The components of the real exchange rate in Hungary

This paper provides a statistical analysis of the components of real exchange rate in Hungary for the period 1991-1996. The real exchange rate is decomposed into a tradable and a nontradable rate. The following main conclusions are valid: 1. The Balassa-Samuelson effect, which presumes a real appreciation when productivity in the tradable sector grows faster than in the nontradable sector, is markedly substantiated by the data for Hungary. 2. The homogeneity assumption of the traded sector is not justified by the data. The traded sector defined by the usual statistical terms does not indicate PPP to hold. 3. The relative (common currency) price of the traded sector shows fluctuations driven by changes in the nominal exchange rate. 4. Fluctuations in the relative (common currency) price of the traded sector are larger than fluctuations of relative prices of nontradables in terms of tradables. In other words prices of the traded and non-traded sectors behave similarly to nominal exchange rate shocks: they have similar inertia. 5. A summary conclusion comprising findings of 1-4: for Hungarian data the definition of statistical categories of trading and non-trading sectors are useful in separating industries according to their rate of technological change, but it is much less helpful in separating good substitutes from poor substitutes for internationally traded goods. In section 1 we describe the way we decomposed the real exchange rate. In section 2 we try to explain the determinants of the components, in section 3 we try to arrive to a quantification of the rate of change of the equilibrium real exchange rate in Hungary.

Optimal Indebtendness of a Small Open Economy with Precautionary Behavior

The model is an application of the precautionary consumer saving model to the external debt policy of a small open economy. Let us assume that the welfare criterion of macroeconomic policy is the utility function of a representative infinitely living dynasty. This approach is in line with the intertemporal optimization model of the current account of Obstfeld-Rogoff [1995]. It is known that assuming differences in tastes or growth rates across countries imply unacceptably extreme long-run predictions in this model. We show that a model with uninsurable wage risks and precautionary behaviour leads to stable stationary indebtedness levels within the range of magnitudes observed in reality. Let us assume that the consumption function of the representative dinasty has the form of a CES function. The positive third derivative of this function and uncertainty together give rise to a precautionary behavior. As a result, countries who grow fast relative to their own time preference, will borrow, but their debt will be constrained by the risk that indebtedness implies. By similar reasoning, a patient or slow-growing country will lend but its lending will converge to an amount where the gained security that its reserves offer is equal to its opportunity cost. We parameterized the model assuming a drifting random-walk aggregate income with a standard error of 2%, a habit factor of 80% of the previous years income incorporated into the CES funtion, risk-aversion and time preference parameters taken from the literature, and found that typical indebtedness ratios observed in the world can be replicated as a policy outcome of our model, in contrast to deterministic models where the rate of the optimal indebtedness was in the range of 20-30 times GDP. The calculations are based on adaptation of the Taylor-series approximation of Skinner [1989]. A sensitivity analysis of the stationary solution to various parameters and various scenarios for effects of assumed shocks and consequences of catch-up growth paths for a converging country are calculated. In another section the problem is discussed whether the level of indebtedness can be considered a goal of macroeconomic policy and if it was a goal how could it be achieved. Let us assume agents with idiosynchratic uninsured wage risks. These risks are correlated but there exists an aggregate risk for the country as a whole. Aggregate risk has to be handled by macroeconomic policy. The optimum intertemporal consumption choice of the social planner (macro-policy maker) does not necessarily coincide with the sum of the optimal decisions of individual agents. Fiscal policy is the tool that creates consistency between the two. It is shown that the model with the parametrizations given above and a proportional income tax system implies that government debt nearly fully appears in external debt, i.e. Ricardian compensation is very close to 0. This means, that the fiscal tool is effective in enforcing the social optimum of indebtedness.

Potential Output and Foreign Trade in Small Open Economies

In open economies excess demand in the tradables sector often manfests itself in an external deficit instead of the employment gap that is applied in the usual Phillips-curve model. The inflationary pressure in this case arises from an expected or actual weakening of the exchange rate and its pass-through into prices. This phenomenon gave the idea to define an output as sustainable ('potential') if it does not rely on a permanent increase of external indebtedness. Both domestic and foreign demand shocks generate deviations of actual aoutput from the potential. Potential output for Hungary, Mexico, and Poland was estimated using the Kalman-filter.economic integration, I(2)- ness, Kalman-filter, output gap, transition economies.

Analyzing Fiscal Policy and Growth with a Calibrated Macro Model

CEE countries experience a catching up period in economic growth while preparing for accession to the European Union. In several countries we experience an expenditure boom arising either from exuberant expectations of consumers towards EU or EM or a fiscal deficit usually underpinned by an argument that a reallocation of total consumption at the expense of the future is a result of intertemporal optimization. The paper analyses whether this argument is justifiable. The key factors that influence the intertemporal trade-off are country risk and externalities from foreign direct investments. High indebtedness increases macroeconomic risk and discourages investments. If investment externalities exist the investment gap may cause high output loss. With careful calibration of the parameters determining the risk premium and the external effects of FDI the model predicts a 20% annual return of fiscal austerity at the macro level. This number is too high to be justifiable by any reasonable rate of time preference.Catching-up, Risk Premium, FDI, Consumption boom, Simulation.

Differential equation approximations of stochastic network processes: an operator semigroup approach

The rigorous linking of exact stochastic models to mean-field approximations is studied. Starting from the differential equation point of view the stochastic model is identified by its Kolmogorov equations, which is a system of linear ODEs that depends on the state space size ($N$) and can be written as $\dot u_N=A_N u_N$. Our results rely on the convergence of the transition matrices $A_N$ to an operator $A$. This convergence also implies that the solutions $u_N$ converge to the solution $u$ of $\dot u=Au$. The limiting ODE can be easily used to derive simpler mean-field-type models such that the moments of the stochastic process will converge uniformly to the solution of appropriately chosen mean-field equations. A bi-product of this method is the proof that the rate of convergence is $\mathcal{O}(1/N)$. In addition, it turns out that the proof holds for cases that are slightly more general than the usual density dependent one. Moreover, for Markov chains where the transition rates satisfy some sign conditions, a new approach for proving convergence to the mean-field limit is proposed. The starting point in this case is the derivation of a countable system of ordinary differential equations for all the moments. This is followed by the proof of a perturbation theorem for this infinite system, which in turn leads to an estimate for the difference between the moments and the corresponding quantities derived from the solution of the mean-field ODE

Comment on ``Magnetoresistance Anomalies in Antiferromagnetic YBa2_2Cu3_3O6+x_{6+x}: Fingerprints of Charged Stripes''

In a recent Letter Ando et al (cond-mat/9905071) discovered an anomalous magnetoresistance(MR) in hole doped antiferromagnetic YBa$_2$Cu$_3$O$_{6+x}$, which they attributed to charged stripes, i.e., to segregation of holes into lines. In this Comment we show that the experiments, albeit being interesting, do not prove the existence of stripes. In our view the anomalous behavior is due to an (a,b) plane anisotropy of the resistivity in the bulk and to a magnetic field dependent antiferromagnetic (AF) domain structure. It is unlikely that domain walls are charged stripes.Comment: 1 page, Accepted to PRL, Reply exists by authors of original pape

Filling the gap: open economy considerations for more reliable potential output estimates. Bruegel Working Paper 2015/11, October 2015

This paper argues that the Phillips curve relationship is not sufficient to trace back the output gap, because the effect of excess demand is not symmetric across tradeable and non-tradeable sectors. In the non-tradeable sector, excess demand creates excess employment and inflation via the Phillips curve, while in the tradeable sector much of the excess demand is absorbed by the trade balance. We set up an unobserved-components model including both a Phillips curve and a current account equation to estimate ‘sustainable output’ for 45 countries. Our estimates for many countries differ substantially from the potential output estimates of the European Commission, IMF and OECD. We assemble a comprehensive real-time dataset to estimate our model on data which was available in each year from 2004-15. Our model was able to identify correctly the sign of pre-crisis output gaps using real time data for countries such as the United States, Spain and Ireland, in contrast to the estimates of the three institutions, which estimated negative output gaps real-time, while their current estimates for the pre-crisis period suggest positive gaps. In the past five years the annual output gap estimate revisions of our model, the European Commission, IMF, OECD and the Hodrick-Prescott filter were broadly similar in the range of 0.5-1.0 percent of GDP for advanced countries. Such large revisions are worrisome, because the European fiscal framework can translate the imprecision in output gap estimates into poorly grounded fiscal policymaking in the EU