International Emprics

Question 1

Does PPP hold?

Answer 1

Absolute: No. (Meese and Rogoff 1988)
Relative: Yes (Half life of deviations is roughly 3-5 years) (Taylor and Taylor 2004)

Question 2

Why can real ER fluctuate

Answer 2

Transport costs means it can fluctuate 0.57 to 1.74 (Anderson and Wincoop, 2004)

Question 3

Conflict between internal and external balance?

Answer 3

Meade: Zones of real ER and Y!

Question 4

ER unpredictable:

Answer 4

Meese and Rogoff 1983: For less than 12 month period, models fail to outperform random walk!

Question 5

CIP?

Answer 5

Obstfeld and Taylor (2004): Holds if capital mobility

Question 6

UIP?

Answer 6

Doesn’t hold: Past forecast errors are useful in predicting future errors (Cumby and Obstfeld, 1984)

Question 7

Balassa Samuelson effect

Answer 7

Relative price of NT vs T related to relative productivities!

Question 8

Bhagwati-Kravis-Lipsey

Answer 8

Relative price of labour intensive NT related to labour / capital endowment (NOT relative productivity!)

Question 9

Balassa Samuelson evaluation?
Fairly strong, but one cause of imperfect

Answer 9

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 !

Question 10

Home bias puzzle

Answer 10

French and Poterba, 1991
e.g: 1989: UK 82%, US: 94%

Question 11

Why may home bias puzzle exist?

Answer 11

Info/transaction costs
Multinationals create measurement errors

Question 12

Feldstein, Horioka Puzzle

Answer 12

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

Question 13

Reconcile Feldstein Horioka

Answer 13

Macro policy may attempt to ensure CA=Xbar (see zones of internal and external discomfort)
Persistent prod shocks can affect both I and S!

Question 14

Currency crisis models why?

Answer 14

We see outcomes inconsistent with original models (eg EMS crisis / Asian tigers). Speculators ARE rational to attack currency pegs (Grauble,1996)

Question 15

1st generation

Answer 15

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.

Question 16

2nd generation

Answer 16

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

Question 17

3rd Generation

Answer 17

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!

Question 18

Trade barriers and imperfect competition lead to

Answer 18

Pricing to market (Krugman, 1987)

Question 19

Does Marshall Lerner hold

Answer 19

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)

Question 20

Prime Specie Flow Mechanism

Answer 20

Current account will self correct under the gold standard (Hume, 1752). This is because CA=/=0 implies gold flows and so price adjusts!