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This paper reviews the thirteen-year record of Open Economies Review (OER), an economics journal specializing in issues of the open economy, both at the micro and macro levels. It first examines the journal’s output – defined by number and type of articles published, location of the authors’ institutional affiliation, recurrent themes, and rejection rates – and then critically assesses the development of big themes in international economics and finance, where OER authors have made a contribution. The main conclusion is that national border represents a big constraint to the expansion of the open economy, a point not lost by OER authors.

This study aims to investigate Granger-causal relations between the Ringgit-USD exchange rate and selected domestic and international economic variables after the flotation of the Ringgit beginning with 25 July 2005.

The study uses lag-augmented vector autoregression (LA-VAR) developed by Toda and Yamamoto (1995) to test for Granger-causality. To visualize short-run dynamics in the Malaysian Ringgit (RM)-USD exchange rate to shocks in predictor variables, generalized impulse-response functions (Pesaran and Shin, 1998) are derived from the estimated LA-VAR models.

Results based on LA-VAR generalized impulse responses and data measured in daily frequency indicate strong Granger-causal relationships with the Dow Jones Industrial Average and oil prices. Evidence is also indicative for a causal relationship with the Shanghai Composite Index. Positive shocks in these three variables lead an appreciation of the Ringgit.

These results provide insights for policymakers in East Asia in their attempt to manage the floating of their currency.

The paper adds to existing empirical literature in three ways. First, it investigates the RM-USD exchange rate after its managed flotation beginning with 25 July 2005. Second, the study provides results for exchange rates measured in two frequencies, namely, daily and monthly. Third, the empirical LA-VAR model applied includes variables capturing economic and financial conditions in China. Prior literature puts a focus on macroeconomic conditions in the USA. Yet, since 2009, China has been the largest trading partner of Malaysia.

This chapter, by virtue of a generalized specification, examines the equilibrium growth paths under two distinct scenarios, namely, a small open economy and a small semiopen economy in a two-sector, endogenous growth model of money. We show that these two scenarios end up with very different characteristics of equilibrium and the steady-state effects of inflation targeting (IT). In a small open economy, there is a nonbalanced-growth path equilibrium (hence, great ratios are nonstationary), while in a small semiopen economy there is a balanced-growth path equilibrium (great ratios are stationary). This provides a convincing reconciliation of the discrepancy in the empirical literature on great ratios. In addition, our steady-state analysis implicitly suggests that a lower inflation target gives rise to a positive GDP growth effect only for those IT countries which are more open to international trade. This enables us to explain why IT countries are relatively open to the international market and why some IT countries with a high degree of trade openness continuously lowered their inflation targets in the 1990s.

Despite being a flexible tool that can address several macroeconomic issues, Dynamic Stochastic General Equilibrium (DSGE) models have been rarely used to analyse the interaction between monetary and fiscal policy until the post-financial crisis, leaving a gap in the analysis of how government consumption affects the transmission mechanism of monetary policy. This motivates this paper to analyse how government consumption affects the dynamics of a small open economy, once the former is included in a non-separable form to the utility function. To the best of the authors' knowledge, this issue has not been addressed by the literature, and the authors aim to do so in this paper.

A standard New Keynesian model for a small open economy is used to allow for the presence of non-separable government consumption in the utility function. The model is supported by panel regressions.

The inclusion of Government consumption dampens the transmission mechanism of monetary policy. The degree of openness dampens the crowding out effect of fiscal policy to monetary policy, as the exchange rate channel empowers it. Empirical estimates for 35 OECD countries support the theoretical findings of the model.

The effect of government consumption on the transmission mechanism of MP has not been addressed in the literature. This paper contributes to the literature by addressing this issue.

• • The inclusion of Government consumption dampens the transmission mechanism of monetary policy.

• • The degree of openness alleviates the crowding out effect of fiscal policy to monetary policy, as the exchange rate channel empowers it.

• • Empirical estimates for 35 OECD countries support the theoretical findings of the model.

• The inclusion of Government consumption dampens the transmission mechanism of monetary policy.

• The degree of openness alleviates the crowding out effect of fiscal policy to monetary policy, as the exchange rate channel empowers it.

• Empirical estimates for 35 OECD countries support the theoretical findings of the model.

The global slack hypothesis is central to the discussion of the trade-offs that monetary policy faces in an increasingly more integrated world. The workhorse New Open Economy Macro (NOEM) model of Martínez-García and Wynne (2010), which fleshes out this hypothesis, shows how expected future local inflation and global slack affect current local inflation. In this chapter, I propose the use of the orthogonalization method of Aoki (1981) and Fukuda (1993) on the workhorse NOEM model to further decompose local inflation into a global component and an inflation differential component. I find that the log-linearized rational expectations model of Martínez-García and Wynne (2010) can be solved with two separate subsystems to describe each of these two components of inflation.

I estimate the full NOEM model with Bayesian techniques using data for the United States and an aggregate of its 38 largest trading partners from 1980Q1 until 2011Q4. The Bayesian estimation recognizes the parameter uncertainty surrounding the model and calls on the data (inflation and output) to discipline the parameterization. My findings show that the strength of the international spillovers through trade – even in the absence of common shocks – is reflected in the response of global inflation and is incorporated into local inflation dynamics. Furthermore, I find that key features of the economy can have different impacts on global and local inflation – in particular, I show that the parameters that determine the import share and the price-elasticity of trade matter in explaining the inflation differential component but not the global component of inflation.

The primary purpose of this paper is to investigate the sources of the business cycle fluctuations in Vietnam. To this end, the author develops a small open economy New Keynesian dynamic stochastic general equilibrium (SOE-NK-DSGE) model. Accordingly, this model includes various features, such as habit consumption, staggered price, price indexation, incomplete exchange-rate pass-through (ERPT), the failures of the law of one price (LOOP) and the uncovered interest rate parity. It is then estimated by using the Bayesian technique and Vietnamese data 1999Q1–2017Q1. Based on the estimated model, this paper analyzes the sources of the business cycle fluctuations in this emerging economy. Indeed, this research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.

A SOE-NK-DSGE model—Bayesian estimation.

This paper analyzes the sources of the business cycle fluctuations in Vietnam.

This research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.

We investigate the Bayesian approach to model comparison within a two-country framework with nominal rigidities using the workhorse New Keynesian open-economy model of Martínez-García and Wynne (2010). We discuss the trade-offs that monetary policy – characterized by a Taylor-type rule – faces in an interconnected world, with perfectly flexible exchange rates. We then use posterior model probabilities to evaluate the weight of evidence in support of such a model when estimated against more parsimonious specifications that either abstract from monetary frictions or assume autarky by means of controlled experiments that employ simulated data. We argue that Bayesian model comparison with posterior odds is sensitive to sample size and the choice of observable variables for estimation. We show that posterior model probabilities strongly penalize overfitting, which can lead us to favor a less parameterized model against the true data-generating process when the two become arbitrarily close to each other. We also illustrate that the spillovers from monetary policy across countries have an added confounding effect.

This paper aims to investigate whether the Gulf Cooperation Council (GCC) is an optimum currency area in the wake of the global financial crisis and low oil prices using annual data from 2000 to 2016.

It applies the European Monetary Union as a reference point and co-movement methodology on key variables such as gross domestic product, inflation, terms of trade and current account balance. The findings revealed that all countries meet the macroeconomic convergence criteria and there is greater co-movement of these variables in the GCC.

Furthermore, the degree of co-movements increases during the financial crisis and recent low oil prices, which signifies the synchronization of shocks. However, labor is less mobile in the region and current account balance co-movement is relatively weak, but with the endogeneity of a monetary union, these constraints will evaporate as the zone enters monetary unification. The paper recommends that for the GCC monetary union to happen and be sustainable, there needs to be political will. The paper also recommended for the zone to have a common identification card so that nationals can move and work freely within the GCC region.

The study defers from the others in the following: this paper considered shock synchronization and co-movement methodology, which has not been applied in the region to assess its feasibility as an OCA.

This study examines the importance of exchange rate and credit growth fluctuations when designing monetary policy in Thailand. To this end, the authors construct a small open economy New Keynesian dynamic stochastic general equilibrium (DSGE) model. The model encompasses several essential characteristics, including incomplete financial markets, incomplete exchange rate pass-through, deviations from the law of one price and a banking sector. The authors consider generalized Taylor rules, in which policymakers adjust policy rates in response to output, inflation, credit growth and exchange rate fluctuations. The marginal likelihoods are then employed to investigate whether the central bank responds to fluctuations in the exchange rate and credit growth.

This study constructs a small open economy DSGE model and then estimates the model using Bayesian methods.

The authors demonstrate that the monetary authority does target exchange rates, whereas there is no evidence in favor of incorporating credit growth into the policy rules. These findings survive various robustness checks. Furthermore, the authors demonstrate that domestic shocks contribute significantly to domestic business cycles. Although the terms of trade shock plays a minor role in business cycles, it explains the most significant proportion of exchange rate fluctuations, followed by the country risk premium shock.

This study is the first attempt at exploring the relevance of exchange rate and credit growth fluctuations when designing monetary policy in Thailand.

Deficits in fiscal and current account balances in a large number of countries reveal interesting implications of the causal relationship between internal and external imbalances. Empirical evidence about the occurrence of so-called twin deficits or twin surpluses provides crucial information about the validity of an intertemporal approach. However, most recent dynamic cyclical changes during the crisis period revealed many questions about the direct interconnection between macroeconomic performance and twin imbalances. In the paper we observe substantial features of twin imbalances in European transition economies. Event study (identification of large fiscal and current account changes and their parallel occurrence) and vector auto-regression methods will be employed to examine key aspects of twin imbalances. Our results suggest that current account deteriorations were predominately associated with negative public investment and savings balances (fiscal deficits), while current account improvements were predominately associated with positive private investment and savings balances, confirming empirical evidence about twin deficits in European transition economies.