nep-ifn New Economics Papers
on International Finance
Issue of 2005‒12‒01
twelve papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Dual Inflation and the Real Exchange Rate in New Open Economy Macroeconomics By Balazs Vilagi
  2. Monetary Policy in an Equilibrium Portfolio Balance Model By Stijn van Nieuwerburgh; Michael Kumhof
  3. Stuck on Gold: Real Exchange Rate Volatility and the Rise and Fall of the Gold Standard By Natalia Chernyshoff; David S. Jacks; Alan M. Taylor
  4. Regime-Switching in Exchange Rate Policy and Balance Sheet Effects By Norbert Fiess, and Rashmi Shankar
  5. Monetary Policy and the Illusionary Exchange Rate Puzzle By Bjørnland, Hilde C.
  6. Market Expectations and Currency Crises: Theory and Empirics By Bernardo Guimaraes
  9. Currency Speculation Behaviour of Industrial Firms: Evidence from a Two-Country Laboratory Experiment By Johannes Kaiser; Sebastian Kube
  10. Real Effects of Nominal Exchange Rate Shocks By Istvan Konya; Peter Benczur
  11. Establishing Credibility: Evolving Perceptions of the European Central Bank By Linda S. Goldberg; Michael W. Klein
  12. An Assignment Theory of Foreign Direct Investment By Stephen Yeaple; Volker Nocke

  1. By: Balazs Vilagi (Economics Department Central Bank of Hungary)
    JEL: E31 F41
    Date: 2005
  2. By: Stijn van Nieuwerburgh; Michael Kumhof
    Keywords: Portfolio balance, sterilized foreign exchange intervention
    JEL: E42 F41
    Date: 2005
  3. By: Natalia Chernyshoff; David S. Jacks; Alan M. Taylor
    Abstract: Did adoption of the gold standard exacerbate or diminish macroeconomic volatility? Supporters thought so, critics thought not, and theory offers ambiguous messages. A hard exchange-rate regime such as the gold standard might limit monetary shocks if it ties the hands of policy makers. But any decision to forsake exchange-rate flexibility might compromise shock absorption in a world of real shocks and nominal stickiness. A simple model shows how a lack of flexibility can be discerned in the transmission of terms of trade shocks. Evidence on the relationship between real exchange rate volatility and terms of trade volatility from the late nineteenth and early twentieth century exposes a dramatic change. The classical gold standard did absorb shocks, but the interwar gold standard did not, and this historical pattern suggests that the interwar gold standard was a poor regime choice.
    JEL: F33 F41 N10
    Date: 2005–11
  4. By: Norbert Fiess, and Rashmi Shankar
    Abstract: It is well accepted that exchange rate policy in many emerging markets has been characterized by shifts between a stronger and weaker commitment to peg. This raises the following questions, which we address in our paper: Does intervention policy exhibit clearly defined and periodic shifts? What drives this policy variability? We identify clearly defined switches between high and low intervention in all the countries in our sample. We also find strong evidence that balance sheet effects, proxied by the stock ratio of external liabilities to assets, and economic performance, as measured by GDP and stock market indices, determine the likelihood of the regime shift. Specifically, an increase in reserve currency debt raises potential capital losses from devaluation and reduces the probability of switching to a low intervention regime. We use a panel of quarterly data starting 1985 through 2004 for a sample of 15 countries, mostly from East Asia and Latin America. We adopt a novel two-step empirical strategy in this paper. First, we measure the policy response of the central bank in two ways, both derived from the monetarist model: a standard exchange market pressure index and a model-based volatility ratio that is endogenized relative to Japan, our “benchmark” floater. We apply regime-switching methods to these “policy response indices.” This generates a time-series of unconditional probabilities of switching between high and low intervention. In the second step, we establish a set of variables that explains changes in these probabilities
    JEL: F31 F34
  5. By: Bjørnland, Hilde C. (Dept. of Economics, University of Oslo)
    Abstract: Dornbusch’s exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has developed into a “styled facts” to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restriction on them. By instead imposing a long-run neutrality restriction on the real exchange, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, I find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate that appreciates on impact. The maximum effect occurs immediately, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP.
    Keywords: Dornbusch overshooting; VAR; monetary policy; exchange rate puzzle; identification
    JEL: C32 E52 F31 F41
    Date: 2005–11–07
  6. By: Bernardo Guimaraes
    Keywords: currency crises, expectations, exchange rate, options
    JEL: F3 D8
    Date: 2005
  7. By: Paulo Gala
    Abstract: A recurrent issue in the empirical literature that relates real exchange rate levels and growth is the relatively undervalued level of the Asian currencies when compared to Latin American and African ones for the period 1970 to 1999. In most works, higher per capita growth rates and lower currency levels emerge for Asian countries, which appears to be a regional pattern. For the Latin American and African cases, the pattern seems to be the opposite. Appreciation cycles are constantly showing up together with stop and go growth episodes. Accordingly, a central issue to understand the East and Southeast Asian success, as compared to the Latin American and African failures, could be found in the way they managed their exchange rate policies and on the evolution of their real exchange rate levels. The objective of this paper is to compare the evolution of exchange rate policies and levels in Asia and Latin America from 1970 to 1999. The work reviews some aspects of exchange rate management for some of the countries in these regions based on a survey of case studies. It also presents an evolution of real exchange rate levels against the US dollar for a set of 20 countries based on World Bank data and on an exchange rate distortion index.
    JEL: F31
    Date: 2005
  8. By: Márcio Holland
    Abstract: After strong currency crisis, in January 1999, Brazil implemented flexible exchange rate regime combined with inflation targeting. Some economists believe that emerging markets do not allow the exchange rate to float as much they had announced and therefore they suffer from the fear of floating. However, in this article there is evidence to believe that central banks in the emerging markets care about inflation ratter than exchange rate. The remarkable result found in this article is that the aggressiveness of the interest rate reaction to inflation explains far more the current monetary and exchange rate policy in Brazil than the idea of the fear of floating.
    JEL: E31 E37 E52 C22
    Date: 2005
  9. By: Johannes Kaiser (Laboratory for Experimental Economics, University of Bonn, Germany); Sebastian Kube (Department of Economics, University of Karlsruhe, Germany)
    Abstract: We analyse the behavioural components of a firm's speculation decisions. Specifically, we conducted laboratory experiments to study how firms speculate in a deterministic two-country model with two currencies. The data is used to investigate how exchange rate variations and interest rates can influence a firm's behaviour. The subjects made only small use of technical trade. We show the existence of exchange rate uncertainty and show how the subjects try to cope with it by hedging and pessimistic expectations. One can observe that central banks can curb the influence of speculation on exchange rate volatility if they are powerful enough and collude.
    Keywords: currency speculation, exchange rate uncertainty, behavioural finance, laboratory experiment
    JEL: C91 D84 E44 E52 F31
    Date: 2005–11–19
  10. By: Istvan Konya; Peter Benczur (Economics Magyar Nemzeti Bank)
    Keywords: real effects of nominal shocks, endogenous pass-through, two-sector growth model, q-theory, money-in-the-utility
    JEL: F32 F41 F43
    Date: 2005
  11. By: Linda S. Goldberg; Michael W. Klein
    Abstract: The perceptions of a central bank's inflation aversion may reflect institutional structure or, more dynamically, the history of its policy decisions. In this paper, we present a novel empirical framework that uses high frequency data to test for persistent variation in market perceptions of central bank inflation aversion. The first years of the European Central Bank (ECB) provide a natural experiment for this model. Tests of the effect of news announcements on the slope of yield curves in the euro-area, and on the euro/dollar exchange rate, suggest that the market's perception of the policy stance of the ECB during its first six years of operation significantly evolved, with a belief in its inflation aversion increasing in the wake of its monetary tightening. In contrast, tests based on the response of the slope of the United States yield curve to news offer no comparable evidence of any change in market perceptions of the inflation aversion of the Federal Reserve.
    JEL: F3 E5 E6
    Date: 2005–11
  12. By: Stephen Yeaple; Volker Nocke (Department of Economics University of Pennsylvania)
    Keywords: Foreign Direct Investment, Mergers, Greenfield, Firm Heterogeneity
    JEL: F12 F14 F23 L11
    Date: 2005

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