Docstoc

Peering Through Monetary Mist Macroeconomic Effects of Monetary

Document Sample
Peering Through Monetary Mist Macroeconomic Effects of  Monetary Powered By Docstoc
					   Peering Through Monetary Mist:
Macroeconomic Effects of Monetary
  Policy under Borderless World of
        Financial and Labor Market

           Suchanan Chunanantatham
                     January 8, 2007
Presentation guide


   Introduction:
       How did it all begin?
       What is it that I intend to study?
       How distinguish this thesis over the others in the same
        area?
   Model summary
       What is the building block behind the results?
   Results of the study
       What is the answer to the questions at hand?
   Conclusion
       What is the implication learned?
Introduction
   Objective 1
     To study whether financial market integration
      strengthens or weakens the ability of policymakers to
      stabilize the economy using macroeconomic policy
   Motivation
     A widespread acceleration in financial liberalization
     To the extent that such integration is a policy choice,
      investigating its benefit and cost seem to be an obvious
      and promising direction for research
     Among many aspects, the implication in term of
      macroeconomic policy is chosen.
   Theoretical framework
     Classic workhorse model developed by Mundell(1962)
      and Fleming (1963)
     Mixed results and drawbacks
   Contribution
     New open economy macroeconomic model developed
      by Ofstfeld and Rogoff (1995)
Introduction

   Objective 2
       To explore role played by labor market integration on the
        effect of financial market integration on the adjustment of
        the economy to unanticipated changes in monetary policy
   Motivation
       Most of works in international policy transmission assume
        no migration of labor across countries.
       Through it alleviates the theoretical analysis, it is clearly at
        variance with empirical evidences
   Contribution
       Extending the model to include international labor flow
        would render the model to be more practical while allow for
        more detail study if financial market integration
              Model
                           Consumer
 -Choose consumption, bond, -Each individual consumption of
 and money holding to maximizedifferentiated products need to be
 utility subject to budget    chosen so as to minimize the cost
 constraint                  of attaining aggregate consumption
                                                               1                        1
                                                                        H  Ms                     H
                                                                               H

                                      s t
                                                     N  Cs 
                                                       H   H           N  H                       N                                  
C
          Max
                     
                    H 
                                                 1               1      Ps                                             ptH ( z ) 
                                                                                                                   ctH ( z )   H  CtH , where z=h,f
     H    H   H
         ,D ,M ,F
                         s t
                                s t
                                                                                                        
Subject to N H DtH  (1 itH1 ) N H DtH1  N H M tH1  N H M tH  wtH N H
                                                                                                                             Pt                1
                                        Pt H N H CtH  Pt H N H I tH  Pt H N H Z tH  N H  tH  Pt H N H Tt H        n H 1      1
                                                                                                                                                   1  1
                                                                                                                   P    p (h) dh    p ( f )  df 
                                                                                                                    H
                                                                                                                                        
                                                                                                                                           H
                                                                                                                                                  
                    where N H Z tH    N H I tH 
                                    1               2

                                    2                                                                                  0             n                
                          N H is given.

              Producer                                                                                    Government
              - Price adjustment mechanism                                                                -Assume government
                  Free entry and exit                                                                     spending is zero
                  + Inelastic labor supply                                                                -Gov’t budget constraint
                  Zero profit                                                                                                   ( M t 1  M t )
                                                                                                                          Tt 
                  - Pricing rule psH  wsH                                                                                               Pt
Numerical results


   In what follows, quantitative properties based on
    the previous chapter’s qualitative framework are
    explored.
   Computational experiments
       No closed-form solution simulating a calibrated
        version of the log-linear system numerically
       Method of undetermined coefficient
   The results are interpreted by using impulse
    response analysis
Numerical results
   Combination of experiments
     The plots, which represent the propagation of asymmetric
      shock on various macroeconomic variables, are classified
      into four cases
    Case 1: Prior to Labor Market Integration
      1.1 Degree of Capital mobility: high
      1.2 Degree of capital mobility: Low X
    Case 2: Subsequent to Labor Market Integration
      2.1 Degree of Capital mobility: high
      2.2 Degree of capital mobility: Low X
   Shock
       Follow Sutherland (1996), the shocks considered in this
        thesis are permanent and asymmetric.
Numerical results

 Case 1: Prior to international labor migration
 First objective:
 “how the degree of international financial
 market integration matters for the dynamics
 of the model in the aftermath of monetary
 shock with the labor market separated
 between nations.”
   Numerical results
1.1 High degree of capital mobility with incomplete labor
market integration: The benchmark case
        Nominal interest rate
                                                   0.2                                                                                             0.5

                                                                                                                                                  0.45
                                                   0.1
                                                                                                                                                   0.4
             Percent deviation from steady state




                                                                                                            Percent deviation from steady state
                                                     0                                                                                            0.35

                                                                                                                                                   0.3
                                                   -0.1

                                                                                                                                                  0.25
                                                   -0.2
                                                                                                                                                   0.2

                                                   -0.3                  Home                                                                     0.15                   Foreign
                                                                                                                                                   0.1
                                                   -0.4
                                                                                                                                                  0.05

                                                   -0.5                                                                                             0
                                                       -1   0   1   2      3         4      5   6   7   8                                            -1   0   1   2      3         4      5   6   7   8
                                                                        Years after shock                                                                             Years after shock

                                                  Low barrier in making international flows of funds only
                                                   one interest rate
                                                  An asymmetric shock
                                                    the interest rates are leaved unaffected by
                                                   monetary shock from each country
                                      Numerical results
                                                    General price index
                                       1                                                                                              0

                                      0.9                                                                                           -0.1

                                      0.8                                                                                           -0.2
Percent deviation from steady state




                                                                                              Percent deviation from steady state
                                      0.7                                                                                           -0.3

                                      0.6                                                                                           -0.4

                                      0.5                                                                                           -0.5

                                      0.4                                                                                           -0.6

                                      0.3                                                                                           -0.7

                                      0.2                                                                                           -0.8

                                      0.1                                                                                           -0.9

                                       0                                                                                             -1
                                        -1       0    1   2      3         4      5   6   7   8                                        -1   0   1   2      3         4      5   6   7   8
                                                              Years after shock                                                                         Years after shock



                                                     Flexible-price model  home price index
                                                     increases by somewhat the same amount as a
                                                     change in money supply.
Numerical results
                                         Wage (or price of individual differentiated products)
                                           1                                                                                           0

                                          0.9                                                                                        -0.1

                                          0.8                                                                                        -0.2
    Percent deviation from steady state




                                                                                               Percent deviation from steady state
                                          0.7                                                                                        -0.3

                                          0.6                                                                                        -0.4

                                          0.5                                                                                        -0.5

                                          0.4                                                                                        -0.6

                                          0.3                                                                                        -0.7

                                          0.2                                                                                        -0.8

                                          0.1                                                                                        -0.9

                                           0                                                                                          -1
                                            -1     0   1   2      3         4      5   6   7   8                                        -1   0   1   2      3         4      5   6   7   8
                                                               Years after shock                                                                         Years after shock

                                                The symmetry of both countries  individual prices of goods in
                                                 each country (either own-produced or imported) behave like its
                                                 general price index.
                                                          pt   Pt 
                                                           ˆ H    ˆ H  N HCH ˆ H
                                                                         Q
                                                                              Ct 
                                                                                     N FC F ˆ F
                                                                                       Q
                                                                                                
                                                                                            Ct  0                                                    
                                                So, apparently individual prices in home, which is equal to wage
                                                 in the model where flexible prices guarantee zero profit, rise by
                                                 one percent as well.
Numerical results
   Implication:
     Real wage remains unchanged at the level that
        generates steady state full employment,
       i.e., we have zero deviation of outputs from steady
        state
                                 ˆ
                      ytH  0or Yt H  0
                      ˆ
       Obviously, where full employment is assured by wage
        and price flexibility, monetary policy has impact that
        would be predicted from the basic quantity theory of
        money.
        That is, it is only price level in an economy, not real
        economic variables, such as output and employment,
        that is affected by quantity of money.
        Contradict to Sutherland (1996) where there is
        price-rigidity, the general level of price will change in
        proportion to the change in money stock, leaving the
        real side of economy unchanged
Numerical results
                          Consumption index (and consumption of individual goods)
                                       0.08                                                                                            0.01

                                       0.07                                                                                                0
 Percent deviation from steady state




                                                                                                 Percent deviation from steady state
                                       0.06                                                                                            -0.01

                                       0.05                                                                                            -0.02

                                       0.04                                                                                            -0.03

                                       0.03                                                                                            -0.04

                                       0.02                                                                                            -0.05

                                       0.01                                                                                            -0.06

                                           0                                                                                           -0.07

                                       -0.01                                                                                           -0.08
                                            -1   0   1   2      3         4      5   6   7   8                                              -1   0   1   2      3         4      5   6   7   8
                                                             Years after shock                                                                               Years after shock


                                                 Once-and-for-all step change from its initial value
                                                 to a new long-run steady state level.
Numerical results
     The main reason for flat consumption:
       Unchanged real interest  no incentive to
        reallocate consumption overtime
                 ˆ
                   
                        ˆ
                                
                                          ˆ                   
                 CtH1  CtH   1    it H  Et Pt 1  Pt H 
                                                    ˆH ˆ
                                                                 
         In other words, a country will wish to smooth
          consumption in the situation where a subjective
          discount factor is equal to the market discount
          factor
                                                     
                      C  H
                        t 1    C   (1  rt ) 
                                  t
                                   H
                                   
                                               H
                                                 
         Not surprisingly, in presence of an efficient ways
          of accumulating financial wealth, countries can
          gain more opportunity for consumption-
          smoothing, as confirmed in the above two graphs.
                                            Numerical results
                                       2
                                                 Exchange rate
                                      1.8

                                      1.6
Percent deviation from steady state




                                      1.4

                                      1.2                                                             Exchange rate dynamic
                                                                                                                  1 ˆ H ˆ F  ˆH ˆF
                                                                                                                        
                                                                                                                    Ct  Ct   it  it 
                                       1

                                      0.8                                                     ˆ    ˆ      ˆ
                                                                                              Et  M tH  M tF 
                                      0.6
                                                                                                                           
                                      0.4

                                      0.2

                                       0
                                        -1    0   1   2      3         4      5   6   7   8
                                                          Years after shock

                                              The relative money supply and
                                            change in relative consumption level                                 no change
                                               once-and-for-all step change                                 in nominal interest rate

        exchange rate must also jumps immediately to its long-run level.
                                                  Indeed, home currency depreciates (foreign currency
                                                   appreciates) to about 2 percent.
Numerical results
   No-exchange-rate-overshooting property of the model
     Exchange rate dynamic is virtually identical to the central
      equation of the flexible-price monetary model of
      exchange rates

    s   m  m    y  y    i  i     i  i   ste
               s   m  m    y  y   ste

       According to above equation, once domestic currency is
        expected to depreciate over the coming period, the today
        demand for domestic currency will fall, causing an increase in
        exchange rate immediately.
       Consequently, Dornbusch-type exchange rate
        overshooting does not essentially occur in this model.
Numerical results
                                                                Quantity of funds transferred
                                                           0.1                                                                                                             0.02
 Percent deviation from steady state consumption value




                                                                                                                   Percent deviation from steady state consumption level
                                                         0.08                                                                                                                 0



                                                         0.06                                                                                                              -0.02



                                                         0.04                                                                                                              -0.04



                                                         0.02                                                                                                              -0.06



                                                             0                                                                                                             -0.08


                                                         -0.02                                                                                                              -0.1
                                                              -1   0   1   2      3         4      5   6   7   8                                                                -1   0   1   2      3         4      5   6   7   8
                                                                               Years after shock                                                                                                 Years after shock




                                                                   Domestic agents are accumulating foreign bonds
                                                                   (increase in net claim on the rest of the world) as the
                                                                   depreciation in domestic currency gives rise to
                                                                   national current account surplus
 Numerical results
1.2 Low degree of capital mobility with incomplete labor
market integration
     How does presence of imperfect financial
      market integration affect the dynamics of the
      model?
 1    i               ˆ      
          ˆt H  1    it F  Et Et 1  Et   N H C H Et I tH1  I tH
                                    ˆ       ˆ                ˆ 
                                                                      ˆ      
                                                                        (1)
       Equation (1) states that the yield differential
       between domestic and foreign bond( i.e., the
       nominal interest differential less the expected
       depreciation of the nominal exchange rate) is
       proportional to expected rate of change of the
       cross-border flow of funds.
     Numerical results
  1    iˆt H  1    iˆt F  Et  Et 1  Et    N H C H Et  IˆtH1  IˆtH 
                                         ˆ       ˆ
                                                                          

               Algebraically, with higher value of ,
     A negative expected rate of change in cross-border flow of funds
                                                                            0.2                                                                                                                                  0.5

                                                                                                                                                                                                             0.45
                                                                            0.1
                                                                                                                                                                                                                 0.4




                                                                                                                                                                       Percent deviation from steady state
                                      Percent deviation from steady state
                                                                              0                                                                                                                              0.35

                                                                                                                                                                                                                 0.3
                                                                            -0.1


 A higher negative in international                                         -0.2
                                                                                                                                                                                                             0.25

                                                                                                                                                                                                                 0.2

  nominal interest rate differential                                        -0.3
                                                                                                                                                                                                             0.15

                                                                                                                                                                                                                 0.1
                                                                            -0.4
                                                                                                                                                                                                             0.05

                                                                            -0.5                                                                                                                                   0
                                                                                -1   0   1   2      3         4      5   6   7                 8                                                                    -1       0       1       2      3         4          5       6       7       8
                                                                                                 Years after shock                                                                                           2                                   Years after shock

                                                                                                                                                                               1.8

                                                                                                                                                                               1.6




                                                                                                                                 Percent deviation from steady state
             A bigger expected rate of change                                                                                                                                  1.4


                 in value of home currency                                                                                                                                     1.2

                                                                                                                                                                                                             1

                                                                                                                                                                               0.8

the initial impact on exchange rate of monetary expansion                                                                                                                      0.6


     when international financial market are segmented                                                                                                                         0.4

                                                                                                                                                                               0.2
                      would be smaller                                                                                                                                                                       0
                                                                                                                                                                                                              -1         0       1       2        3       4          5       6       7       8
   Numerical results
     Intuitively, the central implication of imperfect capital mobility is
      that domestic and foreign bonds become differentiated and can,
      therefore, pay different rate of return.
      With low capital mobility,
          The tendency for money supply to induce higher asset
                   accumulation in domestic economy

                relatively higher downward pressure on
                     relative yield of domestic asset

 First, nominal interest rate of each country becomes more diverge,
    i.e., nominal interest rate rises in home while falls in foreign.

  Second, since one component of domestic yield is capital gain arisen
from change in exchange rate, the higher domestic yield fall implies that
               expected depreciation is relatively higher.
Numerical results
                                       Price (individual prices of home product and wage)
                                        1                                                                                              0

                                       0.9                                                                                           -0.1

                                       0.8                                                                                           -0.2
 Percent deviation from steady state




                                                                                               Percent deviation from steady state
                                       0.7                                                                                           -0.3

                                       0.6                                                                                           -0.4

                                       0.5                                                                                           -0.5

                                       0.4                                                                                           -0.6

                                       0.3                                                                                           -0.7

                                       0.2                                                                                           -0.8

                                       0.1                                                                                           -0.9

                                        0                                                                                             -1
                                         -1    0   1   2      3         4      5   6   7   8                                            -1   0   1   2      3         4      5   6   7   8
                                                           Years after shock                                                                             Years after shock




                                             In keeping parity of purchasing power among the
                                              countries,
                                             the marginally increase in E  home general price
                                              index rises by less
Numerical results
   Consumption (and consumption of individual goods)
                                               0.08                                                                                            0.01


                                               0.07                                                                                                0




                                                                                                         Percent deviation from steady state
         Percent deviation from steady state




                                               0.06                                                                                            -0.01


                                               0.05                                                                                            -0.02


                                               0.04                                                                                            -0.03

                                               0.03                                                                                            -0.04

                                               0.02                                                                                            -0.05

                                               0.01                                                                                            -0.06

                                                   0                                                                                           -0.07

                                               -0.01                                                                                           -0.08
                                                    -1   0   1   2      3         4      5   6   7   8                                              -1   0   1   2      3         4      5   6   7   8
                                                                     Years after shock                                                                               Years after shock




       Home consumption index rises sharply and then
        declines afterward.
       Fall in real interest rate in home  incentive for domestic
        consumers to bring consumption forward in time
       When market interest rate differs from time-preference rate,
        the motivation to smooth consumption is modified by an
        incentive to tilt the consumption path.
       Another reason: lower increase in price level
                                                                                                            Numerical results
                                                                                                                                                         First Investigation
                                                                                                                                       Money shock under different degrees of financial market
                                                                                                                                          integration: Before international labors migration


                                                                                                                                       Perfectly integrated                          Imperfectly integrated
                                                                                                                                                                                                                                                                                                        0.2


                                                                                                                                                                                                                                                                                                        0.1




                                                                                                                                                                                                                                                                  Percent deviation from steady state
                                                                                                               Unchanged interest rate
                                                                                                                                                                                 -             Interest rate
                                                                                                                                                                                                                                                                                                          0


                                                                                                                                                                                                                                                                                                        -0.1


                                                                                                                                                                                                                                                                                                        -0.2

                                                         0.08
                                                                                                                                                                                                                                                                                                        -0.3
                                                         0.07
                                                                                                                                                                                                                                                                                                        -0.4
Percent deviation from steady state




                                                         0.06


                                                         0.05                                                                                                                                                                                                                                           -0.5

                                                         0.04                                                                                                                    -    sharply and afterward
                                                                                                                                                                                                                                                                                                            -1   0     1        2      3         4
                                                                                                                                                                                                                                                                                                                                    Years after shock
                                                                                                                                                                                                                                                                                                                                                        5       6   7   8



                                                         0.03

                                                         0.02

                                                         0.01

                                                                            0
                                                                                                                          Once-and-for-all in C
                                               -0.01
                                                    -1                                0       1       2      3         4      5    6   7       8
                                                                                                                                                                                                                                                    2
                                                                                                          Years after shock

                                                                                                                                                                                                                                                   1.8

                                                                                                                                                                                                                                                   1.6




                                                                                                                                                                                                             Percent deviation from steady state
                                                                                                                              Once-and-for-all in E +                                          E   by less
                                                                                                                                                                                                                                                   1.4

                                                                                                                                                                                                                                                   1.2

                                                                                                                                                                                                                                                    1
                                                                                1
                                                                                                                                                                                                                                                   0.8
                                                                            0.9
                                                                                                                                                                                                                                                   0.6
                                                                            0.8
                                      Percent deviation from steady state




                                                                                                                                                                                                                                                   0.4
                                                                            0.7
                                                                                                                                                                                                                                                   0.2
                                                                            0.6
                                                                                                                                                                                                                                                    0




                                                                                                                                                           Price   more         +
                                                                                                                                                                                                                                                     -1   0   1   2                                        3         4      5          6        7           8




                                                                                                                                                                                               Price   less
                                                                            0.5
                                                                                                                                                                                                                                                                                                        Years after shock
                                                                            0.4

                                                                            0.3

                                                                            0.2

                                                                            0.1

                                                                                0
                                                                                 -1       0       1        2      3         4      5       6       7   8
                                                                                                               Years after shock




                                                                                                                                               Output: unchange                         Output: unchange
                                                                                                                                                                                     ˆ
                                                                                                                                                                          ytH  0or Yt H  0
                                                                                                                                                                          ˆ
Numerical results

   In other words, at any degree of labor market
    integration, it would be sufficient to establish the
    financial market integration as the factor that
    reduces volatility of interest rates and increases in
    volatility of prices and exchange rate.
   Hence, along the lines of Mundell-Fleming model
    and Sutherland (1996), the monetary policy effect
    toward exchange rate tends to be stronger, the
    higher is the degree of international capital mobility.
   On the other hand, while it enhances the effect on
    exchange rate, its effect on output deteriorates as
    perfectly flexible prices and wages bring about the
    classic neutrality property of monetary policy.
Numerical results


Case 2: Subsequent to international labor
  migration
Second objective
“ Whether implications of international capital
  mobility for the macroeconomic effects of
  monetary policy are sensitive to the extent of
  integration in international labor market.”
 Numerical results
    Comparing between incomplete and complete
     labor market integration, it go without saying that
     the presence of international labors resettlement

                does not significantly alter
     the way any of macro variables response to shock
          from what is analyzed in the last section.


    As before, the implications of lowering in trading
     friction in international financial transaction on
     monetary policy effects work through
the interaction of relative asset return and exchange rate
                                                Numerical results
                                               1    it H
                                                        ˆ                                                                1    it F  Et Et 1  Et
                                                                                                                                   ˆ         ˆ       ˆ                                   ˆ 
                                                                                                                                                                                                   ˆ
                                                                                                                                                                              N H C H Et I tH1  I tH   
                                              After the lower impediments to cross-country capital flows are introduced,
                                               the fall in relative yield from holding assets in different countries is
                                               smaller.
                                              This, simultaneously, means two things.
                                                The deviation of interest differential between domestic and foreign
                                                  bond becomes narrower
                                      0.4                                           Because of the higher expected inflation
                                                                              in domestic economy as a result of greater
Percent deviation from steady state




                                      0.2


                                        0


                                      -0.2
                                                                              monetary-induce exchange rate depreciation in
                                      -0.4
                                                            Home              the case where home agents can easily switch
                                      -0.6
                                                                              places to invest their assets
                                                                                          0.25


                                                                                     the borrowers and lenders add inflation
                                      -0.8
                                                    Percent deviation from steady state




                                                                                           0.2
                                        -1


                                                                              premium to interest rate.
                                                             Foreign
                                      -1.2                                                0.15
                                          -1    0                                           1       2       3       4       5       6       7       8
                                                                                                    Years after shock
                                                                                    Ultimately, an expansion in money supply
                                                                                           0.1




                                                                              in home will raise interest rate when financial
                                                                                          0.05


                                                                                             0

                                                                              market integration is highly complete.
                                                                                          -0.05


                                                                                   “expected inflation effect”
                                                                                           -0.1
                                                                                               -1       0       1       2       3       4       5       6   7   8
 Numerical results
1    iˆt H  1    iˆt F  Et  Et 1  Et 
                                       ˆ       ˆ                                                               ˆ
                                                                                                                      
                                                                                                                       ˆ
                                                                                                  N H C H Et I tH1  I tH   
     The magnitude of an increase in depreciation expectation
      is getting smaller.
      In contrast to the case where a nation’s capital market is
      less loosen up, lower expected depreciation generates
      dramatically higher monetary-induced increase in
      exchange rate, as confirmed by the following diagram.
                                                                        4.5
                                  Percent deviation from steady state




                                                                         4

                                                                        3.5

                                                                         3

                                                                        2.5

                                                                         2

                                                                        1.5

                                                                         1

                                                                        0.5

                                                                         0
                                                                          -1   0   1   2    3     4    5   6   7   8
                                                                                       Years after shock
    Numerical results
How are things different in the presence of global linkages in labor market?

  1    iˆt H  1    iˆt F  Et  Et 1  Et 
                                         ˆ       ˆ                     ˆ 
                                                                               ˆ
                                                          N H C H Et I tH1  I tH   
          The nominal exchange rate increases by more from an
           symmetric shock in a relative money supply, as compared
           to the case previous to migration.
          It appears from the equation that the relative difference
           between returns from holding assets of home and foreign
           country becomes smaller after labors relocate from home to
           foreign.
          The smaller yield differential, then, implies that the expected
           domestic currency depreciation happens to be less
           significant in the world of high worldwide labor mobility.
          So, with lower depreciation expected, it is necessary for the
           impact effect of monetary change on exchange rate to be
           larger
          , i.e., higher depreciation (in either low or high degree of
           financial market integration) if labors are allowed to migrate.
    Numerical results
   Armed with the dynamics of exchange rate, we can determine

     the effect of monetary policy change on other macro variables.
   If we compare to the world where difficulties in undertaking position in
    oversea financial market is more important, asymmetric shock in money
    supply causes home general price index and wage (or price of individual
    goods) to rise by more as it produces a bigger rate of home currency
    depreciation.


                                               3.5                                                                                   3
         Percent deviation from steady state




                                                                                              Percent deviation from steady state
                                                3
                                                                                                                                    2.5


                                               2.5
                                                                  Price                                                              2                 Wage
                                                2
                                                                                                                                    1.5
                                               1.5

                                                                                                                                     1
                                                1


                                                                                                                                    0.5
                                               0.5


                                                0                                                                                    0
                                                 -1   0   1   2    3     4    5   6   7   8                                           -1   0   1   2    3     4    5   6   7   8
                                                              Years after shock                                                                    Years after shock
    Numerical results
How are things different in the presence of global linkages in labor market?
    The direct effect of a change in the location of production on
     price index of that country:
      After a given amount of home labors move to foreign country,
       steady state value of home total outputs, as well as the
         number of varieties home produces, decline.
       This raises positive effect of expansionary monetary policy
         on home price.

     “Price index effect”:
              Price index in a particular region would tend to be higher,
              the lower is the share of production sector in that region.

       Accordingly, we can notice a larger rise in home price index,
        as compared to the circumstances before labor market
        integration.
   Numerical results
     Wage:
       Because a substantial depreciation in home currency creates
        a higher demand for home products at the expense of
        foreign products,
       moving of home labors to foreign country would appear to
        raise home wages up higher after the disturbance hits the
        economy.
“Home market effect”
                  With the vertical labor supply curve,
      the producers in location with larger demand for its product
               would have to pay a higher nominal wage.
         Therefore, an asymmetric change in monetary policy would
          cause a higher rise in home wage rate if labor is mobile
          across regions.
   Numerical results
     Dynamics of consumption and current account
      Expansionary monetary policy in home gives rise to
  a fall in consumption, instead of raising it as it does in the case
  ahead of home emigration.
    • This is so because it generates a much higher rise in price level,
  which implies a lower purchasing power and thus the incentive to spending.
    • Plus, the fact the home interest rate fall by less as a result of money
  supply increase means that agents will wish to consume relatively more
  in the future, rather than now.
      Consequently, in the below panel, as the disturbance strikes,
  home consumption declines once labor is highly mobile across countries.
In fact, home consumption climbs down by more,                                             0




                                                   Percent deviation from steady state
thus leading to greater current account surplus                                           -2




when the two financial markets are highly                                                 -4


                                                                                          -6
integrated.
   • Of course, this is attributed to the higher
                                                                                          -8




   increases in domestic price + smaller fall in                                         -10



   domestic interest falls when countries become less                                    -12



   isolated to the global financial market                                               -14
                                                                                            -1   0   1   2   3   4   5   6   7   8
                                                                                                         Numerical results
                                      Second Investigation: Implications of international capital
                                           mobility for the effects of monetary policy: After
                                                     international labors migration


                                                                                       0.4
                                                                                                                                     Perfectly integrated                        Imperfectly integrated
                                             Percent deviation from steady state




                                                                                       0.2


                                                                                        0


                                                                                   -0.2


                                                                                   -0.4


                                                                                   -0.6

                                                                                                                                                     interest rate
                                                                                                                                                                             -            Interest rate
                                                                                   -0.8


                                                                                        -1

                                                                                                                                                                                                                                                 4.5
                                                                                   -1.2
                                                                                       -1        0       1       2       3       4   5   6   7   8




                                                                                                                                                                                                           Percent deviation from steady state
                                                                                                                                                                                                                                                   4
                                                                                                                 Years after shock
                                                                                                                                                                                                                                                 3.5




                                      3.5
                                                                                                                                                      E      more           +               E     less                                             3

                                                                                                                                                                                                                                                 2.5

                                                                                                                                                                                                                                                   2

                                                                                                                                                                                                                                                 1.5
Percent deviation from steady state




                                       3
                                                                                                                                                                                                                                                   1

                                      2.5
                                                                                                                                                                                                                                                 0.5


                                       2                                                                                                                                                                                                           0




                                                                                                                                                     Price    more                        Price     less
                                                                                                                                                                                                                                                    -1   0   1   2    3     4    5   6   7   8




                                                                                                                                                                            +
                                                                                                                                                                                                                                                                 Years after shock
                                      1.5


                                       1


                                      0.5


                                       0                                                                                                                                                                                                           0
                                        -1                                         0         1       2       3       4       5   6   7   8
                                                                                                     Years after shock




                                                                                                                                                                                                           Percent deviation from steady state
                                                                                                                                                                                                                                                  -2




                                                                                                                                                      C      more           +               C     less                                            -4


                                                                                                                                                                                                                                                  -6


                                                                                                                                                                                                                                                  -8


                                                                                                                                                                                                                                                 -10


                                                                                                                                                                                                                                                 -12




                                                                                                                                         Output: unchange                           Output: unchange                                             -14
                                                                                                                                                                                                                                                    -1   0   1   2    3     4    5
                                                                                                                                                                                                                                                                 Years after shock
                                                                                                                                                                                                                                                                                     6   7   8




                                                                                                                                                                                ˆ
                                                                                                                                                                     ytH  0or Yt H  0
                                                                                                                                                                     ˆ
 Summary of simulation results

    In the nutshell, the simulated results carried out
     at different degrees of financial and labor market
     integration ultimately indicate that
1) The way macroeconomic variables response after
money shock hit economy obviously differs between
economy with low and high capital mobility

                     Cases                    i, r   C , c( z ) E P, p( z ) y( z ), Y
                         Financial market integration
     (i) Imperfect integrated labor market     -        -      +       +        0

     (ii) Perfectly integrated labor market   -*        +      +       +        0
Summary of simulation results
   Accordingly, although the approach taken here differs
    radically from that of traditional Mundell-Fleming model in
    that it allows policy issues to be analyzed by mean of full-
    fledged micro-founded dynamic model, the two approach
    share some implications as both models appear to predict
    that the nominal exchange rate effect of monetary policy tend
    to increase in the world where capital mobility is far above the
    ground.
   At the same time, the flexile-price NOEM model developed in
    this paper and the quantity theorist also are not extremely
    far apart in terms of output implication of monetary policy.
   Eventually, money is all that matters for change in nominal,
    not real, income, as reflected clearly in the basic quantity
    theory of money.
 Summary of simulation results
 2) Another interesting results concern the impact of having a
    particular amount of labors migrates from home to
    foreign country.

The simulation results suggest that quite the same pattern
still applies even after the possibility of shift in labor location
is incorporated.
                    Cases                    i, r   C , c( z ) E P, p( z ) y( z ), Y
                        Financial market integration
    (i) Imperfect integrated labor market     -        -       +      +        0
    (ii) Perfectly integrated labor market    -*       +       +      +        0

 As a consequence, regardless of the condition in terms of
   linkage in labor market of each nation, the international
   financial market integration does show a consistent and
   dependable effect toward the behavior of economy in the
   upshot of shock in money supply.
  The end
Thank you

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:7
posted:7/2/2012
language:English
pages:38