The effect of the nominal exchange rate on prices: a 2-sector dynamic model with slow capital adjustment and money-inthe-utility

Transcription

1 The effec of he nominal exchange ae on pices: a 2-seco dynamic model wih slow capial adjusmen and money-inhe-uiliy Pee Benczu Magya Nemzei Bank and Cenal Euopean Univesiy

2 Model objecives basic assumpions: wo secos (aded = manufacuing, nonaded = sevices), p T =ep T * wo facos of poducion (capial and labo) slow adjusmens (fom ineempoal behavio): nominal -- consumpion expendiues and income (MIU); eal -- K accumulaion (q) is behavio: effecs of shocks (nominal, eal), nominal pahs pices, wages, enal aes capial and labo employmen in he wo secos consumpion, invesmen, ade balance impac effec plus pesisence -- an endogenous popagaion mechanism: excess demand (spending) ceaes some of is excess supply (income) boh igidiies ae needed fo boh he impac effec and he pesisence highlighs ha open economy eal exchange ae developmens have deep 2-seco, 2-faco deeminans

3 Poenial applicaions demand effec of a fiscal (income) shock: income => expendiue => NT-T elaive pice => income (w) nominal appeciaion: epoduces quie many of sylized ERBS facs (Reinha-Végh 995, Bunsein e al 2002) and he ecen Hungaian expeience, wihou sicky pices (-2) consumpion boom, (3) slow disinflaion, (4) ade deficis NT pices and wages ae majo souces of inflaion misbehavio invesmen collapse, FDI ouflow, T-NT asymmey in invesmen he effec is like a fiscal expansion! => endogenously slow adjusmen of wages and NT pices => failue of ERBSs? he impac of euo convesion ae on nominal and eal vaiables -- he size and pesisence of misalignmen, is effec on secos and facos of poducion B-S effec wih slow invesmen, empoay demand effec

4 Theoeical inepeaion of NATREX long un: all sae vaiables ae sable medium un: all sae vaiables ha adjus fas ae empoaily unchanged (e.g., H is along he dh/d=0 locaion) ealized behavio: all sae vaiables adjus slowly H dh/d=0 eal exchange ae H 0 (K 0 ) mediumem NATREX medium-em NATREX pah dk/d=0 H 0 obseved pah long-em NATREX "pah" p(k, H(K ))=p(k ) medium-em p(h,k ) obseved p(k*, H*) = p* long-em K 0 K ime

5 Model deails 2 secos: C-D pod., labo-augmening exogenous gowh in T (he long-un is hen he flexible Balassa-Samuelson model ); can ansfom all ino effecive vaiables 2 inpus: labo -- mobile acoss secos, capial -- mobile acoss secos bu adjuss slowly beween counies demand: ineempoal opimizaion of a C-D aggegae (T, NT consumpion and eal money -- H/P) a nea-opimal policy funcion fo nominal expendiue: E=VH=(+)/(-)H (neglecs changes in ) -- have a coninuous, full opimizaion vesion wih qualiaively idenical esuls (Benczu-Konya) consume income: only w (K is foeign, capialiss ea only T) all makes clea excep fo Tobin-q fo capial ( *), money accumulaion (E Y, TB 0)

6 Numeical soluion (winsolve is enough!) dynamics: lineaize laws of moion, can keep he pe peiod equaions calibaion: =0.8, = 0.5 (NT is moe labo-inensive); =2/3 weigh of NT *=0.005 (5% pe yea since yea = 0 peiods), g=0.00 (% ) c= half-life of an innovaion in K is app. 2 yeas; V=0. -- half-life of a money shock is app. yea H 0, K 0 is % of seady sae values. * 2 *) / ( * 2 *) ( * 2 ) ( * 2 g VH k g e H H e c K K K ek k e H V k K T T T T

7 Inuiion of model mechanics nominal appeciaion (disinflaion, song EMU ae) inceases he value of money in T his leads o excess spending, jus like a fiscal simulus highe consumpion of NT and T, highe NT poducion, lowe T poducion, ade defici (H flows ou) NT pices incease because he sho-em ansfomaion cuve is nonlinea popagaion: highe NT pices incease domesic income ( ansfe effec )! Conceely: if NT is moe labo-inensive, hen wages incease he pice of capial ( and q) falls, which hus invesmen asymmey: w, ; NT, T, eallocaions beween secos

8 Resuls equilibium gowh pahs, wih diffeen K 0 : (-2) K<K* => >* => p NT <p NT * (invese Solpe-Samuelson) => convegence means excess inflaion (even w/o TFP gowh) -- if he NT seco is moe labo-inensive nominal gowh pahs: fom equilibium H 0 (K 0 ), e= and 0.9 (3-7) -- app. % misalignmen fo aound 2 yeas, bu an impoan effec on,w and K! he diffeence of he wo nominal pahs (i.e., he nominal impulse esponse of an appeciaion): K, p, K NT, K T, L T, L NT, k T (k NT ), /e, w/e, C, Y, TB, eal GDP (8-6) sensiiviy o he adjusmen speed (c,v), iniial values, fiscal expansion (dh>0 exa income)

9 Discussion, fuue eseach geneal inuiion: he nominal exchange ae influences T pices, while some asses ae fixed in local cuency => change in demand => GE change in pices and income money, wealh o pofolio-ebalancing inepeaions -- simila, bu diffeen impac and pesisence ole of appoximaions (E=VH, nea-q heoy): full opimizaion vesion in coninuous ime, he same inuiion woks (E 0 /H 0 >0, so an appeciaion ceaes excess demand) he ole of secoal inensiies, capial owneship? he ole of uni subsiuabiliy CES in consumpion: high subsiuabiliy deceases he impac and he pesisence, low subs. inceases (w can even incease moe han :!) CES in poducion: jus he opposie (low subs. magnifies he effec)

10 Discussion, fuue eseach con. slow eallocaion beween secos: secoal q Dixi-Sigliz compeiion wih empoay pofis and gadual eny ( sicky eny ) => endogenous T passhough as well? he ole of economic developmen (disance fom seady sae, he weigh of K) pice o inflaion ineia? success of ERBSs -- can we ace hem o diffeences in he sengh of model effecs? sicky pice models: fims will no adjus o 00% exchange ae passhough, so adjusmen is even slowe calibaion on Hungaian daa, o saic/dynamics esimaion? non-homoheiciy of T-NT demand?