The stickiness and currency of pricing of traded goods play a central role in international macroeconomics; however, empirical evidence on these features is seriously limited. To address this, we use micro data on U.S. import and export prices at the dock for the period 1994–2005 and present four main results: First, the median price duration in the currency of pricing is 10.6 (12.8) months for imports (exports). Second, 90% (97%) of imports (exports) are priced in dollars. Consequently, contrary to standard modeling assumptions, for the United States, there is producer currency pricing in exports and local currency pricing in imports. Third, import price rigidity has increased by ten percentage points, with increasing rigidity in differentiated goods prices. Fourth, even conditioning on a price change, exchange rate pass-through into U.S. import prices is low, at 22%.
The topic of capital flows to emerging markets (henceforth EM) poses several questions. There is the question of why capital flows to EM's are so little, as in Lucas (1990), just as there is the concern that capital flows might be ‘too much’ as in Reinhart and Rogoff (2004). The precise costs and benefits to EM's in terms of international risk sharing, volatility of real variables, productivity spillovers, among others, are also points of debate (Aguiar and Gopinath, 2006 and Jeanne and Gourinchas, in press). This book, takes the level of capital flows as given and explores another important set of questions regarding the currency composition and maturity composition of borrowing by EM's—namely, why do EM's borrow mainly in a foreign currency and at short maturities. This book proposes an intriguing answer and an impressive amount of evidence. However, just as with the other questions, the debate remains unsettled and urges the need for further research.
Emerging market business cycles exhibit strongly countercyclical current accounts, consumption volatility that exceeds income volatility, and “sudden stops” in capital inflows. These features contrast with developed small open economies. Nevertheless, we show that a standard model characterizes both types of markets. Motivated by the frequent policy regime switches observed in emerging markets, our premise is that these economies are subject to substantial volatility in trend growth. Our methodology exploits the information in consumption and net exports to identify the persistence of productivity. We find that shocks to trend growth—rather than transitory fluctuations around a stable trend—are the primary source of fluctuations in emerging markets. The key features of emerging market business cycles are then shown to be consistent with this underlying income process in an otherwise standard equilibrium model.
In today’s times, the single most debated question in international policy circles is the fate of the U.S. dollar and the U.S current account. This book is a collection of essays on this debate. The papers were presented at a conference in Washington, D.C., on May 25, 2004, organized by the Institute for International Economics. The main questions that were asked at the time of the conference were the following: (1) How much further does the dollar need to depreciate? (2) Against which currencies does it need to depreciate? The general consensus among the authors is that there is a serious misalignment of key national currencies in the world. The main conclusion is that the dollar needs to decline by an additional 15 percent or so and most of this adjustment needs to take place against Asian currencies. This will require China to revalue its exchange rate against the dollar by around 20 percent.
World capital markets have experienced large scale sovereign defaults on a number of occasions. In this paper we develop a quantitative model of debt and default in a small open economy. We use this model to match four empirical regularities regarding emerging markets: defaults occur in equilibrium, interest rates are countercyclical, net exports are countercyclical, and interest rates and the current account are positively correlated. We highlight the role of the stochastic trend in emerging markets, in an otherwise standard model with endogenous default, to match these facts.
In this paper we use a quantitative model to explore the potential frictions that distinguish emerging market business cycles from developed small open economies. Following Aguiar and Gopinath (2007) we allow total factor productivity (TFP) to have a stationary and an integrated component. We also allow for shocks to the consumption and investment Euler Equations that operate through the interest rate. These “wedges” represent changes in the intertemporal marginal rate of transformation, which may be due to changes in observed interest rates, unobserved borrowing constraints, or other ﬁnancial frictions. We estimate the model using data from Mexico and Canada. We show that interest rate shocks orthogonal to domestic TFP fail to explain the behavior of emerging markets. We then allow for interest rates to respond to/co-vary with productivity shocks. We ﬁnd that emerging market business cycles appear to be driven by large shocks to trend income combined with relatively small transitory shocks that co-vary with the interest rate.
In placing capital market imperfections at the center of emerging market crises, the theoretical literature has associated a liquidity crisis with low foreign investment and the exit of investors from the crisis economy. However, a liquidity crisis is equally consistent with an inﬂow of foreign capital in the form of mergers and acquisitions (M&A). To support this hypothesis, we use a ﬁrm-level dataset to show that foreign acquisitions increased by 91% in East Asia between 1996 and 1998, while intra-national merger activity declined. Firm liquidity plays a signiﬁcant and sizeable role in explaining both the increase in foreign acquisitions and the decline in the price of acquisitions during the crisis. This contrasts with the role of liquidity in non-crisis years and in non-crisis economies in the region. This effect is also most prominent in the tradable sector. Quantitatively, the observed decline in liquidity can explain 25% of the increase in foreign acquisition activity in the tradable sectors. The nature of M&A activity supports liquidity-based explanations of the East Asian crisis and provides an explanation for the puzzling stability of FDI inﬂows during the crises.
Emerging markets in the 1990s experienced periods of booms followed by collapses in gross domestic product, consumption, traded and non-traded sector output and real exchange rate movements alongside unprecedented movements in foreign investor participation in these economies. An important feature of these episodes is the asymmetry in the pattern of booms and collapses. We introduce a natural search friction into the foreign investment decision in a small open economy and demonstrate that this can generate the asymmetry observed in the data. The magnitude of the reversals predicted by the model can be quantitatively large and empirically relevant.