“Nominal Shocks and Real Exchange Rates: Evidence from Two Centuries,” with Pao-Lin Tien, Journal of International Money and Finance, forthcoming.
This paper employs structural vector autoregression methods to examine the contribution of real and nominal shocks to real exchange rate movements using two hundred and seventeen years of data from Britain and the United States. Shocks are identified with long-run restrictions. The long time series makes possible an investigation of how the role of nominal shocks has evolved over time due to changes in the shock processes or to structural changes in the economy which might alter how a shock is transmitted to the real exchange rate. The sample is split at 1913, which is the end of the classical gold standard period, the last of the monetary regimes of the 19th century. The earlier subsample (1795-1913) shows a much stronger role for nominal shocks in explaining real exchange rate movements than the later subsample (1914-2010). Counterfactual analysis shows that the difference between the two periods is mainly due to the size of the nominal shocks rather than structural changes in the economy.
“Current Account Reversals and Structural Change in Developing and Industrialized Countries,” with David R. Hineline, Journal of International Trade and Economic Development 24:1 (February 2015), 147-171.
This paper examines the compositional changes that occur in economies experiencing current account reversals using sectoral-level data on output and employment growth around 55 reversal episodes. The experiences of developing and industrialized countries are compared, and the role of currency crises is also examined. Labor market adjustments following reversals is developing countries is shown to differ from that of industrialized economies. The possibility that this difference is related to labor market informality is briefly examined.
“Monetary Rules and Sectoral Unemployment in Open Economies,” Journal of Macroeconomics, 40 (June 2014), 277-292.
This paper incorporates a search-and-matching model of the labor market into a “New Open Economy Macroeconomics” framework. This allows for an examination of the behavior of tradable and nontradable sector unemployment rates under alternative monetary rules. An examination of dynamics in response to shocks to productivity, world prices and interest rates, and foreign demand suggests that monetary rules that respond to prices of domestic output rather than consumer prices may be better able to stabilize unemployment.
“As the Current Account Turns: Disaggregating the Effects of Current Account Reversals in Industrial Countries,” with David R. Hineline, The World Economy 36:12 (December 2013), 1516-1541.
This paper extends the study of current account (CA) reversals by considering the implications for the composition of output and employment. It is shown that decreases in CA deficits imply increases in tradable relative to nontradable output and/or declines in investment. The impact of CA ‘rebalancing’ should therefore be expected to vary considerably across sectors of an economy. This intersectoral variation is studied by examining the dynamics of output, employment and prices using data for 55 sectors of the economy during 14 industrial country reversal episodes. The output and employment declines associated with CA reversals are most clearly evident in investment-related sectors, while sectors related to primary commodities generally perform relatively well following reversals. Reversals are also followed by increases in relative inflation for tradable goods sectors.
“Specific Factors and International Monetary Policy Coordination,” Open Economies Review 23:2 (April 2012), 319-336.
The consequences of intersectoral factor immobility for optimal monetary policy are examined in a “New Open Economy Macroeconomics” framework. When labor cannot be reallocated between tradable and nontradable goods production, this rigidity generates a welfare loss, which increases as the sectors become more different. When prices are predetermined, the model becomes a monetary “specific factor” model. Intersectoral factor immobility complicates the optimal monetary policy problem by creating a tradeoff between stabilizing tradable and nontradable sector labor. When labor is mobile between sectors, policy coordination can significantly reduce labor volatility. When it is not mobile, coordination results in less volatility in tradable sector labor, but increased nontradable sector labor volatility.
“Temporal Aggregation and Purchasing Power Parity Persistence,” with Yamin Ahmad, Journal of International Money and Finance 30:5 (September 2011), 817-830.
This paper uses a unique new monthly US–UK real exchange rate series for the January 1794–December 2009 period to reexamine the academic debate over purchasing power parity (PPP). The consensus view described by Rogoff (1996) is that PPP holds in the long-run, but short-run deviations are very persistent, with half-lives ranging from 3 to 5 years. Most of the literature using long time series relies on the annual data developed by Lee (1976) and Lothian and Taylor (1996), which were both constructed from underlying higher-frequency data sources. Estimates of purchasing power parity persistence using these series may therefore be subject to temporal aggregation bias. We find evidence of aggregation bias which indicates the half-life of PPP deviations has been overestimated in much of the previous literature. We also find that estimates of the half-lives are further reduced once we account for the Harrod (1933)–Balassa (1964)–Samuelson (1964) effect. The result of aggregation bias appears to be robust even when considering the case that real exchange rates exhibit nonlinear dynamics.
“Interest Differentials and Extreme Support for Uncovered Interest Rate Parity,” with George K. Davis and Norman C. Miller, International Review of Economics and Finance 19:4 (October 2010), 723-732.
This paper addresses two findings from the empirical literature testing uncovered interest parity (UIP): (i) more favorable results when interest differentials (IDs) are large and (ii) instability across samples. Simulations demonstrate that explanations of the results using large IDs based on the hypothesis of a “zone of speculative inactivity” are inconsistent with empirical evidence. Furthermore, it is shown that, if agents forecast IDs based on long-run values, coefficient estimates will be unstable if rates of decay in IDs vary significantly and, for ex post UIP to hold, IDs must decay in absolute value. This is consistent with OECD country data.
“Across Time and Regimes: 212 Years of the US-UK Real Exchange Rate,” Economic Inquiry 48:4 (October 2010), 951-964.
The behavior of the US-UK real exchange rate over the period 1794–2005 is examined. This series includes five intervals of floating nominal exchange rates and four fixed exchange rate regime periods. A consistent pattern of higher real exchange rate volatility under floating nominal rates is shown. Over time, real exchange rate movements have increasingly been driven by movements in the nominal exchange rate rather than relative prices. The persistence of the real exchange rate has been considerably higher in the postwar period.
“The Causes of and Gains from Intertemporal Trade,” with Norman C. Miller, Journal of Economic Education 41:3 (Summer 2010), 275-291.
The authors show how the causes of and the gains from current account imbalances can be integrated into undergraduate economics courses using the same pedagogical tools that are used to explain comparative advantage and the gains from trade. A nonzero current account provides a mechanism for intertemporal trade, and a country has a comparative advantage in present (future) goods if its autarky real interest rate is below (above) the world real interest rate. They explain why the intertemporal approach to the current account reaches different conclusions from the traditional approach regarding welfare effects. Also, they integrate alternative approaches for explaining the underlying cause(s) of nonzero current account balances.
“Real Rigidities and Real Exchange Rate Volatility,” Journal of International Money and Finance 28:1 (February 2009), 135-147.
This paper shows that certain real rigidities can help explain high volatility of real exchange rates relative to other macroeconomic aggregates. An international real business cycle model is used to demonstrate that real exchange rate volatility increases if (i) it is costly to move labor between sectors and (ii) the consumption of tradable goods requires distribution services. Model dynamics are generated by shocks to productivity and preferences based on sectoral output, employment and consumption data from G-7 countries. The introduction of intersectoral adjustment and distribution costs substantially increases the real exchange rate volatility generated by the model.