Prices and Exchange Rates in General Equilibrium

Existing empirical evidence suggests that real exchange rates exhibit hump-shaped dynamics. I show that this is a robust fact across nine large, developed economies.

Prices and Exchange Rates in General Equilibrium

This thesis examines the dynamics of prices and exchange rates. Chapter 1, written jointly with Emi Nakamura, documents the extent of price rigidity in the United States using the micro data that underlie the consumer and producer price indices for the time period 1988--2005. We find that the median frequency of non-sale price change is 9--12% per month, roughly half of what it is including sales. This implies an uncensored median duration of regular prices of 8--11 months. The median frequency of price change for finished goods producer prices is roughly 11% per month. For certain product categories, we find that the main source of price adjustment is not price changes for identical items; rather most price adjustment is associated with product turnover. We also investigate how the frequency of price change varies with the overall inflation rate, seasonality in the frequency of price change and the hazard function of price changes.

Relative Price Movements in Dynamic General Equilibrium Models of International Trade

We examine the behavior of international relative prices from the perspective of dynamic general equilibrium theory, with particular emphasis on the variability of the terms of trade and the relation between the terms of trade and net ...

Relative Price Movements in Dynamic General Equilibrium Models of International Trade

We examine the behavior of international relative prices from the perspective of dynamic general equilibrium theory, with particular emphasis on the variability of the terms of trade and the relation between the terms of trade and net exports. We highlight aspects of the theory that are critical in determining these properties, contrast our perspective with those associated with the Marshall-Lerner condition and the Harberger-Laursen-Metzler effect, and point out features of the data that have proved difficult to explain within existing dynamic general equilibrium models.

Sovereign Defaults External Debt and Real Exchange Rate Dynamics

Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model.

Sovereign Defaults  External Debt  and Real Exchange Rate Dynamics

Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation. --Abstract.

Exchange Rate Disconnect in General Equilibrium

We propose a dynamic general equilibrium model of exchange rate determination, which simultaneously accounts for all major puzzles associated with nominal and real exchange rates.

Exchange Rate Disconnect in General Equilibrium

We propose a dynamic general equilibrium model of exchange rate determination, which simultaneously accounts for all major puzzles associated with nominal and real exchange rates. This includes the Meese-Rogoff disconnect puzzle, the PPP puzzle, the terms-of-trade puzzle, the Backus- Smith puzzle, and the UIP puzzle. The model has two main building blocks - the driving force (or the exogenous shock process) and the transmission mechanism - both crucial for the quantitative success of the model. The transmission mechanism - which relies on strategic complementarities in price setting, weak substitutability between domestic and foreign goods, and home bias in consumption - is tightly disciplined by the micro-level empirical estimates in the recent international macroeconomics literature. The driving force is an exogenous small but persistent shock to international asset demand, which we prove is the only type of shock that can generate the exchange rate disconnect properties. We then show that a model with this financial shock alone is quantitatively consistent with the moments describing the dynamic comovement between exchange rates and macro variables. Nominal rigidities improve on the margin the quantitative performance of the model, but are not necessary for exchange rate disconnect, as the driving force does not rely on the monetary shocks. We extend the analysis to multiple shocks and an explicit model of the financial sector to address the additional Mussa puzzle and Engel's risk premium puzzle.

An Estimated Dynamic Stochastic General Equilibrium Model of the Jordanian Economy

This paper presents and estimates a small open economy dynamic stochastic general-equilibrium model (DSGE) for the Jordanian economy.

An Estimated Dynamic Stochastic General Equilibrium Model of the Jordanian Economy

This paper presents and estimates a small open economy dynamic stochastic general-equilibrium model (DSGE) for the Jordanian economy. The model features nominal and real rigidities, imperfect competition and habit formation in the consumer’s utility function. Oil imports are explicitly modeled in the consumption basket and domestic production. Bayesian estimation methods are employed on quarterly Jordanian data. The model’s properties are described by impulse response analysis of identified structural shocks pertinent to the economy. These properties assess the effectiveness of the pegged exchange rate regime in minimizing inflation and output trade-offs. The estimates of the structural parameters fall within plausible ranges, and simulation results suggest that while the peg amplifies output, consumption and (price and wage) inflation volatility, it offers a relatively low risk premium.

Monetary Policy and Real Exchange Rate Dynamics in Stick price Models

"The authors study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models.

Monetary Policy and Real Exchange Rate Dynamics in Stick price Models

"The authors study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Their analytical and quantitative results show that the source of interest rate persistence - policy inertia or persistent policy shocks - is key. When the monetary policy rule has a strong interest rate smoothing component, these models fail to generate high real exchange rate persistence in response to monetary shocks, as policy inertia hampers their ability to generate a hump-shaped response to such shocks. Moreover, in the presence of persistent monetary shocks, increasing policy inertia may decrease real exchange rate persistence."--Abstract.

Real Exchange Rates and Sectoral Productivity in the Eurozone

We investigate the link between real exchange rates and sectoral total factor productivity measures for countries in the Eurozone.

Real Exchange Rates and Sectoral Productivity in the Eurozone

We investigate the link between real exchange rates and sectoral total factor productivity measures for countries in the Eurozone. Real exchange rate patterns closely accord with an amended Balassa-Samuelson interpretation, both in cross-section and time series. We construct a sticky price dynamic general equilibrium model to generate a cross-section and time series of real exchange rates that can be directly compared to the data. Under the assumption of a common currency, estimates from simulated regressions are very similar to the empirical estimates for the Eurozone. Our findings contrast with previous studies that have found little relationship between productivity levels and the real exchange rate among high-income countries, but those studies have included country pairs which have a floating nominal exchange rate.

Macroeconomic Theory

Suitable for students and researchers seeking coverage of the developments in macroeconomics, this title lays out the core ideas of modern macroeconomics and its links with finance.

Macroeconomic Theory

Suitable for students and researchers seeking coverage of the developments in macroeconomics, this title lays out the core ideas of modern macroeconomics and its links with finance. It presents the simplest general equilibrium macroeconomic model for a closed economy, and then gradually develops a comprehensive model of the open economy.

Economic Transitions in China and Japan

This is followed by an examination of the possible determinants of the striking transition to real appreciation thereafter, noting mounting evidence that an improved rural terms of trade tightened China's labour market, slowed rural to ...

Economic Transitions in China and Japan

[Truncated] This dissertation aims to offer insights into the path of China's and Japan's recent economic transitions and the implications for their real exchange rates. The literature on the determination of real exchange rates is reviewed in the first substantive chapter, confirming that, in the short run, it is dominated by cross-border financial capital flows and their associated influence on domestic aggregate demand. Economic fundamentals play key roles in both the short and long runs, though they are most influential in the long run. Indeed, shocks to technology, demographic structure, consumer preferences, the fiscal balance, the money supply, and to distortions such as trade barriers and imperfect competition can all affect real exchange rates. An analytical model describing short-run determinants is developed to codify these effects. The second substantive chapter examines China's exchange rate puzzle. International pressure to revalue China's currency stems in part from the expectation that rapid economic growth should be associated with an underlying real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis. A dynamic general equilibrium model is adopted to simulate the economy and show that, during the period of 1994-2003, trade reforms and a rising national saving rate were offsetting forces in the presence of elastic labour supply. This is followed by an examination of the possible determinants of the striking transition to real appreciation thereafter, noting mounting evidence that an improved rural terms of trade tightened China's labour market, slowed rural to urban migration and raised domestic unit costs. The third substantive chapter revisits Japan's economic stagnation and is focussed on the keys to its impending recovery. The many claimed sources of Japan's stagnation are reviewed, with particular attention to the extraordinary gyrations in Japan's real exchange rate between the late 1980s and the mid-1990s. These played an important role in the economic performance of the time. A smooth real depreciation is shown to be part of the recipe for recovery, the potential sources of which are analysed using a multi-region global dynamic general equilibrium model. Both demand and supply side determinants of the real exchange rate are considered and it is suggested that a further sudden and substantial real appreciation should be avoided. Moreover, it is shown that improvements in Japan's services sector productivity would bring about the needed smooth real depreciation and that this would play a key role in promoting the recovery.

Real Exchange Rates and Productivity Closed Form Solutions and Some Empirical Evidence

The International Monetary Fund (IMF) presents the full text of an article entitled "Real Exchange Rates and Productivity: Closed-Form Solutions and Some Empirical Evidence," by Jahanara Begum and published June 2000.

Real Exchange Rates and Productivity   Closed Form Solutions and Some Empirical Evidence

The International Monetary Fund (IMF) presents the full text of an article entitled "Real Exchange Rates and Productivity: Closed-Form Solutions and Some Empirical Evidence," by Jahanara Begum and published June 2000. The article discusses the impact of productivity shocks on real exchange rate fluctuations in a dynamic international general equilibrium model with nontraded goods.

Sovereign Defaults External Debt and Real Exchange Rate Dynamics

Emerging countries experience real exchange rate depreciations around defaults.

Sovereign Defaults  External Debt  and Real Exchange Rate Dynamics

Emerging countries experience real exchange rate depreciations around defaults. In this paper, we examine this observed pattern empirically and through the lens of a dynamic stochastic general equilibrium model. The theoretical model explicitly incorporates bond issuances in local and foreign currencies, and endogenous determination of real exchange rate and default risk. Our quantitative analysis replicates the link between real exchange rate depreciation and default probability around defaults and moments of the real exchange rate that match the data. Prior to default, interactions of real exchange rate depreciation, originated from a sequence of low tradable goods shocks with the sovereign’s large share of foreign currency debt, trigger defaults. In post-default periods, the resulting output costs and loss of market access due to default lead to further real exchange rate depreciation.

Financial Liberalization Structural Change and Real Exchange Rate Appreciations

We account for the appreciation of the real exchange rate in Mexico between 1988 and 2002 using a two sector dynamic general equilibrium model of a small open economy with two driving forces: (i) differential productivity growth across ...

Financial Liberalization  Structural Change  and Real Exchange Rate Appreciations

We account for the appreciation of the real exchange rate in Mexico between 1988 and 2002 using a two sector dynamic general equilibrium model of a small open economy with two driving forces: (i) differential productivity growth across sectors and (ii) a decline in the cost of borrowing in foreign markets. These two mechanisms account for 60 percent of the decline in the relative price of tradable goods and explain a large fraction of the reallocation of labor across sectors. We do not find a significant role for migration remittances, foreign reserves accumulation, government spending, terms of trade, or import tariffs.

Dynamic Macroeconomic Theory

This book on dynamic equilibrium macroeconomics is suitable for graduate-level courses; a companion book, Exercises in Dynamic Macroeconomic Theory, provides answers to the exercises and is also available from Harvard University Press.

Dynamic Macroeconomic Theory

The tasks of macroeconomics are to interpret observations on economic aggregates in terms of the motivations and constraints of economic agents and to predict the consequences of alternative hypothetical ways of administering government economic policy. General equilibrium models form a convenient context for analyzing such alternative government policies. In the past ten years, the strengths of general equilibrium models and the corresponding deficiencies of Keynesian and monetarist models of the 1960s have induced macroeconomists to begin applying general equilibrium models. This book describes some general equilibrium models that are dynamic, that have been built to help interpret time-series of observations of economic aggregates and to predict the consequences of alternative government interventions. The first part of the book describes dynamic programming, search theory, and real dynamic capital pricing models. Among the applications are stochastic optimal growth models, matching models, arbitrage pricing theories, and theories of interest rates, stock prices, and options. The remaining parts of the book are devoted to issues in monetary theory; currency-in-utility-function models, cash-in-advance models, Townsend turnpike models, and overlapping generations models are all used to study a set of common issues. By putting these models to work on concrete problems in exercises offered throughout the text, Sargent provides insights into the strengths and weaknesses of these models of money. An appendix on functional analysis shows the unity that underlies the mathematics used in disparate areas of rational expectations economics. This book on dynamic equilibrium macroeconomics is suitable for graduate-level courses; a companion book, Exercises in Dynamic Macroeconomic Theory, provides answers to the exercises and is also available from Harvard University Press.

Macroeconomic Dynamics in Open Economies

This is done by developing a stylized international real business cycle model which is simulated to explore its ability to shed new light on the dynamic behavior of the standard small open economy.

Macroeconomic Dynamics in Open Economies

This thesis examines the role of technological innovation in generating macroeconomic dynamics in open economies. Each chapter constitutes an original and independent contribution to the literature. In Chapter 1, I examine the behavioral responses of key macroeconomic variables in Canada to exogenous shocks to investment-specific technology. This is done by developing a stylized international real business cycle model which is simulated to explore its ability to shed new light on the dynamic behavior of the standard small open economy. The results indicate that this model can quantitatively replicate the key dynamic features of the post-war Canadian economy, and thus shocks to investment-specific technology can be considered an important exogenous process for studying and understanding modern macroeconomic dynamics in small open economies. In Chapter 2, I demonstrate that a two-country flexible price dynamic general equilibrium model driven by shocks to technology, and with a localized distribution services sector can replicate the key dynamic features of the real exchange rate. In doing so, the paper identifies the importance of two key channels for real exchange rate dynamics. In particular, I show: (i) that shocks in the real sector are important contributors to movements in the real exchange rate, and (ii) that the endogenous wedge created by the distribution costs of traded consumer goods is a significant source of fluctuation for the real exchange rate, and the overall macro-economy. Finally, in chapter 3 I analyze a dynamic general equilibrium model with a mixture of fiscal deficits, stochastic endowment, and sovereign debts. It offers an environment in which a loss of confidence in the sustainability of the government's fiscal position creates an environment for currency crises. The evidence provided demonstrates that the Argentine government's decision to abandon the peg in 2002---following the default on its international debts, was a self-fulfilling outcome of agent's expectations based on the underlying economic environment. Moreover, I also show that in an essentially identical economic framework---where the equilibrium probability of default is low, the optimal action for the government would be to maintain the fixed exchange rate and issue new debts to finance the fiscal deficit.