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on International Finance |
| By: | Rebecca L Driver; Peter F Westaway |
| Abstract: | This paper explains what is meant by the concept of equilibrium exchange rates. It argues that a variety of equilibrium exchange rates can be defined and their behaviour will vary according to different definitions of the exchange rate, and over short, medium and long-term horizons. It emphasises that the relevance of each type will depend on the question at hand. The behaviour of different measures of the equilibrium exchange rate is explained with reference to a range of theoretical models. The paper explicitly addresses the circumstances under which purchasing power parity, a commonly adopted benchmark for long-run exchange rate movements, is appropriate. The most important purpose of the paper is to provide a taxonomy of the different empirical measures of equilibrium exchange rates that have been derived in the literature. It offers a comprehensive guide to the bewildering array of related acronyms that has sprung up and explains the different contexts in which different equilibrium measures might prove informative. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:248&r=ifn |
| By: | Jan J J Groen; Ravi Balakrishnan |
| Abstract: | In this paper we report estimates of the effective sterling, sterling/Deutsche mark and sterling/US dollar risk premia over a monthly 1987-2001 sample, generated using a conditional factor model for the stochastic discount factor of a representative 'worldwide' investor. The model relates this stochastic discount factor to the real return on a 'worldwide' stock portfolio, with the model parameters varying with variations in the slope of the 'world' term structure of interest rates. Econometric tests indicate that this model is accepted by the data. The corresponding parameter estimates are used to compute the risk premium for the three aforementioned sterling exchange rates. A graphical analysis indicates that, in terms of magnitude, our measure of the exchange rate risk premium is mainly of importance for the sterling/Deutsche mark exchange rate. Risk-adjusted test regressions for uncovered interest rate parity vis-`a-vis the major European currencies provide some confirmation for this. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:250&r=ifn |
| By: | Gianluca Benigno; Christoph Thoenissen |
| Abstract: | This paper addresses the consumption-real exchange rate anomaly. International real business cycle models based on complete financial markets predict a unitary correlation between the real exchange rate and the ratio of home to foreign consumption when subjected to supply-side shocks. In the data, this correlation is usually small and often negative. This paper shows that this anomaly can be successfully addressed by models that have an incomplete financial market structure and a non-traded as well as traded goods production sector. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:254&r=ifn |
| By: | Alvaro Aguirre; César Calderón |
| Abstract: | We evaluate the growth effects of real exchange rate (RER) misalignments and their volatility. We calculate RER misaligments as deviations of actual RERs from their equilibrium for 60 countries over 1965-2003 using panel and time series cointegration methods. Using dynamic panel data techniques we find that RER misalignments hinder growth but the effect is non-linear: growth declines are larger, the larger the size of the overvaluation. Although large undervaluations hurt growth, small to moderate undervaluations enhance growth. However, we find that it is difficult to follow a pro-growth RER policy. Finally, growth is hampered by highly volatile RER misalignments. |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:chb:bcchwp:315&r=ifn |
| By: | Justin M. Dubas; Byung-Joo Lee; Nelson C. Mark |
| Abstract: | We propose an econometric procedure for obtaining de facto exchange rate regime classifications which we apply to study the relationship between exchange rate regimes and economic growth. Our classification method models the de jure regimes as outcomes of a multinomial logit choice problem conditional on the volatility of a country's effective exchange rate, a bilateral exchange rate and international reserves. An `effective' de facto exchange rate regime classification is then obtained by assigning country-year observations to the regime with the highest predictive probability obtained from the estimation problem. An econometric investigation into the relationship between exchange rate regimes and GDP growth finds that growth is higher under stable currency-value regimes. Significant asymmetric effects on country growth from not doing what is said are found for nonindustrialized countries. Countries that exhibit `fear of floating' experience significantly higher growth. |
| JEL: | F30 F31 F41 |
| Date: | 2005–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11272&r=ifn |
| By: | Akiko Terada-hagiwara (Asian Development Bank) |
| Abstract: | This paper untangles the causes behind real exchange rate devaluation events with particular attention paid to the Sudden Stop of capital flows. By utilizing cumulative impulse response function and variance decomposition analysis, we argue that there is the asymmetric response across Sudden Stop and tranquil times. Further comparison across the Sudden Stop in the 80s (gdebt crisish) and 90s (gSudden Stop crisish), however, reveals that the Sudden Stop disturbance has become more prominent in explaining the real exchange rate disturbance in Sudden Stop crisis of the 1990s rather than debt crisis of the 1980s. |
| Keywords: | Exchange rate depreciation, Capital flows, Sudden Stop, Asia, and Latin America |
| JEL: | F31 F32 F41 |
| Date: | 2005–04–20 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0504006&r=ifn |
| By: | Rolf Maier |
| Abstract: | This paper extends the ongoing discussion on optimal exchange rate regimes to the issue of pro-poor growth. To analyze empirically the poverty effects of exchange rate regimes, we estimate the distribution effects of different exchange rate arrangements on the poorest 20 and 20 to 40 percent. In addition, we test the total effect, i.e. the distribution and growth effect, to capture potential trade-offs between poverty effects through overall economic growth and distribution. To analyze this question, we collect an irregular and unbalanced panel of time-series cross-country data on the first and second quintile share from 76 countries and use two recently proposed de facto exchange rate regime classifications, Levy-Yeyati/Sturzenegger (2002) and Reinhart/Rogoff (2003). To cover econometric issues, cross-country variation and dynamic aspects of within-country changes of the income of the poor, we apply two econometric specifications, a growth equation and a system GMM estimation. We estimate the poverty effects of different exchange rate regimes for all countries and, separately, developing and industrial countries due to considerable differences in economic structure, access to international capital markets and soundness of domestic financial systems. Empirical findings vary considerably with respect to three aspects. First, findings for the Levy-Yeyati/Sturzenegger (2002) and Reinhart/Rogoff (2003) classification differ significantly with respect to similar exchange rate categories. Thus the classification process of exchange rate regimes affects critically the policy conclusions. Second, statistically significant exchange rate regimes in the Reinhart/Rogoff (2003) classification impact positively on the poor in developing countries, but negatively on the poor in industrial countries. Thus exchange rate regimes affect very differently the poor in developing and industrial countries in the Reinhart/Rogoff (2003) classification. Third, statistical significance of exchange rate regimes in the system GMM approach differs considerably for adjusted and unadjusted income inequality measures. Due to these varying and only weakly robust empirical findings, a concise policy recommendation with respect to poverty-reducing exchange rate regimes is difficult. Nevertheless, positive effects of intermediate regimes of the Reinhart/Rogoff (2003) classification in developing countries should be emphasized, showing at least a tendency to not negative and possible positive effects of intermediate regimes on the poorest 40 percent in developing countries. |
| Keywords: | Pro-Poor Growth, Exchange Rate Regimes |
| JEL: | F3 F4 |
| Date: | 2005–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0504008&r=ifn |