Productivity and the Euro-Dollar exchange rate

This article analyses the impact of productivity developments in the United States and the euro area on the euro-dollar exchange rate. The article presents a new measure of relative average labour, productivity (ALP) which does not suffer from the biases implicit in readily available relative ALP data. Importantly, the patterns of these series differ widely. Employing the Johansen cointegration framework, four models are estimated using four different productivity proxies. Our results indicate that the extent to which productivity can explain the euro depreciation varies with the productivity proxy used: readily available measures explain most, our new, preferred measure least. In all models, however, productivity can explain only a fraction of the actual euro depreciation experienced in 1999–2000. JEL no. F31, C32, O47 The views expressed in this study are those of the authors and do not necessarily reflect those of the European Central Bank or its staff.     

Interaction between structural and cyclical shocks in production and employment

Interaction between Structural and Cyclical Shocks in Production and Employment. — A major aim of recent empirical modelling of the business cycle is to identify the relative importance of aggregate supply and demand shocks. This paper uses the methodology of unobserved (or structural) components time series models for the identification of technology and demand shocks in a two-equation system of structural labour productivity and industrial output. It allows us to introduce the correlation between the structural and cyclical shocks such that the mutual dependency of these shocks can be estimated explicitly. The data is quarterly time series of labour productivity in industry and industrial output for Germany, the Netherlands, the United Kingdom and the United States. Our results show that the covariance of the dynamics of structural and cyclical shocks appears to be important in these countries.     

An equilibrium foundation of the Soros chart

The most prominent characteristic of the Japanese yen/U.S. dollar nominal exchange rate in the post-Plaza Accord era is near random-walk behavior sharing a common stochastic trend with the two-country monetary base differential augmented with excess reserves. In this paper, we develop a simple two-country incomplete-market model equipped with domestic reserve markets to structurally investigate this anecdotal evidence known as the Soros chart. In this model, we theoretically verify that a market discount factor close to one generates near random-walk behavior of an equilibrium nominal exchange rate in accordance with a permanent component of the augmented monetary base differential as an economic fundamental. Results of a Bayesian posterior simulation with post-Plaza Accord data of Japan and the United States plausibly support our model as a data generating process of the Japanese yen/U.S. dollar exchange rate. The model identifies the two-country differential in money demand shocks as the main generator of the sharp depreciation of the Japanese yen against the U.S. dollar under the Abenomics. We discuss data evidence that the identified money demand shocks are tightly correlated with longer-term interest rate differentials between the two countries.     

Proposal for a common currency among rich democracies

This paper proposes the creation of a common currency for the industrialized democracies, notably the United States, the European Union, and Japan. A common currency implies a common monetary policy; institutional arrangements for which are discussed. The rationale rests on the assumption that asymmetrical financial shocks will become more important than asymmetrical real shocks for these large, diversified economies, and that one of the growing sources of financial shocks will be changing expectations about exchange rate movements among national currencies. These financial shocks will in turn disturb real economies, such that flexible exchange rates among major currencies will increasingly become sources of shock more than shock absorbers. Such a common currency would also make it much easier for emerging markets to frame their monetary and exchange rate policies.     

美元定价、汇率传递与美元贬值对东亚经济的冲击

本文对东亚国家和地区国际商品贸易定价货币的选择进行了考察,分析了东亚汇率传递的特征及美元贬值对东亚经济的影响与冲击,并提出中国的对策。研究发现:美元定价已成为外部冲击向东亚经济传导的重要渠道;美元定价导致美国和东亚之间只存在单向的汇率传递,从而削弱约束美元贬值的内在机制;在美元定价条件下,东亚国家在面对美元贬值对经济的刺激作用时乐观其成,但是在面对美元贬值所带来的"滞胀"冲击时却没有有效的隔离机制。     

Deflation,Productivity Shocks and Gold: Evidence from the 1880–1914 Period

In this paper we examine the sources and impact of deflation on the growth experiences of the four dominant countries on the gold standard in the period 1880–1913: the United States, The United Kingdom, France and Germany. We distinguish between good deflation, (driven by positive aggregate supply shocks) and bad deflation (driven by aggregate demand shocks). We use an empirical Blanchard/Quah model which decomposes the behaviour of prices, output and the money stock into the impact of shocks such as a world price level shock, a domestic supply shock, and domestic demand shocks including a shock to the domestic gold stock. Our key finding is that the European economies were essentially classic in the sense that output was mainly supply driven and that money was neutral even when country specific gold stocks are included. In the United States, however, we observe both good and bad deflation.     

Sources of Purchasing Power Disparities between the G3 Economies

Recent theoretical and empirical research in international macroeconomics has rediscovered the problem of purchasing power parity (PPP). Empirically, PPP is a bad approximation of both the short-term and medium-term properties of the data. Economists have had difficulties in explaining the persistent misalignments of real exchange rates, but new empirical research by Clarida and Galí (1995), Carnegie Rochester Conference Series on Public Policy, Vol. 41 suggested that much of these real exchange rate movements are due to relative demand shocks. The present paper challenges this view by using an extended version of their structural vector autoregressive (SVAR) model in order to identify a larger number of real shocks (labor supply, productivity, and aggregate demand) and nominal shocks (money demand and money supply). It is found that while some of their results go through in our extended framework, there is serious doubt with respect to the appropriateness of labeling those shocks which drive real exchange rates as aggregate demand disturbances.J. Japan Int. Econ.December 1997,11(4), pp. 548–583. Universität Bonn, Lennéstrasse 43, 53113 Bonn, Germany and CEPR.     

International monetary transmission in East Asia: Floaters,non-floaters,and capital controls

This paper analyzes the impacts of the United States (US) monetary shocks on East Asian countries using structural vector-autoregression (VAR) model. We find that the impacts of the US monetary shocks on East Asian domestic interest rates and exchange rates contradict conventional wisdom. The conventional exchange rate channel is unlikely to play much role in the transmission of the US monetary policy shocks to floaters in East Asian countries, excluding Japan. In these countries, the domestic interest rates respond strongly to the US interest rate changes, by giving up monetary autonomy, probably because of fear of floating. However, the domestic interest rate does not respond much in countries with fixed exchange rate regimes and capital account restrictions, such as China and Malaysia. This may suggest that the countries with fixed exchange rate regimes enjoy a higher degree of monetary autonomy, most likely with the help of capital account restrictions.     

The Behavior of the Real Exchange Rate Under Fixed and Floating Exchange Rate Regimes

This article investigates the behavior of real exchange rates under fixed and flexible exchange rates. Using data from both the Bretton Woods and the modern floating periods, we decompose real exchange rate movements into components attributable to supply shocks, real demand shocks, monetary shocks, capital flows shocks, and real oil price shocks. Empirical results show that real demand shocks are an important source of real exchange rate movements under both fixed and flexible rates, while monetary shocks are negligible. Supply and oil price shocks seem to be more important under Bretton Woods, while capital flows shocks seem to explain a relatively higher proportion of real exchange rate movements under the modern floating period.     

Optimum Currency Areas in Emerging Market Regions: Evidence Based on the Symmetry of Economic Shocks

This paper examines which emerging market regions form optimum currency areas (OCAs) by assessing the symmetry of macroeconomic shocks. We extend the output-prices-VAR framework by adding net exports and the real effective exchange rate as endogenous variables. Based on theoretical considerations, we derive which shocks affect these variables in the long run: shocks to labor productivity, foreign trade, labor supply, and money supply. The considered economies of Central and Eastern Europe, the Commonwealth of Independent States, East and Southeast Asia, and South Asia, exhibit large enough shock symmetry to form a currency union; the economies of Africa, Latin America, and the Middle East do not.     

供求冲击与人民币汇率的波动：基于DSGE两国模型的模拟分析

为分析人民币汇率的波动,本文应用当前新开放经济学主流的动态随机一般均衡两国模型的研究方法,通过引入垄断竞争的市场结构和粘性的价格调整方式,模拟了在以技术冲击为代表的供给冲击和以货币冲击为代表的需求冲击下汇率的波动,进而用来拟合人民币汇率的波动。结果表明相对于需求冲击,供给冲击对人民币汇率波动的拟合比较好,这表明“巴拉萨-萨缪尔森”效应是解释和预测人民币汇率波动的合理途径,也给我国的人民币汇率稳定政策提供了明确的导向。     

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.     

New Keynesian Explanations of Cyclical Movements in Aggregate Inflation and Regional Inflation Differentials

What determines the cyclical behavior of aggregate inflation and regional inflation differentials? The answer has strong implications for monetary policy and in Europe for the Stability and Growth Pact. In the United States, inflation rates move pro-cyclically, and across the Euro Area, inflation differentials are positively correlated with growth differentials. This suggests that demand shocks are the primary determinants of the cyclical behavior of aggregate inflation and regional inflation differentials. In this paper, we discuss New Keynesian explanations of these correlations, and we argue that demand shocks are either missing or inadequately modeled in the in typical New Keynesian model.     

美国经济波动对东亚经济的影响

经济全球化使世界经济紧密联系在一起,各国经济也更易受到外部经济冲击的影响。本文考察了美国经济波动对东亚8个开放经济体的影响,结果显示,东亚经济大约有18%的波动来源于美国经济的冲击,这主要是因为美国和东亚保持着紧密的贸易和金融联系。由于各经济体在经济总量、汇率制度安排等方面的差异,造成受美国经济波动的影响也不相同。总体看,这些冲击持续的时间大约在15个季度。     

Exchange Rate Behavior of Canada,Japan, the United Kingdom and the United States

We revisit a significant research topic on exchange rate behavior by restating the test procedures with an appropriate econometric methodology to re-examine three aspects. (i) Does the inflation (price) factor affect nominal exchange rate? (ii) Do relative interest rates affect a country’s exchange rate? (iii) Do the price and interest rate effects hold if controls for non-parity factors are embedded in tests? The quarterly data series for this study are taken over 55 years. The traditional parity condition model with price and interest rate as criterion variables is extended to take into account recently-verified non-parity factors, namely trade, productivity and foreign reserves. The results affirm that both parity factors and also the non-parity factors significantly affect the exchange rates of Canada, Japan, the United Kingdom and the United States. In our view, these findings relating to four free-floating currencies help extend our knowledge on how currency behavior is consistent with parity and non-parity theorems using a relevant methodological approach in this study.     

Trade openness, real exchange rates and job reallocation: evidence from Belgium

This paper investigates the impact of real exchange rate movements on job reallocation at the industry level. The analysis focuses on the manufacturing sector of Belgium, using data for 82 NACE 3-digit industries, over the time span 1996–2002. I find that real exchange rate changes do have a significant impact on job flows, and that this impact is magnified by increasing levels of trade exposure. In particular, a real appreciation is found to lower net employment growth through higher job destruction, while job creation is not significantly affected. These results are in line with previous empirical evidence on the United States, and differ from earlier findings for France and Germany, where the adjustment to real exchange rate shocks has been found to occur mainly through the job creation margin. I suggest that these differences may be explained by the fact that Belgium is a small open economy.     

Sources of Real Exchange Rate Volatility in Africa: The Case of ECOWAS*

Abstract: This study examines the impact of (real) demand shocks, (aggregate) supply shocks, and monetary shocks on real exchange rates in 13 West African countries. We observe that the real demand shocks explain most of the fluctuations in real exchange rates in all these countries. Accordingly, policymakers should adopt a careful demand management strategy by controlling government expenditure and taxes.     

Nontradable Goods and the Real Exchange Rate

How important are nontradable goods and distribution costs to explain real exchange rate dynamics? We answer this question by estimating a general equilibrium model with intermediate and final tradable and nontradable goods. We find that the estimated model can match characteristics of the data that are relevant in international macroeconomics, such as real exchange rate persistence and volatility, and the correlation between the real exchange rate and other variables. The distinction between tradable and nontradable goods is key to understand real exchange rate fluctuations, but the introduction of distribution costs is not. Nontradable sector technology shocks explain about one third of real exchange rate volatility. We also show that, in order to explain the low correlation between the ratio of relative consumption and the real exchange rates across countries, demand shocks are necessary.     

Monetary regime choice in Singapore: Would a Taylor rule outperform exchange-rate management?

A DSGE–VAR approach was adopted to examine the managed exchange-rate system at work in Singapore and to ask if the country had any reason to fear floating the exchange rate and adopting a Taylor rule. The results showed that, in terms of overall inflation volatility, the exchange rate rule had a comparative advantage over the Taylor rule when export-price shocks were the major sources of real volatility while a Taylor rule was preferable when domestic productivity shocks were dominant. The exchange-rate rule also dominated the Taylor rule for reducing inflation persistence.     

Foreign Direct Investment in R&D and Exchange Rate Uncertainty

The current practice in the literature on the impact of exchange rate uncertainty on foreign direct investment is to consider exchange rate volatility. In this paper, we demonstrate the importance of considering also covariances and apply the theoretical arguments to a UK industry panel of FDI in R&D. An increase in the covariance of the euro and sterling, which would be a certain consequence of the UK’s entry into European Monetary Union, will increase foreign R&D into the UK. Increased volatility of the euro-dollar exchange rate tends to relocate R&D investment from the Euro Area into the UK.