NAIRU and productivity shocks: evidence from three gigantic economies

This article investigates NAIRU which stands for Non Accelerating Inflation Rate of Unemployment and its trend in three of the world gigantic economies to mention orderly USA, Japan and China. A Vector Autoregressive Regression model estimated to study the reaction of NAIRU to shocks imposed by labour productivity. Results indicate both productivity shocks and NAIRU fluctuations have counter effects.     

Exchange rates of oil exporting countries and global oil price shocks: a nonlinear smooth-transition approach

This paper models logistic and exponential smooth transition adjustments of real exchange rates for six major oil-exporting countries in response to different shocks affecting oil prices. The logistic form captures asymmetric and the exponential form symmetric adjustments in regards to positive and negative oil price shocks. We chose oil-exporting countries that do not peg their exchange rates. For most countries, we detect no statistically significant non-linearities for the adjustment process of real exchange rate returns, be they asymmetric or symmetric, in response to oil supply shocks, idiosyncratic oil-market-specific shocks, and speculative oil-market shocks. Exceptions are oil supply shocks in the UK and possibly Brazil, where exchange rates respond nonlinearly, though the effects are symmetric for both countries. On the other hand, global aggregate demand shocks, which are shocks not originating directly in the oil market, have nonlinear asymmetric effects on real exchange rate returns for Canada, Mexico, Norway and Russia, and nonlinear symmetric effects for Brazil and the UK.     

Credit demand and supply shocks in Italy during the Great Recession

In this article, we use Structural VAR analysis to disentangle credit demand and supply shocks and their effect on real economic activity in Italy during the 2008 to 2014 crisis period. The three endogenous variables considered are the loan interest rate, the loans growth rate and the employment to population ratio. The data are observed at annual frequency for each of 103 Italian provinces. The empirical evidence suggests that the variance of the shocks varies across four Italian macro-regions: North, Centre, South and Islands, and hece heteroscedasticity is used to identify (ex ante) the structural shocks. Sign restrictions are used to interpret shocks ex post. The empirical findings suggest a prominent role of credit supply shock in shaping real activity dynamics and also that credit crunch hits the North of Italy less than the remaining macro-regions, especially the South of Italy.     

The relationship between exchange rates and interest rates in a small open emerging economy: The case of Romania

This paper revisits the relationship between interest rates and exchange rates in a small open emerging economy using wavelet-based methodologies. Based on data for Romania, our results confirm the theoretical predictions on the interest rate - exchange rate relationship during turmoil or policy changes. In the short term, the relationship is negative, confirming the sticky-price models, and over the long term, the relationship is positive, confirming the Purchasing Power Parity theory. At the beginning of the turmoil, the exchange rate movements generally take the lead over the interest rates for the first month, but the monetary authorities take the lead afterwards. Our results reveal that in a small open emerging economy with a direct inflation targeting monetary policy regime, the relationship between exchange rates and interest rate is fundamentally different from that in an advanced economy. Also, our results stress the necessity that the central bank must pay simultaneous attention to both variables in order to achieve their monetary policy targets.     

Inflation persistence and exchange rate regime: Implications for dynamic adjustment to shocks in a small open economy

The paper examines implications of inflation persistence for business cycle dynamics following terms of trade shock in a small oil producing economy, under inflation targeting and exchange rate targeting regimes. It is shown that due to the ‘Walters critique’ effect, the country’s adjustment paths are slow and cyclical if there is a significant backward-looking element in the inflation dynamics and the exchange rate is fixed. It is also shown that such cyclical adjustment paths are moderated if there is a high proportion of forward-looking price setters in the economy, so that when the Phillips curve becomes completely forward-looking cyclicality in adjustment paths disappears and the response of the real exchange rate becomes hump-shaped. In contrast, with an independent monetary policy, irrespective of the degree of inflation persistence, flexible exchange rate allows to escape severe cycles, which results in a smooth response of the real exchange rate.     

Exchange rates,inflation and growth in small,open economies: a difference-in-differences approach

Financial crises in emerging markets have led many observers to recommend abandoning fixed exchange rates and adopting more flexible regimes. Moreover, some recent research suggests that the correct exchange rate regime may have a significant effect on inflation and even economic growth. The estimated effect found in such studies, however, likely suffers from an upward bias, as countries which choose a given exchange rate regime have other hard-to-measure policies and attributes which also affect economic performance. Utilizing a recent data set on actual, as opposed to official exchange rate regimes, this article employs the difference-in-differences method, currently popular in applied microeconomics, to a set of emerging markets that switched to more flexible currency policies. Results indicate that, contrary to previous studies, exchange rates themselves exert no significant impact on inflation or output.     

Asset prices, exchange rates and the current account

This paper analyses the role of asset prices in comparison to other factors, in particular exchange rates, as a driver of the US trade balance. It employs a Bayesian structural VAR model that requires imposing only a minimum of economically meaningful sign restrictions. We find that equity market shocks and housing price shocks have been major determinants of the US current account in the past, accounting for up to 30% of the movements of the US trade balance at a horizon of 20 quarters. By contrast, shocks to the real exchange rate have been less relevant, explaining about 9% and exerting a more temporary effect on the US trade balance. Our findings suggest that large exchange rate movements may not necessarily be the key element of an adjustment of today's large current account imbalances, and that in particular relative global asset price changes could be a potent source of adjustment.     

Exchange economies with asymmetric information: competitive equilibrium and core

Summary. A replica theorem is shown to hold for exchange economies with asymmetric information. In a replicated exchange economy with asymmetric information the set of all core elements with equal treatment is nonempty, but it is in general only a subset of the core. Nevertheless, the replica theorem and the presence of at least one core element with equal treatment suffice to show existence of a competitive quasi-equilibrium. Conditions on the initial endowments and the communication system are given to ensure that every competitive quasi-equilibrium is a competitive equilibrium.Received: 24 February 2003, Revised: 3 July 2003JEL Classification Numbers: C70, D50, D82.I thank an anonymous referee whose comments led to an improvement of the paper.     

Inflation,growth and exchange rate regimes in small open economies

Summary. This paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Endogenously arising volatility may be observed independently of the exchange rate regime. Private information - with high rates of domestic inflation - increases the scope for indeterminacy and economic fluctuations.Received: 26 March 2002, Revised: 29 October 2002JEL Classification Numbers: E32, E44, F33.P.L. Hernandez-Verme: I would like to thank Leonardo Auernheimer, Valerie Bencivenga, Dean Corbae, Scott Freeman, Todd Keister, Beatrix Paal, and Maxwell Stinchcombe for very helpful comments and suggestions. Very special thanks are due to Bruce D. Smith. The paper also benefited from the discussions in the seminars in CIDE, the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Kansas City, Indiana University, ITAM, Purdue University, the Second Annual Missouri Economics Conference, Texas A&M, the University of Missouri and the University of Texas at Austin.     

Monetary policy co-movement and spillover of shocks among BRICS economies

The 2008 global financial crisis has revealed the possibility of cross-border spillover effects of domestic Monetary Policy (MP) on financial stability and capital flows around the world. Recognizing these facts, Central Banks in Advanced Economies (AE) have undertaken simultaneous Monetary Policy actions to minimize collateral damage and contain financial risks. In this paper, we investigate whether a similar spillover and co-movement of Monetary Policy exist among BRICS countries. Specifically, we study the transmission of monetary policy shocks among the member countries using monthly data. We use the method of Principal Component Analysis (PCA) and Vector Autoregression Model to identify possible dynamic relationships. Our results indicate possible co-movement in interest rates and significant cross-border transmission of monetary policy shocks among the BRICS countries.     

Non-linear cointegration and adjustment: an asymmetric exponential smooth-transition model for US interest rates

This paper seeks to extend the extant empirical evidence regarding asymmetric adjustment to equilibrium of short and long interest rates. Using an adaptation of the exponential smooth transition model to allow for sign asymmetry in the transition function, we show that equilibrium reversion exhibits two broad characteristics. First, small deviations are random, while large deviations are reverting. Second, deviations that arise when the long rate exceeds the short rate are characterised by quicker reversion than the opposite case. These results are consistent with the effects of arbitrage and central bank intervention. Finally, forecasting exercises support this model over alternate linear and non-linear specifications.      

Exchange rate changes and endogenous terms of trade effects in a small open economy

This paper shows that the small-country assumption of dependent-economy models is unlikely to hold for many of the cases in which this class of models is used, for example, in the analysis of a terms of trade shock in the “commodity currency” models. When a shock affects most or all of the small countries exporting a commodity, the combined exchange rate effects will result in endogenous terms of trade changes even for those countries too small to individually affect world markets. The paper also explores the possible implications of these secondary terms of trade changes for the dependent-economy models.     

The exchange rate and optimal monetary policy rules in open and developing economies: Some simple analytics

Using a simple, tractable model, this paper revisits and expands upon issues relating to optimal monetary policy rules (MPRs) in open economies. The optimality of the rule is explored through various specifications of a central bank loss function as it is the loss function that offers insight into central bank preferences. Many of the issues on this topic have centred on the role of the exchange rate: Is it optimal for the policy instrument to react to the exchange rate? What is the role of the exchange rate in a domestic inflation targeting vs CPI inflation targeting? Does a fear of floating have any bearing on the way optimal MPRs are constructed? While this paper is not empirical, the analysis is relevant for central banks in open and developing economies that face a choice between allowing exchange rates to float (and adopting an inflation targeting regime) and engaging in some degree of exchange rate fixity.     

Foreign output shocks,monetary rules and macroeconomic volatilities in small open economies

The 2008 financial crisis is marked by the drop in output of major industrial countries which affected small open economies in various degrees. We examine the role of three different types of monetary policy rules in mitigating or exacerbating the effects of a negative foreign output shock on key macroeconomic variables of a small open economy by numerically solving a dynamic stochastic general equilibrium (DSGE) model. We find that compared to the Taylor rule, small open economies that follow either fixed exchange rate regime or strict inflation targeting tend to stabilize real exchange rate and inflation at the expense of substantial instability in the real economy.     

Amplification of shocks at the zero lower bound in a small open and large closed economy

This letter compares the consequences of hitting the zero lower bound in small open and large closed economies. I show that in a large economy shocks are modified by the zero lower bound on interest rate much more than in a small one – as a result, the large economy may suffer more.     

Does political instability affect exchange rates in Arab Spring countries?

This article investigates the dynamic relationship between political instability and exchange rates in five Arab Spring countries over the period 1992Q1–2016Q4. We include macroeconomic fundamentals to identify the transmission channels through which political instability may affect exchange rates. Based on VAR and ARDL models, our results report that political instability is associated with a significant drop in the value of domestic currencies of these countries. Economic growth is found to be the key mechanism channel. We find also that the dependence between variables is more emphasized in the short run than in the long run.     

Effects of government spending shocks in China,Japan, and Korea

ABSTRACT

This study investigates the effects of government spending shocks on various key macro variables in China, Korea, and Japan using structural VAR models. The main empirical findings are as follows. Government spending multipliers of all three countries are far larger than 1 in recent years. The effectiveness of fiscal expansion has not changed markedly in China but substantially increased in Korea (after the Asian financial crisis) and Japan (during zero lower bound period). Increases in the effectiveness of fiscal expansion are associated with changes in the monetary and exchange rate policy regimes and institutions of these countries. Among the three countries, the government spending multiplier is relatively large in China but relatively small in Japan in recent years. Although the effects on exchange rate and trade balance vary across countries and sample periods, real exchange rate tends to depreciate, whereas trade balance tends to improve under flexible exchange rate regimes. Some empirical findings are consistent with standard theory, but others are not.

Abbreviations: NK: New Keynesian VAR: Vector Autoregressive ZLB: Zero Lower Bound     

我国供给和需求冲击的区域差异效应研究——基于结构VAR的分析

本文根据Blanchard and Quah发展的结构VAR技术,将影响中国沿海和内陆地区实际GDP与通货膨胀率的冲击分解为供给和需求冲击。估算结果发现,沿海和内陆地区供给冲击的同步性较高但呈下降趋势,需求冲击的同步性弱于供给冲击,不过呈提高趋势,但由于区域协调而降低了其短期内的同步性。根据累积脉冲响应函数和预测误差方差分解结果,实际GDP和价格水平波动的绝大部分分别来自于供给和需求冲击,需求层面的区域协调对缩小区域差距无济于事,反而引致内陆地区的价格波动。各地区对供给和需求冲击反应的差异,使得在宏观调控和区域协调方面产生效率和区域平等、需求管理型宏观政策有效性和区域平等的两难困境。破解之道在于从影响区域反应差异的因素入手,提高内陆地区实际产出对内陆地区正向供给、需求冲击的反应强度和降低沿海需求冲击对内陆地区的负效应。     

Exchange rates change,asset-denominated currency difference and stock price fluctuation

This paper examines differences in the connectedness between exchange rates and stock prices for companies with different asset currencies on the Hong Kong stock market, and it seeks to explain those differences by proposing a hypothesis on asset-denominated currency difference. Under a framework of investor heterogeneity, we establish a dynamic, discrete theoretical model to analyse the connectedness between exchange rates, the stocks of local Hong Kong companies, the stocks of companies from the mainland and foreign exchange interventions. Using monthly data from January 2000 to August 2018, we adopt the time-varying parameter vector auto-regression (TVP-VAR) model to empirically study the dynamic relationships between exchange rates and the prices of both Hong Kong-based and mainland-based stocks. The results show significant differences in the ways that exchange rates and prices for the two types of stocks are linked. The exchange rates are positively correlated with mainland stocks and negatively correlated with Hong Kong stocks. Moreover, foreign exchange intervention is found to be an effective means for stabilising exchange rates, although such intervention tends to increase stock volatility.

Abbreviations: TVP-VAR - time-varying parameter vector auto-regression model; MCMC - Monte Carlo-Markov Chain method.     

Permanent and transitory shocks in the presence of asymmetric error correction

This article highlights the potential importance of asymmetries in the loading vector of a set of cointegrated variables for the construction, analysis and interpretation of permanent and transitory shocks using impulse response functions. We derive an asymmetric version of the Permanent–Transitory decomposition suggested by Gonzalo and Ng (2001) and illustrate the potential importance of such asymmetries using the ‘cay’ data of Lettau and Ludvigson (2004).