Endogenous Private Transfer and Real Exchange Rate Dynamics in a Two-Sector Dependent Economy

Government to government transfers are treated understandably as exogenous in open economy macro models. Even private transfer like remittances are treated as exogenous in the extant literature. In this paper we examine the effects of endogenous private transfer (remittances) on the real exchange rates using a dynamic two-sector dependent economy model. We examine the effects of demand and supply shocks and found that the dynamic patterns for real exchange rates depends on endogeneity of the transfer and the factor intensity of the traded and non-traded sectors

Accounting for City Real Exchange Rate Changes in India

We examine the role of non-traded goods in the city real exchange rate changes in India. Using the Mean Squared Error (MSE) decomposition we find that non-traded goods explain about 30% of the variation of the Indian city real exchange rate changes, rather than the small amount found in other cross-country studies. We also analyze the role of consumption elasticity of substitution between traded and non-traded goods

Oil Prices and Remittances: Impacts of Oil Price Shocks on the Macroeconomy of a Small, Oil Importing, and Labor Exporting Country

We examine the dynamic effects of an oil price shock on a small open economy that imports oil and exports labor to the oil exporting countries. We find that the reduction in output resulting from the oil price shock is at least partially mitigated by an accompanying increase in remittances from the expatriated labor. We also show that with a jump in oil price, domestic labor use decreases and labor export increases, oil consumption falls, and steady-state capital and consumption fall. However, consumption may intially jump up depending on the relative sizes of the negative supply effect and the positive remittance effect. Although consumption will eventually fall below the pre-shock level as steady state is approached, the initial consumption increase may be sufficiently large and long lasting to make the shock scenario welfare improving

Macroeconomic Interdependence and Integration in Africa

There is a renewed interest in the debate on integration in Africa since the creation of the Africa Union in 2002. This study investigates the feasibility of a full-fledge union in Africa from an economic standpoint. Towards this goal, we examine both the contemporaneous and dynamic relations in the short- and long-run among six key macro variables--consumer price level, gross domestic product, consumption, investment, trade flows and government expenditures--in eight African countries. In the quarterly data from 1976 to 2005, we observe the existence of common trends in real output, price level, private consumption, government consumption, investment and trade flows among these eight countries. In addition, we also note that there exist common cycles in real output, investment and trade flows for these countries. These two critical findings indicate the existence of some macroeconomic interdependence among these countries. Thus, the chances for success of integration in Africa driven by these eight countries are appreciable

Currency Substitution in Selected African Countries

This study investigates the presence of currency substitution in eight African countries--Egypt, Morocco, Nigeria, Ghana, Kenya, South Africa, Tunisia and Zambia--for the period 1976 to 2005 using both regional and US dollar as anchor currencies. We find that currency substitution is prevalent in Ghana and Nigeria when CFA franc is used as an anchor currency. However, when US dollar is used as an anchor currency there is no evidence of currency substitution in Ghana but we still observe the presence of currency substitution in Nigeria. Also we find presence of currency substitution in South Africa but not in Egypt when the US dollar is the anchor currency. For Kenya, Tunisia and Zambia there is no evidence of currency substitution irrespective of the anchor currencies considered. In the case of Morocco, we observe no evidence of currency substitution when the Egyptian pound is used as anchor currency but there is weak evidence of currency substitution when the US dollar is considered

Current Account Imbalances and Foreign Investment: A Theoretical Analysis of Interrelationships and Causalities

This paper develops a unified structure to examine the interrelationships between current account, foreign investment, and domestic capital accumulation. In particular, we develop a two-country, two-period model with international mobility of both physical and financial capital, and endogenous domestic capital accumulation. We consider cases where (i) current account is endogenous, but foreign investments are exogenous, and (ii) current account is exogenous, but foreign investments are endogenous. For (i), we examine how inflow and outflow of foreign physical capital affects current account. For the second case, we examine how an increase in current account deficit affects foreign investments. The complementarity or substitutability of foreign capital and domestic capital turns out to be crucial to the relationship between current account deficit and foreign investment. Copyright � 2010 Blackwell Publishing Ltd.