nep-fmk New Economics Papers
on Financial Markets
Issue of 2005‒09‒02
five papers chosen by
Carolina Valiente
London South Bank University

  1. The Effects of the Exchange Rate on Investment: Evidence from Canadian Manufacturing Industries By Tarek Harchaoui; Faouzi Tarkhani; Terence Yuen
  2. Insurance Policies for Monetary Policy in the Euro Area By Keith Küster; Volker Wieland
  3. Discretionary Monetary Policy and the Zero Lower Bound on Nominal Interest Rates By Klaus Adam; Roberto Billi
  4. Environmental news and stock markets performance: Further evidence for Argentina By Mariana Conte Grand; Vanesa V. D'Elia
  5. The Optimal Inflation Buffer with a Zero Bound By Roberto Billi

  1. By: Tarek Harchaoui; Faouzi Tarkhani; Terence Yuen
    Abstract: Using industry-level data for 22 Canadian manufacturing industries, the authors examine the relationship between exchange rates and investment during the period 1981-97. Their empirical results show that the overall effect of exchange rates on total investment is statistically insignificant. Further investigation reveals the non-uniform investment response to exchange rate movements in three channels. First, it is important to distinguish between environments that have low and high exchange rate volatilities. Through changes in output demands, depreciations would have a positive effect on total investment when the exchange rate volatility is low. Yet, this stimulative effect becomes considerably smaller as the volatility increases. Second, these results for total investment are mainly due to movements in other machinery and equipment, and not to investment in information technology and structures. Third, investment in industries with low markup ratios are more likely to be affected by exchange rate movements.
    Keywords: Exchange rates; Domestic demand and components
    JEL: F4 D24
    Date: 2005
  2. By: Keith Küster (University of Frankfurt); Volker Wieland (University of Frankfurt)
    Abstract: In this paper, we examine the cost of insurance against model uncertainty for the Euro area considering four alternative reference models, all of which are used for policy-analysis at the ECB.We find that maximal insurance across this model range in terms of aMinimax policy comes at moderate costs in terms of lower expected performance. We extract priors that would rationalize the Minimax policy from a Bayesian perspective. These priors indicate that full insurance is strongly oriented towards the model with highest baseline losses. Furthermore, this policy is not as tolerant towards small perturbations of policy parameters as the Bayesian policy rule. We propose to strike a compromise and use preferences for policy design that allow for intermediate degrees of ambiguity-aversion.These preferences allow the specification of priors but also give extra weight to the worst uncertain outcomes in a given context.
    Keywords: Model uncertainty, robustness, monetary policy rules, minimax, euro area.
    JEL: E52 E58 E61
    Date: 2005–01–13
  3. By: Klaus Adam (European Central Bank); Roberto Billi (Center for Financial Studies)
    Abstract: Ignoring the existence of the zero lower bound on nominal interest rates one considerably understates the value of monetary commitment in New Keynesian models. A stochastic forward-looking model with lower bound, calibrated to the U.S. economy, suggests that low values for the natural rate of interest lead to sizeable output losses and deflation under discretionary monetary policy. The fall in output and deflation are much larger than in the case with policy commitment and do not show up at all if the model abstracts from the existence of the lower bound. The welfare losses of discretionary policy increase even further when inflation is partly determined by lagged inflation in the Phillips curve. These results emerge because private sector expectations and the discretionary policy response to these expectations reinforce each other and cause the lower bound to be reached much earlier than under commitment.
    Keywords: Nonlinear Optimal Policy, Occasionally Binding Constraint, Sequential Policy, Markov Perfect Equilibrium, Liquidity Trap
    JEL: E31 E52
    Date: 2005–01–16
  4. By: Mariana Conte Grand; Vanesa V. D'Elia
    Abstract: More and more firms tend nowadays to adopt environment-friendly attitudes. Their motivation originates in local environmental regulations or requirements of foreign markets to which firms export (both induced by consumers and investors´ valuation of pro-environment initiatives). There is a well-established literature capturing the impact on stock prices of environmental information releases using the event study methodology. Studies are usually based on information environmental regulation (i.e., the regulator announcement of emissions or compliance status with respect to standards) or on simple media coverage of environmental news. Dasgupta, Laplante and Mamingi (2001) is one of the few references to show that public information on environmental behavior has impact on stock prices in the developing world. It includes Argentina in its analysis together with Chile, Mexico and the Philippines. In this manuscript, we focus specifically on Argentina. We find that positive environmental news have no impact, while negative news do have an effect on average rates of return a few days following its appearance. But, when focusing on different types of positive news, we find that ISO certification has no effect whatsoever, while investment decisions do have some positive significant influence on returns. On the other side, negative news influence on stock returns is particularly significant for events linked to citizen complaints and government rulings (confirming other studies results) and for media coverage of oil company issues. However, we find abnormal returns of a much smaller magnitude than other studies for developing countries. We believe that is readonable because there seem to be no reason why the level of abnormal returns (not its volatility) should be larger for environmental news in developing countries than in developed ones.
    Keywords: developing countries, environmental management, environmental news, capital markets, event study
    JEL: Q58 G14
    Date: 2005–08
  5. By: Roberto Billi (Center for Financial Studies)
    Abstract: This paper characterizes the optimal inflation buffer consistent with a zero lower bound on nominal interest rates in a New Keynesian sticky-price model. It is shown that a purely forward-looking version of the model that abstracts from inflation inertia would significantly underestimate the inflation buffer. If the central bank follows the prescriptions of a welfaretheoretic objective, a larger buffer appears optimal than would be the case employing a traditional loss function. Taking also into account potential downward nominal rigidities in the price-setting behavior of firms appears not to impose significant further distortions on the economy.
    Keywords: Inflation Inertia, Downward Nominal Rigidity, Nonlinear Policy, Liquidity Trap
    JEL: C63 E31 E52
    Date: 2005–01–17

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