scholarly journals Demand Shocks and Open Economy Puzzles

2015 ◽  
Vol 105 (5) ◽  
pp. 644-649 ◽  
Author(s):  
Yan Bai ◽  
José-VÍctor RÍos-Rull
Keyword(s):  
Exchange Rate ◽  
Business Cycle ◽  
Real Exchange Rate ◽  
Open Economy ◽  
Perfect Matching ◽  
Trade Deficit ◽  
Real Business Cycle ◽  
Demand Shocks ◽  
Search Effort ◽  
Cross Country

We pose good markets frictions on top of an otherwise standard two-country international real business cycle (IRBC) model. Shopping for goods takes effort, which prevents perfect matching between customers and producers. An increase in search effort implies increased measured productivity. Demand shocks increase expenditures and search effort simultaneously increasing output, consumption, productivity, and the trade deficit and appreciating the real exchange rate. Thus we solve the Backus-Smith puzzle and we show that the cross country correlation of consumption is higher than that of output. Standard IRBC models cannot account for these puzzles along with movements in TFP.

scholarly journals Monetary Policy and the Predictability of Nominal Exchange Rates

2020 ◽  
Author(s):  
M S Eichenbaum ◽  
B K Johannsen ◽  
S T Rebelo
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Open Economy ◽  
Real Exchange Rates ◽  
Nominal Exchange Rate ◽  
Medium Size ◽  
Inflation Rates ◽  
Nominal Exchange Rates

Abstract This article studies how the monetary policy regime affects the relative importance of nominal exchange rates and inflation rates in shaping the response of real exchange rates to shocks. We document two facts about inflation-targeting countries. First, the current real exchange rate predicts future changes in the nominal exchange rate. Second, the real exchange rate is a poor predictor of future inflation rates. We estimate a medium-size, open-economy DSGE model that accounts quantitatively for these facts as well as other empirical properties of real and nominal exchange rates. The key estimated shocks that drive the dynamics of exchange rates and their covariance with inflation are disturbances to the foreign demand for dollar-denominated bonds.

scholarly journals Testing the Harrod Balassa Sameulson Hypothesis: The Case of Pakistan.

2011 ◽  
Vol 50 (4II) ◽  
pp. 379-399 ◽  
Author(s):  
Sunila Jabeen ◽  
Waseem Shahid Malik ◽  
Azad Haider
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Open Economy ◽  
Purchasing Power Parity ◽  
Control Variable ◽  
Policy Implications ◽  
Purchasing Power ◽  
Power Parity ◽  
Long Run ◽  
Tradable Sector

For a small open economy of Pakistan, exchange rate is determined through the two alternative theories; the nominal theory of exchange rate named by Purchasing Power Parity (PPP) and the real theory known as Harrod Balassa Sameulson (HBS). According to the requirements of theories, two kinds of real exchange rate have been employed for the yearly data of 1972-2008. As, both of the theories are disputed at the ground of their long run relationship with real exchange rate, therefore, the VAR based Johenson Co-integration approach has been utilised to see the long run relationships. PPP has shown less satisfactory results either in its form of absolute version or relative version. Because, real exchange rate in Pakistan is a non-stationary process by Augmented Dickey Fuller unit-root test, predicting some pushing force behind the non-tradable sector. While favouring the PPP in tradable sector, the ADF and KPSS are indicating the presence of the HBS in Pakistan. On the other hand, the analysis of the HBS through co-integration is showing that relative productivity difference has an opposite relationship with relative non-tradable sector prices and with RER. However, the relationship between relative non-tradable sector prices and RER is much stronger and according to the theory. So, there have been incorporated some demand side and external factors to reduce the mis-specification of the simple HBS model. Therefore, in the extended HBS model, productivity difference, government consumption expenditure, terms of trade and world oil prices are appreciating the RER and money supply (a control variable) is pursuing depreciation in RER. So, these results yield some policy implications for Pakistan which can be useful for developing countries as well. JEL classification: E0, E31, E44 Keywords: Harrod-Balassa-Samuelson, Exchange Rate, Purchasing Power Parity, Pakistan

scholarly journals Understanding Business Cycle Fluctuations in Pakistan

2020 ◽  
Vol 59 (1) ◽  
pp. 1-28
Author(s):  
Gulzar Khan ◽  
Ather Maqsood Ahmed
Keyword(s):  
Exchange Rate ◽  
Business Cycle ◽  
Open Economy ◽  
Rational Expectations ◽  
Forecast Error ◽  
Error Variance ◽  
New Keynesian ◽  
Impulse Response Functions ◽  
Business Cycle Fluctuations ◽  
The Exchange Rate

Notwithstanding the level of improvement in understanding the complexities of an economy, it is now well accepted that the ultimate incidence of various policy interventions leads to varied outcomes in terms of magnitude and persistence depending upon the structure of the economy. The objective of the present study is to disentangle the relative contributions of various exogenous and domestic shocks that contribute to business cycle fluctuations in Pakistan. The study is based on the New-Keynesian Open economy model, which is an extended version of (Gali & Monacili 2005). Keating’s two-step approach (1990, 2000) is employed to capture the dynamic behaviour of the variables of interest. Impulse response functions, along with forecast error variance decomposition analyses, are used to gain useful insights into the understanding of the transmission mechanism of policy and non-policy shocks. It is observed that fiscal policy does matter, at least in the short-run. The interest rate shock leads to the exchange rate appreciation thereby confirming the exchange rate puzzle. In response to adverse supply shocks, the Monetary Authority responds with a monetary contraction that prolongs the recessionary periods. Furthermore, it has a limited power to control inflation as inflation in Pakistan stems from supply-side factors as well as fiscal dominance. JEL Classification: C32, E52, E62, F41 Keywords: Open Economy, New Keynesian Model, Rational Expectations, Exchange Rate Puzzle

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