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on International Finance |
| By: | Norbert Fiess (The World Bank); Rashmi Shankar (Brandeis University) |
| Abstract: | The authors apply regime-switching methods to a monetarist model of exchange rates and identify well-defined intervention policy cycles. The policy response indices include a standard exchange market pressure-based index and a model-based volatility ratio that is endogenized relative to Japan, assumed to be a "benchmark" floater. The authors 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 cost of the regime shift. They use a panel of quarterly data from 1985 to 2004 for a sample of 15 countries, mostly in East Asia and Latin America. |
| Keywords: | International economics |
| Date: | 2005–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3653&r=ifn |
| By: | Olivier, CARDI |
| Abstract: | We use a two-good dynamic optimizing small open economy model to provide a new explanation of the J-Curve phenomenon in terms of habit persistence in consumption and sluggishness in capital adjustment. The results differ markedly depending on the permanence or temporary nature of the relative price change. A short-lived terms of trade worsening may lead to a once-for-all decrease in the marginal utility of wealth and to higher steady-state values of the habitual standard of living, the real expense, and the net foreign assets through the combination of intertemporal speculation, inertia, and hysteresis effects. Investment and real expense folow non-monotonic transitional paths and current account dynamics are driven by new forces. In accordance with recent empirical results, investment is procyclical, trade balance deteriorates initially, net foreign assets adjustment exhibits a J-Curve, and the current account surplus phase is associated with a fall in real income. |
| Keywords: | Current account; Habit Formation; Temporary Shock; J-Curve |
| JEL: | F41 E22 E21 F32 |
| Date: | 2005–06–15 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2005029&r=ifn |
| By: | Luc, BAUWENS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Dagfinn, RIME; Genaro, SUCARRAT |
| Abstract: | This paper sheds new light on the mixture of distribution hypothesis by means of a study of the weekly exchange rate volatility of the Norwegian krone. In line with other studies we find that the impact of information arrival on exchange rate volatility is positive and statiscally significant, and that the hypothesis that an increase in the number of traders reduces exchange rate volatility is not supported. The novelties of our study consist in documenting that the positive impact of information arrival on volatillity is relatively stable across three different exchange rate regimes, and in that the impact is relatively similar for both weekly volatility and weekly realised volatility. It is not given that the former should be the case since exchange rate stabilisation was actively pursued by the central bank in parts of the study period; We also report a case in which undesirable residual properties attained within traditional frameworks are easily removed by applying the log-transformation on volatilities. |
| Keywords: | Exchange rate volatility; log-linear analysis; mixture of distribution hypothesis |
| JEL: | F31 |
| Date: | 2005–07–15 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2005043&r=ifn |
| By: | Yoichiro Ishihara (The World Bank) |
| Abstract: | Studies use different conceptual and operational definitions of crises. The different crisis identifications can lead to inconsistent conclusions and policy formulation even if the same analytical framework is applied. Also, most studies focus on only a few types of crises. This narrow focus on crises may not capture the multidimensionality of crises. Seven crisis types are analyzed, namely (1) liquidity type banking crises, (2) solvency type banking crises, (3) balance of payments crises, (4) currency crises, (5) debt crises, (6) growth rate crises, and (7) financial crises. Crisis data were collected from 15 emerging economies in 1980-2002 on a quarterly basis. The crisis identification exercise finds that multidimensionality in which different crisis types occur in short periods is one of the most important characteristics of recent crises. Further, the Granger causality tests in five Asian economies (Indonesia, the Republic of Korea, Malaysia, the Philippines, and Thailand) find that currency crises tend to trigger other types of crises, and therefore exchange rate management is essential. |
| Keywords: | International economics, Macroeconomics and growth |
| Date: | 2005–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3598&r=ifn |
| By: | Ali Zafar (The World Bank) |
| Abstract: | The author estimates the degree of misalignment of the CFA franc since the introduction of the euro in 1999. Using a relative purchasing power parity-based methodology, he develops a monthly panel time series dataset for both the Economic and Monetary Community of Central Africa (CEMAC) zone and the West African Economic and Monetary Union (UEMOA) zone to compute a trade-weighted real effective exchange rate indexed series from January 1999 to December 2004. The author's main finding is that the real effective exchange rate appreciated by close to 8 percent in UEMOA and 7 percent in CEMAC, influenced by volatility in the euro-dollar bilateral exchange rate and conservative monetary policies in the two zones, resulting in a partial loss of competitiveness in export markets. The lower appreciation in Central Africa can be explained by lower inflation in CEMAC than in UEMOA and by the greater trade with higher inflation East Asian countries, partially offset by the peg to the dollar. However, the inclusion of "unrecorded trade" results in an appreciation of only 6 percent in the UEMOA zone and 6 percent in the CEMAC zone due to higher inflation in the two countries with unmonitored cross-border flows, Ghana and Nigeria. Using time series econometrics, an Engle-Granger two stage procedure for cointegration, and an error correction framework, a single equation modeling of the real exchange rate from 1970 to 2005 as a function of terms of trade, economic openness, aid inflows, and a dummy representing the 1994 devaluation, the author finds little statistical evidence of a long-run equilibrium exchange rate that is a vector of economic fundamentals. The dummy explains most of the real exchange rate behavior in the two zones, while openness in UEMOA has contributed to an appreciation of the real effective exchange rate. |
| Keywords: | International economics, Macroeconomics and growth |
| Date: | 2005–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:3751&r=ifn |
| By: | Yaprak Gulcan (Department of Economics, Faculty of Business, Dokuz Eylül University); Mustafa Erhan Bilman (Department of Economics, Faculty of Business, Dokuz Eylül University) |
| Abstract: | This study investigates the effect of budget deficit reduction on exchange rate between US dollar and Turkish lira (TL). Our article aims to illustrate that the evidence on the relationship between budget deficits and exchange rates is not clear-cut and to explain why the theoretical approaches that underlie the relationship are ambiguous while there is general agreement that cutting budget deficits and debt will lower interest rates. The relationship between deficit reduction and exchange rates has caused a debate among the most famous monetary policy makers and researchers. [Melvin (1989), Mishkin (1992), Greenspan (1995), Thiessen (1995), Krugman (1995), Feldstein (1995)] In addition, budget deficit can be counted as one of the most common and major problem that influences the macroeconomic stability in developing economies. In this sense, cointegration method and causality tests were used in order to find out the possible effects of budget deficit reduction on exchange rates during the period of 1960-2003 in Turkey. |
| Keywords: | Budget deficits, exchange rates, cointegration analysis |
| JEL: | H62 F31 |
| Date: | 2005–12–12 |
| URL: | http://d.repec.org/n?u=RePEc:deu:dpaper:0705&r=ifn |
| By: | Marc-André Gosselin; Nicolas Parent |
| Abstract: | Over the past few years, the ability of the United States to finance its current account deficit has been facilitated by massive purchases of U.S. Treasury bonds and agency securities by Asian central banks. In this process, Asian central banks have accumulated large stockpiles of U.S.-dollar foreign exchange reserves. How far is the current level of reserves from that predicted by the standard macroeconomic determinants? The authors answer this question by using Pedroni's (1999) panel cointegration tests as the basis for the estimation of a long-run reserve-demand function in a panel of eight Asian emerging-market economies. This is a key innovation relative to the existing research on international reserves modelling: although the data are typically I(1), the literature ignores this fact and makes statistical inference based on unadjusted standard errors. While the authors find evidence of a positive structural break in the demand for international reserves by Asian central banks in the aftermath of the financial crisis of 1997-98, their results indicate that the actual level of reserves accumulated in 2003-04 was still in excess relative to that predicted by the model. Therefore, as long as historical relationships hold, a slowdown in the rate of accumulation of reserves is likely. This poses negative risks for the U.S. dollar. However, both the substantial capital losses that Asian central banks would incur if they were to drastically change their holding policy and the evidence that the currency composition of reserves evolves only gradually mitigate the risks of a rapid depreciation of the U.S. dollar triggered by Asian central banks. |
| Keywords: | Econometric and statistical methods; International topics; Financial stability |
| JEL: | C23 F31 G15 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:05-38&r=ifn |
| By: | Erdem Basci (Central Bank of Turkey); Mehmet Caner (University of Pittsburgh) |
| JEL: | F3 F4 |
| Date: | 2005–12–09 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0512001&r=ifn |
| By: | Priit Vahter; Jaan Masso |
| Abstract: | The aim of this paper is to study the effects of both inward and outward foreign direct investment (FDI) on productivity. The main novelty is the analysis of the spillover effects of outward FDI that may occur outside the investing firms on the rest of the home country. The effects are addressed both for the manufacturing and services sectors. To our best knowledge there have so far been no studies based on enterprise-level panel data analysing the spillovers of outward FDI in the production function estimation framework. We find that engaging in outward FDI or receiving inward FDI is positively related to the productivity of the parent firm in Estonia or the subsidiary in Estonia. We do not find much evidence of positive spillovers via outward or inward FDI that is robust to the specification of the model or does not depend on the sector being studied. The results on spillover effects vary according to different specifications of the spillover variable, sector or the model, being either statistically insignificant or, in some cases, positive. |
| Keywords: | foreign direct investment, spillovers, home country effects, productivity |
| JEL: | F10 F21 F23 |
| URL: | http://d.repec.org/n?u=RePEc:eea:boewps:wp2005-13&r=ifn |