Department of Economics,
Trinity College Dublin
Institute for International Integration Studies
Dublin 2, Ireland
Tel: (353 1) 896 1597
Fax: (353 1) 677 2503
E-mail: v.galstyan (at) tcd (dot) ie
Abstract: In this paper we empirically analyze regime-dependent behavior of real exchange rate dynamics. We identify that countries with higher public debt tend to have more depreciated exchange rates. The findings from our nonlinear short-run model suggest that real exchange rate misalignments with a fundamental equilibrium are considerably less persistent and more volatile during times of higher public or external debt. Assessing the underlying sources of the variance of changes in misalignments along the debt dimension, we retrieve evidence indicating that nominal exchange rate and relative price fluctuations are more important determinants in states of high debt than in states of low debt during which real exchange rate fundamentals are equally influential. Overall, our results imply that accounting for nonlinearities along the lines of gross debt levels is absolutely crucial when considering the mechanics of real exchange rate adjustment in emerging markets.
Abstract: This paper analyses optimal policy on the basis that the economy comprises a number of different sectors. It shows that the composition of output matters, that policy should take into account the source of shocks as well as their aggregate magnitude, and that policy tools impacting individual sectors can be significantly welfare improving. If sectoral policy is not adopted, then commitment in tax policy is important in similar ways and for similar reasons to commitment in monetary policy. With sectoral policy, commitment for tax and monetary policies ceases to be important.
Abstract: This paper contributes to empirical research on the dynamics of the terms of trade. We start by proposing a method for constructing different measures of the terms of trade. This is achieved by estimating a range of substitution elasticities using a panel data approach and highly disaggregated data on trade flows. Next, various measures of the terms of trade and trade margins are related to productivity and demand proxies. We find that domestic demand side movements are positively related to the terms of trade, while domestic productivity gains result in a deterioration of the terms of trade. Our results suggest that higher relative productivity raises the real component of exports relative to imports along the intensive margin inducing a weakening of the terms of trade.
Abstract: In an extended Ricardian model of trade, we study the effects of improving trade deficits on relative prices, and the relation between productivity improvements and real exchange rates. An improvement in the trade balance induces relative wages to overshoot their long-run value, placing downward pressure on the terms of trade of the same order of magnitude found in Armington type models. Once the pattern of specialization changes, some of the decline is reversed with a smaller value of depreciation. We find that persistent productivity differentials do not cause distinct trends in the terms of trade. The result depends on the size of the non-tradable sector and the variability of industry-specific efficiencies. We also find that self-selection into export markets causes the relative price of non-tradable goods to respond to exogenous shift, giving birth to an endogenous Balassa-Samuelson effect. The model also suggests that in the long-run the variation of the real exchange rate is dominated by the volatility of the terms of trade.
Abstract: This paper studies how country size affects the role of the exchange rate in external adjustment. First, the impact of country size on the sensitivity of relative prices to external imbalances is explored in a twocountry neoclassical model. Second, at the empirical level, a significant effect of external imbalances on relative prices is found. In particular, a trade surplus is associated with a depreciation of the real exchange rate. Our estimations reveal a systematic pattern in the sensitivity of the real exchange rate to external imbalances: larger countries are characterized by a higher absolute trade elasticity of the exchange rate.
Abstract: There has been considerable bilateral variation in the pattern of portfolio capital ?ows during the global ?nancial crisis: for a given destination, investors from different countries adjusted their holdings to different degrees. We show that the size of the initial bilateral holding, geographical distance, common language, the level of trade and common institutional linkages help to explain the pattern of adjustment. These bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries.
Abstract: In this paper we examine shifts in the bilateral patterns in international portfolio holdings in emerging Europe during the 2001-2008 period. In relation to the 2001-2007 pre-crisis period, we find some evidence that shifts in the geographical composition of portfolio equity liabilities reflect shifts in bilateral trade patterns. In addition, we find that the new member states disproportionately attracted portfolio equity investment from other members of the European Union after 2004. During the crisis period, we find that the bilateral composition of the shift in portfolio positions is affected by the scale of pre-crisis holdings and the geographical proximity of creditors. We also find that countries in the euro area are more likely to maintain portfolio positions in emerging Europe than were investors from other regions.
Abstract: We show that the composition of government spending influences the long-run behavior of the real exchange rate. We develop a two-sector small open-economy model in which an increase in government consumption is associated with real appreciation, while an increase in government investment may generate real depreciation. Our empirical work confirms that government consumption and government investment have differential effects on the real exchange rate and the relative price of nontradables.
Abstract: Our goal in this paper is to investigate the relation between government spending and the long-run behaviour of the Irish real exchange rate. We postulate that an increase in government consumption should be associated with real appreciation, while the impact of government investment is ambiguous. Empirically, we find that an increase in government consumption indeed appreciates the real exchange rate while an increase in government investment is associated with real depreciation. Accordingly, the level and composition of government spending matters for Irish external competitiveness.
Abstract: We quantify the role of the extensive margin in the recent trade dynamics of selected countries that are running large and persistent trade imbalances. We find that the role of the extensive margin is quite substantial, although it varies in significance across the countries in the sample. Finally, we highlight differences in behaviour between the fixed-varieties and varieties-adjusted terms of trade.