Sources of Current Account Fluctuations in Industrialized Countries

We analyze the sources of current account fluctuations for the G6 economies. Based on Bergin and Sheffrin’s (2000) two-goods inter-temporal framework, we build a SVAR model including the world real interest rate, net output, real exchange rate, and the current account. The theory model allows for the identification of structural shocks in the SVAR using longrun restrictions. Our results suggest three main conclusions: i) we find evidence in favour of the present-value model of the CA for all countries except France; ii) there is substantial support for the two-good intertemporal model, since both external supply and preferences shocks account for an important proportion of CA fluctuations; iii) temporary domestic shocks account for a large proportion of CA fluctuations, but the excess response of the CA is less pronounced than in previous studies

Smooth Breaks and Nonlinear Mean Reversion: Post-Bretton Woods Real Exchange Rates

The recent literature on Purchasing Power Parity (PPP) has emphasized the role of two phenomena that may lead to the rejection of the PPP hypothesis: structural breaks and nonlinear adjustment induced by transaction costs. These two hypotheses are analyzed separately in the literature. We develop tests for unit roots that account jointly for structural breaks and nonlinear adjustment. Structural breaks are modeled by means of a Fourier function that allows for infrequent smooth temporary mean changes and is hence compatible with long-run PPP. Nonlinear adjustment is modeled by means of an ESTAR model. Our tests present good finite sample properties. The tests are applied to a set of 15 OECD countries’ RERs and are able to reject the null of a unit root in 14 cases. The breaks are usually associated with the great appreciation and later depreciation of the dollar in the 1980s and the ESTAR adjustment appears to play an important role.Fourier model; ESTAR; nonlinear adjustment; PPP;

Unemployment, Hysterisis and Transition

We quantify the degree of persistence in the unemployment rates of transition countries using a variety of methods benchmarked against the EU. In doing so, we will also characterize the dynamic behavior of unemployment in the CEECs during the past decade. In part of the paper, we will work with the concept of linear ÒHysteresisÓ as described by the presence of unit roots in unemployment as in most empirical research on this area. Given that this is potentially a rather narrow definition, we will also take into account the existence of structural breaks and non-linear dynamics in unemployment in order to allow for a richer set of dynamics. Finally, we examine whether CEECsÕ unemployment presents features of multiple equilibria, that is, if it remains locked into a new level whenever a structural change occurs. Our findings show that, in general, we can reject the unit root hypothesis after controlling for structural changes and business cycle effects, but we can observe the presence of a high and low unemployment equilibria. The speed of adjustment is faster for CEECs than the EU, although CEECs tend to move more frequently between equilibria.unemployment, hysterisis, unit root, transition

A Disaggregate Characterisation of Recessions

The Great Recession has inspired renewed interest in analyzing the behaviour of the economy during recession episodes, and how these temporary events can shape the productive structure of the economy for long periods. Most of the existing literature focuses on recessions at the aggregate level. We provide evidence on the behavior of a large set of developed and emerging markets at the disaggregate level around recession dates. We analyze sectoral value added (VA), employment, productivity, concentration, and structural change, and whether patterns arise in a systematic way. We unveil a set of regularities, grouped into 12 stylized facts, about the behaviour of these variables for both sets of countries and depending on the productivity level and the level of external financial dependence of industries. We also distinguish financial from normal recessions. We find that recessions tend to be more industry specific events in emerging markets and economy-wide phenomena in developed economies. Moreover, the amplitude of the cycle for VA and productivity growth is larger for emerging markets. The opposite is generally true for employment growth. Also, industries with high dependence on external finance generally face higher contractions in VA growth the year of the recession, and those contractions are higher in the case of financial than in the case of normal recessions. Finally, concentration of both VA and employment is higher among emerging markets, and especially when looking at employment shares

The rise of services and balanced growth in theory and data

When measured using NIPA conventions, a two-sector model of balanced growth and structural transformation can account for the mildly declining GDP growth rate, increasing share of services, and increasing real investment/GDP ratio observed in the post-war U.S. economy. These changes induce a decline of 36% in the marginal product of capital and of 5.4% in the real interest rate. By retaining the U.S. calibration, the process of structural transformation can also account, per-se, for cross-country differences in real investment/GDP ratios, which are comparable to those displayed by the U.S. along its growth path

Net Foreign Assets, Productivity and Real Exchange Rates in Constrained Economies

Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an exogenous 2-sector growth model in which RER determination depends on the country's capacity to borrow from international capital markets. The country faces a constraint on capital inflows. With high domestic savings, the country converges to the world per capita income and RER only depends on productivity spread between sectors (Balassa-Samuelson effect). If the constraint is too tight and/or domestic savings too low, RER depends on both net foreign assets (transfer effect) and productivity. We then analyze the empirical implications of the model and find that, in accordance with the theory, RER is mainly driven by productivity and net foreign assets in constrained countries and exclusively by productivity in unconstrained countries.Real exchange rate; capital inflows constraint; overlapping generations

The Rise of Services and Balanced Growth in Theory and Data

We investigate the effect of structural transformation on the process of economic growth. Using a two-sector growth model we show that, in addition to Baumol’s cost disease, structural transformation from goods to services generates other predictions that are in line with cross-country growth facts: an increase in the real investment rate, a decline in the real interest rate and the marginal product of capital and an acceleration of investment-specific technological change as the share of services increases. The model calibrated to U.S. data can account for the elasticity of real investment rates to the share of services measured in cross-country data

Dynamic network model of banking system stability

This paper presents a dynamic model of banking interactions, which uses interbank connections to study the stability of the banking system. The dynamic model extends previous work on network models of the banking system taking inspiration from large scale, complex, interconnected systems studied within the domain of engineering. The banking system is represented as a network where nodes are individual banks and the links between any two banks consist of interbank loans and borrowing. The dynamic structure of the model is represented as a set of differential equations, which, to the best of our knowledge, is an original characteristic of our approach. This dynamic structure not only allows us to analyse systemic risk but also to incorporate an analysis of control mechanisms. Uncertainty is introduced in the system by applying stochastic shocks to the bank deposits, which are assigned as an exogenous signal. The behaviour of the system can be analysed for different initial conditions and parameter sets. This paper shows some preliminary results under different combinations of bank reserve ratios, bank capital sizes and different degrees of bank inter-connectedness. The results show that both reserve ratio and link rate have a positive effect on the stability of the system in the presence of moderate shocks. However, for high values of the shocks, high reserve ratios may have a detrimental effect on the survival of banks. In future work, we will apply strategies from the domain of control engineering to the dynamic model to characterise more formally the stability of the banking network

Efficiency and production frontiers in the aftermath of recessions: international evidence

The relationship between recessions and productivity growth has been the focus of an important body of theoretical and empirical research in the last two decades. We contribute to this literature by presenting new evidence on the evolution of productivity in the aftermath of recessions. Our method allows us to distinguish between frontier and (in-)efficiency effects of recessions. We present international evidence for a panel of 70 countries for the 1960-2000 period. Our results reveal that the average cumulative impact of recessions on productivity up to four years after its end is negative and significant. This, however, results from a mixture of mechanisms. The level of frontier production increases, but the rate of technical progress decreases, leading to a fall in frontier production. Efficiency also falls, lending support for the idea that recessions tend to reduce, rather than increase, economic restructuring. Long and deep recessions are also shown to have distinctive impacts on productivity