rate in an Open Economy

This paper investigates the dynamic effect of government spending in an optimizing monetary model of an open economy with capital immobility and fixed exchange rates. It is found that a rise in government spending will always lead to a reduction in real interest rates on impact. Moreover, real interest rates can be lower during temporary periods of high government spending. This result is compatible with the observation of low real interest rates during wars.     

The intertemporal substitution effect of government purchases on the interest rate: Empirical estimates for the Netherlands

In an intertemporal equilibrium setting, temporary government purchases may affect the real interest rate. A temporary change in the level of government spending does not affect the optimal intertemporal allocation of rational consumers, who will therefore try to maintain their consumption plans. Assuming no change in the supply of goods, there is an excess demand for goods and in a closed economy the real interest rate has to rise to maintain equilibrium at the goods market. In this paper it is examined whether predictions of intertemporal substitution models hold up to the experience of the Netherlands. We extend Barro's empirical work in three ways. First, we construct a new measure of temporary government outlays. Second, we take the time series behaviour of the data concerned into account and employ a less restrictive specification for the equation to be estimated. Third, we examine the intertemporal substitution effect of government purchases onreal interest rates. Our results provide only mixed support for the hypothesis that temporary government purchases raise real interest rates. It turns out that only temporary military outlays affect the nominal and real interest rate.     

Real exchange rate shocks on tradables,nontradables, and the current account: Mexico, 1980–2000.

Effects of external and income shocks on consumption and on the current account in Mexico from 1980 to 2000 are investigated. An intertemporal model captures the extent into which non-traded goods consumption affects traded-goods consumption, clarifying the roles of intratemporal or intertemporal substitution. Vector autoregressions (VARs) show that the 1% shock to non-traded goods consumption affects traded-goods consumption by −2% immediately, reverting to zero only after one year, supporting the intratemporal channel. Real exchange rate (RER) shocks exert considerable macroeconomic fluctuations. The 1% shock to RER affects traded goods consumption by −2% immediately, reaching −5% one year later. At the expense of income shocks, RER shocks grow in explanatory power over time: from 20%–25% at 1 quarter to 65%–69% of the variance of traded goods consumption 3 years later. Figures for the current account range from 14% to 68%, while income shocks appear less important. In contrast, for non-traded goods, RER shocks roughly match the quantitative importance of income shocks, reinforcing the theoretical analysis. First version received: June 2001/Final version received: July 2002 RID="*" ID="*"  Previous versions of this paper were presented at the conferences: “Economic and Financial Cycles and NAFTA: Micro and Macro Issues and Analysis” in Mexico City and at the “35^th Annual Meeting of the Canadian Economics Association” in Montréal. I wish to thank two anonymous referees of this journal for very helpful comments, Steven Ambler, Vincent Dropsy, Jo?o Faria, Michel Normandin, Yoshi Otani, Tsunemasa Shiba and Gerardo Villoslado for comments and encouragement. I remain solely responsible for the shortcomings of this paper. Financial support from the Japanese Ministry of Education and Culture in early parts of this project is gratefully acknowledged.     

International finance in general equilibrium

Our purpose in this paper is to unify international trade and finance in a single general equilibrium model. Our model is rich enough to include multiple commodities (including traded and nontraded goods), heterogeneous consumers in each country, multiple time periods, multiple credit markets, and multiple currencies. Yet our model is simple enough to be effectively computable. We explicitly calculate the financial and real effects of changes in tariffs, productivity, and preferences, as well as the effects of monetary and fiscal policy.We maintain agent optimization, rational expectations, and market clearing (i.e. perfect competition with flexible prices) throughout. But because of the important role money plays, and because of the heterogeneity of markets and agents, we find that fiscal and monetary policy both have real effects. The effects of policy on real income, long-term interest rates, and exchange rates are qualitatively identical to those suggested in Mundell-Fleming (without the small country hypothesis), although our equilibrating mechanisms are different. However, because the Mundell-Fleming model ignores expectations and relative price changes, our model predicts different effects on the flow of capital, the balance of trade, and real exchange rates in some circumstances.     

Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective

This paper examines the choice of optimal exchange rate regime for an oil-exporting small open economy using a welfare-based model. The paper extends the standard New Keynesian Small Open Economy model to include three countries: a small oil-exporting country and two large foreign countries. The model also features three sectors: traded, non-traded, and primary-commodity (crude-oil). The sources of uncertainty are random monetary (demand), productivity (real), and real oil price (supply) shocks. Despite the absence of a non-oil traded sector in this primary-commodity economy, the welfare analysis suggests that flexible exchange rate regimes can reduce external shocks and consumption volatility given certain caveats about pricing-schemes. The analysis also suggests that a basket peg is more welfare-improving than a unilateral peg, as higher volatility of the anchor currency reduces consumer welfare.