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52. Oil Shocks and External Adjustment
- Author:
- Luca Guerrieri, Martin Bodenstein, and Christopher J. Erceg
- Publication Date:
- 06-2007
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- This paper investigates how oil price shocks affect the trade balance and terms of trade in a two country DSGE model. We show that the response of the external sector depends critically on the structure of financial market risk-sharing. Under incomplete markets, higher oil prices reduce the relative wealth of an oil-importing country, and induce its nonoil terms of trade to deteriorate, and its nonoil trade balance to improve. The magnitude of the nonoil terms of trade response hinges on structural parameters that affect the divergence in wealth effects across oil importers and exporters, including the elasticity of substitution between oil and other inputs in production, and the discount factor. By contrast, cross-country wealth differences effectively disappear under complete markets, with the implication that oil shocks have essentially no effect on the nonoil terms of trade or the nonoil trade balance.
- Topic:
- Economics, Foreign Exchange, International Trade and Finance, Markets, and Oil
53. Exchange Rate Pass-Through to Export Prices: Assessing Some Cross-Country Evidence
- Author:
- Robert Vigfusson, Nathan Sheets, and Joseph Gagnon
- Publication Date:
- 09-2007
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- A growing body of empirical work has found evidence of a decline in exchange rate pass-through to import prices in a number of industrial countries. Our paper complements this work by examining pass-through from the other side of the transaction; that is, we assess the exchange rate sensitivity of export prices (denominated in the exporter's currency). We first sketch out a streamlined analytical model that highlights some key factors that determine pass-through. Using this model as reference, we find that the prices charged on exports to the United States are more responsive to the exchange rate than is the case for export prices to other destinations, which is consistent with results in the literature suggesting that import price pass-through in the U.S. market is relatively low. We also find that moves in the exchange rate sensitivity of export prices over time have been significantly affected by country and region-specific factors, including the Asian financial crisis (for emerging Asia), deepening integration with the United States (for Canada), and the effects of the 1992 ERM crisis (for the United Kingdom).
- Topic:
- Economics, Foreign Exchange, International Trade and Finance, and Markets
- Political Geography:
- United States, United Kingdom, Canada, and Asia
54. U.S. External Adjustment: Is It Disorderly? Is It Unique? Will It Disrupt the Rest of the World?
- Author:
- Steven B. Kamin and Trevor A. Reeve
- Publication Date:
- 04-2007
- Content Type:
- Working Paper
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- In recent years, a number of studies have analyzed the experiences of a broad range of industrial economies during periods when their current account deficits have narrowed. Such studies identified systematic aspects of external adjustment, but it is unclear how good a guide the experience of other countries may be to the effects of a future narrowing of the U.S. external imbalance. In contrast, this paper focuses in depth on the historical experience of external adjustment in the United States. Using data from the past thirty-five years, we compare economic performance in episodes during which the U.S. trade balance deteriorated and episodes during which it adjusted. We find trade balance adjustment to have been generally benign: U.S. real GDP growth tended to fall, but not to a statistically significant extent; housing construction slumped; inflation generally rose modestly; and although nominal interest rates tended to rise, real interest rates fell. The paper then compares these outcomes to those in foreign industrial economies. We find that the economic performance of the United States during periods of external adjustment is remarkably similar to the foreign experience. Finally, we also examine the performance of the foreign industrial economies during the periods of U.S. deterioration and adjustment. Contrary to concerns that U.S. adjustment will prove injurious to foreign economies, our analysis suggests that the foreign economies fared reasonably well during past periods when the U.S. trade deficit narrowed: the growth of domestic demand and real GDP abroad generally strengthened during such episodes, although inflation and interest rates tended to rise as well.
- Topic:
- Economics, Foreign Exchange, International Trade and Finance, and Markets
- Political Geography:
- United States
55. The Case for Exchange Rate Flexibility in Oil-Exporting Economies
- Author:
- Brad Setser
- Publication Date:
- 11-2007
- Content Type:
- Policy Brief
- Institution:
- Peterson Institute for International Economics
- Abstract:
- Brad Setser is a fellow at the Greenberg Center for Geoeconomic Studies at the Council on Foreign Relations. He previously worked as a senior economist at RGEMonitor, an online financial information service. He served in the US Treasury Department from 1997 to 2001, where he concluded his tenure as the acting director of the Office of International Monetary and Financial Policy, and spent 2002 as a visiting scholar at the International Monetary Fund. He is the coauthor of Bailouts or Bail-ins? Responding to Financial Crises in Emerging Economies (Institute for International Economics, 2004) with Nouriel Roubini.
- Topic:
- Economics, Foreign Exchange, International Trade and Finance, and Oil
- Political Geography:
- United States
56. Congress, Treasury, and the Accountability of Exchange Rate Policy: How the 1988 Trade Act Should Be Reformed
- Author:
- Randall Henning
- Publication Date:
- 09-2007
- Content Type:
- Working Paper
- Institution:
- Peterson Institute for International Economics
- Abstract:
- The controversy within the United States over Chinese exchange rate policy has generated a series of legislative proposals to restrict the discretion of the Treasury Department in determining currency manipulation and to reform the department's accountability to Congress. This paper reviews Treasury's reports to Congress on exchange rate policy—introduced by the 1988 Trade Act—and Congress's treatment of them. It finds that the accountability process has often not worked well in practice: The reports provide only a partial basis for effective congressional oversight. For its part, Congress held hearings on less than half of the reports and overlooked some important substantive issues. Several recommendations can improve guidance to the Treasury, standards for assessment, and congressional oversight. These include (1) refining the criteria used to determine currency manipulation and writing them into law, (2) explicitly harnessing US decisions on manipulation to the International Monetary Fund's rules on exchange rates, (3) clarifying the general objectives of US exchange rate policy, (4) reaffirming the mandate to seek international macroeconomic and currency cooperation, (5) requiring Treasury to lead an executivewide policy review, and (6) institutionalizing multicommittee oversight of exchange rate policy by Congress. Legislators should strengthen reporting and oversight of broader exchange rate policy in addition to strengthening the provisions targeting manipulation.
- Topic:
- Economics, Foreign Exchange, and International Trade and Finance
- Political Geography:
- United States and China
57. Measurement and Inference in International Reserve Diversification
- Author:
- Anna Wong
- Publication Date:
- 07-2007
- Content Type:
- Working Paper
- Institution:
- Peterson Institute for International Economics
- Abstract:
- This paper analyzes international reserve diversification by examining changes in quantity shares of currencies held in foreign exchange reserves. It discusses alternative methodologies for constructing quantity shares and applies the preferred methodology to three sets of data on the currency composition of foreign exchange reserves: quarterly aggregate International Monetary Fund's Composition of Foreign Exchange Reserves (IMF COFER) data, quarterly IMF COFER data for industrial- and developing-country groups, and annual data for 23 individual countries that disclose the currency composition of their foreign exchange reserve holdings. What can one infer from available data about the diversification of foreign exchange reserves since 1999? The analysis suggests four conclusions: (1) The behavior of the quantity shares of the US dollar and the euro in total reserves is consistent with net stabilizing intervention; their quantity shares tend to rise when these currencies are declining and vice versa. (2) The principal driver of this stabilizing diversification over the period 1999Q1–2005Q4 is Japan. (3) The industrial countries as a group but excluding Japan do not indicate stabilizing diversification. (4) The nonindustrial countries as a group display stabilizing diversification over short periods of only a few quarters. In summary, the aggregate data conceal much diversity in the practices of individual countries.
- Topic:
- Economics, Foreign Exchange, and International Trade and Finance
- Political Geography:
- United States, Japan, and Asia
58. A (Lack of) Progress Report on China's Exchange Rate Policies
- Author:
- Morris Goldstein
- Publication Date:
- 06-2007
- Content Type:
- Working Paper
- Institution:
- Peterson Institute for International Economics
- Abstract:
- This working paper assesses the progress made in improving China's exchange rate policies over the past five years (that is, since 2002). I first discuss four indicators of progress on China's external imbalance and its exchange rate policies—namely, the change in (and level of) China's global current account position, movements in the real effective exchange rate of the renminbi (RMB), the role of market forces in the determination of the RMB, and China's compliance with its obligations on exchange rate policy as a member of the International Monetary Fund (IMF). I then discuss why the lack of progress in improving China's exchange rate policies matters for the economies of the China and the United States and for the international monetary and trading system. I also argue that several popular arguments and excuses for why more cannot be accomplished on removing the large undervaluation of the RMB are unpersuasive. Finally, I consider what can and should be done by China, the United States, and the IMF to accelerate progress over the next year or two.
- Topic:
- Development, Economics, and Foreign Exchange
- Political Geography:
- United States, China, and Asia
59. From Industrial Policy to Innovative Policy: Japan's Pursuit of Competitive Advantage
- Author:
- Marcus Noland
- Publication Date:
- 05-2007
- Content Type:
- Working Paper
- Institution:
- Peterson Institute for International Economics
- Abstract:
- Japan faces significant challenges in encouraging innovation and entrepreneurship. Attempts to formally model past industrial policy interventions uniformly uncover little, if any, positive impact on productivity, growth, or welfare. The evidence indicates that most resource flows went to large, politically influential “backward” sectors, suggesting that political economy considerations may be central to the apparent ineffectiveness of Japanese industrial policy.
- Topic:
- Development, Foreign Exchange, and Industrial Policy
- Political Geography:
- Japan and Asia
60. The Trade Effects of Preferential Arrangements: New Evidence from the Australia Productivity Commission
- Author:
- Dean A. DeRosa
- Publication Date:
- 01-2007
- Content Type:
- Working Paper
- Institution:
- Peterson Institute for International Economics
- Abstract:
- This paper critically examines “new” evidence from the gravity model that indicates the majority of preferential trading arrangements (PTAs) today are predominantly trade diverting. This new evidence on trade diversion was presented in a recent Australia Productivity Commission (APC) working paper. Although no major faults are found in the methodology of the APC study, the present analysis finds the opposite conclusion—that the majority of current PTAs are predominantly trade creating—when a variant of the gravity model formulated by Andrew Rose is applied to up-to-date regression data using a variety of econometric methods, including the Tobit regression method employed by the APC study.
- Topic:
- Economics, Foreign Exchange, and Treaties and Agreements
- Political Geography:
- Australia/Pacific