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on International Finance |
| By: | Geir Høidal Bjønnes (Norwegian School of Management); Dagfinn Rime (Norges Bank); Haakon O. Aa. Solheim (Statistics Norway (SSB)) |
| Abstract: | We presents evidence that non-financial customers are the main liquidity providers in the overnight foreign exchange market using a unique daily data set covering almost all transactions in the SEK/EUR market over almost ten years. Two main findings support this: (i) The net position of non-financial customers is negatively correlated with the exchange rate, opposed to the positive correlation found for financial customers; (ii) Changes in net position of non-financial customers are forecasted by changes in net position of financial customers, indicating that non-financial customers take a passive role consistent with liquidity provision. |
| Keywords: | Microstructure, International finance, Liquidity |
| JEL: | F31 F41 G15 |
| Date: | 2004–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2004_13&r=ifn |
| By: | Q. Farooq Akram (Norges Bank) |
| Abstract: | It is often argued that Norway’s sizeable net foreign assets based on its petroleum wealth imply an appreciation of its real exchange rate to a permanently strong level. We investigate this issue within the framework of the fundamental equilibrium real exchange rate (FEER) approach. It is shown that the strength of the FEER depends on the share of imports that can be financed by petroleum (based) revenues. Projections of the FEER over a long horizon suggest that the petroleum wealth implies a stronger equilibrium exchange rate than the rate that would have balanced (non-petroleum) foreign trade in each period. However, the FEER depreciates steadily over time with growth in imports relative to petroleum revenues and converges towards the rate that balances foreign trade. A permanently strong FEER presupposes that e.g. imports stay constant over time. Our results are in accord with the behaviour of the real exchange before and after the discovery of Norway’s petroleum resources. |
| Keywords: | Equilibrium real exchange rate, FEER, econometric analysis |
| JEL: | C32 C53 F31 F41 |
| Date: | 2004–11–17 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2004_16&r=ifn |
| By: | Roger Hammersland (Norges Bank) |
| Abstract: | The purpose of this paper is to reexamine empirically the relationship between long-term interest rates in well integrated ?nancial markets. The analysis focuses on long-term interest rates in the US and Germany and has been carried out within the framework of a ?ve dimensional VAR for the simultaneous determination of short- and long-term interest rates in the US and Germany and the rate of exchange rate depreciation. The results strongly support the existence of a long-run relationship between the long-term German and the longterm US interest rate and imply a full pass-through of changes in the long-term US rate into the corresponding German rate. The analysis also substantiates that the direction of causality goes from the longterm US to the long-term German interest rate. With regard to the possibility of controlling the long end of the market on the part of the Bundesbank, the paper apparently takes on a rather pessimistic view, as there is nothing to indicate a long-run relationship between shortand long-term German interest rates. However, the strong in?uence that short-term German interest rates exhibit on German long-term interest rates in the very short run according to the structural model of this paper, might be taken to indicate that the opposite is the case, as e ects originating from expectations of future short-term interest rates might totally neutralize an unequivocally positive short-run portfolio e ect in the long run. If this is the case, there is nothing strange to the fact that one is unable to identify a long-run relationship between short- and long-term German interest rates. On the contrary, it is exactly what to be expected if the monetary transmission mechanism works appropriately. |
| Keywords: | Cointegration, Simultaneous Equation Models, International Interest Rate Linkages, Transmission Mechanism |
| JEL: | C32 E43 E52 E58 |
| Date: | 2004–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2004_20&r=ifn |
| By: | Hans Keiding (Institute of Economics, University of Copenhagen); Mette J. Knudsen (Institute of Economics, University of Copenhagen) |
| Abstract: | We consider a simple two-country model, where each country produces a consumption good from a single input. Production takes time, and the model is considered over two consecutive periods. There are three categories of economic agents, namely factor owners, entrepreneurs, and financial intermediaries. The latter offers credits to entrepreneurs and are funded by sale internationally transferable bonds. We assume that the national credit markets are monopolistic but that other markets are competitive. Exchange rate policy is introduced in two different ways, either as a market intervention by a government, sustained by intervention in the commodity market, and, more realistically, as a policy commitment by the monetary authorities, which in equilibrium is taken into consideration by the financial intermediary. The results of the simple model show that an increase in the value of the domestic currency from an equilibrium position will in most cases decrease aggregate welfare of the country, but it will improve welfare of the financial intermediaries. Thus, in the simple framework of our model, a specific sector – and one with a considerable influence on policy choices – stands to gain from this exchange rate policy. |
| Keywords: | fear of floating; income distribution; financial intermediaries |
| JEL: | F41 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0503&r=ifn |
| By: | Michael Ehrmann; Marcel Fratzscher; Roberto Rigobon |
| Abstract: | The paper presents a framework for analyzing the degree of financial transmission between money, bond and equity markets and exchange rates within and between the United States and the euro area. We find that asset prices react strongest to other domestic asset price shocks, and that there are also substantial international spillovers, both within and across asset classes. The results underline the dominance of US markets as the main driver of global financial markets: US financial markets explain, on average, more than 25% of movements in euro area financial markets, whereas euro area markets account only for about 8% of US asset price changes. The international propagation of shocks is strengthened in times of recession, and has most likely changed in recent years: prior to EMU, the paper finds smaller international spillovers. |
| JEL: | E44 F3 C5 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11166&r=ifn |
| By: | Simon Wren-Lewis (Reserve Bank of New Zealand) |
| Abstract: | This paper extends the `Five Area Bilateral Equilibrium Exchange Rate' (FABEER) model used in Wren-Lewis (2003) to include New Zealand and Australia. This model calculates medium term exchange rates conditional on assumptions for `sustainable' current accounts. The model suggests that the equilibrium value of both currencies has been declining over the last ten years and that both currencies were near fair value (on average) during 2002. Equilibrium values against the US dollar are estimated to be around 0.50 (New Zealand) and 0.59 (Australia), although these estimates are sensitive to the assumed equilibrium values for variables like commodity prices and the current account. |
| JEL: | E17 E61 F31 |
| Date: | 2004–08 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2004/07&r=ifn |
| By: | Angela Huang (Reserve Bank of New Zealand) |
| Abstract: | Numerous empirical studies investigate whether exchange rates are related to `economic fundamentals' in the long-run and find a range of relationships through cointegration analysis. We report similar cointegrating relationships for the value of the New Zealand dollar relative to the US dollar (NZD/USD) and for the value of the New Zealand dollar relative to the Australian dollar (NZD/AUD). These include determinants such as commodity prices, 90-day interest rate differentials, and inflation and growth differentials. However, Godbout and van Norden (1997) demonstrate that finite-sample problems may have affected the conclusions of such cointegration studies. Through a simple Monte Carlo study, we consider whether the cointegration coefficients can reasonably be interpreted as `long-run' elasticities of the exchange rate to changes in fundamental variables. The simulation results suggest that given a relatively short span of data it is possible for cointegration analysis to indicate that a long-run relationship has been found when in fact there is only a cyclical relationship. Therefore caution is advised when interpreting the empirical results and making policy assessments about the nature of exchange movements relative to its broad trend. |
| JEL: | F31 C15 C22 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2004/08&r=ifn |
| By: | Cuong Le Van (CERMSEM); Cécile Couharde (CEPN); Thai Bao Luong (CEPN) |
| Abstract: | In this article, we develop an analytical general equilibrium model of the equilibrium exchange rate. This theoretical framework allows us to identify the relevant set of variables which determinate the equilibrium exchange rate and to explore how theses variables influence the trajectory of the equilibrium exchange rate. |
| Keywords: | Equilibrium exchange rate, purchasing power parity; Balassa-Samuelson effect; general equilibrium model |
| JEL: | D51 F41 F31 |
| Date: | 2004–05 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:b04060&r=ifn |