Robert Kollmann

The Exchange Rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: A Quantitative Investigation

This paper studies a dynamic-optimizing model of a semi-small open economy with sticky nominal prices and wages. The model exhibits exchange rate overshooting in response to money supply shocks. The predicted variability of nominal and real exchange rates is roughly consistent with that of G7 effective exchange rates during the post-Bretton Woods era.

International Portfolio Equilibrium and the Current Account

This paper analyses the determinants of international asset portfolios, using a neoclassical dynamic general equilibrium model with home bias in consumption. For plausible parameter values, the model explains the fact that typical investors hold most of their wealth in domestic assets (portfolio home bias). In the model, the current account balance (change in net foreign assets) is mainly driven by fluctuations in equity prices; the current account is predicted to be highly volatile and to exhibit low serial correlation; changes in a countrys foreign equity assets and liabilities are predicted to be highly positively correlated. The paper constructs current account series that include external capital gains/losses, for 17 OECD economies. The behaviour of those series confirms the theoretical predictions.

Explaining international comovements of output and asset returns: The role of money and nominal rigidities

Empirically, output and asset returns are highly positively correlated across the United States and the other major industrialized countries. Standard business cycle models that assume flexible prices and wages, in the Real Business Cycle tradition, have great difficulties explaining this fact. This paper presents a dynamic-optimizing stochastic general equilibrium model of a two-country world with sticky nominal prices and wages and a flexible exchange rate. The structure here predicts positive international transmission of country-specific monetary policy and technology shocks, and it generates sizable cross-country correlations of output and of asset returns. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This a (This abstract was borrowed from another version of this item.)

Welfare effects of a monetary union: the role of trade openness

This paper evaluates the welfare effects of a monetary union (MU), compared to a floating exchange rate regime, using a quantitative business cycle model of a two-country world with sticky prices. It is assumed that, under a float, there are shocks to the uncovered interest rate parity (UIP) condition. These shocks are shown to have a negative effect on welfare-the detrimental effect is stronger, the higher the degree of trade openness. A MU eliminates UIP shocks, and it may thus raise welfare. The welfare gain from MU is positively linked to openness. (JEL: E4, F3, F4) Copyright (c) 2004 The European Economic Association.

US trade balance dynamics: the role of fiscal policy and productivity shocks and of financial market linkages

This paper examines whether domestic and foreign productivity and fiscal policy changes can account for the wide swings in U.S. net exports during the period 1975-1991. A two-country Real Business Cycle (RBC) model with a government sector is used for that purpose. The analysis focuses on the response of optimizing, forward-looking private decision makers to exogenous shocks, and on the way that this response is affected by international asset market linkages. Historical quarterly series on total factor productivity, government consumption and average tax rates in the U.S. and in an aggregate of the remaining G7 countries (G6, henceforth) are fed into the model. A version of the model in which international asset markets are incomplete, in the sense that only non-contingent debt contracts (bonds) can be used for international financial transactions, tracks the observed behavior of the U.S. trade balance rather closely, provided permanent country-specific productivity shifts are assumed (statistical tests presented in the paper support the assumption of permanent idiosyncratic U.S. and G6 productivity shocks). The simulations of the structural model suggest that U.S. productivity changes were the major source of fluctuations in U.S. net exports during the period 1975-1991; they show that tax changes too had a noticeable impact on the trade balance but that government spending only played a secondary role. The simulations suggest, in particular, that the relatively rapid productivity growth and the large tax cuts that occurred in the U.S. during the first half of the 1980s were important sources behind the sharp drop in U.S. net exports during that period. In contrast to the structure with incomplete international asset markets, a version of the model that postulates complete international asset markets, as assumed in many International RBC models (see e.g., Dellas, 1986; Baxter and Crucini, 1993; Backus et al., 1995), fails to explain the observed behavior of the U.S. trade balance--predicted trade balance series generated by that version of the model are negatively correlated with the actual U.S. trade balance.

Limited Asset Market Participation and the Consumption-Real Exchange Rate Anomaly

Under efficient consumption risk sharing, as assumed in standard international business cycle models, a countrys aggregate consumption rises relative to foreign consumption, when the countrys real exchange rate depreciates. Yet empirically, relative consumption and the real exchange rate are essentially uncorrelated. This paper shows that this ‘consumption‐real exchange rate anomaly’ can be explained by a simple model in which a subset of households trade in complete financial markets, while the remaining households lead hand‐to‐mouth (HTM) lives. HTM behaviour also generates greater volatility of the real exchange rate and of net exports, which likewise brings the model closer to the data. S’il y avait un partage efficace du risque, tel que suppose dans des modeles standard du cycle des affaires international, alors la consommation agregee d’un pays augmenterait, par rapport a la consommation etrangere, lorsque le taux de change reel du pays se deprecie. Cependant, empiriquement, la correlation entre la consommation relative et le taux de change reel est proche de zero. Cette etude montre que ce phenomene peut etre explique par un modele simple dans lequel une partie des menages a acces a des marches financiers complets, tandis que les menages restants ‘vivent au jour le jour’ (VJJ). Un comportement VJJ engendre aussi une volatilite plus elevee du taux de change reel et des exportations nettes, ce qui accroit egalement la pertinence empirique du modele.

Welfare-Maximizing Operational Monetary and Tax Policy Rules

This Paper computes welfare-maximizing monetary and tax policy feedback rules, in a calibrated dynamic general equilibrium model with sticky prices. The government makes exogenous final good purchases, levies a proportional income tax, and issues nominal one-period bonds. A quadratic approximation method is used to solve the model, and to compute household welfare. Optimized policy has a strong anti-inflation stance and implies persistent fluctuations of the tax rate and of public debt. Very simple optimized policy rules, under which the interest rate just responds to inflation and the tax rate just responds to public debt, yield a welfare level very close to that generated by richer rules.

Hidden unemployment: a search theoretic interpretation

Abstract Labor force surveys show that in the United States a significant fraction of the jobless who do not search for work, and who are therefore not classified as unemployed by official statistics, state that they ‘want a job now’. A model of job search is used to interpret this phenomenon.

The correlation of productivity growth across regions and industries in the United States

Abstract This paper shows that productivity growth is more strongly correlated across U.S. regions than across the G7 countries. Cross-region correlations of productivity growth within a given industry are typically stronger than cross-sector correlations of productivity growth within the same region.

Productive Government Purchases and the Real Exchange Rate

Empirical research documents that an exogenous rise in government purchases in a given country triggers a depreciation of its real exchange rate. This raises an important puzzle, as standard macro theories predict an appreciation of the real exchange rate. We argue that this prediction reflects the assumption that government purchases are unproductive. Using a simple model, we show that the real exchange rate may depreciate in response to a rise in government purchases, if those purchases increase domestic private sector productivity. A very small dose of public sector externality is sufficient to generate this result.