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As economic activities came to a standstill during the COVID-19 pandemic, the Philippines, like many economies across the globe, experienced rising inflation, currency depreciation and fluctuating capital markets. To manage these variables and stabilize the macroeconomy, the central bank resorted to monetary tightening. In the Philippines, a key mechanism that contributes to this stabilizing effect rests on remittances that have been cushioning the economy from the effects of volatilities and uncertainties in the global economy. During economic downturns and reduced capital flows, remittances provide support not only to recipient households but also to the country's financial sector. Using time series analysis, we estimate the response of remittance inflows on impulses from selected macroeconomic variables, namely interest rate, inflation rate and exchange rate. A common characteristic shared by the selected indicators is their influence on recipient households' consumption-related decisionmaking process. These findings warrant the need to redesign major institutional policies to manage remittances in light of their anticipated feedback effect on the economy. Keywords: Exchange rate, inflation, interest rate, remittances, the Philippines., 1. Introduction Asymmetries in global labour markets have compelled labour movement across economies (Katz and Stark 1987). Driven by business cycles, socio-economic inequalities, political rationales, environmental crises, demographic changes such [...]

Capital inflows have been pinpointed as an important pathway through which the low-income, poor savings and investment as well as widening resource-gap, characterised within the West African sub-region can be filled. Besides the above, the convergence hypothesis has been identified as an important model with which to confirm evidence of club-convergence among countries within the sub-region aimed to supporting or refuting the call for a single-currency or monetary union recently agreed upon by the individual Heads of State. To achieve the above, this study employed Panel Autoregressive Distributed Lagged (PARDL) Technique to examine the threshold effects of capital inflows and macroeconomic conditions, as well as their interactive effects, necessary to spur growth and facilitate convergence among WAMZ countries from 1980 to 2017. The findings revealed that index of macroeconomic conditions and capital inflows are substitutes. Also, thresholds of capital inflows and macroeconomic conditions equivalent to 2.2 percent and 6 percent of GDP respectively are required within each member countries in order to enhance growth and accelerate growth convergence. The study recommends that macroeconomic stability should be ensured, in order to maintain inflows of adequate dosage. In addition, governments of member countries should maintain a threshold of 2.17% and 5.99% of GDP for index of capital inflows (CAPIN) and macroeconomic conditions (MACRO) in order to attract and retain investible funds, reduce external shocks arising from volatility, which in turn enhance growth and convergence. Most significantly, policy-makers should not rely on capital inflows in the short run because it transmits negative signals into the WAMZ economies which militates against growth. Rather, deliberate efforts should be channelled at advancing human capital and trade facilitation through qualitative education and infrastructural financing. In order to extend this study, researchers interested in international macroeconomics can re-examine the capital inflows-macroeconomic conditions relation by adding institutional quality into the models. JEL Classifications: F4, E6, O4 Keywords: Macroeconomic Conditions, Capital Inflows, Growth Convergence, PARDL, INTRODUCTION In the sub-Saharan African (SSA) economies, the investible capital required to support medium and large-scale enterprise are found to often fall below the required benchmark. This might be as [...]

The macroeconomics and traditional stock market nexus is widely explored in the extant literature, but few studies have focused on the impact of macroeconomics on Islamic stock markets. In fact, to our knowledge, only one or two prior studies have looked into both conventional and Islamic stock markets at the same time to see the impact of macroeconomics for comparison purposes. However, these studies have found differing views. Besides, no study has looked into the issue from the standpoint of Bangladesh. To close the gap, the study primarily explores the effect of macroeconomic variables on Islamic and conventional stock indices. Also, it looks at which index (Islamic or conventional) is more susceptible to macroeconomic shocks. The DSEX Shariah Index and the DSE Broad Index of the Dhaka Stock Exchange (DSE) are chosen as Islamic and conventional stock indices, respectively. In contrast, inflation rate, money supply, interest rate, and exchange rate are selected as proxies of macroeconomic variables. Using autoregressive distributed lag (ARDL) and Granger causality approaches for the monthly data from January 2014 to June 2021, our findings indicate that aggregate money supply has a positive long-term influence on both Islamic and conventional indices, whereas interest rates have a negative impact. Conversely, in the short run, the interest rate has a favorable impact on both indices. However, inflation only has a short-term impact on the Islamic stock index. Overall, the findings suggest that both indices behave almost analogously with the macroeconomic variables. Therefore, Islamic investors can undoubtedly choose Islamic stocks for their portfolios without sacrificing significant financial losses. Our study also provides some vital policy implications. Since our study finds a strong link between macroeconomics and stock markets, we urge the monetary authority to align their policies with those of the stock markets in Bangladesh because there were previously some inconsistencies in the policies of the monetary authority and stock markets, which appeared to be partly responsible for the recent stock market crash in Bangladesh in 2010-2011. JEL Classifications: G11, G12, G14, G15 Keywords: Islamic index, conventional index, macroeconomic variables, effect, long-run, short-run Contact author's email address: Email: bokhtiar_bank@yahoo.com, INTRODUCTION Understanding the relationship between a country's macroeconomic condition and stock market movement is crucial since stock indices' change is likely to respond to macroeconomic fundamentals shifts (Khan & Zaman [...]

It is important for the policy makers to know what kinds of shocks are responsible for macroeconomic fluctuations or recession to formulate appropriate policy responses. This paper exploits a stylized model to identify the sources of macroeconomic and exchange rate fluctuations in the US. The model consists of a productivity equation, a demand function, an exchange rate augmented Phillips curve, a monetary policy rule and an exchange rate equation (uncovered interest parity (UIP) condition). The stylized model implies a set of short-run restrictions that allow for the identification of the structural shocks in a vector autoregression model in order to test the model's consistency with data. We use real GDP for output, GDP deflator for price, Federal fund rate (FF) as monetary policy. The other two variables are unemployment rate and Nominal effective exchange rate (NEER). Throughout the analyses oil price is used as an exogenous variable. The Sample period starts from 1980q1, and ends at 2008 q2 to avoid possible non-linearity arise from 2008 financial crisis. Results show that more than half of the fluctuation in unemployment and output is explained by two shocks namely productivity/technology shock and aggregate demand shock. Monetary policy shock can explain around 15 per cent while supply and exchange rate shock explain less than 10 percent of the variation in unemployment and output. These results from our simple model are compatible with those from more sophisticated models found in current literature. Hence, our model is more appealing to the policy makers. Further, to gauge the importance of monetary policy in stabilizing the economy, a counterfactual simulation exercise is performed. The exercise shows that monetary policy has stabilized inflation and unemployment, though at the cost of increasing variability in output. The findings of this paper emphasize that policy makers should be aware of the importance of demand side shocks such as policy uncertainty and money supply. A positive uncertainty shock (an increase in uncertainty) may reduce investment and may slow the economic recovery. On the other hand, a prolong period of expansionary monetary policy may make the inflation expectations less anchored. Therefore, the policy makers should try to keep the impact of policy uncertainty at the minimum level and should follow prudent monetary policy. JEL Classifications: E32, E37 Keywords: Macroeconomic Fluctuations, Productivity Shock, Monetary Policy, Structural VAR, Counterfactual Simulation Contact author's email address: mailtorafayet@gmail.com, INTRODUCTION It is important for the policy makers to know what kinds of shocks are responsible for macroeconomic fluctuations or recession to formulate appropriate policy responses. The main body of [...]

ABSTRACT The relationship between macroeconomic risk and security returns has been central to financial economics. A well-known concept in capital asset pricing theory is that only systematic risk factors affect [...]

ABSTRACT The intermediation role of banks which is vital for the development of any nation can be adversely affected by non-performing loans. This study investigated the macroeconomic determinants of non-performing [...]

ABSTRACT The interaction between macroeconomic variables and share returns has been a debatable topic since decades. Much of the earlier studies have talked about significant relationships between stock market and [...]

Seasonality is a quite dominant source of variation in many economic time series. Several empirical studies have shown that seasonality is not a stable component but rather of stochastic nature. In this spirit, literature has seen the development of several seasonal unit root tests by generalizing the frameworks of the conventional (non-seasonal) ones. In general, existing tests for seasonal unit roots are heavily dependent on some restricted specifications for the deterministic component or they are interested in a particular observation frequency. The seasonal unit root test of Hylleberg et al. (1990) [HEGY] is the most in empirical works. The strong point of this procedure is that it can distinguish between different seasonal unit roots. However, such a procedure does not take into account the breakpoints characterizing some macroeconomic data. In this study, we investigate the persistence property of the quarterly industrial production of Brazil, Russia, India, China and South Africa, covering the period of early 1990s till the last quarter of 2013, with the industrial production for BRICS characterized by strong seasonality and upward trend. For our purpose, we use the seasonal unit root test developed by Popp (2007), which controls for not only seasonal and trending behavior, but also for a break of unknown timing in seasonal means. Specifically, Popp's (2007) test is based on an HEGY testing strategy with innovational outliers. It has been shown that this test has a stable size even in the presence of large breaks. Also, it can accurately identify the dates of small breaks. Our results indicate that, while there exist a non-seasonal unit root in the industrial production for Brazil, India and China, there is a strong evidence a seasonal unit root at Nyquist frequency for only China. In addition, there is a strong evidence of rejection of bi-annual unit roots in all BRICS industrial production. Using Jaccard (1902) coefficients for similarities, the greatest ones are recorded for Brazil and South Africa on the one hand, and Russia and South Africa on the other hand. By contrast, Russia and India have no similarity. Accordingly, some policy implications can be formulated for China as it is the only country, among the BRICS, which exhibits a seasonal unit root in its industrial production. Our results therefore, suggest that economists should examine the evolution of industrial production in China not only at the business cycle frequencies but also at the seasonal as well. JEL Classifications: C12, C22. Keywords: Seasonal unit root tests, Structural breaks, Linear time trend, Industrial production, BRICS., INTRODUCTION Seasonality is a quite dominant source of variation in many economic time series. In general, there are three models of seasonality. The first approach, which is adopted by macroeconomists, [...]

This study investigated the effects of exchange rate volatility on firm performance in Nigeria, by examining cross sectional data for the most active 20 companies listed on the Nigerian Stock Exchange. The study developed three dynamic panel models that account for heterogeneities among the companies and it extended recent research by allowing international investors and corporations to base their investment decisions on the exchange rate volatilities between the Nigerian Naira and their home country currencies. The method used in the study is the dynamic panel data approach applying the Arrelano-Bond dynamic panel-data and Arellano-Bover generalized method of moments (GMM) estimators. The variables used in the study to proxy firm performance are the rate of return on assets (RRA), asset turnover ratio (ATR), and portfolio activity & resilience (PAR) variable. While RRA variable is obtained by simply dividing the firm's profits by the total assets of the business, ATR variable and the PAR variables are obtained by dividing the firm's sales revenue by the assets employed in the business and by dividing the percentage change in sales by the percentage change in gross domestic product GDP. The exchange rate volatility variable is simply obtained by taking the square of the mean adjusted relative change in the official exchange rate. The result of the paned data estimate shows that there is no significant difference between the Arrelano-Bond dynamic panel approach and Arellano-Bover generalized method of moments (GMM) estimators. The result of the three estimates revealed that exchange rate volatility has significant negative impacts on the rate of return on assets, asset turn ratio and the portfolio activity & resilience, thus, establishing that there exist a significant negative impact of exchange rate volatility on firm performance in Nigeria between 2004 and 2013. Overall, the study suggests that the higher the exchange rate volatility in an economy the less efficient will firms operating in the economy and by implication the lower will be firms' operating performance. JEL Classifications: C34, D21, D51, D92, F31 Keywords: Exchange Rate Volatility, Firm Performance, Panel Data Regression, Rate of Return on Assets, Asset Turnover Ratio, Portfolio Activity & Resilience, INTRODUCTION Firrm performance has played a central role in management research. A series of important studies has allowed us to have a robust technical knowledge on key issues such as [...]

The introduction of the Euro in 1999 implied the transfer of the responsibility for monetary policy to the European Central Bank and it eliminated the member countries' nominal exchange rates. The smooth operation of a common currency area requires that independent exchange rates are replaced by other adjustment mechanisms. In the Euro area, wages have not been flexible enough, labor mobility is low, no sufficient central fiscal institutions exist, and the fiscal mles have been weak. This led to large external imbalances and high public debt in some countries. Since the outbreak of the economic crisis, macroeconomic reforms resulted in improved international competitiveness and lower public deficits. Several new institutions have been created on the European level, strengthening mutual economic surveillance and cooperation. Keywords Euro area * Macroeconomic adjustment ? International competitiveness * Fiscal federalism * Banking union JEL Classification E62 * G20 * H62, Introduction With the introduction of the Euro, the exchange rate risk among the member states was eliminated. Financial market participants evidently misperceived the sovereign risks, since the interest rate differential [...]

In the heat of severe global macroeconomic volatility, monetary authorities in the developing world are faced with the challenge of identifying the sources of such volatilities in their countries. Previous studies on developed countries have attributed home country macroeconomic shocks to monetary policy shocks in foreign countries. Consequently, it was suspected that interest rate shocks in trading partner countries such as the United States might be contributing to macroeconomic shocks in Ghana. Hence, the need to replicate such studies on Ghana becomes imperative. Therefore, this paper aims at (i) ascertaining whether Ghana's interest rate respond to the interest rate shocks in USA (ii) finding out if interest rate shocks in USA affect other basic macroeconomic variables of the Ghanaian economy. Data on four Ghanaian variables of real gross domestic product, consumer price index, exchange rate and interest rate were collected. Data on U.S variables (federal fund rate and the world consumer price index) were also collected. All data series were annual and span the period, 1983 to 2011. A VAR model of the Ghanaian economy was specified assuming the U.S variables to be exogenous, affecting the vector of endogenous Ghanaian variables contemporaneously. To automatically resolve the problem of unit root found in our series when the mean reversion status of the series were checked, a VECM of the VAR model was estimated. The study further generated the impulse responses (IR) of the Ghanaian variables to variables of the United States. The impulse response analysis of our VAR model shows that in general, interest rate shocks in the United States as well as shocks in the global consumer prices led to insignificant fluctuations in the Ghanaian macro economy. While the countries' real gross domestic product, interest rates and consumer price indices responded insignificantly to shocks originating from the United States (the upper standard error band fluctuated between 0.00 and 0.50 and the lower standard error band fluctuated between -0.00 and -0.40), its exchange rate responded significantly to shocks from U.S exchange rates (the upper standard error band took off from 0.00, went down to -0.03 before going up to 0.02 while its lower standard error band fluctuated between -0.00 and -0.4). By implication, macroeconomic shocks in Ghana are mostly home- made. To avoid being misled into wrong policy decisions, policy makers in Ghana were therefore advised to always strike a balance between imported and home-made shocks when allocating their policy making resources. JEL Classifications: F36, F41, F65 Keywords: Interest rate, shocks, International transmission, Ghana, U.S.A., VAR., INTRODUCTION Macroeconomic theory asserts that economic policy shocks are transmitted from one country to another. This assertion emphasizes the international transmission effects of monetary policy shocks. Over the decades, one [...]

This study examines the macroeconomic factors underlying FDI flows to India using cointegrating VAR with I(1) exogenous variables. The results indicate that conventional determinants such as a depreciating exchange rate, higher domestic returns, higher domestic output and better infrastructure are conducive to FDI flows to India. The results also indicate that macroeconomic instability has adverse effects while credit worthiness is conducive to FDI flows. A negative relation between trade openness and FDI is observed suggesting that FDI flows to India may be tariff jumping in nature. Empirical estimates also indicate that an increase in global FDI flows to other emerging economies reduces FDI flows to India indicating that India competes with other emerging economies in receiving FDI. Further, the results show that higher foreign output is conducive to FDI flows indicating procyclicality of FDI with economic performance of foreign countries. JEL Classifications: F21, C32 Keywords: Foreign direct investment, VECM, India, INTRODUCTION This paper analyses the macroeconomic determinants of FDI to India for the period 1997Q3 to 2011Q3. In this paper we examine both domestic and foreign macroeconomic factors (1) that [...]

The present study pertains to unravelling the internal (bank specific) and external (macroeconomic) determinants of nonperforming loans in Mauritius using annual report data from a panel of 10 existing banks and macroeconomic data for the period 2000 to 2012. The model used in the present instance comprises of a vector of bank specific and macro economic variables which include the inflation rate, lending interest rates, growth of the construction sector and tourism sector as well as global variables such as the Euro zone's GDP growth. The model is tested both in a static and dynamic framework. Four estimation techniques are considered, viz Fixed Effects, differenced GMM, System GMM and Random coefficient estimation. The results indicate that, notwithstanding there are many significant factors influencing NPL, the most critical elements nevertheless remain declines in the construction sector and the rise in cross border loans. Interestingly, the study provides important policy insights which centres on the improvement of credit concentration guidelines as well as the modification of the MCIB reporting. JEL Classifications: G21, C33 Keywords: Mauritian Banks; NPL; Macroeconomic factors; Bank Specific factors, INTRODUCTION The level of non-performing loans (NPL) has been unfortunately rising worldwide as banks continue to diversify their products and markets to immune themselves from external shocks caused by the [...]

Social protection has become part and parcel of the development response in Southeast Asia and across the globe and is likely to gain even greater prominence in light of the post-2015 development agenda. Its set of objectives has steadily widened with social protection now expected to fulfil a plethora of functions ranging from household-level consumption smoothing to macro-level economic stabilization. Notwithstanding the many achievements of social protection to date, this paper aims to inject a healthy dose of realism into current debates about its appropriate roles. This paper particularly reflects on the productivity-enhancing and growth-inducing focus within social protection--a particularly strong feature in Southeast Asia--and how this undermines principles of inclusivity, human rights and social justice. As an antidote to this Machiavellian type of social protection, this paper argues for 'Inclusive Social Protection', focusing on equitable coverage, realistic expectations and better integration of policies and programmes. Keywords: Social protection, social justice, inclusiveness, graduation, conditional cash transfers, post 2015, Southeast Asia., I. Introduction In recent years, social protection has become part and parcel of the development response across the globe. Social protection has been coined a 'quiet revolution' (Barrientos and Hulme [...]

The study tests the policy irrelevance proposition in the inflation targeting monetary policy environment in South Africa, as well as in the context of a dichotomy between anticipated and unanticipated policy shocks. Findings from estimates of monetary policy reaction function confirmed that an open economy implicit Taylor rule characterised the monetary policy instrument in South Africa, providing evidence that suggests that the monetary policy has, indeed, been conducted systematically on the basis of information from past inflation and the output gap. While aggregates of evidence invalidates rational expectations' PIP proposition in South Africa, doubts exists about the capacity of inflation targeting monetary policy in curbing inflationary pressures in the economy. For policy, this study supports calls for supplementing the inflation targeting framework with targets for other real variables, such as output and employment. JEL Classification: C62, F15, I34. Keywords: Rational Expectations, Inflation Targeting, South Africa., INTRODUCTION Investigating the effects of monetary policy on the business cycles has attracted a huge volume of theoretical and empirical literature (1). This interest is understandably spurred by the need [...]

Previous research has shown that trust alters input efficiencies across countries, which is suggestive of parameter heterogeneity. In this paper, trust's role in parameter heterogeneity is further explored within the context of the neoclassical growth model. This heterogeneity creates a nonlinear regression specification, which is estimated using a Metropolis within Gibbs algorithm. Results show that country-level trust differences cause human capital's exponent to vary by 43% and physical capital's exponent to vary by 29% across countries. This trust-induced parameter heterogeneity has important implications for various aspects of the development process. Under higher trust levels, the responsiveness of output per worker to changes in savings is increased by as much as 52%. In addition, this parameter heterogeneity also serves to mitigate untenably high implied rates of rate return differences between the US and other countries. JEL Classifications: O11, O50, Z13 Keywords: Trust, Development, Parameter Heterogeneity, INTRODUCTION The neoclassical growth model (NGM) has long been the workhorse of macroeconomic development research. A key assumption of the NGM and its associated linear specification is that the exponents [...]

Abstract The paper offers an overview of what structural models of the IS-LM and Mundell-Fleming variety can tell about the macroeconomics of economic crises. In addition to demonstrating how the [...]

The purpose of the paper is to investigate the factors that encourage and inhibit FDI flows to countries in the Middle East and North Africa (MENA). The approach followed is identified with New Institutional Economics (NIE). The extended NIE literature shows that both macroeconomic and institutional location factors are dominant influences on the investment decision. Pooled least squares regressions were used to estimate the results for 18MENA countries. The findings confirm that various NIE factors are indeed significant determinants of FDI, including economic growth, current account deficits, trade openness and less restrictive business regulations. The main limitations of the study is the lack of long term time series data and the need to explore different FDI patterns in oil producing versus non-oil producing countries in MENA. This study added to the increased importance of the growth of regional integration for FDI for investors. In this case FDI flows to MENA are investigated, which adds value to the accumulated knowledge of business environments in other regions in the developing world such as Latin America, Southeast Asia, and Central and East Europe., INTRODUCTION This paper investigates the causes of FDI flows to the Middle East and North Africa (MENA). The subsequent analysis of foreign direct investment (FDI) in MENA intersects two approaches [...]

In recent years, there has been a lot of speculation as to the performance of corporations in two rapidly growing economies. Both China and India have shown rapid industrial growth for the last decade and this trend is expected to continue. However, the economies of these two countries are very different. China's industrial economy is centrally controlled while a substantial portion of the Indian economy's growth is driven by businesses in the private sector. This study examines the similarities and differences in the financial characteristics of corporations operating in these two countries. Financial data is used from year end 2004 for large corporations to examine if there are major differences in how businesses operate, the profitability of their operations, how they are set up and how they raise capital. This study will be useful for persons that want to understand how the two systems work and for potential investors in trying to determine where to place their investment funds., INTRODUCTION The expectation is that in the next two decades, China and India will turn into super-powers and industrialized nations. The analysis in this paper will help in understanding how [...]

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.05.001 Byline: Martin D.D. Evans Keywords: Exchange rate dynamics; The exchange rate disconnect puzzle; Microstructure; Order Flow Abstract: The aim of this paper is to establish the link between the high frequency dynamics of spot exchange rates and developments in the macroeconomy. To do so, I first present a theoretical model of exchange-rate determination that bridges the gap between existing microstructure and traditional models. The model examines how dispersed microeconomic information known to individual agents outside the foreign exchange market is aggregated and transmitted to dealers via transaction flows (i.e., order flow); and how the information is then embedded in the spot exchange rate. I then report empirical evidence that strongly supports the presence of the link between the macroeconomy, order flow, and high frequency exchange rate returns implied by the model. In fact, my empirical results indicate that between 20 and 30% of the variance in excess currency returns over one- and two-month horizons can be linked back to developments in the macroeconomy. This level of explanatory power is an order of magnitude higher than that found in traditional models -- even the newly developed monetary models incorporating central banks reaction functions. Moreover, it provides a straightforward solution to the exchange-rate disconnect puzzle. Namely, the high frequency behavior of spot exchange rates reflects the flow of new information reaching dealers concerning the slowly evolving state of the macroeconomy, rather than the effects of shocks that drive rapidly changing macroeconomic conditions. Author Affiliation: Department of Economics, Georgetown University, Washington DC 20057, United States McDonough School of Business, Georgetown University, Washington DC 20057, United States National Bureau of Economic Research, United States Article History: Received 27 June 2008; Revised 6 May 2009; Accepted 13 May 2009

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.09.007 Byline: Philip R. Lane (a)(b), Jay C. Shambaugh (c)(d) Keywords: Financial globalization; Exchange rates; International portfolios Abstract: A major focus of the recent literature on the determination of optimal portfolios in open-economy macroeconomic models has been on the role of currency movements in determining portfolio returns that may hedge various macroeconomic shocks. However, there is little empirical evidence on the foreign currency exposures that are embedded in international balance sheets. Using a new database, we provide stylized facts concerning the cross-country and time-series variation in aggregate foreign currency exposure and its various subcomponents. In panel estimation, we find that richer, more open economies take longer foreign-currency positions. In addition, we find that an increase in the propensity for a currency to depreciate during bad times is associated with a longer position in foreign currencies, providing a hedge against domestic output fluctuations. We view these new stylized facts as informative in their own right and also potentially useful to the burgeoning theoretical literature on the macroeconomics of international portfolios. Author Affiliation: (a) IIIS, Trinity College Dublin, Ireland (b) CEPR, United Kingdom (c) Dartmouth College, United States (d) NBER, United States Article History: Received 18 June 2008; Revised 29 September 2009; Accepted 30 September 2009 Article Note: (footnote) [star] Prepared for the IMF/WEF Conference on International Macro-Finance (Washington DC, April 24-25 2008).

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jimonfin.2009.06.006 Byline: Russell S. Boyer Abstract: Friedman's central contributions to open economy macroeconomics are contained in his essay 'The Case for Flexible Exchange Rates.' The paper describes equilibrium in an open economy in terms of the flow market for domestic currency, and so presents the basic elements of The Monetary Approach to the Balance of Payments, which Mundell and Johnson developed later in the decade. An application of the argument includes the first definitive statement of the criteria which one finds in the literature on Optimum Currency Areas. The essay's model, in a better specified, more modern form, reappears in A Monetary History (with Anna Schwartz), where it serves as a basis for detailed analysis of particular episodes and as a framework for empirical work which continues to this day. Author Affiliation: Department of Economics, Social Science Centre, University of Western Ontario, London, Ontario N6A5C2, Canada

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jimonfin.2008.07.009 Byline: Stuart Landon, Constance E. Smith Abstract: Aggregate and sector-level investment equations are estimated for a panel of 17 OECD countries using an error correction methodology. A real currency depreciation is found to reduce aggregate investment and investment in all nine sectors in the short run, and aggregate investment in the long run. The decline in investment is quite persistent in service sectors, sectors that generally benefit less from an expansion of demand following a currency depreciation. A rise in the real wage has no short run impact on investment in most sectors, but has a significant negative long run effect in six of nine sectors. Author Affiliation: Department of Economics, University of Alberta, 8-14 Tory Building, Edmonton, Alberta T6G 2H4, Canada

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jimonfin.2008.09.005 Byline: William T. Gavin (a), David M. Kemme (b) Abstract: Empirical macroeconomics is plagued by small sample size and large idiosyncratic variation. This problem is especially severe in the case of the transition economies. We utilize a mixed-estimation method incorporating prior information from OECD country data to estimate the parameters of a reduced-form transition economy model. An exactly identified structural VAR model is constructed to analyze monetary policy in the transition economies. The OECD information increases the precision of the impulse response functions in the transition economies. The method provides a systematic way to analyze monetary policy in the transition economies where data availability is limited. Author Affiliation: (a) Research Department, P.O. Box 442, Federal Reserve Bank of St. Louis, St. Louis, MO 63166-0442, USA (b) Department of Economics, University of Memphis, Memphis, TN, USA

Prospect theory has been the focus of increasing attention in many fields of economics. However, it has scarcely been addressed in macroeconomic growth models--neither on theoretical nor on empirical grounds. In this paper we use prospect theory in a stochastic optimal growth model. Thereafter, the focus lies on linking the Euler equation obtained from a prospect theory growth model of this kind to real macroeconomic data. We will use generalized method of moments (GMM) estimation to test the implications of such a non-linear prospect utility Euler equation. Our results indicate that loss aversion can be traced in aggregate macroeconomic time series. JEL classification: E21; O41 Keywords: Ramsey growth model; Loss aversion; Prospect theory; GMM

This paper studies the effect of market structure and macroeconomic uncertainty on the transmission of monetary policy. We motivate our analysis with a simple model which predicts that: (1) investment and production in more concentrated sectors are more affected by demand shocks and (2) high uncertainty makes investment and production more sensitive to demand shocks. The empirical analysis estimates the effect of monetary shocks on sectoral output for different sectors in the US using a structural vector autoregressive (VAR) approach. The results are generally consistent with the theoretical predictions. JEL classification: E32; E52; G32 Keywords: Market concentration; Macroeconomic uncertainty; Monetary policy transmission; Vector autoregressive models

This paper studies the changes in world business cycles during the period 1960-2003. We employ a Bayesian dynamic latent factor model to estimate common and country-specific components in the main macroeconomic aggregates (output, consumption, and investment) of the G-7 countries. We then quantify the relative importance of the common and country components in explaining comovement in each observable aggregate over three distinct time periods: the Bretton Woods (BW) period (1960:11972:2), the period of common shocks (1972:3-1986:2), and the globalization period (1986:3-2003:4). The results indicate that the common (G-7) factor explains, on average, a larger fraction of output, consumption and investment volatility in the globalization period than it does in the BW period. Keywords: International business cycles; Globalization; Transmission of macroeconomic fluctuations JEL classification: E32; F42; F41

While the relationship between volatility and risk is central to much of the financial literature it has hot been incorporated systematically into assessment of sovereign debt sustainability. This paper attempts to fill this gap by studying how the probability distribution of sovereign debt to GDP ratios depends on the stochastic properties of underlying macroeconomic variables. Using right-hand tail of the distribution as a measure of the risk we are able to show how the volatility of the underlying variables as well as potential interactions between them influence country risk. JEL classification: C15; F34 Keywords: Macroeconomic volatility; Debt dynamics; Sovereign spreads

We present empirical evidence on the forces driving real exchange rates in the long-run. Using data from the US, UK and Italy across different exchange rate regimes, we find support for the hypothesis that productivity and fiscal shocks matter. However, in some cases fiscal shocks cause depreciations, likely triggered by the monetary accommodation of fiscal shocks. We also find that the traditional Harrod-Balassa-Samuelson effect of productivity on real exchange rates is reversed in some cases, which confirms the importance of the distributive sector in driving productivity gains. JEL classification: F31; E44; C32 Keywords: Real exchange rates; Macroeconomic fluctuations; Structural change

The labor search and matching model plays a growing role in macroeconomic analysis. This paper provides a critical, selective survey of the literature. Four fundamental questions are explored: How are unemployment, job vacancies, and employment determined as equilibrium phenomena? What determines worker flows and transition rates from one labor market state to another? How are wages determined? What role do labor market dynamics play in explaining business cycles and growth? The survey describes the basic model, reviews its theoretical extensions, and discusses its empirical applications in macroeconomics. The model has been developed against the background of difficulties with the use of the neoclassical, frictionless model of the labor market in macroeconomics. Its success includes the modelling of labor market outcomes as equilibrium phenomena, the reasonable fit of the data, and--when inserted into business cycle models--improved performance of more general macroeconomic models. At the same time, there is evidence against the Nash solution used for wage setting and an active debate as to the ability of the model to account for some of the cyclical facts. JEL classification: E24; E32; E52; J23; J31; J41; J63; J64; J65 Keywords: Search; Matching; Macroeconomics; Business cycles; Worker flows; Growth; Policy

Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news. Keywords: Asset pricing; Macroeconomic news announcements; Financial market linkages; Market microstructure; High-frequency data; Survey data; Asset return volatility; Forecasting

In this paper I analyze whether restrictions to capital mobility reduce vulnerability to external shocks. More specifically, I ask if countries that restrict the free flow of international capital have a lower probability of experiencing a large contraction in net capital flows. I use three new indexes on the degree of international financial integration and a large multi-country data set for 1970-2004 to estimate a series of random-effect probit equations. I find that the marginal effect of higher capital mobility on the probability of a capital flow contraction is positive and statistically significant, but very small. Having a flexible exchange rate greatly reduces the probability of experiencing a capital flow contraction. The benefits of flexible rates increase as the degree of capital mobility increases. A higher current account deficit increases the probability of a capital flow contraction, while a higher ratio of FDI to GDP reduces that probability. JEL classification: F30; F32 Keywords: Capital controls; Capital mobility; Contagion; External imbalances; Current account deficits; Sudden stops; Capital flow contractions

We propose a stylized intertemporal macroeconomic model wherein the combination of decentralized trading and microeconomic uncertainty (taking the form of privately observed and uninsured idiosyncratic shocks) creates an information problem between agents and generates indeterminacy of the macroeconomic equilibrium. For a given value of the economic fundamentals, the economy admits a continuum of equilibria that can be indexed by the sales expectations of firms at the time of investment. The Walrasian equilibrium is one of these possible equilibria but it is reached only if firms are optimistic enough. With a weaker degree of optimism, equilibrium output, employment and real wages will be lower than in the Walrasian equilibrium. Moreover, the range of possible equilibria will depend positively on the wage elasticity of the labour supply and on the magnitude of the information problem between buyers and sellers (in our case, the variance of the idiosyncratic shocks). Stochastic simulations performed on a calibrated version of the model show that pure demand expectation shocks may generate business cycle statistics that are not inconsistent with the observed ones. JEL classification: E3 Keywords: Indeterminacy; Non-Walrasian economy; Business cycle; Animal spirits; Continuum of equilibria

Large and volatile capital flows pose serious challenges for macroeconomic management in developing countries. In this paper, we examine the price-based capital controls adopted by Brazil during the 1990s with the objective of facing some of those difficulties. We use data on capital account transactions at a monthly frequency in order to evaluate the effects of those policies on net fixed-income capital flows and on total portfolio flows using GMM techniques. Our results suggest that the controls could have been effective in reducing both types of flows. Key words--international capital flows, capital controls, Latin America, Brazil

It would be dangerous to increase the opening up of the capital accounts given the weaknesses in the financial sector as well as the finances of India. The progress in India's macroeconomics after the 1990's is examined.

A central aspect of the recent debate on global imbalances and the US current account deficit is the role of the exchange rate peg being followed by China and other Asian economies. While one view has stressed the need for Asian currency appreciation, another focuses on the importance of fiscal adjustment and more generally adjustment in relative savings rates in the US and Asian economies. This paper develops a simple two-region open economy macroeconomic model to analyze the alternative impacts of currency appreciation and fiscal adjustment on the current account. We stress a number of structural features of emerging Asian economies that may make currency appreciation an ineffective means of current account adjustment relative to fiscal policy changes. In addition, we note that there may be a welfare conflict between regions on the best way to achieve adjustment. JEL classification: E52; E58; F41 Keywords: Current account; Currency appreciation

We use univariate GARCH models of inflation and output growth and monthly data for the G7 covering the 1957-2000 period to test for the causal effect of real and nominal macroeconomic uncertainty on inflation and output growth, and the effect of inflation on inflation uncertainty. Our evidence supports a number of important conclusions. First, inflation is a positive determinant of uncertainty about inflation. Second, output growth uncertainty is a positive determinant of the output growth rate. Third, there is mixed evidence regarding the effect of inflation uncertainty on inflation and output growth. Hence, uncertainty about the inflation rate is not necessarily detrimental to economic growth. Finally, there is not much evidence supporting the hypothesis that output uncertainty raises inflation. JEL classifications: C22; C51; C52; E0 Keywords: Inflation; Output Growth; Uncertainty; Granger-causality; GARCH models