nep-ifn New Economics Papers
on International Finance
Issue of 2005‒01‒02
ten papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. The Impact of News in the Dollar/Deutschmark Exchange Rate: Evidence from the 1990's By Stefan Krause
  2. State Dependent Pricing and Exchange Rate Pass-Through By Flodén, Martin; Wilander, Fredrik
  3. Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets By Torben G. Andersen; Tim Bollerslev; Francis X. Diebold; Clara Vega
  4. Conservative Central Banks, and Nominal Growth, Exchange Rate and Inflation Targets By Ronald A. Ratti; Sang-Kun Bae
  5. Financial Globalization and Exchange Rates By Philip R. Lane; G Milesi-Feretti
  6. Inflation Contracts, Inflation and Exchange Rate Targeting, and Uncertain Central Bank Preferences By Ronald A. Ratti; Sang-Kun Bae
  7. Exchange rate regimes and exchange market pressure in accession countries By Vanneste J.; Van Poeck A.; Veiner M.
  8. A Risk Allocation Approach to Optimal Exchange Rate Policy By B. Gabriela Mundaca; Jon Strand
  9. Optimal Debt and Equilibrium Exchange Rates in a Stochastic Environment: an Overview By Jerome Stein
  10. Trade Openness And Real Exchange Rate Volatility: Panel Data Evidence By César Calderón

  1. By: Stefan Krause
    Abstract: In this paper I analyse three specifications of spot exchange rate models by using an alternative approach in defining the news variable. In particular, I employ quarterly data of the U.S. dollar / German Mark exchange rate for the period 1991-1998 in order to determine whether the effect of news announcements on the exchange rate is still present in the decade of the 1990's. The empirical evidence suggests that news do not seem to provide explanatory power for justifying deviations from either the efficient markets hypothesis or the uncovered interest rate parity. Nevertheless, newspaper announcements and news about inflation do contribute to significantly explain short run departures from purchasing power parity (PPP) with the expected sign, supporting the view that deviations from PPP will arise from new information available in the market.
    Date: 2004–12
  2. By: Flodén, Martin (Department of Economics, Stockholm School of Economics); Wilander, Fredrik (Department of Economics, Stockholm School of Economics)
    Abstract: We analyze exchange rate pass-through and volatility of import prices in a dynamic framework where firms are subject to menu costs and decide on price adjustments in response to exchange rate innovations. The exchange rate pass-through and import price volatility then depend on the pricing convention in combination with functional forms of cost and demand functions. In particular, there is lower pass-through, less frequent price adjustments, lower price volatility, and slightly lower average prices when prices are set in the importer’s currency than when prices are set in the exporter’s currency. The degree of pass-through also depends on the magnitude of exchange rate innovations. Large exchange rate innovations raise pass-through if prices are set in the importer’s currency but reduce pass-through if prices are set in the exporter’s currency. Finally, the presence of inflation can generate a substantial asymmetry in price adjustments. This asymmetry could lead to pitfalls when empirically estimating pass-through, and we present some potential resolutions to this estimation problem.
    Keywords: Exchange rate pass-through; Nominal rigidities; Invoicing; State dependent pricing
    JEL: D40 E30 F31 F40
    Date: 2004–12–01
  3. By: Torben G. Andersen (Department of Economics, Northwestern University); Tim Bollerslev (Department of Economics, Duke University); Francis X. Diebold (Department of Economics, University of Pennsylvania); Clara Vega (Department of Finance, University of Rochester)
    Abstract: We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing “cash flow” and “discount rate” effects for equity valuation. This finding helps explain the time-varying correlation between stock and bond returns, and the relatively small equity market news effect when averaged across expansions and recessions. Lastly, relying on the pronounced heteroskedasticity in the high-frequency data, we document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects.
    Keywords: Asset Pricing, Macroeconomic News Announcements, Financial Market Linkages, Market Microstructure, High-Frequency Data, Survey Data, Asset Return Volatility, Forecasting
    JEL: F3 F4 G1 C5
    Date: 2003–07–01
  4. By: Ronald A. Ratti (Department of Economics, University of Missouri-Columbia); Sang-Kun Bae
    Abstract: A framework is developed in which inflation biases with different target variables are compared. A nominal growth target measured in consumer prices yields less stabilization bias than a nominal income growth target. Exchange rate and inflation targets result in less stabilization bias in absolute value than an income growth target the more government cares about real exchange rate stabilization and the more open the economy. A conservative central bank may not be best under exchange rate and nominal growth targets. Greater openness reduces biases of discretionary policy and raises the chance that a conservative central bank is optimal in replication of commitment equilibrium.
    JEL: E52 E58 F41
    Date: 2004–12–21
  5. By: Philip R. Lane; G Milesi-Feretti
    Abstract: The founders of the Bretton Woods System sixty years ago were primarily concerned with orderly exchange rateadjustment in a world economy that was characterized by widespread restrictions on international capitalmobility. In contrast, the rapid pace of financial globalization during recent years poses new challenges for theinternational monetary system. In particular, large gross cross-holdings of foreign assets and liabilities meansthat the valuation channel of exchange rate adjustment has grown in importance, relative to the traditional tradebalance channel. Accordingly, this paper empirically explores some of the inter-connections between financialglobalization and exchange rate adjustment and discusses the policy implications.
    Keywords: Financial integration, capital flows, external assets and liabilities
    JEL: F31 F32
    Date: 2004–12
  6. By: Ronald A. Ratti (Department of Economics, University of Missouri-Columbia); Sang-Kun Bae
    Abstract: When central bank preferences are uncertain, delegation implemented by inflation or exchange rate targeting may be superior to delegation implemented through an inflation contract combined with an optimal inflation target. Distortion introduced by uncertainty about preferences into stabilization of shocks is largest under the contract regime. With targeting regimes this distortion is reduced by government increasing incentives to stabilize the targeted variable if uncertainty about preferences increases. A central banker with a populist bias improves outcomes under exchange rate targeting and the contract/optimal inflation target regime by reducing the distortion in stabilization induced by uncertain preferences.
    JEL: E42 E52 E58 F41
    Date: 2004–12–21
  7. By: Vanneste J.; Van Poeck A.; Veiner M.
    Date: 2004–06
  8. By: B. Gabriela Mundaca; Jon Strand
    Abstract: We derive the optimal exchange rate policy for a small open economy subject to terms-of-trade shocks. Firm owners and workers are risk averse but workers more so. Wages are given or partially indexed in the short run, and capital markets are imperfect. The government sets the exchange rate to allocate risk between workers and owners. With less risk-averse firms, and greater difference in risk aversion between workers and firms, the optimal exchange rate should vary little with pure terms-of-trade shocks but more with general shocks to prices. Optimal exchange rate variation is greater with indexed wages, but is smaller when firms behave monopolistically and when wage taxes (profit taxes) change procyclically (countercyclically) with export prices (import prices). The model gives policy rules for determining optimal variations of the exchange rate, and indicates when it is, and is not, optimal to join a currency union with trading partners, implying zero exchange rate variation.
    Keywords: currency band, monetary union, price volatility, optimal risk allocation
    JEL: F31 F33 F41
    Date: 2004
  9. By: Jerome Stein
    Abstract: The focus is upon equilibrium real exchange rates, optimal external debt and their interaction, in a world where both the return on investment and the real rate of interest are stochastic variables. These theoretically based measures are applied empirically to answer the following questions: What is a theoretically based empirical measure of an "excess debt" that increases the probability of a debt crisis? What is a theoretically based empirical measure of a "misaligned" exchange rate that increases the probability of a currency/balance of payments crises? Two theoretical tools are used to derive Early Warning Signals. One is the NATREX model to estimate the equilibrium real exchange rate. The second is stochastic optimal control/dynamic programming to derive the optimal debt and endogenous growth rate. Examples are given of these applications.
    Keywords: stochastic optimal control, foreign debt, NATREX, vulnerability to external shocks, sustainable current account, warning signals of debt crisis, exchange rate misalignments
    JEL: C61 D81 D90 F30 F31 F34 F40
    Date: 2004
  10. By: César Calderón
    Abstract: A recent strand of the literature, the so-called “New Open Economy Macroeconomics”, argues that nonmonetary factors have gained importance in explaining exchange rate volatility. In this context, it has been suggested the inclusion of shocks to productivity, terms of trade, and government spending, among others. The goal of the present paper is to explain the real exchange rate volatility by positing a structural relationship between volatility and its determinants. To perform our task we collected information on exchange rates, output, terms of trade, government spending, monetary aggregates, exchange rate regimes, trade and financial openness for a sample of industrial and developing countries for the 1974-2003 period. We will use GMM-IV methods for panel data to test the following hypotheses: (a) real exchange rate (RER) fluctuations are less volatile in more open countries, and (b) trade openness helps attenuate the impact of highly volatile shocks to fundamentals on the volatility of RER fluctuations.
    Date: 2004–12

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