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on International Finance |
| By: | Campa, Jose M. (IESE Business School); Goldberg, Linda S. (Federal Reserve Bank of New York); Gonzalez-Minguez, Jose M. (Banco de España) |
| Abstract: | This paper presents an empirical analysis of transmission rates from exchange rate movements to import prices, across countries and product categories, in the euro area over the last fifteen years. Our results show that the transmission of exchange rate changes to import prices in the short run is high, although incomplete, and that it differs across industries and countries; in the long run, exchange rate pass-through is higher and close to one. We find no strong statistical evidence that the introduction of the euro caused a structural change in this transmission. Although estimated point elasticities seem to have declined since the introduction of the euro, we find little evidence of a structural break in the transmission of exchange rate movements except in the case of some manufacturing industries. And since the euro was introduced, industries producing differentiated goods have been more likely to experience reduced rates of exchange rate pass-through to import prices. Exchange rate changes continue to lead to large changes in import prices across euro-area countries. |
| Keywords: | Currency; invoicing; pass-through; exchange rate; producer currency pricing; local currency pricing; |
| Date: | 2005–09–18 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0609&r=ifn |
| By: | Kathryn Dominguez; Freyan Panthaki |
| Abstract: | This paper examines whether the traditional sets of macro surprises, that most of the literature considers, are the only sorts of news that can explain exchange rate movements. We examine the intra-daily influence of a broad set of news reports, including variables which are not typically considered "fundamentals" in the context of standard models of exchange rate determination, and ask whether they too help predict exchange rate behavior. We also examine whether "news" not only impacts exchange rates directly, but also influences exchange rates via order flow (signed trade volume). Our results indicate that along with the standard fundamentals, both non-fundamental news and order flow matter, suggesting that future models of exchange rate determination ought to include all three types of explanatory variables. |
| JEL: | F31 G15 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11769&r=ifn |
| By: | Francisco Ledesma-Rodríguez; Manuel Navarro-Ibáñezr; Jorge Pérez-Rodríguez; Simón Sosvilla-Rivero |
| Abstract: | The objective of this paper is to identify implicit exchange rate regimes for the Spanish peseta/Deutschmark exchange rate. To this end, several statistical approaches, proposed by previous studies, are applied to the period 1965-1998. The results indicate the existence of implicit regimes other than a free-floating one. |
| URL: | http://d.repec.org/n?u=RePEc:fda:fdaddt:2005-21&r=ifn |
| By: | Marcelo Sánchez (Correspondence to: European Central Bank, Postfach 160319, 60066 Frankfurt am Main, Germany) |
| Abstract: | The link between exchange rates and interest rates features prominently in the theoretical and empirical literature on small open economies. This paper revisits this relationship using a simple model that incorporates the role of exchange rate pass-through into domestic prices and distinguishes between cases of expansionary and contractionary depreciations. The model results show that the correlation between exchange rates and interest rates, conditional on an adverse risk premium shock, is negative for expansionary depreciations and positive for contractionary ones. For this type of shock, interest rates are found to be raised to prevent the contractionary effect of a depreciation regardless of whether the latter effect is strong or mild. Interest rates are predicted to also rise in response to an adverse net export shock in contractionary depreciation cases, and to be lowered in the case of expansionary ones. |
| Keywords: | Transmission mechanism; Emerging market economies; Exchange rate; Monetary policy. |
| JEL: | E52 E58 F31 F41 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20050548&r=ifn |
| By: | Vitaliy Vandrovych (International Business School Brandeis University) |
| Abstract: | This paper studies the dynamics of six major exchange rates, and runs formal tests to distinguish among different types of nonlinearities. In particular we study exchange rate returns, normalized exchange rates and exchange rate volatilities, classifying these series using BDS test, correlation dimensions and maximum Liapunov exponents. Estimates of dimension indicate high complexity in all series, suggesting that the series are either stochastic processes or high dimensional deterministic processes. Though we obtain a number of positive estimates of Liapunov exponent, they are quite small and it seems more appropriate to interpret them as indicating stochastic origin of the series. |
| JEL: | C22 F31 |
| Date: | 2005–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:sce:scecf5:234&r=ifn |
| By: | Schaling,Eric (Tilburg University, Center for Economic Research) |
| Abstract: | South Africa's 40 years of experience with capital controls on residents and non-residents (1961-2001) reads like a collection of examples of perverse unanticipated effects of legislation and regulation. We show that the presence of capital controls on residents and non-residents, enabled the South African Reserve Bank (SARB) to target domestic interest rates (and or the exchange rate) via interventions in the (commercial) foreign exchange market. This provides an early rationale for anchoring SA monetary policy via the exchange rate, rather than via domestic interest rates. This suggests not only that the capital controls themselves exhibited substantial institutional inertia, but that this same institutional inertia also applied to the monetary policy regime. A plausible reason for this is that for most of the 20th century in South Africa (partial) capital controls and exchange rate based monetary policies were like Siamese twins; almost impossible to separate. |
| Keywords: | capital controls;exchange rate mechanism |
| JEL: | E42 E61 E65 F32 F33 F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:kubcen:2005110&r=ifn |
| By: | Michael P. Dooley; David Folkerts-Landau; Peter M. Garber |
| Abstract: | In this paper we examine the behavior of interest rates and exchange rates following a variety of shocks to the international monetary system. Our analysis suggests that real interest rates in the US and Europe will remain low relative to historical experience for an extended period but converge slowly toward normal levels. During this adjustment interval, the US absorbs a disproportionate share of world savings. After a substantial initial appreciation of floating currencies relative to the dollar, the dollar and other floating currencies remain constant relative to each other. An improvement in the investment climate in Europe during the adjustment period would generate an immediate depreciation of the euro relative to the dollar. In real terms, the dollar and the floating currencies will eventually have to depreciate relative to the managed currencies. But most of the adjustment in the US trade account will come as US absorption responds to increases in real interest rates. |
| JEL: | F02 F32 F33 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11771&r=ifn |
| By: | Roberta De Santis (ISAE, Instituto di Studi e Analisi Economica) |
| Abstract: | The object of this study is to assess the role of trade in the transmission of currency shocks across geographically close countries. The analysis will focus on identifying and comparing the degree of vulnerability of new EU member states from the Central and Eastern European countries (CEECs) to currency shocks. We interpret the interactions that a centre-periphery model identifies for periphery countries as a possible description of existing interdependencies among CEECs. According to the centre periphery model discussed by Corsetti et al. (1998b), “if there is no pass-through, then direct bilateral trade links may play a more important role than competition in the third market in determining the transmission of exchange rate shocks in the periphery. If there is full pass-through, a high share of bilateral trade within a region can actually limit the extent of beggar-thy-neighbour effects.” These effects are emphasised by a high degree of export similarity among the countries in the periphery. As a result of the heterogeneity in pass-through and trade structures, it is very difficult to derive a unitary policy implication on the potential sustainability of the exchange rate mechanism (ERM) II. Yet it is possible to single out the country pairs in which the likelihood of transmitting currency shocks is higher. Preliminary results point out that (other things being equal and given the contained intra-periphery trade) the transmission of currency disturbances is lower if the disturbance originates in countries with low a pass-through rate (the Slovak and Czech Republics, Estonia and Latvia) and higher if it originates in countries with a high pass-through rate (Poland, Hungary and Slovenia). |
| Keywords: | currency crises, trade and contagion |
| JEL: | F31 F32 F41 |
| Date: | 2004–07 |
| URL: | http://d.repec.org/n?u=RePEc:epr:enepwp:028&r=ifn |
| By: | Christopher Ragan |
| Abstract: | The author provides a non-technical explanation of the role played by the exchange rate in Canada's inflation-targeting monetary policy. He reviews the motivation for inflation targeting and describes the monetary transmission mechanism. Though the exchange rate is an integral component of the transmission mechanism, the author explains why it is not a target for monetary policy. He provides a simple taxonomy for exchange rate movements, distinguishing between movements associated with direct shocks to aggregate demand and those unrelated to such direct shocks. He explains the importance to monetary policy of determining the cause of any given movement in the exchange rate, and of determining the net effect on aggregate demand. The author also describes Canadian monetary policy during the 200304 period, a time when the Canadian dollar appreciated sharply against the U.S. dollar. |
| Keywords: | Exchange rates; Inflation targets; Monetary policy implementation |
| JEL: | E50 E52 F41 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-34&r=ifn |
| By: | Hyungsik Roger Moon; Benoit Perron |
| Abstract: | This paper studies nonstationarities in panels of exchange rates and interest rates. For this, we survey developments in the analysis of nonstationary panels with cross-sectional dependence modeled as a factor model. We focus on panel unit root tests and on inference on the nonstationary factors. Our results suggest that PPP does not hold for our panel of 17 exchange rates due to the presence of nonstationary factors. The dominant factor has a very strong European flavor. Moreover, we find a single nonstationary factor in a panel of Canadian and U.S. interest rates of different maturities and risk. Since some of the idiosyncratic components are stationary, these series are cointegrated. The dominant factor has a level interpretation as in the term structure literature. |
| Date: | 2005–08 |
| URL: | http://d.repec.org/n?u=RePEc:scp:wpaper:05-35&r=ifn |
| By: | Anthony Landry (Economics Boston University) |
| Abstract: | We introduce elements of state-dependent pricing and strategic complementarity within an otherwise standard "New Open Economy Macroeconomics" model, and develop its implications for the dynamics of real and nominal economic activity. Under a traditional Producer-Currency-Pricing environment, our framework replicates key international features following a domestic monetary shock. In contrast with its time-dependent counterpart, our approach delivers (i) a high international output correlation relative to consumption correlation, (ii) a delayed surge in inflation across countries, (iii) a delayed overshooting of exchange rates, and (iv) a J-curve dynamic in the domestic trade balance. Moreover, our model emphasizes the expenditure-switching effect as an important channel of monetary policy transmission, and consequently keeps the spirit of the Mundell-Fleming-Dornbusch model within the confines of the microfounded dynamic general equilibrium approach |
| Keywords: | international monetary policy transmission, international comovements, state-dependent pricing, strategic complementarity. |
| JEL: | F41 F42 |
| Date: | 2005–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:sce:scecf5:455&r=ifn |
| By: | Kulwindar Singh (Centre for Civil Society) |
| Abstract: | The Concept of Foreign Direct Investment is now a part of India's economic future but the term remains vague to many, despite the profound effects on the economy. Despite the extensive studies on FDI, there has been little illumination forthcoming and it remains a contentious topic. The paper explores the uneven beginnings of FDI, in India and examines the developments (economic and political) relating to the trends in two sectors: Industry and Infrastructure and sub sector Telecom, to illustrate that. |
| Keywords: | India FDI, FDI liberalization |
| JEL: | O P |
| Date: | 2005–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpdc:0511013&r=ifn |
| By: | Merih Uctum (Economics Brooklyn College and the Graduate Center, City University of New York); Remzi Uctum |
| Abstract: | The goal of the paper is to analyze how financial and economic crises affect the relation between capital flows and their determinants. We develop a model of foreign portfolio investment (FPI) and foreign direct investment (FDI), and apply it to Turkey using an endogenous break analysis and accounting for country risk. We identify two breakpoints that correspond to two crises dates. Our results show changes in the sign and/or coefficient of a number of determinants in both types of investment and thus suggest that analyses based on the assumption of parameter constancy may lead to misleading results. |
| Keywords: | capital flows, crises, structural changes |
| JEL: | F21 F32 F36 |
| Date: | 2005–11–11 |
| URL: | http://d.repec.org/n?u=RePEc:sce:scecf5:224&r=ifn |