Paul R. Bergin

INTEREST RATES, EXCHANGE RATES AND PRESENT VALUE MODELS OF THE CURRENT ACCOUNT

This paper develops a testable intertemporal model of the current account that allows for variable interest rates and exchange rates. These additional variables are channels through which external shocks may influence the domestic current account. The restrictions from the theoretical model are subjected to present value tests using quarterly data from three small open economies. The paper finds that including the interest rate and exchange rate improves the fit of the intertemporal model over what was found in previous studies. The model predictions better replicate the volatility of current account data and better explain historical episodes of current account imbalance.

Staggered price setting, translog preferences, and endogenous persistence

This paper generates persistent real effects of a monetary disturbance in the context of staggered price setters. The model combines two related and reinforcing features: a translog demand structure and a particular input--output production structure. These features offer a rationale why a firm, when computing its own optimal contract price, is influenced by the prices set in other overlapping contracts. Practically, the two features interact in a positive manner and provide a way to generate significant endogenous persistence. Keyword(s): Endogenous persistence; Staggered contracts; Translog preferences

Putting the 'New Open Economy Macroeconomics' to a test

Abstract This paper explores one way to extend the New Open Economy Macroeconomics in an empirical direction. Adapting maximum likelihood procedures, it estimates and tests an intertemporal small open economy model with monetary shocks and nominal rigidities. Results offer mixed support for a benchmark model where prices are assumed to be sticky in the currency of the buyer. Price stickiness seems to be an important element, as overall results are poorer for versions of the model in which prices either are flexible or are sticky in the currency of the producer. The benchmark model does a better job explaining some variables than others; in particular, it does a poor job explaining exchange rate movements.

Fiscal solvency and price level determination in a monetary union

The following sections are included:IntroductionThe ModelFiscal Solvency and Household TransversalitySome ExamplesConclusionAppendixAcknowledgmentReferences

Global Price Dispersion: Are Prices Converging or Diverging?

This paper documents significant time-variation in the degree of global price convergence over the last two decades. In particular, there appears to be a general U-shaped pattern with price dispersion first falling and then rising in recent years, a pattern which is remarkably robust across country groupings and commodity groups. This time-variation is difficult to explain in terms of the standard gravity equation variables common in the literature, as these tend not to vary much over time or have not risen in recent years. However, regression analysis indicates that this time-varying pattern coincides well with oil price fluctuations, which are clearly time-varying and have risen substantially since the late 1990s. As a result, this paper offers new evidence on the role of transportation costs in driving international price dispersion.

The Micro-Macro Disconnect of Purchasing Power Parity

This paper reconciles the persistence of aggregate real exchange rates with the faster adjustment of international relative prices in microeconomic data. Error correction model estimates indicate that a different mix of shocks drives international price deviations at the microeconomic level and that dynamic adjustment works through arbitrage in the goods market rather than the foreign exchange market. When half-lives are estimated conditional on a common set of estimated macro shocks, we find that micro relative prices exhibit every bit as much persistence as aggregate real exchange rates. These results challenge theories of real exchange rate persistence based on sticky prices and heterogeneity across goods.

Tradability, Productivity, and Understanding International Economic Integration

This paper develops a two-country macro model with endogenous tradability to study features of international economic integration. Recent episodes of integration in Europe and North America suggest some surprising observations: while quantities of trade have increased significantly, especially along the extensive margin, price dispersion has not decreased and may even have increased. We propose a way of reconciling these price and quantity observations in a macroeconomic model where the decision of heterogeneous firms to trade internationally is endogenous. Trade is shaped both by the nature of heterogeneity -- trade costs versus productivity -- and by the nature of trade policies -- cuts in fixed costs versus cuts in per unit costs like tariffs. For example, in contrast to tariff cuts, trade policies that work mainly by lowering various fixed costs of trade may have large effects on entry decisions at the extensive margin without having direct effects on price-setting decisions. Whether this entry raises or lowers overall price dispersion depends on the type of heterogeneity that distinguishes the new entrants from incumbent traders.

Understanding international portfolio diversification and turnover rates

The following sections are included:IntroductionWhat Recent Data Have to SayA Simple Fixed Cost Portfolio Allocation ModelDeriving Benchmark ResultsAlternative Parameters and Cost SpecificationsConclusionData AppendixAcknowledgmentsReferences

A Model of Endogenous Nontradability and its Implications for the Current Account

This paper analyzes how a model where goods are endogenously nontraded can help explain the relationship between the current account and real exchange rate fluctuations. We formulate a small open economy two-period model in which goods switch endogenously between being traded or nontraded. The model demonstrates how movements in the real exchange rate and real interest rate can impose significant costs on intertemporal trade. The model also shows that a variety of nonlinear relationships is possible between the current account and real exchange rate, depending on the relative transport costs and substitutability in preferences between goods. In contrast to recent work, our analysis implies that such costs of intertemporal trade may be a concern for many countries, not just those with large current account imbalances.

International Portfolio Diversification and Multilateral Effects of Correlations

Not only are investors biased toward home assets, but when they do invest abroad, they appear to favor countries with returns more correlated with home assets. Often attributed to a preference for familiarity, this ‘correlation puzzle’ further reduces effective diversification. However, a multi-country DSGE model of portfolio choice makes clear that the effects of a bilateral stock return correlation must be studied in the context of the full covariance structure. For example, the attractiveness of a foreign country as a hedge depends upon its hedging potential relative to other potential destination countries. This paper develops a new empirical approach based upon a multi-country theoretical model that controls for the full covariance structure in a theoretically rigorous yet tractable manner. Estimation under this approach overturns the correlation puzzle, and finds that international investors do seek the diversification benefits of low cross-country correlations as theory would predict. Since covariances are central to modern theories of portfolio choice, this empirical methodology should be useful also for other applications.