nep-ifn New Economics Papers
on International Finance
Issue of 2005‒02‒27
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Expectations Hypotheses Tests and Predictive Regressions at Long Horizons By Rossi, Barbara
  2. Following Germany's Lead: Using International Monetary Linkages to Identify the Effect of Monetary Policy on the Economy By di Giovanni, Julian; McCrary, Justin; von Wachter, Till
  3. The Law of one Price in the Russian Economy By Konstantin Gluschenko
  4. Structural policy reforms and external imbalances By Mike Kennedy; Torsten Sløk
  5. Can Fluctuations in the Consumption-Wealth Ratio Help to Predict Exchange Rates? By Jorge Selaive; Vicente Tuesta R
  6. International Financial Adjustment By Pierre-Olivier Gourinchas; Helene Rey
  7. Going Multinational under Exchange Rate Uncertainty. By Henry Aray; Javier Gardeazábal

  1. By: Rossi, Barbara
    Abstract: Many rational expectations models state that an economic variable is determined as the present value of future variables. These restrictions have traditionally been tested on VARs where variables appear either in levels (or cointegrating relationships) or first differences. Commonly used test statistics may lead to over-rejections in small samples in the presence of highly persistent variables. Similar problems occur in longhorizon predictive regressions. We propose an alternative method based on local-tounity asymptotic approximations. We apply this method to long-horizon Predictive Regressions, Uncovered Interest Rate Parity, the Term Structure, and the Permanent Income Hypothesis.
    Keywords: expectation hypotheses; present value models; long-horizon; local to unity
    JEL: F30 F40
    Date: 2005
  2. By: di Giovanni, Julian (IMF); McCrary, Justin (University of Michigan); von Wachter, Till (Columbia University and IZA Bonn)
    Abstract: Forward-looking behavior on the part of the monetary authority leads least squares estimates to understate the true growth consequences of monetary policy interventions. We present instrumental variables estimates of the impact of interest rates on real output growth for several European countries, using German interest rates as the instrument. We compare this identification strategy to the vector autoregression approach, and give an interpretation of our estimates that is appropriate in a dynamic context. Moreover, we show that the difference between least squares and instrumental variables estimates provides bounds for the degree of endogeneity in monetary policy. The results confirm a considerable downward bias of estimates that do not account for potential forward-looking monetary policy decisions. The bias is higher for countries whose monetary policy was more independent of Germany.
    Keywords: monetary policy, forward looking bias, instrumental variables
    JEL: E52 J60
    Date: 2005–02
  3. By: Konstantin Gluschenko
    Abstract: Taking the law of one price as a test for market integration, the spatial set-up of Russia’s market integration over 1994-2000 is analyzed with the use of time series of the cost of a staples basket across Russian regions. The law is found to hold for about 50% to 60% of Russian regions, estimates of a threshold model suggesting rather high barriers to inter-regional trade. To reveal whether there is a movement towards market integration among non-integrated regions, dynamics of cross-sectional distribution of prices receives study. The results indicate that such a tendency does take place. An effort is made to identify forces responsible for Enter-regional price disparities.
    Keywords: market integration, price dispersion, price convergence, Russia, Russian regions
    JEL: P22 P25 R15 R19
  4. By: Mike Kennedy; Torsten Sløk
    Abstract: It has been argued that one solution to global current account imbalances is for countries with current account surpluses to undertake structural reforms. This would raise their potential growth, which is assumed to put downward pressure on the current account position. This paper takes a closer look at how such structural reforms in labour markets, product markets, and financial markets could be expected to affect current accounts. It also tests empirically, using pooled time-series techniques (that control for the influence of relative cyclical positions, government fiscal balances and the real exchange rate), whether or not reforms in these areas would have any significant relationship with current accounts. The overall finding is that indicators of structural reforms do have a significant relationship with the current account but the contribution of these variables to explain current account positions is quite limited. <p> Politique de réformes structurelles et balances extérieures <p> Il a été démontré qu’une solution au déséquilibre de la balance des opérations courantes dans les pays ayant un excédént serait d’entreprendre des réformes structurelles. Cela devrait augmenter leur potentiel de croissance, ce qui est supposé soulager la pression sur la situation de la balance des opérations courantes. Cet article examine de près comment de telles réformes structurelles dans les marchés financiers, du travail et de la production sont susceptibles d’influer les comptes courants. Il vérifie aussi empiriquement, au moyen d’un ensemble de séries temporelles techniques (lesquelles contrôlent l’influence des situations conjoncturelles relatives, l’équilibre budgétaire et le taux de changes réel) si des réformes dans ces secteurs ont une relation significative avec les comptes courants. Il en ressort que ces indicateurs de réformes structurelles ont une relation significative avec les comptes courants, mais que la contribution de ces variables à l'explication de la situation de la balance des opérations courantes est très limitée.
    Keywords: current accounts; structural reforms
    JEL: F32 J40
    Date: 2005–01–24
  5. By: Jorge Selaive (Central Bank of Chile); Vicente Tuesta R (Central Bank of Peru)
    Abstract: It is well documented that macroeconomic fundamentals are little help in predicting changes in nominal exchange rates compared to the predictions made by a simple random walk. Lettau and Ludvigson (2001) find that fluctuations in the common long-term trend in consumption, asset wealth, and labor income (hereby, consumption-wealth ratio) is a strong predictor of the excess returns. In this paper, we study the role of the consumption-wealth ratio in predicting the change in the nominal exchange rate of a large set of countries. We find evidence that fluctuations in the consumption-wealth ratio help to predict in-sample all the currencies. In terms of out-of-sample forecasts, our results suggest that the consumption-wealth ratio may play a significant role at predicting the Canadian dollar at all horizons and at short-intermediate horizons for some currencies.
    Keywords: Exchange Rates, Consumption-Wealth Ratio, Predictability
    JEL: C52 F31
    Date: 2005–01
  6. By: Pierre-Olivier Gourinchas; Helene Rey
    Abstract: The paper proposes a unified framework to study the dynamics of net foreign assets and exchange rate movements. We show that deteriorations in a country's net exports or net foreign asset position have to be matched either by future net export growth (trade adjustment channel) or by future increases in the returns of the net foreign asset portfolio (hitherto unexplored financial adjustment channel). Using a newly constructed data set on US gross foreign positions, we find that stabilizing valuation effects contribute as much as 31% of the external adjustment. Our theory also has asset pricing implications. Deviations from trend of the ratio of net exports to net foreign assets predict net foreign asset portfolio returns one quarter to two years ahead and net exports at longer horizons. The exchange rate affects the trade balance and the valuation of net foreign assets. It is forecastable in and out of sample at one quarter and beyond. A one standard deviation decrease of the ratio of net exports to net foreign assets predicts an annualized 4% depreciation of the exchange rate over the next quarter.
    JEL: F3
    Date: 2005–02
  7. By: Henry Aray (Universidad del País Vasco); Javier Gardeazábal (Universidad del País Vasco)
    Keywords: Foreign Direct Investment, Option Pricing, Exchange rate volatility
    JEL: F23 F31
    Date: 2005–02–24

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