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on International Finance |
| By: | Eiji Ogawa; Junko Shimizu |
| Abstract: | The monetary authorities in East Asian countries have been strengthening their regional monetary cooperation since the Asian Currency Crisis in 1997. In this paper, we propose a deviation measurement for coordinated exchange rate policies in East Asia to enhance the monetary authorities' surveillance process for their regional monetary cooperation. We estimate an AMU (Asian Monetary Unit) as a weighted average of East Asian currencies according to the method to calculate the ECU used under the EMS before introducing the euro into some EU countries. We consider four types of AMU, which are based on trade volume, nominal GDP, GDP measured at PPP, and international reserves. After choosing both the AMUs based on GDP measured at PPP weight and trade weight from a viewpoint of stability of the AMU value in terms of a currency basket composed of the US dollar and the euro, we calculate the deviation indicators from the benchmark rates for each of the East Asian currencies. We compare both nominal and real deviation indicators by taking into account inflation rate differentials. The real deviation indicator should be adequate for surveillance over effects of exchange rate policy on real economy while the nominal one can be frequently watched in real time. |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:05017&r=ifn |
| By: | Martin Cincibuch; Jiri Podpiera |
| Abstract: | Using the simple arbitrage model, we decompose real appreciation in tradables in three Central European countries between the pricing-to-market component (disparity) and the local relative price component (substitution ratio). Appreciation is only partially explained by local relative prices. The rest is absorbed by disparity, depending on the size of the no-arbitrage band. The observed disparity fluctuates in a wider band for differentiated products than for a commodity like goods. |
| Keywords: | Purchasing power parity, pricing-to-market, transition, real appreciation, exchange rates |
| JEL: | F12 F15 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:9/2004&r=ifn |
| By: | WenShwo Fang (Feng Chia University); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas) |
| Abstract: | This paper revisits the weak relationship between exchange rate depreciation and exports for Singapore, using a bivariate GARCH-M model that simultaneously estimates time-varying risk. The evidence shows that depreciation does not significantly improve exports, but that exchange rate risk significantly impedes exports. In sum, Singaporean policy makers can better promote export growth by stabilizing the exchange rate rather than generating its depreciation. |
| Keywords: | depreciation, exchange rate risk, exports, bivariate GARCH-M model |
| JEL: | F14 F31 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2004-45&r=ifn |
| By: | Charles Engel |
| Abstract: | Firms sometimes write price lists or catalogs for their exports, so they set prices for a period of time and do not adjust prices during that interval in response to changes in their environment. The firm sets the price either in its own currency or the importer's currency. This paper draws a simple link between the choice of currency, and the pricing decision of a firm that changes prices in response to all shocks. Specifically, if the latter firm's price has a lower variance in terms of its own currency than the importer's currency, then the firm with a price list will set the price in its own currency (and otherwise it will set price in the foreign currency.) This relationship is established by consideration of the firm with a price list as a special case of a firm that indexes its export price to the exchange rate. |
| JEL: | F1 F4 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11209&r=ifn |
| By: | WenShwo Fang (Feng Chia University); YiHao Lai (Deng Chia University); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas) |
| Abstract: | Exchange rate movements affect exports in two ways -- its depreciation and its variability (risk). A depreciation raises exports, but the associated exchange rate risk could offset that positive effect. The present paper investigates the net effect for eight Asian countries using a dynamic conditional correlation bivariate GARCH-M model that simultaneously estimates time varying correlation and exchange rate risk. Depreciation encourages exports, as expected, for most countries, but its contribution to export growth is weak. Exchange rate risk contributes to export growth in Malaysia and the Philippines, leading to positive net effects. Exchange rate risk generates a negative effect for six of the countries, resulting in a negative net effect in Indonesia, Japan, Singapore, Taiwan and a zero net effect in Korea and Thailand. Since the negative effect of exchange rate risk may offset, or even dominate, positive contributions from depreciation, policy makers need to reduce exchange rate fluctuation along with and possibly before efforts to depreciate the currency. |
| Keywords: | exports, exchange rate policy, net effect, DCC bivariate GARCH-M model |
| JEL: | F14 F31 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2005-07&r=ifn |
| By: | Tomáš Holub |
| Abstract: | This paper discusses the role of foreign exchange interventions in the inflation-targeting regime, focusing on the Czech experience since 1998. It proposes criteria for assessing whether the interventions are consistent with the inflation targeting. While the CNB’s interventions in mid- 1998 and in 2002 pass these criteria easily, the judgement might be more uncertain concerning the interventions in early-1998 and in 1999/2000. It is also stressed that the literature on managed floating usually ignores the difficulty in defining clear procedural rules for the interventions. This contrasts with the procedures guiding the interest rate decisions under the inflation targeting regime, which may occasionally create tensions in the policy regime, as demonstrated by the Czech experience, too. The interventions’ effectiveness in the Czech Republic is also discussed. It seems that sometimes they might have had an immediate impact lasting up to 2 or 3 months, but no strategy can be identified that would work in all episodes. Moreover, even many of the “successful” interventions were not able to prevent quite prolonged periods of exchange rate overvaluation in 1998 and in 2002. It is concluded that the signalling role of foreign exchange interventions is more important than their “market-equilibrating effect”, implying a rather unstable transmission between the central bank actions and the market reactions. Finally, the paper analyses the sterilisation costs, which are shown to have been quite substantial in the Czech Republic. It is argued that the financial sustainability of the interventions is quite important for their credibility and effectiveness. |
| Keywords: | Exchange rate, foreign exchange interventions, inflation targeting, sterilisation. |
| JEL: | E42 E44 E52 E58 E65 F31 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:1/2004&r=ifn |
| By: | WenShwo Fang (Feng Chia University); YiHao Lai (Feng Chia University); Stephen M. Miller (University of Connecticut and University of Nevada Las Vegas) |
| Abstract: | The effects of exchange rate risk have interested researchers, since the collapse of fixed exchange rates. Little consensus exists, however, regarding its effect on exports. Previous studies implicitly assume symmetry. This paper tests the hypothesis of asymmetric effects of exchange rate risk with a dynamic conditional correlation bivariate GARCH(1,1)-M model. The asymmetry means that exchange rate risk (volatility) affects exports differently during appreciations and depreciations of the exchange rate. The data include bilateral exports from eight Asian countries to the US. The empirical results show that real exchange rate risk significantly affects exports for all countries, negative or positive, in periods of depreciation or appreciation. For five of the eight countries, the effects of exchange risk are asymmetric. Thus, policy makers can consider the stability of the exchange rate in addition to its depreciation as a method of stimulating export growth. |
| Keywords: | depreciation, exchange rate risk, exports, bivariate GARCH-M model |
| JEL: | C32 F14 F31 F41 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:uct:uconnp:2005-09&r=ifn |
| By: | Daal, Elton |
| Abstract: | We propose a multi-currency quadratic term structure model that allows for several sources of market incompleteness. A new feature of the model is the jump-quadratic dynamics of the exchange rates that simultaneously generate greater flexibility in the time-varying risk premium and excessive currency volatility. Our model empirically outperforms the complete market quadratic and affine multi-currency diffusion models. It accounts for the forward premium anomaly with reasonable market price of risks. The market incompleteness consists of idiosyncratic diffusion-like innovations and jump discontinuities. We find that the jumps dominate the variations in the currency returns and produce most of the excessive currency volatility. |
| Keywords: | Quadratic term structure, Incomplete markets, Jumps, Excess volatility |
| JEL: | F31 E43 D52 C14 |
| Date: | 2004–09–29 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2004-04&r=ifn |
| By: | Claude Lopez |
| Abstract: | This paper offers a panel extension of the unit root test proposed by Elliott, Rothenberg and Stock (1996). More specifically, the proposed approach allows for heterogeneous serial and contemporaneous correlation, while fixing the rate of convergence to be homogeneous across series. The new test demonstrates significantly better finite sample-power properties than the Levin, Lin and Chu (2002) or the Moon, Perron and Phillips (2003) tests, especially for highly persistent series. An application to the real exchange rate convergence illustrates the impact of such improvements. Analyzing the post Bretton Woods period, the new test provides strong and reliable evidence of Purchasing Power Parity among industrialized countries. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:cin:ucecwp:2005-01&r=ifn |
| By: | Aleš Bulíř; Kateřina Šmídková |
| Abstract: | Estimation and simulation of sustainable real exchange rates in some of the new EU accession countries point to potential difficulties in sustaining the ERM2 regime if entered too soon and with weak policies. According to the estimates, the Czech, Hungarian, and Polish currencies were overvalued in 2003. Simulations, conditional on large-model macroeconomic projections, suggest that under current policies those currencies would be unlikely to stay within the ERM2 stability corridor during 2004-2010. In-sample simulations for Greece, Portugal, and Spain indicate both a much smaller misalignment of national currencies prior to ERM2, and a more stable path of real exchange rates over the medium term than can be expected for the new accession countries. |
| Keywords: | ERM2, Foreign direct investment, Sustainable real exchange rates. |
| JEL: | F31 F33 F36 F47 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:10/2004&r=ifn |
| By: | Ian Babetskii |
| Abstract: | There are two opposite points of view on the link between economic integration and business cycle synchronization. De Grauwe (1997) classifies these competing views as “The European Commission View” and “The Krugman View”. According to the European Commission (1990), closer integration leads to less frequent asymmetric shocks and to more synchronized business cycles between countries. On the other hand, for Krugman (1993) closer integration implies higher specialization and, thus, higher risks of idiosyncratic shocks. Drawing on the evidence from a group of transition countries which have experienced a notable increase in trade openness and economic integration with the European Union during the past decade, this paper tries to determine whose argument is supported by the data. This is done by confronting estimated time-varying coefficients of supply and demand shock asymmetry with indicators of trade intensity and exchange rates. We find that (i) an increase in trade intensity leads to higher symmetry of demand shocks; the effect of integration on supply shock asymmetry varies from country to country; (ii) a decrease in exchange rate volatility has a positive effect on demand shock convergence. The results for demand shocks can be interpreted in favor of “The European Commission View”, also known as the endogeneity argument by Frankel and Rose (1998) in the OCA criteria discussion, according to which trade links reduce asymmetries between countries. Overall, our results support Kenen’s (2001) argument that the impact of trade integration on shock asymmetry depends on the type of shock. |
| Keywords: | EU enlargement, business cycle, trade, OCA (optimal currency area) |
| JEL: | E32 F30 F42 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2/2004&r=ifn |
| By: | Narcisa Kadlčáková; Joerg Keplinger |
| Abstract: | This project undertakes an empirical analysis in credit risk modeling using a data sample representative of bank lending to the Czech corporate sector. A rating system is constructed using a proprietary database (Creditreform) that provides a solvency index for a large number of Czech firms. Several methods for the calibration and validation of a rating system are described and tested in practice. On the basis of a representative portfolio for Czech industries, systemic predictions of regulatory and economic capital are obtained and compared. The methodologies formulated by the latest Consultative Document of the NBCA (April 2003) and by the Credit Metrics and CreditRisk+ models are applied. The main contributions of this project can be briefly summarized as follows: (a) it shows in an applied manner that input data problems in credit risk modeling can be overcome, (b) it sheds light on regulatory issues that are gaining increasing relevance, and (c) it outlines the most important features of two credit risk models. |
| Keywords: | Credit Risk, Economic Capital, Exchange Rate Exposure, Rating System. |
| JEL: | G21 G28 G23 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:6/2004&r=ifn |
| By: | Caroline M. Betts; Timothy J. Kehoe |
| Abstract: | This paper studies the relation between the United States’ bilateral real exchange rate and the associated bilateral relative price of nontraded goods for five of its most important trade relationships. Traditional theory attributes fluctuations in real exchange rates to changes in the relative price of nontraded goods. We find that this relation depends crucially on the choice of price series used to measure relative prices and on the choice of trade partner. The relation is stronger when we measure relative prices using producer prices rather than consumer prices. The relation is stronger the more important is the trade relationship between the United States and a trade partner. Even in cases where there is a strong relation between the real exchange rate and the relative price of nontraded goods, however, a large fraction of real exchange rate fluctuations is due to deviations from the law of one price for traded goods. |
| Keywords: | Risk management, correlated defaults, credit loss distributions, heterogeneity, diversification |
| JEL: | C33 G13 G21 |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:scp:wpaper:05-16&r=ifn |