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Michele Ca' Zorzi

International & European Relations

Division

International Policy Analysis

Current Position

Lead Economist

Fields of interest

International Economics

Email

michele.cazorzi@ecb.europa.eu

Education
1993-1998

PhD in Economics, University of Warwick, 1999

Professional experience
2017-2019

Principal Economist, International Policy Analysis

2014-2017

Senior Economist, International Policy Analysis

2011-2013

Senior Economist, Monetary Policy Research

2010-2010

Senior Economist, EU Country Division, Sep-Dec 2010

2005-2010

Senior Economist, External Developments Division, FX and BOP Section

1999-2004

Economist, External Developments Division, Global Section

26 September 2022
WORKING PAPER SERIES - No. 2731
Details
Abstract
We build currency portfolios based on the paradigm that exchange rates slowly converge to their equilibrium to highlight three results. First, this property can be exploited to build profitable portfolios. Second, the slow pace of convergence at short-horizons is consistent with the evidence of profitable carry trade strategies, i.e. the common practice of borrowing in low-yield currencies and investing in high-yield currencies. Third, the predictive power of equilibrium exchange rates may boost the performance of carry trade strategies.
JEL Code
F31 : International Economics→International Finance→Foreign Exchange
G12 : Financial Economics→General Financial Markets→Asset Pricing, Trading Volume, Bond Interest Rates
G15 : Financial Economics→General Financial Markets→International Financial Markets
11 November 2021
ECONOMIC BULLETIN - ARTICLE
Economic Bulletin Issue 7, 2021
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Abstract
This article reviews three popular equilibrium exchange rate models, the purchasing power parity (PPP), behavioural equilibrium exchange rate (BEER) and macroeconomic balance (MB) models. The aim is to address two questions: whether such models help in forecasting real and nominal exchange rates and which macroeconomic fundamentals contain such predictive power. The evidence suggests that real exchange rates adjust over time to their estimated real exchange rate equilibria only in the cases of the PPP and BEER models. Exploring this empirical regularity, it is possible to draw three important lessons. The first is that such equilibrium adjustment helps to forecast real exchange rates. The second lesson is that this real equilibrium adjustment process helps in forecasting nominal exchange rates, as most of the adjustment toward equilibrium is achieved by currency movements and not by relative price changes. The third is that most of the forecasting power comes from the exploitation of the mean-reverting properties of real exchange rates rather than an understanding of the relationship between exchange rates and economic fundamentals.
JEL Code
C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models
F31 : International Economics→International Finance→Foreign Exchange
F37 : International Economics→International Finance→International Finance Forecasting and Simulation: Models and Applications
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
21 September 2021
OCCASIONAL PAPER SERIES - No. 263
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Abstract
This paper assesses how globalisation has shaped the economic environment in which the ECB operates and discusses whether this warrants adjustments to the monetary policy strategy. The paper first looks at how trade and financial integration have evolved since the last strategy review in 2003. It then examines the effects of these developments on global productivity growth, the natural interest rate (r*), inflation trends and monetary transmission. While trade globalisation initially boosted productivity growth, this effect may be waning as trade integration slows and market contestability promotes a winner-takes-all environment. The impact of globalisation on r* has been ambiguous: downward pressures, fuelled by global demand for safe assets and an increase in the propensity to save against a background of rising inequality, are counteracted by upward pressures, from the boost to global productivity associated with greater trade integration. Headline inflation rates have become more synchronised globally, largely because commodity prices are increasingly determined by global factors. Meanwhile, core inflation rates show a lower degree of commonality. Globalisation has made a rather modest contribution to the synchronised fall in trend inflation across countries and contributed only moderately to the reduction in the responsiveness of inflation to changes in activity. Regarding monetary transmission, globalisation has made the role of the exchange rate more complex by introducing new mechanisms through which it affects financial conditions, real activity and price dynamics. Against the background of this discussion, the paper then examines the implications for the ECB’s monetary policy strategy. In doing so, it asks two questions. How is the ECB’s economic and monetary analysis affected by globalisation? And how does globalisation influence the choice of the ECB’s monetary policy objective and instruments? ...
JEL Code
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission
F44 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Business Cycles
F62 : International Economics→Economic Impacts of Globalization→Macroeconomic Impacts
F65 : International Economics→Economic Impacts of Globalization→Finance
15 April 2021
RESEARCH BULLETIN - No. 83
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Abstract
ECB and Federal Reserve monetary policy both spill over to other countries. But these spillovers are asymmetric. Federal Reserve monetary policy shocks have a significant impact on economic activity in the euro area and the rest of the world, mainly by affecting financial conditions globally. Conversely, ECB monetary policy shocks have little impact on the US economy and on global financial conditions, but still significantly affect global trade and economic activity, especially in emerging markets.
JEL Code
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
F3 : International Economics→International Finance
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission
13 May 2020
WORKING PAPER SERIES - No. 2407
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Abstract
This paper estimates and compares the international transmission of European Central Bank (ECB) and Federal Reserve System monetary policy in a unified and methodologically consistent framework. It identifies pure monetary policy shocks by purging them of the bias stemming from contemporaneous central bank information effects. The results suggest that there is a hierarchy in the global spillovers from ECB and Federal Reserve monetary policy: while the spillovers to consumer prices are relatively small in both directions, Federal Reserve monetary policy shocks have a larger impact on euro area financial markets and real activity. Federal Reserve monetary policy also has a significantly larger impact than ECB monetary policy on real and financial variables in the rest of the world.
JEL Code
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
F3 : International Economics→International Finance
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission
Network
Research Task Force (RTF)
13 May 2020
DISCUSSION PAPER SERIES - No. 10
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Abstract
This paper estimates and compares the international transmission of European Central Bank (ECB) and Federal Reserve System monetary policy in a unified and methodologically consistent framework. It identifies pure monetary policy shocks by purging them of the bias stemming from contemporaneous central bank information effects. The results suggest that there is a hierarchy in the global spillovers from ECB and Federal Reserve monetary policy: while the spillovers to consumer prices are relatively small in both directions, Federal Reserve monetary policy shocks have a larger impact on euro area financial markets and real activity. Federal Reserve monetary policy also has a significantly larger impact than ECB monetary policy on real and financial variables in the rest of the world.
JEL Code
E44 : Macroeconomics and Monetary Economics→Money and Interest Rates→Financial Markets and the Macroeconomy
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
F3 : International Economics→International Finance
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
F42 : International Economics→Macroeconomic Aspects of International Trade and Finance→International Policy Coordination and Transmission
9 January 2020
WORKING PAPER SERIES - No. 2358
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Abstract
In this paper we evaluate the predictive power of the three most popular equilibrium exchange rate concepts: Purchasing Power Parity (PPP), Behavioral Equilibrium Exchange Rate (BEER) and the Macroeconomic Balance (MB) approach. We show that there is a clear trade-off between storytelling and forecast accuracy. The PPP model offers little economic insights, but has good predictive power. The BEER framework, which links exchange rates to fundamentals, does not deliver forecasts of better quality than PPP. The MB approach has the most appealing economic interpretation, but performs poorly in forecasting terms. Sensitivity analysis confirms that changing the composition of fundamentals in the BEER model or modifying key underlying assumptions in the MB model does not generally enhance their predictive power.
JEL Code
C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models
F31 : International Economics→International Finance→Foreign Exchange
F37 : International Economics→International Finance→International Finance Forecasting and Simulation: Models and Applications
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
22 May 2018
WORKING PAPER SERIES - No. 2151
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Abstract
This paper shows that there are two regularities in foreign exchange markets in advanced countries with flexible regimes. First, real exchange rates are mean-reverting, as implied by the Purchasing Power Parity model. Second, the adjustment takes place via nominal exchange rates. These features of the data can be exploited, even on the back of a napkin, to generate nominal exchange rate forecasts that outperform the random walk. The secret is to avoid estimating the pace of mean reversion and assume that relative prices are unchanged. Direct forecasting or panel data techniques are better than the random walk but fail to beat this simple calibrated model.
JEL Code
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
F31 : International Economics→International Finance→Foreign Exchange
F37 : International Economics→International Finance→International Finance Forecasting and Simulation: Models and Applications
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
13 May 2016
WORKING PAPER SERIES - No. 1905
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Abstract
We run a real exchange rate forecasting "horse race", which highlights that two principles hold. First, forecasts should not replicate the high volatility of exchange rates observed in sample. Second, models should exploit the mean reversion of the real exchange rate over long horizons. Abiding by these principles, an open-economy DSGE model performs well in real exchange rate forecasting. However, it fails to forecast nominal exchange rates better than the random walk. We find that the root cause is its inability to predict domestic and foreign inflation. This shortcoming leads us toward simpler ways to outperform the random walk.
JEL Code
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
F31 : International Economics→International Finance→Foreign Exchange
F37 : International Economics→International Finance→International Finance Forecasting and Simulation: Models and Applications
10 March 2014
WORKING PAPER SERIES - No. 1647
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Abstract
A balanced current account in the euro area has disguised sizeable net lending imbalances at the country level, exposing the common currency area to severe pressures during the financial crisis. The key contribution of this paper is to evaluate the adjustment process through the lenses of the New Multi Country Model at the country and sectoral level. We find that shocks to the external, fiscal and monetary environment help explain, to a large degree, the sizeable current account adjustment and rise in unemployment in Spain. The model also suggests that a recovery in wage competitiveness helps to reduce external deficits at the cost of higher net borrowing by households. The stimulus effects on aggregate demand, via the interest rate response of the common monetary authority and the competitiveness channel, are present but not overly large, as the rebound in economic activity depends mainly on global demand, supportive monetary policy, business and consumer confidence.
JEL Code
C5 : Mathematical and Quantitative Methods→Econometric Modeling
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe
Network
Competitiveness Research Network
14 August 2013
WORKING PAPER SERIES - No. 1576
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Abstract
This paper brings three new insights into the Purchasing Power Parity (PPP) debate. First, we show that a half-life PPP model is able to forecast real exchange rates (RER) better than the random walk (RW) model at both short and long-term horizons. Secondly, we find that this result holds only if the speed of adjustment to the sample mean is calibrated at reasonable values rather than estimated. Finally, we find that it is also preferable to calibrate, rather than to elicit as a prior, the parameter determining the speed of adjustment to PPP.
JEL Code
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
F31 : International Economics→International Finance→Foreign Exchange
F37 : International Economics→International Finance→International Finance Forecasting and Simulation: Models and Applications
16 April 2013
WORKING PAPER SERIES - No. 1534
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Abstract
This paper studies the influence of aggregating across space when (i) testing the PPP theory or more generally pair-wise cointegration and (ii) evaluating the PPP puzzle. Our contribution is threefold: we show that aggregating foreign data and applying an ADF test may lead to erroneously reject the PPP hypothesis. We then show, on the basis of theoretical arguments as well as Monte Carlo experiments, that a sizable bias in the estimates of half-life deviations to PPP may be due to the effect of aggregation across space. We finally illustrate empirically the importance of spatial considerations when estimating the speed of price convergence among euro area countries.
JEL Code
C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
16 November 2012
WORKING PAPER SERIES - No. 1492
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Abstract
The paper provides a novel Bayesian methodological framework to estimate structural VAR (SVAR) models with recursive identification schemes that allows for the inclusion of over-identifying restrictions. The proposed framework enables the researcher to (i) elicit the prior on the non-zero contemporaneous relations between economic variables and to (ii) derive an analytical expression for the posterior distribution and marginal data density. We illustrate our methodological framework by estimating a backward looking New-Keynesian model taking into account prior beliefs about the contemporaneous coefficients in the Phillips curve and Taylor rule.
JEL Code
C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E47 : Macroeconomics and Monetary Economics→Money and Interest Rates→Forecasting and Simulation: Models and Applications
14 June 2012
WORKING PAPER SERIES - No. 1444
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Abstract
The curse of dimensionality refers to the difficulty of including all relevant variables in empirical applications due to the lack of sufficient degrees of freedom. A common solution to alleviate the problem in the context of open economy models is to aggregate foreign variables by constructing trade-weighted cross-sectional averages. This paper provides two key contributions in the context of static panel data models. The first is to show under what conditions the aggregation of foreign variables (AFV) leads to consistent estimates (as the time dimension T is fixed and the cross section dimension N -> infinite). The second is to design a formal test to assess the admissibility of the AFV restriction and to evaluate the small sample properties of the test by undertaking Monte Carlo experiments. Finally, we illustrate an application in the context of the current account empirical literature where the AFV restriction is rejected.
JEL Code
C12 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Hypothesis Testing: General
C31 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Cross-Sectional Models, Spatial Models, Treatment Effect Models, Quantile Regressions, Social Interaction Models
C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
1 June 2012
WORKING PAPER SERIES - No. 1441
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Abstract
The global financial crisis has led to a revival of the empirical literature on current account imbalances. This paper contributes to that literature by investigating the importance of evaluating model and parameter uncertainty prior to reaching any firm conclusion. We explore three alternative econometric strategies: examining all models, selecting a few, and combining them all. Out of thousands (or indeed millions) of models a story emerges. Prior to the financial crisis, current account positions of major economies such as the US, UK, Japan and China were not aligned with fundamentals.
JEL Code
C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General
C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F34 : International Economics→International Finance→International Lending and Debt Problems
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe
27 July 2011
OCCASIONAL PAPER SERIES - No. 126
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Abstract
This paper analyses the impact of the global financial crisis on euro area cross-border financial flows by comparing recent developments with the main pre-crisis trends. Two prominent features of the period of turmoil were (i) the sizeable deleveraging of external financial exposures by the private sector and, in particular, the banking sector from 2008 and (ii) the significant changes in the composition of euro area cross-border portfolio flows, as investors shifted from equity to debt instruments, from long-term to short- term debt instruments and from private to public sector securities. Since 2009 such trends have started reversing. However, as balance sheet restructuring by financial and non-financial corporations continues, cross-border financial flows have remained well below pre-crisis levels. The degree of resumption and volatility of crossborder financial activity may have a major bearing on growth prospects for the euro area and may also matter from a financial stability perspective. We argue that the recent experience, first of extraordinary growth and then of scaling down of international financial activity, calls for enhanced monitoring of developments in crossborder financial flows so that the underlying risks to the domestic economy stemming from the financial sector can be better assessed. Looking forward, successful implementation of policy actions to promote macroeconomic discipline and enhance financial regulation and supervision could influence, inter alia, the composition and volume of cross-border capital flows, contributing to a more efficient and sustainable allocation of resources.
JEL Code
D8 : Microeconomics→Information, Knowledge, and Uncertainty
C7 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory
29 January 2010
WORKING PAPER SERIES - No. 1151
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Abstract
This paper reviews three different concepts of equilibrium exchange rates that are widely used in policy analysis and constitute the backbone of the IMF CGER assessment: the Macroeconomic Balance, the External Sustainability and the reduced form approaches. We raise a number of econometric issues that were previously neglected, proposing some methodological advances to address them. The first issue relates to the presence of model uncertainty in deriving benchmarks for the current account, introducing Bayesian averaging techniques as a solution. The second issue reveals that, if one considers all the sets of plausible identification schemes, the uncertainty surrounding export and import exchange rate elasticities is large even at longer horizons. The third issue discusses the uncertainty associated to the estimation of a reduced form relationship for the real exchange rate, concluding that inference can be improved by panel estimation. The fourth and final issue addresses the presence of strong and weak cross section dependence in panel estimation, suggesting which panel estimators one could use in this case. Overall, the analysis puts forward a number of innovative solutions in dealing with the large uncertainties surrounding equilibrium exchange rate estimates.
JEL Code
F31 : International Economics→International Finance→Foreign Exchange
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
23 September 2009
WORKING PAPER SERIES - No. 1094
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Abstract
The contribution of this paper is to revisit the Early Warning System (EWS) literature by analysing selected episodes of financial market crisis, i.e. those preceded by a spell of credit and real estate expansions. The aim is to disentangle instances when this constitutes a natural phenomenon associated with a process of financial development and innovation from those where it constitutes a worrisome signal. We identify economic variables that have leading indicator properties, thus helping to distinguish between “benign” episodes from those likely ending with downward pressures on the exchange rate or even a fully-fledged banking crisis. We find that a large current account deficit, a fall in price competitiveness, strong real growth and high public debt-to-GDP ratio increase the probability that a lending or housing boom would be accompanied by financial market tensions shortly after the peak.
JEL Code
E32 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Business Fluctuations, Cycles
F31 : International Economics→International Finance→Foreign Exchange
F37 : International Economics→International Finance→International Finance Forecasting and Simulation: Models and Applications
28 January 2009
WORKING PAPER SERIES - No. 995
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Abstract
This paper examines two competing approaches for calculating current account benchmarks, i.e. the external sustainability approach á la Lane and Milesi-Ferretti (LM) versus the structural current accounts literature (SCA) based on panel econometric techniques. The aim is to gauge the medium term adjustment in current account positions that may be required in some central and eastern European countries. As regards the LM approach, we show how the outcome is especially sensitive to (i) the normative choice for external indebtedness and (ii) the decision to exclude the foreign direct investment subcomponent from the NFA aggregate. Turning our search to the SCA approach, we assess its sensitivity to model and parameter uncertainty by setting different selection criteria to choose amongst the over 8000 possible combinations of fundamentals. Furthermore, to test the robustness of our findings we combine all models, attaching to each a probability (Bayesian Averaging of Classical Estimates). We show both the LM and SCA methodologies are not immune from severe drawbacks and conceptual difficulties. Nevertheless pulling together the results of both approaches point to the countries that may need a current account adjustment over a medium term horizon.
JEL Code
C11 : Mathematical and Quantitative Methods→Econometric and Statistical Methods and Methodology: General→Bayesian Analysis: General
C33 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Panel Data Models, Spatio-temporal Models
F15 : International Economics→Trade→Economic Integration
F32 : International Economics→International Finance→Current Account Adjustment, Short-Term Capital Movements
F34 : International Economics→International Finance→International Lending and Debt Problems
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
O52 : Economic Development, Technological Change, and Growth→Economywide Country Studies→Europe
16 May 2008
WORKING PAPER SERIES - No. 895
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Abstract
In this paper we present a novel approach to the empirical validation of the intertemporal approach to the current account. We develop a calibrated model highlighting the role of consumption smoothing and capital accumulation in the economic convergence process. After solving the model, we derive the theoretical values for the euro area countries’ current account, testing to what extent they match reality. The model explains most of the dispersion in the current account and saving ratio, though cannot equally well capture differences in the investment ratios. The conclusion that we draw is that consumption smoothing, based on expectations of economic convergence, is driving the current account of the euro area countries over medium-term horizons. Capital accumulation appears to play a less pronounced role.
JEL Code
D91 : Microeconomics→Intertemporal Choice→Intertemporal Household Choice, Life Cycle Models and Saving
F36 : International Economics→International Finance→Financial Aspects of Economic Integration
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
30 November 2007
WORKING PAPER SERIES - No. 833
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Abstract
From a conceptual point of view there is little consensus of what should be the “ideal indicator” of international cost and price competitiveness as each of the standard measures typically employed has its own merits and drawbacks. This calls for addressing the question from an empirical angle, searching for the indicator that best explains and helps forecast export developments. This paper constitutes a first attempt to systematically compare the properties of the alternative cost and price competitiveness measures of the euro area. Although they diverge sometimes, we find little evidence that there is one indicator consistently outperforming the other in terms of explaining and forecasting euro area exports. This suggests that the measures based on consumer and producer prices, which offer some advantages in terms of quality and timeliness, are good approximations of euro area price and cost competitiveness.
JEL Code
F17 : International Economics→Trade→Trade Forecasting and Simulation
F31 : International Economics→International Finance→Foreign Exchange
F41 : International Economics→Macroeconomic Aspects of International Trade and Finance→Open Economy Macroeconomics
21 March 2007
WORKING PAPER SERIES - No. 739
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Abstract
This paper examines the degree of Exchange Rate Pass-Through (ERPT) to prices in 12 emerging markets in Asia, Latin America, and Central and Eastern Europe. Our results, based on three alternative vector autoregressive models, partly overturn the conventional wisdom that ERPT into both import and consumer prices is always higher in "emerging" than in "developed" countries. For emerging markets with only one digit inflation (most notably the Asian countries), passthrough to import and consumer prices is found to be low and not very dissimilar from the levels of developed economies. The paper also finds robust evidence for a positive relationship between the degree of the ERPT and inflation, in line with Taylor's hypothesis once two outlier countries (Argentina and Turkey) are excluded from the analysis. Finally, the presence of a positive link between import openness and ERPT, while plausible theoretically, finds only weak empirical support.
JEL Code
C32 : Mathematical and Quantitative Methods→Multiple or Simultaneous Equation Models, Multiple Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models, Diffusion Processes
E31 : Macroeconomics and Monetary Economics→Prices, Business Fluctuations, and Cycles→Price Level, Inflation, Deflation
28 February 2005
WORKING PAPER SERIES - No. 445
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Abstract
This paper examines the welfare implications of a country joining a currency union as opposed to operating in a flexible exchange rate regime. At the country level, the suboptimal response to domestic and foreign shocks and the inability of setting inflation at the desired level may be offset by a positive impact on potential output. We show that for entry to be welfare enhancing, the potential output gain must be the larger, the smaller the country, the larger the difference between the standard deviation of supply shocks across the participating countries, the smaller the correlation of countries’ supply shocks and the larger the variance of real exchange rate shocks.
JEL Code
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
F33 : International Economics→International Finance→International Monetary Arrangements and Institutions
F40 : International Economics→Macroeconomic Aspects of International Trade and Finance→General
1 February 2003
WORKING PAPER SERIES - No. 216
Details
Abstract
The enlargement of the European monetary union to include the accession countries (ACs) will not lead to higher average inflation in the enlarged euro area, but only to inflation redistribution across countries if continuity of the monetary policy framework is preserved. In the short term, unanticipated shocks to the real exchange rate may instead affect aggregate inflation if member countries' economic structure differs. When comparing welfare, inflation and output stabilisation, we find that the size, differences in economic structure and the variance-covariance matrix of supply and real exchange rate shocks play a key role. The numerical results indicate that the implications for the euro area are significant only if we assume a strong real exchange rate appreciation and if ACs are weighted in terms of purchasing power parity standards. In the event of real exchange rate or country-specific supply shocks in ACs, the consequences would be limited for both the current and the enlarged euro area, but sizeable for ACs themselves.
JEL Code
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy
E58 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Central Banks and Their Policies
F33 : International Economics→International Finance→International Monetary Arrangements and Institutions
F40 : International Economics→Macroeconomic Aspects of International Trade and Finance→General
2017
Journal of International Economics
  • Ca' Zorzi, Kolasa and Rubaszek
2016
Open Economies Review
  • Ca' Zorzi, Muck and Rubaszek
2016
International Finance
  • Angelini, Ca' Zorzi and Forster
2015
Economic Modelling
  • Ca' Zorzi, Kociecki and Rubaszek
2012
Journal of International Money and Finance
  • Ca' Zorzi, Chudik and Dieppe
2012
Empirical Economics
  • Ca' Zorzi, Chudik and Dieppe
2012
Review of Development Economics
  • Ca' Zorzi and Rubaszek
2012
German Economic Review
  • Ca' Zorzi, De Santis and Zampolli
2010
Emerging Market Review
  • Bunda, Ca' Zorzi
2010
P. De Grauwe, ed., The many dimensions of competitiveness, MIT Press
Explaining and forecasting euro area exports: which competitiveness indicator performs best?
  • Ca' Zorzi, Schnatz
2005
P. De Grauwe, ed., Prospects for monetary union after the euro, MIT Press
The admission of accession coutnries to an enlarged monetary union: a tentative assessment
  • Ca' Zorzi, De Santis
2004
Economics Letters, 2004
  • Ca' Zorzi, De Santis
2001
Buti, Sestito and Wijkander, eds, Taxation, welfare and the crisis of unemployment in Europe
The retreat of the welfare system: myths and reality
  • Sestito, Ca' Zorzi