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Enrique Martínez-García, Diego Vilán and Mark A. Wynne
Open-Economy models are central to the discussion of the trade-offs monetary policy faces in an increasingly more globalized world (e.g., Marínez-García & Wynne, 2010), but…
Abstract
Open-Economy models are central to the discussion of the trade-offs monetary policy faces in an increasingly more globalized world (e.g., Marínez-García & Wynne, 2010), but bringing them to the data is not without its challenges. Controlling for misspecification bias, we trace the problem of uncertainty surrounding structural parameter estimation in the context of a fully specified New Open Economy Macro (NOEM) model partly to sample size. We suggest that standard macroeconomic time series with a coverage of less than forty years may not be informative enough for some parameters of interest to be recovered with precision. We also illustrate how uncertainty also arises from weak structural identification, irrespective of the sample size. This remains a concern for empirical research and we recommend estimation with simulated observations before using actual data as a way of detecting structural parameters that are prone to weak identification. We also recommend careful evaluation and documentation of the implementation strategy (specially in the selection of observables) as it can have significant effects on the strength of identification of key model parameters.
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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…
Abstract
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.
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The paper aims at developing a theoretical model for de facto dollarized small open economies focusing on currency substitution and nominal wages indexation to the exchange rate.
Abstract
Purpose
The paper aims at developing a theoretical model for de facto dollarized small open economies focusing on currency substitution and nominal wages indexation to the exchange rate.
Design/methodology/approach
The analysis is performed in a general equilibrium “New Open Economy Macroeconomics” framework with nominal rigidities and imperfect competition in the nontraded good sector.
Findings
The paper finds that a dollar‐indexed economy with low degrees of payments/financial dollarization could experience higher costs in terms of exchange rate and output fluctuations when nominal shocks dominate real shocks, making stabilization programs more difficult to achieve in a rapid and less costly way.
Practical implications
The speed of adjustment of macro variables is faster in the highly dollarized economy as a response to a higher and more volatile inflation rate. A higher level of financial dollarization increases the frequency of domestic prices and wages revisions to nominal exchange rate shocks. This might explain, in turn, why nominal disturbances are shorter lived in the higher dollarized economies, and the asymmetry between financial and real dollarization
Originality/value
Contrary to the “conventional wisdom” that predicts a positive relationship between the degrees of dollarization and the exchange rate pass‐through, our model shows that the degree of dollarization and the degree of dollar indexation are not necessarily the same or even correlated.
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Laura Liu, Christian Matthes and Katerina Petrova
In this chapter, the authors ask two questions: (i) Is the conduct of monetary policy stable across time and similar across major economies? and (ii) Do policy decisions of major…
Abstract
In this chapter, the authors ask two questions: (i) Is the conduct of monetary policy stable across time and similar across major economies? and (ii) Do policy decisions of major central banks have international spillover effects? To address these questions, the authors build on recent semi-parametric advances in time-varying parameter models that allow us to increase the vector autoregressive () dimension and to jointly model three advanced economies (USA, UK and the Euro Area). The main reduced-form finding of this chapter is an increased connectedness between and within countries during the recent financial crisis. In order to study policy spillovers, we jointly identify three economy-specific monetary policy shocks using a combination of sign and magnitude restrictions. The authors find that monetary policy shocks were larger in magnitude and more persistent in the early 1980s than in subsequent periods. The authors also uncover positive spillover effects of policy between countries in the 1980s and diminished, and sometimes negative ‘beggar-thy-neighbour’ effects in the second half of the sample. Moreover, during the 1980s, the authors find evidence for policy coordination between the Federal Reserve, the Bank of England and the European Central Bank.
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Zhan Wang, Xiangzheng Deng and Gang Liu
The purpose of this paper is to show that the environmental income drives economic growth of a large open country.
Abstract
Purpose
The purpose of this paper is to show that the environmental income drives economic growth of a large open country.
Design/methodology/approach
The authors detect that the relative environmental income has double effect of “conspicuous consumption” on the international renewable resource stock changes when a new social norm shapes to environmental-friendly behaviors by using normal macroeconomic approaches.
Findings
Every unit of extra demand for renewable resource consumption increases the net premium of domestic capital asset. Even if the technology spillovers are inefficient to the substitution of capital to labor force in a real business cycle, the relative income with scale effect increases drives savings to investment. In this case, the renewable resource consumption promotes both the reproduction to a higher level and saving the potential cost of environmental improvement. Even if without scale effects, the loss of technology inefficient can be compensated by net positive consumption externality for economic growth in a sustainable manner.
Research limitations/implications
It implies how to earn the environment income determines the future pathway of China’s rural conversion to the era of eco-urbanization.
Originality/value
We test the tax incidence to demonstrate an experimental taxation for environmental improvement ultimately burdens on international consumption side.
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Sami Zaki Alabdulwahab and Ahmed Sabry Abou-Zaid
This paper aims to empirically investigate the sources of real exchange rate fluctuations in Egypt using structural vector autoregression (SVAR). The data covers the period…
Abstract
Purpose
This paper aims to empirically investigate the sources of real exchange rate fluctuations in Egypt using structural vector autoregression (SVAR). The data covers the period between 1980 and 2016, where exchange regime has been changed more than once.
Design/methodology/approach
This paper investigates the source of real exchange rate fluctuations for the period between 1980 and 2016 using the SVAR method. The SVAR method will incorporate real gross domestic product (GDP), real effective exchange rate (REER) and price level in a multidimensional equations system. However, impulse response function (IRF) and error variance decompositions (EVDC) will be generated by the system to have a behavioral insight of real exchange rate in response to economic shocks.
Findings
The IRF and EVDC results indicate a significant impact of demand shocks over the real exchange rate relative to supply shocks and monetary shocks in the period between 1980 and 2016. On the other hand, monetary shocks will have a negligible effect on the real exchange rate in the short run and converging to its previous level in the covering period of the study.
Originality/value
In the best of the authors' knowledge, the topic of the source of the real exchange rate fluctuations in Egypt has not been discussed in a wide range due to the lack of time series data. However, this study provides constructed data for REER for Egypt with the published method in the International Monetary Fund (IMF). Furthermore, the study involves theoretical and econometric modeling to ensure the reliability of the economic results.
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Eiji Okano, Masataka Eguchi, Hiroshi Gunji and Tomomi Miyazaki
We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing…
Abstract
We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate.
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Alka Gupta, Christoph Streb, Vishal K. Gupta and Erik Markin
Acting entrepreneurially in nascent industries is a complex endeavor characterized by uncertainty and ambiguity. Nevertheless, entirely new industries do emerge, often as a direct…
Abstract
Acting entrepreneurially in nascent industries is a complex endeavor characterized by uncertainty and ambiguity. Nevertheless, entirely new industries do emerge, often as a direct result of entrepreneurial behavior. We extend and apply discovery and creation approaches to study entrepreneurial behavior during industry emergence by means of qualitative analysis of a film about the personal computer (PC) industry℉s formative years. We find that discovery and creation behavior are fundamentally interrelated and share a common element: bricolage. Moreover, ideological activism is a major component of entrepreneurial behavior in a new industry℉s formative years during both creation and discovery processes. Implications for research and practice are discussed.
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Françoise Okah Efogo and Boniface Ngah Epo
This paper appraises the effects of monetary policy on trade in value-added (TiVA) using a panel of 38 developing countries spanning the period 1990 to 2019. Specifically, the…
Abstract
Purpose
This paper appraises the effects of monetary policy on trade in value-added (TiVA) using a panel of 38 developing countries spanning the period 1990 to 2019. Specifically, the authors subsequently summon the theory of trade in intermediate products within the New Keynesian framework for open economies that comprises price rigidity to verify this relationship and thereon control for robustness by correcting for endogeneity and unbalanced panel effect.
Design/methodology/approach
The authors mobilize the within estimator corrected for cross sectional dependence as well as the two-stage-least squares fixed effect estimator which corrects for endogeneity. For robustness, the authors also use the Hausman–Taylor estimator to control for endogeneity and random effects in annualized data and the least squares dummy variable corrected estimator.
Findings
Results suggest that the monetary policy instruments such as inflationary gaps and anticipatory inflationary outcomes significantly affect TiVA in developing countries only in the short term with no long-term effect. In addition to contributing to the scanty empirical literature, the authors provide relevant insights on monetary policy tools that can be mobilized in fashioning a global value chain penetration and upgrading strategies.
Originality/value
The authors convoke the theory of trade in intermediate products casted into the New Keynesian framework comprising price rigidity to verify the relationship between TiVA and monetary policy (b) verify for robustness by correcting for endogeneity and unbalanced panel effect.
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