The Changing Role of the Exchange Rate in a Globalised Economy
Irina Bunda, Filippo di Mauro, Rasmus Rüffer
ECB Occasional Paper Series,
No. 94,
2008
Abstract
In addition to its direct effects on the global trading and production structure, the ongoing process of globalisation may have important implications for the interaction of exchange rates and the overall economy. This paper presents evidence regarding possible changes in the role of exchange rates in a more globalised economy. First, it analyses the link between exchange rates and prices, showing that there is at most a moderate decline in exchange rate pass-through for the euro area. Next, it turns to the effect of exchange rate changes on trade flows. The findings indicate that the responsiveness of euro area exports to exchange rate changes may have declined somewhat as a result of globalisation, reflecting mainly shifts in the geographical and sectoral composition of trade flows. The paper also provides a firm-level analysis of the impact of exchange rate changes on corporate profits, which suggests that overall this relationship appears to be relatively stable over time, although there are important cross-country differences. In addition, it studies the overall impact of exchange rates on GDP and the potential role of valuation effects as a transmission channel in the case of the euro area. JEL Classification: E3, F15, F31
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Evaluating the German (New Keynesian) Phillips Curve
Rolf Scheufele
IWH Discussion Papers,
No. 10,
2008
Abstract
This paper evaluates the New Keynesian Phillips Curve (NKPC) and its hybrid
variant within a limited information framework for Germany. The main interest rests on the average frequency of price re-optimization of firms. We use the labor income share as the driving variable and consider a source of real rigidity by allowing for a fixed firm-specific capital stock. A GMM estimation strategy is employed as well as an identification robust method that is based upon the Anderson-Rubin statistic. We find out that the German Phillips Curve is purely forward looking. Moreover, our point estimates are consistent with the view that firms re-optimize prices every two to three quarters. While these estimates seem plausible from an economic point of view, the uncertainties around these estimates are very large and also consistent with perfect nominal price rigidity where firms never re-optimize prices. This analysis also offers some explanations why previous results for the German NKPC based on GMM differ considerably. First, standard GMM results are very sensitive to the way how orthogonality conditions are formulated. Additionally, model misspecifications may be left undetected by conventional J tests. Taken together, this analysis points out
the need for identification robust methods to get reliable estimates for the NKPC.
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Business Cycle Forecast, Summer 2008: Price Hikes and Financial Crisis Cloud Growth Prospects
Wirtschaft im Wandel,
No. 7,
2008
Abstract
In the summer of 2008 the turmoil on financial markets and that on the markets for energy dim the prospects for the world economy. The acceleration of the oil price hike during the first half of the year has led to an increase in expected inflation and to higher interest rates on capital markets, while stock prices are going down. At the same time, the financial crisis is far from over, and banks in the US and in Western Europe continue in their efforts to consolidate their balance sheets. Thus, the expansion of credit supply will be scarcer in the next quarters. All this means that demand will slow in the developed economies during the next quarters. However, the massive fiscal stimulus will help the US economy to stabilize, and the world economy still benefits from the high growth dynamics in the emerging markets economies. All in all, the developed economies will not reach their potential growth rate before the second half of 2009. In Germany, the upswing comes to a temporary halt during summer of this year. Slowing foreign demand and the oil price hike induce firms to postpone investments, and private consumption, the soft spot of the upswing in Germany, is still sluggish due to high inflation rates that impair purchasing power. For the end of 2008, chances are good that growth in Germany accelerates again, because German exporters are still penetrating emerging markets as competitiveness does not diminish. All in all, the German economy will grow by 2.3% in 2008 (mainly due to the very high dynamics at the beginning of the year) and by 1.3% in 2009. A main risk of this forecast is that monetary policy fails in easing the high inflationary pressures. As to fiscal policy, efforts to reach sustainable public finances should not weaken.
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Russia: Ongoing Strong Economic Growth Overshadowed by High Inflation
Martina Kämpfe
Wirtschaft im Wandel,
No. 6,
2008
Abstract
Russian economic growth in 2007 again was driven by strong private consumption and investment, grew by double-digit rates. The roles of budget expenditures and borrowing of private and state-owned firms from abroad in financing investments increased rapidly. Russian inflation climbed again; it was driven up by increases in food prices in line with rising food prices around the world. Inflation pressures had sharpened through more budget spending and scheduled rate increases for electricity and gas as well as for regulated prices for municipal services. Broad money supply (M2) rose rapidly because of strong foreign currency inflows, too. Central bank seeks to bring inflation under control by tightening monetary policy this year. That will somewhat dampen economic growth, but nevertheless GDP growth in the near future will remain at high levels.
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Forecasting the CO2 certificate price risk
Henry Dannenberg, Wilfried Ehrenfeld
IWH Discussion Papers,
No. 5,
2008
Abstract
Modeling the price risk of CO2 certificates is one important aspect of integral corporate risk management related to emissions trading. The paper presents a risk model which may be the basis for evaluating the risk of emission certificate prices. We assume that the certificate price is determined by the expected marginal CO2 abatement costs prevailing at the current trade period and stochastically fluctuates around the respective level as returned from the mean reversion process. Due to uncertainties about future environmental states we suppose that within one trade period, erratic changes in the expected marginal abatement costs may occur leading to shifts in the price level. The aim of the work is to model the erratic changes of the expected reversion level and to estimate the parameters of the mean reversion process.
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Consequences of the US-subprime Crisis Dampen Economic Growth in Germany
Wirtschaft im Wandel,
1. Sonderausgabe
2008
Abstract
The crises of the housing and the financial sector in the US and the turmoil on worldwide financial markets have clouded the prospects of the world economy for this and next year. In particular, conditions for financing consumption and investment will worsen. In addition, the price hikes for energy and food entail a redistribution of purchasing power from ordinary households to the producers of these goods. As a consequence of all this, the economy in the US will be more or less stagnating this year, and world growth will slow down. Firms in the nonfinancial sector, however, are generally in good financial condition, policy in the US takes strong measures to contain the crisis, and growth dynamics in emerging markets economies appear to be robust enough to withstand the dampening effects. In Germany, the economy is, in spite of the adverse effects from abroad and in particular the strong appreciation of the euro, still in good shape. Apparently, the economy has become more robust in the past years, partly due to increased competitiveness of German producers. Still, economic expansion will slow down, with annual growth rates of 1.8% for this year and 1.4% for 2009.
For the first time the forecast of the institutes comprises a medium term projection. For this, the potential growth rate of the German Economy is estimated to be 1.6%. As to policy recommendations, the institutes advise against the establishment of minimum wages in Germany, because they fear adverse effects for employment. In this point the IWH and its partners take a different view.
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Oil Prices and International Trade: How Petrodollar Recycling Affects the Industrialised Countries
Götz Zeddies
Wirtschaft im Wandel,
No. 4,
2008
Abstract
Since 2004, prices for crude oil nearly tripled at international commodity markets. In the wake of the oil crises of the 1970s and ‘80s, numerous empirical studies analysing the macroeconomic effects of sharp increases in commodity prices were carried out pointing at the risks of oil price rises for GDP growth in oil-importing countries. However, in most of these analyses, the impact of oil price increases on international trade of oil-importing countries, which gained in importance in the course of globalisation, is considered only marginally. This is especially the case for the additional revenues of oil-exporting countries spent in large parts for imports from and investment in the industrialised economies.
The present article examines the impact of oil price increases on merchandise exports and imports of single oil-importing industrialised countries. The results show that the curbing effects on merchandise exports are lower than on imports. Whereas import demand responds disproportionally high on the decline in consumption and investment in consequence of oil price increases, the effects on merchandise exports are ambivalent. On the one hand, exports to oil-importing trading partner countries decline due to the local economic downturns, but on the other, exports to oil-exporting countries sharply increase. As a consequence, the negative impact of rising oil prices on macroeconomic activity in oil-importing countries is lowered by the external sector due to growing net exports.
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German Economic Growth in 2008: Temporary Slow Down
Wirtschaft im Wandel,
No. 4,
2008
Abstract
World economic growth has slowed in the first months of 2008. The main causes are the crisis in the US housing sector and the turmoil in the financial sector in general, the spreading expectation of a recession in the US, and sharply rising prices for energy and food. The German economy, though, is still expanding healthily, with strong investment and export activities. Private consumption, however, shrank at the end of 2007. In 2008, while favorable labor market conditions will improve job security and thus the propensity to consume, real incomes will not rise by much due to the risen inflation rate; consumption will again expand only modestly this year. A slower expansion of the world economy and the stronger euro will dampen exports and investment. All in all, growth will slow to (working-day adjusted) 1.2% in 2008. Chances are good that in the next year, after the negative shocks have faded out a bit, growth will be accelerating again. The East German Economy was on a lower growth path in 2006 and 2007 than the economy in the West, according to recently revised national accounts data. Industrial production, however, is more dynamic in the East. Unemployment rates will continue to decrease faster in the East: as in the rest of Germany, employment is growing, and, contrary to what happens in the West, the labor force is shrinking.
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The European Emissions Trading System: What Have We Learned so Far?
Wilfried Ehrenfeld
Wirtschaft im Wandel,
No. 3,
2008
Abstract
The IWH occupies with the consequences of the emission trading for the effected companies. The first period of the European Emission Trading System was conceived as a learning phase during which two problems occurred: The first and most obvious one was the surplus of certificates. The incentives to invest in the mitigation of CO2 can therefore be considered to be low. The second problem resulted from the allocation which was entirely for free. While electricity customers had to bear the main financial burden, electricity producers profited as the certificate-prices were obviously added to the electricity-prices as opportunity costs. The analysis comes to the conclusion that it was right to shorten the amount of certificates on the EU-level for the second trade period and to establish the partly sales or auctioning of certificates in German legislation. Furthermore, the simplification of the allocation method in Germany can be considered to be a progress.
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Can Art Finance itself?
Sören Eisenbeiß, Niels Krap, Tobias Glufke
Wirtschaft im Wandel,
No. 3,
2008
Abstract
Until 2003, public savings in the art sector have been immense. But lately there has been a tendency of increasing public expenditures in this field. Nevertheless one has to ask if these allowances are required to sustain artistic and cultural life.
If, however, art cannot be financed by the contributions of their consumers, the question arises whether and to which extend the government should pay for it. In spring 2007, we realized a survey in cooperation with the “neue theater“ in Halle and the “Anhaltisches Theater Dessau“. Among other subjects, we asked the audience to evaluate the current ticket prices. As a result, we analyzed how these theatres could adjust their ticket prices in order to reduce the need of public subsidies. The conclusion of this survey is that the visitors are reacting rather weakly to moderate price increases. So it can be stated that the theatres could in fact boost their revenues by appropriately raising their ticket prices. Unfortunately, the resulting extra revenue is not sufficient to finance the performing arts without the help of public subsidies.
Finally, an additional argument for subsidizing art is that not only the customers benefit from it, but also the society as a whole because of so-called positive external effects.
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