Essays in open economy macroeconomics

Abstract

Chapter 2: This chapter analyzes the speed of price adjustment in the aftermath of 207 currency crises in 67 countries between 1957 and 1998. The result of slowly adjusting prices in the context of large shocks to the nominal exchange rate found in previous empirical studies is shown to depend crucially on their identification of the post-crisis equilibrium exchange rate, and in particular the hypothesis that large nominal shocks have no permanent effects either on the level or on the trend of the equilibrium real exchange rate. When large shocks to the nominal exchange rate are allowed to be associated with permanent effects, the adjustment of the real exchange rate--i.e. the convergence to the post-crisis path~is found to be very fast, taking place within one month of the crisis for 65% of the episodes and, on average, 6-7 months for the remaining 35%. Significantly, approximately 30% of the adjustment of the real exchange rate to its new path is found to be, on average, due to prices. This pattern of quick adjustment to a new real exchange rate after a crisis is confirmed when the cross-section of crisis episodes is used to characterize the typical crisis experience. Chapter 3: This chapter analyzes the response of job flows by new establishments and shutdowns to the level of the real exchange rate between 1973 and 1993, and finds robust evidence of hysteresis in the structure of US 2-digit manufacturing industries. Following a transitory appreciation of the real exchange rate, employment in manufacturing industries is found to drop permanently, following a fall in the employment stock both of continuing firms, and of firms at the entry-exit margins. Starkly, the drop in job destruction explains most if not all of these facts. These results suggest that although the effects of the real exchange rate on US manufacturing job structure may appear quantitatively small, their persistence makes them an important determinant of the reallocation process of (human) resources. Thus we find support for the classical view that exchange rate shocks relocate labor in and out of the tradable sector depending on whether it is a devaluation or an appreciation. Also, as could be expected from hysteresis models, shutdowns and start-ups systematically account for a disproportionate amount of the response of job destruction and job creation to changes in the real exchange rate. Chapter 4: This chapter shows that the debate on the Tobin transaction tax, which has focused predominantly on issues of implementability and inefficiencies, is misguided, as in a generic model of noise traders, neither the general equilibrium effects nor the endogenous exit of investors are likely to reduce return volatility. In fact, volatility is likely to increase, a prediction that is borne out in available evidence on transaction tax experiments. Finally, this chapter examines several alternatives to the Tobin tax which hold potentially better prospects.