nep-ifn New Economics Papers
on International Finance
Issue of 2005‒05‒23
twenty papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Real Exchange Rate Misalignments and Economic Performance By Alvaro Aguirre; César Calderón
  2. Financial Frictions and Real Devaluations By Alvaro Aguirre; César Calderón
  3. The high-frequency effects of U.S. macroeconomic data releases on prices and trading activity in the global interdealer foreign exchange market By Alain P. Chaboud; Sergey Chernenko; Edward Howorka; Raj S. Krishnasami Iyer; David Liu; Jonathan H. Wright
  4. An assessment of the impact of Japanese foreign exchange intervention: 1991-2004 By Alain P. Chaboud; Owen Humpage
  5. Financial market developments and economic activity during current account adjustments in industrial economies By Hilary Croke; Steven B. Kamin; Sylvain Leduc
  6. Order flow and exchange rate dynamics in electronic brokerage system data By David W. Berger; Alain P. Chaboud; Sergey V. Chernenko; Edward Howorka; Raj S. Iyer; David Liu; Jonathan H. Wright
  7. Exchange rate pass-through to U.S. import prices: some new evidence By Mario Marazzi; Nathan Sheets; Robert J. Vigfusson; Jon Faust; Joseph Gagnon; Jaime Marquez; Robert F. Martin; Trevor Reeve; John Rogers
  8. The case for foreign exchange intervention: the government as a long-term speculator By Christopher J. Neely
  9. Financial Dollarisation: Evaluating The Consequences By Eduardo Levy Yeyati
  10. Foreign Exchange Interventions in Croatia and Turkey: Should We Give a Damn? By Balázs Égert; Maroje Lang
  11. Equilibrium Exchange Rates in Central and Eastern Europe: A Meta-Regression Analysis By Balázs Égert; László Halpern;
  12. Equilibrium Exchange Rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) Diseased? By Balázs Égert; ;
  13. Non-Linear Exchange Rate Dynamics in Target Zones: A Bumpy Road Towards A Honeymoon Some Evidence from the ERM, ERM2 and Selected New EU Member States By Jesús Crespo-Cuaresma; Balázs Égert; Ronald MacDonald
  15. Can Domestic Institutions Explain Exchange Rate Regime Choice? The Political Economy of Monetary Institutions Reconsidered By Beth Simmons; Jens Hainmueller
  16. Trade Balance and Exchange-Rate for a Small Open Economy during the EMS: The Hellenic Case 1983:1-1995:12 By Stamatopoulos Theodoros
  17. Prices and Exchange Rate of Hellenic Drachma (GRD), during 1981- By Stamatopoulos Theodoros
  18. Capital account liberalization and exchange rate regime choice, what scope for flexibility in tunisia ? By Ben Ali Mohamed Sami

  1. By: Alvaro Aguirre; César Calderón
    Abstract: El presente trabajo se enmarca en un APT (Ross, 1976a) de la vertiente de Variables Macroeconómicas, que tiene la ventaja (en comparación con Análisis Factorial) de permitir la interpretación económica de los factores y los premios por riesgo factoriales. Similar a Burmeister y McElroy (1988), consideramos cuatro factores macroeconómicos medidos y un factor no observado; la presencia de factores no observados es una generalización del trabajo previo de Chen, Roll y Ross (1986). Partiendo del modelo de factores, la Teoría de Precios por Arbitraje (APT) impone restricciones, las que son comprobadas empíricamente en el período 1990-2003. Además, el Modelo de Valoración de Activos de Capital (CAPM) está anidado en el APT, lo que permite someter a prueba el modelo CAPM. Nuestros resultados son: (a) la restricción del APT no es rechazada por los datos, (b) las sorpresas en la tasa de crecimiento del Índice Mensual de Actividad Económica (IMACEC), en el precio del cobre y en el precio del petróleo aparecen como factores con premios por riesgo estadísticamente distintos a cero en los retornos accionarios chilenos; mientras que las sorpresa en inflación no aparecen preciadas en la muestra, y (c) el modelo CAPM es fuertemente rechazado por los datos, en favor del APT.
    Date: 2005–04
  2. By: Alvaro Aguirre; César Calderón
    Abstract: In this paper I study the effects of real exchange rate devaluations on output performance using a sample of large devaluation episodes for a group of emerging and developed countries. I find that balance sheet effects, captured by the interaction between the real exchange rate devaluation and the level of external indebtedness of the country, have a significant and negative impact on output. Nevertheless, there is also evidence of a positive effect of the real devaluation associated to the traditional expansionary effect. For countries with large foreign-denominated external debt, the combined effect of the real exchange rate depreciation is likely to generate significant output losses in the short-run. However, in the medium term, the expansionary effect of the real devaluation tends to dominate the balance sheet effect, which implies a positive effect on output in the medium term. Finally, countries with deeper financial market experience lower output losses following a devaluation.
    Date: 2005–05
  3. By: Alain P. Chaboud; Sergey Chernenko; Edward Howorka; Raj S. Krishnasami Iyer; David Liu; Jonathan H. Wright
    Abstract: We introduce a new high-frequency foreign exchange dataset from EBS (Electronic Broking Service) that includes trading volume in the global interdealer spot market, data not previously available to researchers. The data also gives live transactable quotes, rather than the indicative quotes that have been used in most previous high frequency foreign exchange analysis. We describe intraday volume and volatility patterns in euro-dollar and dollar-yen trading. We study the effects of scheduled U.S. macroeconomic data releases, first confirming the finding of recent literature that the conditional mean of the exchange rate responds very quickly to the unexpected component of data releases. We next study the effects of data releases on trading volumes. News releases cause volume to rise, and to remain elevated for a longer period. However, in contrast to the result for the level of the exchange rate, even if the data release is entirely in line with expectations, we find that there is still typically a large pickup in trading volume.
    Keywords: Foreign exchange ; Foreign exchange rates ; International trade
    Date: 2004
  4. By: Alain P. Chaboud; Owen Humpage
    Abstract: We analyze the short-term price impact of Japanese foreign exchange intervention operations between 1991 and 2004, using official data from Japan's Ministry of Finance. Over the period as a whole, we find some evidence of a modest "against the wind" effect, but interventions do not have value as a forecast that the exchange rate will move in a direction consistent with the operations. Interventions conducted between 1995 and 2002, which were large and infrequent, met with a much higher degree of success. For the most recent episode of intervention, in 2003 and 2004, despite the record size and frequency of the overall episode, it is difficult to statistically distinguish the pattern of exchange rate movements on intervention days from that of all the days in that particular subperiod, showing little effectiveness. Still, while the evidence of Japanese intervention effectiveness is modest overall, it appears to be stronger than that found using similar techniques for U.S. intervention operations conducted in the 1980s and 1990s.
    Keywords: Foreign exchange administration - Japan
    Date: 2005
  5. By: Hilary Croke; Steven B. Kamin; Sylvain Leduc
    Abstract: Much has been written about prospects for U.S. current account adjustment, including the possibility of what is sometimes referred to as a "disorderly correction": a sharp fall in the exchange rate that boosts interest rates, depresses stock prices, and weakens economic activity. This paper assesses some of the empirical evidence bearing on the likelihood of the disorderly correction scenario, drawing on the experience of previous current account adjustments in industrial economies. We examined the paths of key economic performance indicators before, during, and after the onset of adjustment, building on the analysis of Freund (2000). We found little evidence among past adjustment episodes of the features highlighted by the disorderly correction hypothesis. Although some episodes in our sample experienced significant shortfalls in GDP growth after the onset of adjustment, these shortfalls were not associated with significant and sustained depreciations of real exchange rates, increases in real interest rates, or declines in real stock prices. By contrast, it was among the episodes where GDP growth picked up during adjustment that the most substantial depreciations of real exchange rates occurred. These findings do not preclude the possibility that future current account adjustments could be disruptive, but they weaken the historical basis for predicting such an outcome.
    Keywords: Balance of payments ; Balance of trade
    Date: 2005
  6. By: David W. Berger; Alain P. Chaboud; Sergey V. Chernenko; Edward Howorka; Raj S. Iyer; David Liu; Jonathan H. Wright
    Abstract: We study the association between order flow and exchange rate returns in five years of high-frequency intraday data from the leading interdealer electronic broking system, EBS. While the association between order flow and exchange rate returns has been studied in several previous papers, these have mostly used relatively short spans of daily data from older bilateral dealing systems and, usually, transaction counts instead of actual trading volume. Using a substantially longer span of recent high-frequency data and measuring order flow as actual signed trading volume, we find a strong positive association between order flow and exchange rate returns at frequencies ranging from one minute to one day, and a more modest but still sizeable association at the monthly frequency. We find, however, no evidence that order flow has predictive power for future exchange rate movements beyond, possibly, the next minute. Focusing on the behavior of order flow and exchange rates at the time of scheduled U.S. economic data releases, we find that the surprise components of these announcements are associated with order flow at high frequency immediately after the data releases. This finding seems inconsistent with a simple efficient markets view of how a public news announcement is incorporated into prices.
    Keywords: Foreign exchange rates ; Electronic trading of securities
    Date: 2005
  7. By: Mario Marazzi; Nathan Sheets; Robert J. Vigfusson; Jon Faust; Joseph Gagnon; Jaime Marquez; Robert F. Martin; Trevor Reeve; John Rogers
    Abstract: This paper documents a sustained decline in exchange rate pass-through to U.S. import prices, from above 0.5 during the 1980s to somewhere in the neighborhood of 0.2 during the last decade. This decline in the pass-through coefficient is robust to the measure of foreign prices that is included in the regression (i.e., CPI versus PPI), whether the estimation is done in levels or differences, and whether U.S. prices are included as an explanatory variable. Notably, the largest estimates of pass-through are obtained when commodity prices are excluded from the regression. In this case, the pass-through coefficient captures both the direct effect of the exchange rate on import prices and an indirect effect operating through changes in commodity prices. Our work indicates that an increasing share of exchange rate pass-through has occurred through this commodity-price channel in recent years. While the source of the decline in pass-through is difficult to pin down with certainty, our work points to several factors, including the reduced share of (commodity-intensive) industrial supplies in U.S. imports and the increased presence of Chinese exporters in U.S. markets. We detect a particular step down in the pass-through coefficient around the time of the Asian financial crisis and document a shift in the export pricing behavior of emerging Asian firms around that time.
    Date: 2005
  8. By: Christopher J. Neely
    Abstract: This paper argues that major governments should act as long-term speculators by intervening to profit from floating exchange rates reversion to fundamentals. Such transactions would improve welfare by transferring risk from private agents to the risk-tolerant government. Interventions explicitly designed to profit the intervening authority would be more likely to be successful and, to the extent that they are, would reduce resource misallocation.
    Keywords: Foreign exchange
    Date: 2004
  9. By: Eduardo Levy Yeyati
    Abstract: Financial dollarisation, defined as the holding by residents of foreign currency assets and liabilities, has been placed at the forefront of the policy debate in developing economies. The reasons include its alleged influence on the conduct of monetary policy and, most prominently, the deleterious impact of exchange rate depreciations on the solvency of dollar debtors (the balance sheet effect). However, the vast analytical literature on these issues contrasts with the scarcity of empirical work to support or refute these implications. This paper contributes to fill this gap. Using a new updated database, the paper revisits the evidence on the determinants of financial dollarisation, and tests whether the impact on monetary and financial stability, and economic performance predicted by the theory is verified in the data. It finds that financially dollarised economies display a more unstable demand for money, a greater propensity to suffer banking crises after a depreciation of the local currency, and slower and more volatile output growth, without significant gains in terms of domestic financial depth. In this light, the case for an active de-dollarisation policy is discussed.
    Date: 2005
  10. By: Balázs Égert; Maroje Lang
    Abstract: This paper studies the impact of daily official foreign exchange interventions on the exchange rates of two EU candidate countries, namely Croatia and Turkey for the periods from 1996 to 2004 and from 2001 to 2004, respectively. Using the event study methodology and a variety of GARCH models reveals that both the Croatian and the Turkish central banks were in a position to influence, to some extent, the level of the exchange rate during the period studied. This lends support to the view that foreign exchange intervention may be effective to a limited extent in emerging market economies.
    Keywords: central bank intervention, foreign exchange intervention, official interventions, foreign exchange market, effectiveness, exchange rate volatility, emerging economies, transition economies
    JEL: F31
    Date: 2005–03–01
  11. By: Balázs Égert; László Halpern;
    Abstract: This paper analyses the ever-growing literature on equilibrium exchange rates in the new EU member states of Central and Eastern Europe in a quantitative manner using meta-regression analysis. The results indicate that the real misalignments reported in the literature are systematically influenced, inter alia, by the underlying theoretical concepts (Balassa-Samuelson effect, Behavioural Equilibrium Exchange Rate, Fundamental Equilibrium Exchange Rate) and by the econometric estimation methods. The important implication of these findings is that a systematic analysis is needed in terms of both alternative economic and econometric specifications to assess equilibrium exchange rates.
    Keywords: equilibrium exchange rate, Balassa-Samuelson effect, meta-analysis
    JEL: C15 E31 F31 O11 P17
    Date: 2005–05–01
  12. By: Balázs Égert; ;
    Abstract: This paper investigates the equilibrium exchange rates of three Southeastern European countries (Bulgaria, Croatia and Romania), of two CIS economies (Russia and Ukraine) and of Turkey. A systematic approach in terms of different time horizons at which the equilibrium exchange rate is assessed is conducted, combined with a careful analysis of country-specific factors. For Russia, a first look is taken at the Dutch Disease phenomenon as a possible driving force behind equilibrium exchange rates. A unified framework including productivity and net foreign assets completed with a set control variables such as openness, public debt and public expenditures is used to compute total real misalignment bands.
    Keywords: Balassa-Samuelson, Dutch Disease, Bulgaria, Croatia, Romania, Russia, Ukraine, Turkey
    JEL: E31 O11 P17
    Date: 2005–05–01
  13. By: Jesús Crespo-Cuaresma; Balázs Égert; Ronald MacDonald
    Abstract: This study investigates exchange rate movements in the Exchange Rate Mechanism (ERM) of the European Monetary System (EMS) and in the Exchange Rate Mechanism II (ERM-II). On the basis of Bessec (2003), we set up a three-regime self-exciting threshold autoregressive model (SETAR) with a non-stationary central band and explicit modelling of the conditional variance. This modelling framework is employed to model daily DM-based and median currency-based bilateral exchange rates of countries participating in the original ERM and also for exchange rates of the Czech Republic, Hungary, Poland and Slovakia from 1999 to 2004. Our results confirm the presence of strong non-linearities and asymmetries in the ERM period, which, however, seem to differ across countries and diminish during the last stage of the run-up to the euro. Important non-linear adjustments are also detected for Denmark in ERM-2 and for our group of four CEE economies.
    Keywords: target zone, ERM, non-linearity, SETAR.
    JEL: F31 G15 O10
    Date: 2005–05–01
  14. By: Axel Dreher (Thurgau Institute of Economics & University of Konstanz); Roland Vaubel (University of Mannheim)
    Abstract: By combining expansionary open market operations with sales of foreign exchange, the central bank can expand the monetary base without depreciating the exchange rate. Thus, if there is a monetary political business cycle, sales of foreign exchange are especially likely before elections. Our panel data analysis for up to 158 countries in 1975-2001 supports this hypothesis. Foreign exchange reserves relative to trend GDP depend negatively on the pre-election index regardless of the exchange rate system. The relationship is significant and robust irrespective of the type of electoral variable, the choice of control variables and the estimation technique.
    Keywords: Foreign exchange interventions, political business cycles
    JEL: F31 E58
    Date: 2005–05–18
  15. By: Beth Simmons (Harvard University); Jens Hainmueller (Harvard University)
    Abstract: Recent articles in International Organization and elsewhere have explored the role of domestic institutions in shaping exchange rate regime choice. These articles use some variation on the information reported by governments to the International Monetary Fund as their dependent variable. Even more recently, new data have become available that reflect actual (de facto) rather than declaratory (de jure) policies with respect to exchange rate regimes. The findings of the domestic institutionalists are significantly weakened, and in some cases reversed, when this more appropriate measure is used to test their claims. These tests cast doubt on whether a domestic institutional focus is the most fruitful way to study exchange rate regimes.
    Keywords: Exchange rate choiche, Political Economy of Monetary Institutions
    JEL: F3 F4
    Date: 2005–05–19
  16. By: Stamatopoulos Theodoros (TEI of Crete, University of Piraeus, Greece & CEFI/Mediterranean University of Aix-Marseille II, France.)
    Abstract: We are interested on assessing the effectiveness of the Bank of Greece (BoG) exchange rate policy, to achieve the objective of adjusting balance of payments des-equilibrium, during the period 1983:1-1995:12. The traditional theory of the balance of payments adjustment process through exchange rate changes is used for this purpose. We found evidence, first, about the doubtful effectiveness of this policy due to the marginal verification of the critical elasticities condition; second, about the success of the exchange rate policy in the short-run, since the monthly data of bilateral exchange rates (USD, DEM, ITL, FRF, GBP, JPY) of the Hellenic Drachma (GRD) Granger cause the respective trade balances; third, about the significant co-movement in the series which in the long-run, are driven by the same stochastic trend. We are much aware of the tentative nature of these conclusions. However, our findings suggest that the loss of the exchange rate policy was costly in the case of Hellas because an efficient policy sacrificed by the BoG to the European Central Bank (ECB).
    Keywords: Optimum Currency Area, EMS, EMU, Traditional Adjustment Process for Merchandise Payments, Granger Causality, Integration and Co- integration Analysis
    JEL: F32 F36 F41 E58 C32
    Date: 2005–05–20
  17. By: Stamatopoulos Theodoros (TEI of Crete, University of Piraeus, Greece & CEFI/Mediterranean University of Aix-Marseille II, France.)
    Abstract: The paper presents empirical results on an import prices equation to the case of the small open Hellenic economy, during her course to the European Monetary Union, in the 1980s until mid-1990s. The analysis employs cointegration theory to examine the long-run co-movements of prices, effective exchange rate of GRD and unit labour cost of the European countries, which export to Greece. Innovation accounting is also used so as to detect the dynamics of the data set. We found slight evidence to support long run equilibrium, however, it was only the Hellenic inflation rate, which was adjusting to the deviations from this. The fragile stability of the system is confirmed by the impulse response functions examination where the exchange rate of the GRD do not converge to its long-run values, even after a 3 years period from the one unit-shock in various innovations. The determinant role of the growth rate of the unit labour cost and therefore of European countries’ prices to the exchange rate of GRD, to the Hellenic inflation rate, and less to the growth rate of the import prices is (1) justified by its high proportion to their variance decomposition and (2) became apparent approximately after 9 months. The latter seems to amount to the “contract-period” in the Magee’s terminology.
    Keywords: Trade Balance Adjustment through exchange rate policies; European Monetary Integration; Unit Root Tests; Co-integration Analysis; Innovation Accounting
    JEL: F3 F4
    Date: 2005–05–20
  18. By: Ben Ali Mohamed Sami (CADRE, Université de Lille, France)
    Abstract: The monetary crises of the Nineties which shook the capital market of several countries highlight the incompatibility of the intermediary exchange rate regimes with the high volatility of international capital account mobility induced by the financial globalisation. Certain economists suggested that a greater flexibility would be necessary to prevent the speculative attacks. Others on the contrary, assert the merits of the rigid fixed exchange regimes. The adoption by Tunisia of structural reform of its economy in a context of gradual opening since 1986 had allowed in January 1993 the instauration of the convertibility of its current account. The total convertibility of the Tunisian dinar which is already at an advanced stage remains a top priority in the immediate future like finality of a more close integration and opening of the Tunisian economy to the world economy. So the total liberalization of the exchange in Tunisia poses the problematic of the prospective choice of its exchange rate regime. We analyze within the framework of this research, the various alternatives which could prove to be optimal. The option of the flexibility is particularly considered.
    Keywords: Exchange rate regimes, Tunisia.
    JEL: F3 F4
    Date: 2005–05–21
  19. By: David Kihangire (Bank of Uganda); David Potts (University of Bradford); Prof. Sam Cameron (University of Bradford)
    Abstract: This study examines the effects of exchange rate variability on Uganda’s flowers exports during 1994-2001 by testing the central hypothesis that following the floating exchange rate regime, ‘Uganda’s exports of tropical flowers are negatively and significantly correlated with exchange rate variability.’ The absence of pure I(0) or I(1) in the data, and lack of endogeneity and simultaneous bias problems invites us to apply ARDL approach to cointegration and OLS. The results suggest that although Uganda’s flower exports are negatively correlated with exchange rate variability, the measured effects are insignificant.
    Keywords: Exchange rate variability, flowers exports, Uganda, dependent- economy
    JEL: F1 F2
    Date: 2005–05–14
  20. By: David Kihangire (Phd)
    Abstract: Using monthly data, this study investigates the effects of exchange rate variability on Uganda’s aggregate export growth under the floating exchange rate policy regime (1994-2001), benchmarked on the fixed exchange rate regime (1988-1993). The main research question it posits is: “What is the effect of exchange rate variability on Uganda’s exports?” Premised on risk-aversion, the study tests the main hypothesis that ‘Uganda’s exports are negatively and significantly correlated with exchange rate variability.’ Due to lack of pure I(0) or I(1) for all the series, and absence of endogeneity and simultaneous bias problems between export supply and export demand, the ARDL approach to cointegration and OLS are applied in the study. The results suggest support for the research hypothesis. The policy implication is that intervention targeting the minimisation of excessive volatility in the real effective exchange rate under the floating regime may contribute to supporting export sector growth, economic growth, and overall external macroeconomic stability in Uganda.
    Keywords: Uganda, Exports, Exchange Rate Variability
    JEL: F1 F2
    Date: 2005–05–21

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