nep-ifn New Economics Papers
on International Finance
Issue of 2005‒09‒17
eight papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Rules versus Discretion in Foreign Exchange Intervention: Evidence from Official Bank of Canada High-Frequency Data By Rasmus Fatum; Michael R. King
  2. SYNCHRONISATION OF FINANCIAL CRISES By Mardi Dungey; Jan P.A.M. Jacobs; Lestano
  3. Inflation dynamics and the New Keynesian Phillips Curve: an identification robust econometric analysis By DUFOUR, Jean-Marie Dufour; KHALAF, Lynda; KICHIAN, Maral
  4. Just how Undervalued is the Chinese Renminbi By Michael Funke; Jörg Rahn
  6. The Knowledge-Capital Model and Small Countries By Helga Kristjánsdóttir
  7. What Drives Sector Allocation of Foreign Direct Investment in Iceland? By Helga Kristjánsdóttir
  8. Globalization and International Conflict: Can FDI Increase Peace? By Solomon Polachek; Carlos Seiglie; Jun Xiang

  1. By: Rasmus Fatum (School of Business, University of Alberta); Michael R. King (Financial Markets Department, Bank of Canada, Ottawa)
    Abstract: This paper analyzes official, high-frequency Bank of Canada intervention and exchange rate data (the latter quoted at the end of every 5-minute interval over every 24-hour period) over the January 1995 to September 1998 time-period. The data is of particular interest as it spans over two distinctly different intervention regimes – one characterized by purely rules-based (“mechanistic”) intervention versus one characterized by both rules-based and discretionary intervention. This unique feature of the data allows for both a comparison of the effects of rules-based version discretionary intervention and a general investigation of intraday effects of intervention. Employing an event-study methodology and three different criteria for success, the study presents strong evidence showing that intervention systematically affects movements in the CAD/USD and in the desired direction along with some evidence that intervention is associated with a reduction of exchange rate volatility. Interestingly, there is no indication that discretionary intervention is more effective than rules-based intervention.
    Keywords: foreign exchange intervention; intraday data; event studies; currency co-movement
    JEL: E58 F31 G14 G15
    Date: 2005–05
  2. By: Mardi Dungey; Jan P.A.M. Jacobs; Lestano
    Abstract: This paper develops concordance indices for studying the simultaneous occurrence of financial crises. The indices are designed to cope with these typically low incidence events. This leads us to confine attention to non-tranquil periods to develop a bivariate index and its multivariate analog for potentially serially correlated categorical data. An application to the Bordo et al (2001) data set reveals the extent of concordance in banking and currency crises across countries. The internationalisation of financial crises in the 20th century is shown to have increased for currency crises and decreased for banking crises.
    JEL: F31 F47 N20
    Date: 2005–08
  3. By: DUFOUR, Jean-Marie Dufour; KHALAF, Lynda; KICHIAN, Maral
    Abstract: In this paper, we use identification-robust methods to assess the empirical adequacy of a New Keynesian Phillips Curve (NKPC) equation. We focus on the Gali and Gertler’s (1999) specification, on both U.S. and Canadian data. Two variants of the model are studied: one based on a rationalexpectations assumption, and a modification to the latter which consists in using survey data on inflation expectations. The results based on these two specifications exhibit sharp differences concerning: (i) identification difficulties, (ii) backward-looking behavior, and (ii) the frequency of price adjustments. Overall, we find that there is some support for the hybrid NKPC for the U.S., whereas the model is not suited to Canada. Our findings underscore the need for employing identificationrobust inference methods in the estimation of expectations-based dynamic macroeconomic relations.
    Keywords: macroeconomics ; inflation dynamics ; New Keynesian Philli Curve ; identification robust inference ; weak instruments ; oimal instruments
    JEL: C12 C13 C3 C52 E3 E31 E5
    Date: 2005
  4. By: Michael Funke; Jörg Rahn
    Abstract: Given that the value of China´s currency has been hot topic recently, this paper explores the equilibrium levels of China´s real and nominal exchange rates. Employing a Johansen cointegration framework, we focus on the behavioral equilibrium exchange rate (BEER) and permanent equilibrium exchange rate (PEER) models. Our results suggest that, while the renminbi is somewhat undervalued against the dollar, the misalignment is not nearly as exaggerated as many popular claims.
    Date: 2005–04
    Abstract: We examine the transmission process of the policy rate to the lending and deposit rates in Greece for the period 1996-2004 within bivariate cointegration and error correction framework. A significant structural break takes place with the accession of Greece into EMU in 2001. The bank rates become much more responsive to the policy rate in terms of impact multipliers and speed of convergence to the equilibrium, a consequence of the common monetary policy. However, the process is still not complete even after the accession into the EMU.
    Keywords: interest rate pass-through, monetary policy, transmission dynamics, Greece.
    JEL: E52 E43
    Date: 2005–09–09
  6. By: Helga Kristjánsdóttir (University of Iceland)
    Abstract: In this paper, Knowledge-Capital model estimates for a small country are compared to estimates obtained for larger economies. The model is based on unique panel data on foreign direct investment in Iceland. Estimates obtained for the Knowledge-Capital model differ considerable from what has been obtained in earlier research, indicating that the driving forces behind foreign direct investment in small countries appear to be different from those in large countries.
    Keywords: foreign direct investment; knowledge-capital
    JEL: F21 F23
    Date: 2005–08
  7. By: Helga Kristjánsdóttir (University of Iceland)
    Abstract: The objective of this paper is to examine how the driving forces of investment in a small country like Iceland differ from those in larger countries. Special attention is given to the dominating investment sector in Iceland due to its resource intensity. Estimates are based on 1989-1999 panel data on foreign direct investment in various sectors. This may help explain why the investment pattern in Iceland differs from the general case.
    Keywords: foreign direct investment; multinational corporations
    JEL: F21 F23
    Date: 2005–08
  8. By: Solomon Polachek; Carlos Seiglie; Jun Xiang
    Abstract: This paper extends the analysis of the conflict-trade relationship by introducing foreign direct investment (FDI). We present a formal model that shows why FDI can improve international relations. We then proceed to test the model empirically. Our empirical results in fact show that foreign direct investment plays a similar role to trade in affecting international interactions. More specifically, we find that the flow of FDI has reduced the degree of international conflict and encouraged cooperation between dyads during the period of the late 1980 and the decade of the 90s. This is an especially important finding since one of the main characteristics of globalization has been the reduction of barriers to international capital flows. As a consequence, these have expanded enormously relative to trade flows. Finally, we also find that trade and FDI complement each other in reducing conflict. The policy implication of our finding is that further international cooperation in reducing barriers to both trade and capital flows can promote a more peaceful world.
    Keywords: Foreign Direct Investment, Conflict, Trade
    JEL: H56 F21
    Date: 2005–09

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