International Emprics Flashcards
Does PPP hold?
Absolute: No. (Meese and Rogoff 1988)
Relative: Yes (Half life of deviations is roughly 3-5 years) (Taylor and Taylor 2004)
Why can real ER fluctuate
Transport costs means it can fluctuate 0.57 to 1.74 (Anderson and Wincoop, 2004)
Conflict between internal and external balance?
Meade: Zones of real ER and Y!
ER unpredictable:
Meese and Rogoff 1983: For less than 12 month period, models fail to outperform random walk!
CIP?
Obstfeld and Taylor (2004): Holds if capital mobility
UIP?
Doesn’t hold: Past forecast errors are useful in predicting future errors (Cumby and Obstfeld, 1984)
Balassa Samuelson effect
Relative price of NT vs T related to relative productivities!
Bhagwati-Kravis-Lipsey
Relative price of labour intensive NT related to labour / capital endowment (NOT relative productivity!)
Balassa Samuelson evaluation?
Fairly strong, but one cause of imperfect
Lothian and Taylor (2008): Better than time trends only!
Feenstra and Taylor (2011): Country experiencing prod up will see wages up, real er down.
Cardi and Restout (2015): Imperfect labour mobility implies it won’t hold. For example, generally tradeables are more service based !
Home bias puzzle
French and Poterba, 1991
e.g: 1989: UK 82%, US: 94%
Why may home bias puzzle exist?
Info/transaction costs
Multinationals create measurement errors
Feldstein, Horioka Puzzle
1980: If perfect capital mobility, Investment should flow to profit opp regardless of savings, but I,S highly correlated.
1960-74 R^2=0.91
1990-97 R^2=0.68
Reconcile Feldstein Horioka
Macro policy may attempt to ensure CA=Xbar (see zones of internal and external discomfort)
Persistent prod shocks can affect both I and S!
Currency crisis models why?
We see outcomes inconsistent with original models (eg EMS crisis / Asian tigers). Speculators ARE rational to attack currency pegs (Grauble,1996)
1st generation
Bad Macro fundamentals (Krugman, 1979)
- Depletion of F to prevent depreciation
- Rational and inevitable if perfect foresight (Flood-Garber, 1984)
- Must occur at T
- Currency crisis of Lebanon 2023 sees pattern similar to this with rapidly declining foreign reserves.
2nd generation
Obstfeld, 1994
Gov minimises a loss function, similar to (Barro-Gordon, 1983): Temptation to abandon peg to stimulate output (time inconsistent). Abandonment happens if sufficient expect abandon! Multiple equilibria: Herding on Soros
Eichengreen et al, 1995: Evidence of arbitrary elements to crises!
EMS Crisis
3rd Generation
Calvo (1997) sudden stop. Asian Tigers. Eichengreen, 1999: High domestic ir leads to incentive for foreign borrowing (long period of e stable)! No reserve requirements on foreign borrowing (weak gov) Debt: L=eL*. Y down leads to e up causing further issues (eg balance sheet)
Masson, 2007: Perverse incentives to borrow foreign leads to fragility to shocks!
Trade barriers and imperfect competition lead to
Pricing to market (Krugman, 1987)
Does Marshall Lerner hold
Traded goods prices insensitive to exchange rate for 2 year horizons if measured in currency it is paid in. Takes a while for volume effect to dominate!(Gopinath, 2016)
Prime Specie Flow Mechanism
Current account will self correct under the gold standard (Hume, 1752). This is because CA=/=0 implies gold flows and so price adjusts!
