A UNIFIED ANALYSIS OF TRADE GAINS IN THE PRESENCE OF PUBLIC GOODS*

It has long been known that free trade is potentially (after lumpsum compensatory transfers) beneficial for each trading country if the autarkic and post‐compensation free‐trade equilibria are perfectly competitive, with market distortions limited to non‐negative taxes on imports and exports. However these conditions are merely sufficient. It can now be shown that, under alternative sufficient conditions, free trade is potentially beneficial to each trading country even in the context of public goods.     

Monetary union: A welfare based approach

This article attempts to shed light on the consequences of the transition to EMU for individual welfare following specific shocks. To this end, we develop a two country intertemporal general equilibrium model that extends the Obstfeld and Rogoff (Journal of Political Economy 103 (3) (1995) 624) specification to nominal rigidities through price adjustment costs and pricing-to-market behavior.We show that, when facing a positive asymmetric permanent shock to either technology or government expenditures occurring in one country, implementing a monetary union is beneficial to the households living in this economy. Conversely, it is detrimental to foreigners. Further, a sensitivity analysis shows that if the gains/losses to implementing monetary union are qualitatively robust when facing changes in the degree of nominal rigidities and the elasticity of substitution between foreign and domestic goods, they are quite sensitive to the degree of pricing-to-market in the economy.     

Does exchange rate variability matter for welfare? A quantitative investigation of stabilization policies

This paper studies what degree of exchange rate stabilization is optimal for several types of open economies. This is accomplished through a quantitative evaluation of optimal monetary policy rules in a two-country sticky-price model. First, a calibrated benchmark model with incomplete asset markets supports past conclusions from simpler models, emphasizing inflation stabilization rather than exchange rate stabilization. It also highlights that the utility gains from optimal stabilization policy are small. Second, while an economy extended to include consumer habits implies greater sensitivity by households to consumption variability, it has only minor effects on the benchmark conclusions and benefits. Finally, these conclusions are altered under an alternative environment where international asset markets exhibit asymmetry in the form of “original sin.” Such countries can benefit from policies that aggressively stabilize the exchange rate, with utility gains larger than the previous cases.     

Exchange rate puzzles: A tale of switching attractors

The rational expectations efficient market model of the exchange rate has failed empirically. In this paper, we develop a model of the exchange rate in which agents use simple forecasting rules. Based on an ex post evaluation of the relative profitability of these rules they decide whether to switch or not. In addition, transactions costs in the goods market are introduced. We show that this simple model creates great complexity in the market which is characterised by the fact that the exchange rate is disconnected from its fundamental most of the time. Finally we show that this model mimicks most of the empirical puzzles uncovered in the literature.     

A model of relative national price levels under pricing to market

This paper proposes an alternative to the Balassa-Samuelson theory of how relative price levels between countries are determined. The theory is a general equilibrium formulation of a model where pricing to market arises endogenously from firm decisions. It differs from Balassa-Samuelson in that it centers on the distinction between segmented national goods markets rather than the distinction between traded and nontraded goods. The paper also explores how Balassa-Samuelson might be updated by combining it together with pricing to market elements. Applied to the case of a monetary union, the theory offers an alternative explanation for the inflation differentials observed in EMU. It implies that such differentials may be a natural and enduring feature of a monetary union in which markets for goods and labor are less than fully integrated.     

SECTORAL EXCHANGE RATE PASS-THROUGH: TESTING THE IMPACT OF POLICY REFORMS IN INDIA

This paper analyses the impact of India's policy reforms on exchange rate pass‐through into import and export prices, using panel data (at one‐digit SITC level) for pre‐ (1980–90) and post‐reform (1991–2001) periods. While the pass‐through into import prices has declined, the pass‐through into export prices (in USD terms) has increased during the 1990s. The results suggest that, relative to rupee depreciation, Indian exporters increased their USD prices around 20% in the 1980s, but decreased them by around 70% in the 1990s. Moreover, the number of sectors exhibiting some degree of pass‐through increased in the 1990s (six), relative to the 1980s (three). These changes may be attributable to the elimination of currency and trade controls, which increased competition among firms and fostered a concern with market share gains in the 1990s over an attempt to use depreciations to increase profits in the 1980s.     

Structural reforms,fiscal consolidation and external rebalancing in monetary union: A model-based analysis

The paper analyses the impact of structural reforms on external positions in monetary union in a 3-region version of QUEST III. Wage cost moderation and fiscal consolidation improve the current account balance in the medium term, but positive income effects tend to offset the initial increase in the long term. The general pattern is robust across alternative levels of initial foreign indebtedness. While lasting imbalance correction requires a contraction of debt-financed domestic demand, supply-side reform can mitigate the associated output contraction. A scenario is given as illustration that would reverse the 20% competitiveness loss in the EMU periphery during the 2000s and reduce foreign and government debt by 30% and 50% of GDP within ten years.     

Tariffs,Offshoring and Unemployment in A Two‐Country Model

This paper develops a two‐country model that incorporates offshoring opportunities, and analyses the effects of tariffs under economic stagnation in a liquidity trap that causes unemployment. We find that a rise in tariffs on imports of outsourced goods contributes to an increase in employment by inducing a shift in production, but also leads to an appreciation of the real exchange rate that tends to reduce employment. The effect of real exchange rate appreciation dominates the effect of the production shift, and accordingly employment and consumption fall. The effects of tariff adjustments are reversed, however, when there is no liquidity trap and hence no unemployment.     

The coordination channel of foreign exchange intervention: A nonlinear microstructural analysis

Taylor (1994, 1995) [Taylor, M.P., 1994. Exchange rate behaviour under alternative exchange rate regimes. In: Kenen, P. (Ed.), Understanding Interdependence: The Macroeconomics of the Open Economy. Princeton University Press, Princeton; Taylor, M.P., 1995. The economics of exchange rates. Journal of Economic Literature 33, 13-47] has proposed the coordination channel as a means by which foreign exchange market intervention may be effective, in addition to the traditional portfolio balance and signalling channels. If strong and persistent misalignments of the exchange rate are caused by nonfundamental influences, such that a return to equilibrium is hampered by a coordination failure among fundamentals-based traders, then official intervention may act as a coordinating signal, encouraging stabilising speculators to re-enter the market at the same time. We develop this idea in the framework of a simple microstructural model of exchange rate movements, which we then estimate using daily data on the dollar-mark exchange rate and on Federal Reserve and Bundesbank intervention operations. The results are supportive of the existence of a coordination channel of intervention effectiveness.     

The behaviour of relative prices in the European Union: A sectoral analysis

Using multivariate unit root test methods, this paper investigates the Purchasing Power Parity (PPP) hypothesis at the sectoral level across six European countries over the last 17 years. Evidence of mean reversion towards PPP is found for the relative prices of some sectors and countries. Mean reversion in relative prices is explained by cross-country and cross-sectoral characteristics such as the distance between countries, nominal exchange rate volatility, differences in GDP per capita, non-tariff barriers, research and development, advertising, industrial concentration and tradeability of the products.     

Real exchange rates and real interest rate differentials: A present value interpretation

Although the real exchange rate-real interest rate (RERI) relationship is central to most open economy macroeconomic models, empirical support for the relationship is generally found to be rather weak. In this paper we re-investigate the RERI relationship using bilateral US real exchange rate data spanning the period 1978-2007. Instead of testing one particular model, we build on Campbell and Shiller [1987. Cointegration tests of present-value models. Journal of Political Economy 95, 1062-1088] to propose a metric of the economic significance of the relationship. Our empirical results provide robust evidence that the RERI link is economically significant and that the real interest rate differential is a reasonable approximation of the expected rate of depreciation over longer horizons.     

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.     

INTERNATIONAL AND INTRA‐NATIONAL TRADE: A CONTINUUM APPROACH*

We build up a Ricardian trade model with multiple regions within a nation and examine how international trade determines interregional patterns of production and specialization. We show that the degree of interregional concentration of economic activities moves in different directions in two trading nations. The role of “absolute advantage” becomes crucial in dictating the course of income disparity across regions. We discuss cases with varying degrees of labour mobility and reconfirm the result on post‐trade interregional concentration and dispersion. Later we explore the impact of “scale factor” in this model and show how principle of comparative advantage and economies of scale interact to determine the pattern of specialization and volume of trade.     

International transmission of environmental policy: A New Keynesian perspective

In this paper we examine the international transmission of environmental policy using a New Keynesian model of the global economy. We first consider the case in which the quality of the environment affects utility, but not productivity. This allows us to look at the trade-off between environmental quality and output. We then consider the case in which the quality of the environment increases productivity but does not affect utility. Our main results show that in both cases a unilateral implementation of a more stringent environmental policy by the domestic country raises foreign welfare under a benchmark parameterization. Our modeling strategy allows an analysis of how nominal rigidities interact with the implementation of environmental reforms, by allowing the domestic country to shift, through exchange rate depreciation, parts of the costs of more stringent environmental policies to the foreign one.     

Business cycle transmission from the US to Germany—A structural factor approach

This paper investigates the transmission of US macroeconomic shocks to Germany using a large-dimensional structural dynamic factor model. This framework allows us to investigate many transmission channels simultaneously, including “new” channels such as stock markets, foreign direct investment, bank lending and the confidence channel. We find that US shocks affect the US and Germany largely symmetrically. Trade seems to be the most relevant transmission channel. Monetary policy reactions to strong price movements seem to play a role as well. No clear conclusion can be drawn yet on the role of financial markets and the confidence channel. Negative domestic influences apparently more than offset positive US influences in the German economy between 1995 and 2000, but the US recession in 2001 appeared to be the main culprit in the German slump.     

A MODEL OF VOTER CHOICE IN A LIFE-CYCLE SETTING

This paper employs an overlapping generations framework in which voters choose political parties based on the economic shocks faced over their lifetimes. Parties internalize voting preferences and develop platforms based on this information. The resulting equilibrium implies that voters select parties that maximize income in their labor period and that minimize inflation in their retirement period. The equilibrium also has the property that individuals switch their votes between the parties, in the presence of adverse states of nature. These results provide an explanation for post World War II voting patterns in the United States. The paper also provides empirical support for the theoretical findings.