Thomas Grennes

The real exchange rate and macroeconomic performance in Sub-Saharan Africa☆

Abstract Pooled time-series and cross-section data for 33 countries in Sub-Saharan Africa (SSA) confirm the negative relationship between the real exchange rate (RER) misalignment and economic performance (economic growth, imports, exports, saving and investment). Macroeconomic instability also slows growth and other indicators of performance. Higher levels of misalignment are accompanied by higher levels of macroeconomic instability. Both lower levels of RER misalignment and instability lead to better economic performance. The Edwards model of RER determination performs well for the region. Black market premia tend to show a greater degree of misalignment in RER than alternative measures.

Real interest rate equalization and the integration of international financial markets

Abstract This paper argues that conventional regression tests of real interest rate equality may be misleading because they neglect to consider transactions costs. A transactions cost band may inhibit the one-to-one correspondence between changes in real rates in alternative countries that is presumed by conventional tests. Statistical problems which may lead to incorrect inferences in conventional tests are also discussed. Alternative tests which overcome these limitations are developed and applied to real interest rates for ten different countries. The alternative tests generate much stronger support for interest parity than is found in the existing literature.

A Revised Test of the Law of One Price Using Rational Price Expectations

The law of one price (LOP) is an important ingredient in theories of international trade. Typical analyses of the LOP assume that parity should hold contemporaneously. This assumption overlooks temporal elements of trade. Recognizing this fact, we expect parity to hold for expected prices. Two empirical procedures are utilized to consider the LOP in international markets for U.S. agricultural commodities. The first utilizes econometric procedures to test an expectations augmented version of the LOP. A second approach uses nonparametric procedures to provide an alternative consideration of expectations. In each case, results provide support for a rational expectations view of the LOP.

Finding the Tipping Point ­ When Sovereign Debt Turns Bad

Public debt has surged during the current global economic crisis and is expected to increase further. This development has raised concerns whether public debt is starting to hit levels where it might negatively affect economic growth. Does such a tipping point in public debt exist? How severe would the impact of public debt be on growth beyond this threshold? What happens if debt stays above this threshold for an extended period of time? The present study addresses these questions with the help of threshold estimations based on a yearly dataset of 101 developing and developed economies spanning a time period from 1980 to 2008. The estimations establish a threshold of 77 percent public debt-to-GDP ratio. If debt is above this threshold, each additional percentage point of debt costs 0.017 percentage points of annual real growth. The effect is even more pronounced in emerging markets where the threshold is 64 percent debt-to-GDP ratio. In these countries, the loss in annual real growth with each additional percentage point in public debt amounts to 0.02 percentage points. The cumulative effect on real GDP could be substantial. Importantly, the estimations control for other variables that might impact growth, such as the initial level of per-capita-GDP.

Testing the law of one price when trade takes time

Abstract The paper deals with several issues that may bias empirical tests against the law of one price. To obtain relatively homogeneous goods, a set of 17 narrowly defined primary products are used. Since trade takes time, the model is specified in terms of expected prices ratger than contemporaneous prices. An empirical measure of rational price expectations is obtained by using the generalized method of moments. The expectations-augmented model provides stronger support for the law of one price than the conventional formulation using contemporaneous prices. Results are also sensitive to the measurement of transport costs and interest rates.

Nonlinear aspects of capital market integration and real interest rate equalization

Abstract In contrast to standard linear regression tests, we consider two nonlinear approaches to evaluate the relationship between international real interest rates. The first, threshold autoregression (TAR) models, confirms the presence of nonlinearities in equilibrating responses to deviations from parity. A second segment of the analysis implements flexible nonparametric regressions and nonparametric versions of TAR models. These results also suggest that important nonlinearities may characterize real interest rate linkages and thus that standard tests, which assume linear relationships, may produce misleading inferences. Additionally, the nonparametric analyses, while generally consistent with the TAR results, imply more complex patterns of adjustment than can be captured with TAR methods.

Devaluation, Foreign Trade Controls, and Domestic Wheat Prices

The 1970s have seen sharp fluctuations in grain prices. Several plausible explanations for the unusual severity of these ups and downs have been advanced, including devaluation of the dollar for the upswing in 1972–74. U.S. wheat prices for the year of highest prices, 1973–74,are examined. A trade model that distinguishes wheat by country of origin is used to analyze various events in that year. It is concluded that insulating trade policies by wheat exporters and importers had the largest impact on U.S. wheat prices.

Spatial price dynamics and integration in russian food markets

This paper evaluates dynamic elements of spatial market linkages for several important food commodities in the Russian Federation. We argue that delivery lags and other impediments to regional commodity trade may delay price responses. Standard regression and cointegration tests that compare contemporaneous price linkages in a short-run setting may not be flexible enough to address integration in such a setting. As an alternative, we complement conventional time-series tests of spatial integration with an analysis of dynamic responses to price shocks. The results provide tempered support for spatial integration, especially in retail markets. However, the results suggest that, because of gradual adjustments to price shocks, integration may occur mainly in the long run.

Trade Models with Differentiated Products

Why do prices differ? Although trade tends to equalize prices, some important differences persist. What is the source of the differences? For certain purposes, it may be important to distinguish two sets of prices: (a) the spatial distribution of prices of a given product (e.g., the prices of U.S. wheat in the United States and in the United Kingdom) and (b) relative prices of similar products in a common geographical market (e.g., price of U.S. wheat in the United Kingdom and the price of Canadian wheat in the United Kingdom).

The Effect of Mechanical Refrigeration on Nutrition in the United States

Although the principles of refrigeration have been understood for thousands of years, the widespread use of mechanical refrigeration in the processing, shipping, and storing of perishable commodities began only in the 1890s. Because refrigeration facilitated the hygienic handling and storage of perishables, it promoted output growth, consumption, and nutrition through the spatial and temporal integration of markets for perishables. We estimate the impact of mechanical refrigeration on output and consumption, and hence on human nutrition, concentrating on the contribution from refrigerated dairy products, an important source of nutrients, particularly proteins and calcium. We conclude that the adoption of refrigeration in the late-nineteenth-century United States increased dairy consumption by 1.7% and overall protein intake by 1.25% annually after the 1890s. The increase in protein consumption was particularly important to the growth of the human organism. According to our lower-bound estimates, refrigeration directly contributed at least 5.1% of the increase in adult stature of the postrefrigeration cohorts, and combined with the indirect effects associated with improvements in the quality of nutrients and the reduction in illness, the overall impact was considerably larger.