Tack Yun

Nominal price rigidity, money supply endogeneity, and business cycles

Abstract This paper investigates the ability of nominal price rigidity to explain the co-movement of inflation with the cyclical component of output observed in the post-war U.S. data. A dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model, allowing for an endogenous money supply rule. It is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models. This result depends little on whether money supply is assumed to be endogenous or not.

Recent Issues in Emerging-Economies Macroeconomics

In this paper, we summarize the recent advancement of emerging-economies macroeconomics. We begin with stylized facts and models of real business-cycles (RBCs) for emerging-market countries and then move onto the discussion of various issues associated with overborrowings and sovereign debts. The common feature of these models is that their analysis is mainly focused on the framework of RBC models for small open economies combined with financial frictions. We also discuss nominal features of emerging economies that are associated with the behavior of nominal exchange rate and foreign reserves observed during the recent global financial crisis, as well as the practice and impact of conventional and unconventional monetary policy measures. We also present some extensions of existing emerging-economies models that allow for the significant role of conventional monetary and fiscal policies. Our results can be summarized as follows. First, the canonical specification of recent models with pecuniary externalities is modified to allow for channels through which conventional monetary and fiscal policies can affect the degree of pecuniary externalities. Second, we attempt to explain the behavior of nominal exchange rate ‘going up elevators and coming down stairs’ shown in emerging economies during periods of zero lower bounds on the short-term nominal interest rate. Third, we modify a prototypical model of sovereign debt to show the negative correlation between the maturity of foreign debt and the accumulation of foreign reserves when the level of foreign debt is substantially high.

Are Asian Business Cycles Different

This paper investigates business cycles in Asia. Business cycles in developing small, open countries are different from those in developed small countries. Most interesting characteristics in developing countries are excessive consumption volatilities and strong countercyclical net export. Asia and Latin American developing countries share these characteristics. However, there are also differences in business cycles in both regions. We find that Asia shows less excessive consumption expenditure volatility to output than Latin American countries, and strong countercyclical net exports. More interestingly, the durable consumption is negatively related with net export in Asia (Korea), while Latin America (Chile) shows positive correlation. Moreover durable consumption shows a negative relationship with export and import while durable consumption in Latin America has positive relationship with export and import. We believe that there exist different transmission mechanisms in Latin America and Asia that connect consumption, net exports and export or import. We find that positive terms of trade shock increase the real GDP significantly in the short run for Latin America, but have no significant effects for East Asia. However, response of net exports to the terms of trade shocks is stronger and more persistent in Asia than in Latin America. This paper also present an analytic model that could explain the durable goods business cycles in Asia. The model can explain durable business cycles in Asia (Korea) which generate strong procyclical durable consumption by the export-income channel with market laddering.

Natural Exchange Rate and Its Implications for the Purchasing Power Parity Puzzle

ABSTRACT The notion of purchasing power parity has been an important building block in the theory of nominal and real exchange rates and for many theoretic models in international economics, leading to the purchasing power parity puzzle. The central issue of the puzzle is how to reconcile volatile short-term movements of real exchange rates (defined as nominal exchange rates adjusted for differences in national price levels) with very slow convergence to the parity condition. The main emphasis of this article is to show that the slow adjustment of the natural exchange rate is responsible for the well-known slow convergence of the real exchange rate to the long-run parity condition. The novel element of this article is to identify the relative importance between the financial channel and output gap channel of the purchasing power parity puzzle. The empirical findings of this article suggest that the financial channel is a dominant factor to explain persistent deviations of the real exchange rate from its long-run level.

Euler Equation Approach for Emerging-market Macro Models

This paper focuses on how to obtain numerical solutions to emerging-market DSGE models with occasionally binding constraints by using the Euler equation, rather than using value functions of households. The main point is that the Euler-equation approach works in a fast and simple way for a variety of recent emerging-market macro models. An important reason behind this point is that it is relatively easy to pin down the functional form of aggregate equilibrium conditions in these models. The time-iteration method is applied to Euler equations of a small open-economy with overborrowings. It is discussed how to use the Euler equation approach to recent models of sovereign debt and to show that the presence of the Laffer-curve of debt-revenues leads us to use the piecewise parameterized-expectations approach.

Macroeconomic and Financial Stability in Emerging-market Countries: A Symposium

During the recent global financial crisis, both advanced and emerging-market economies experienced sharp recessions, that were accompanied in many cases by periods of deep financial instability. Hence, one of the most important questions that emerged in the aftermath of the crisis is how to achieve the reconciliation between macroeconomic stability and financial stability. This question was the main theme of the annual conference of International Economic Journal 2012. The attainment of macroeconomic stability and financial stability in emergingmarket economies requires a deep understanding of the sources of their business cycles and models that are capable of accounting for key characteristics of their aggregate fluctuations, in particular, the excessive consumption volatilities (relative to output volatilities) and the countercyclical movements of net exports. Moreover, another salient feature of aggregate fluctuations in emerging-market