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on International Finance |
| By: | Koedijk, C.G.; Tims, B.; Dijk, M.A. van (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | This paper analyzes the properties of multivariate tests of purchasing power parity (PPP) that fail to take heterogeneity in the speed of mean reversion across real exchange rates into account. We compare the performance of homogeneous and heterogeneous unit root testing methodologies. The recent literature has successfully contested several severe restrictions on the structure of the model, but the assumption of homogeneous mean reversion is still widely used and its consequences are virtually unexplored. Using Monte Carlo simulation, we uncover important adverse properties of the methodology that relies on homogeneous estimation and testing. More specifically, power functions are low and assume irregular shapes. Furthermore, homogeneous estimates of the mean reversion parameters exhibit potentially large biases. This can have a dramatic impact on inferences made on the validity of the PPP hypothesis. Our findings highlight the importance of allowing for heterogeneous estimation when testing for a unit root in panels of real exchange rates. |
| Keywords: | Purchasing Power Parity;Real Exchange Rates;Panel Models;Unit Root Tests;Heterogeneity; |
| Date: | 2005–12–19 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30007857&r=ifn |
| By: | Roc Armenter; Martin Bodenstein |
| Abstract: | Lack of commitment in monetary policy leads to the well known Barro-Gordon inflation bias. In this paper, we argue that two phenomena associated with the time inconsistency problem have been overlooked in the exchange rate debate. We show that, absent commitment, independent monetary policy can also induce expectation traps-that is, welfare-ranked multiple equilibria-and perverse policy responses to real shocks-that is, an equilibrium policy response that is welfare inferior to policy inaction. Both possibilities imply higher macroeconomic volatility under flexible exchange rates than under fixed exchange rates. |
| Keywords: | Foreign exchange rates ; Equilibrium (Economics) ; Monetary policy |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:230&r=ifn |
| By: | Katarina Juselius (Department of Economics, University of Copenhagen); Javier Ordóñez (Jaume I University, Spain) |
| Abstract: | This paper provides an empirical investigation of the wage, price and unemployment dynamics that have taken place in Spain during the last two decades. The aim of this paper is to shed some light on the impact of the European economic integration process on Spanish labour market and the convergence to a European level of prosperity. We find some important lessons to be learnt from the Spanish experience that should be relevant for the new member states. First, high competitiveness in the tradable sector seems crucial for the real and nominal convergence to be successful, implying that the increase of wages in the tradable sector, and subsequently in the nontradable sector, should not be allowed to exceed the growth in productivity. Second, before fixing the real exchange rate it seems crucial that it is on its sustainable (competitive) purchasing power parity level. A real appreciation, as a result of high growth rates during the catching-up period, is likely to be harmful for real growth and employment. |
| Keywords: | Balassa-Samuelson effect; nominal and real convergence; unemployment dynamics; purchasing power parity; cointegrated VAR |
| JEL: | C32 E24 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0529&r=ifn |
| By: | Ingyu Chiou (Eastern Illinois University); James Jordan- Wagner (Eastern Illinois University); Hai-Chin Yu (Chung Yuan University, Taiwan) |
| Abstract: | This paper studies how one currency market affects another currency market in a different time zone, using various contracts of the opening and closing yen-dollar exchange rates traded in Tokyo, London, and New York. We find strong and consistent evidence that the three major currency markets interact significantly. For each of five contracts we examine, Tokyo leads London and New York, London leads New York and Tokyo, and New York leads Tokyo and London. In particular, the causality relationship is much stronger when one market trades right after another. Although our results show violations of market efficiency, these findings cannot be interpreted as the existence of easy arbitrage opportunities among three markets. Instead, these strong causality relationships may be due to some unique characteristics of each of three currency markets, which cannot be observed directly. |
| Keywords: | price transmission, causality, VAR |
| JEL: | G15 |
| Date: | 2005–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpfi:0512024&r=ifn |
| By: | Tony Cavoli (School of Economics, University of Adelaide); Ramkishen S. Rajan (School of Public Policy, George Mason University) |
| Abstract: | This paper develops a simple model to examine the reasons behind the capital inflow surges into selected Asian economies in the 1990s prior to the financial crisis of 1997-98. The simple analytical model reveals that persistent uncovered interest differentials and consequent capital inflows may be a consequence of complete sterilization, perfect capital mobility, sluggish response of interest rates to domestic monetary disequilibrium, or some combination of all three. Using the model as an organizing framework, the paper undertakes a series of related simple empirical tests of the dynamic links between international capital flows and the extent to which they are sterilized and uncovered interest rate differentials (UIDs) in the five crisis-hit economies (Indonesia, Korea, Malaysia, the Philippines and Thailand) over the period 1990:1 to 1997:5. |
| Keywords: | Capital flows, East Asia, interest rates, monetary sterilization, reserves |
| JEL: | F30 F32 F41 |
| URL: | http://d.repec.org/n?u=RePEc:sca:scaewp:0518&r=ifn |
| By: | Ilker Domac; Kyle Peters; Yevgeny Yuzefovichî |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0304&r=ifn |
| By: | Ozge Akinci; Olcay Yucel Culha; Umit Ozlale; Gulbin Sahinbeyoglu |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0506&r=ifn |
| By: | Hakan Kara; Hande Kucuk Tuger; Umit Ozlale; Burc Tuger; Devrim Yavuz; Eray M. Yucel |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0504&r=ifn |
| By: | Guillaume Rocheteau; Peter Rupert; Karl Shell; Randall Wright |
| Abstract: | Using a set of standard success criteria, we show that Riksbank foreign-exchange interventions between 1993 and 2002 lacked forecast value; that is, the observed number of successes was not significantly greater--and usually substantially smaller--than the number one would anticipate given the martingale nature of exchange-rate movements. Under some success criteria, the Riksbank exhibited negative forecast value, implying that the market could have profited by taking a position opposite that of the bank. Moreover, the likelihood of success was independent of such conditioning factors as the amount of a transaction, the time lapses between interventions, or the number of foreign currencies involved. As such, Riksbank intervention could not operate through an expectations or signaling channel. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0514&r=ifn |
| By: | Fernando N. de Oliveira (IBMEC Business School - Rio de Janeiro and Central Bank of Brazil); Walter Novaes (PUC/RJ) |
| Abstract: | Between 1999 and 2002, Brazil's Central Bank sold expressive amounts of dollar indexed debt and foreign exchange swaps. This paper shows that in periods of high volatility of the exchange rate, first semester of 1999 and second semester of 2002, the Central Bank of Brazil increased the foreign exchange hedge, but the financial institutions used this to reduce their foreign exchange exposure. In contrast, increases in foreign hedge during periods of low volatility of the exchange rate were transferred to the productive sector. |
| Keywords: | foreign exchange swaps, central bank interventions, foreign exchange risk |
| JEL: | E58 E52 F31 |
| Date: | 2005–12–15 |
| URL: | http://d.repec.org/n?u=RePEc:ibr:dpaper:2005-13&r=ifn |
| By: | Tony Cavoli (School of Economics, University of Adelaide); Ramkishen S. Rajan (School of Public Policy, George Mason University) |
| Abstract: | There is a broad consensus that the soft US dollar pegs operated by a number of Asian countries prior to 1997 contributed to the regional financial crisis of 1997-98. There is, however, much less agreement on the types of exchange rate regimes operated by many Asian countries since the crisis. Can they still be characterized as soft US dollar pegs, or have they become genuinely more flexible? This paper revisits the evidence regarding the extent of exchange rate flexibility in the five Asian countries (Indonesia, Korea, Malaysia, the Philippines and Thailand) using alternative methodologies and data spanning the pre- and post-crisis time period. Given the diversity of measures of de facto regimes in the literature, the use of alternative methodologies in this paper is critical as a means of obtaining an accurate and robust indication of the type of exchange rate regime operated by a country. |
| Keywords: | Asia, exchange rate regime, inflation targeting, interest rates, reserves, soft dollar peg |
| JEL: | F31 F33 |
| URL: | http://d.repec.org/n?u=RePEc:sca:scaewp:0519&r=ifn |
| By: | Menzie D. Chinn; Jaewoo Lee |
| Abstract: | Three large current account imbalances -- one deficit (the United States) and two surpluses (Japan and the Euro area) -- are subjected to a minimalist structural interpretation. Though simple, this interpretation enables us to assess how much of each of the imbalances require a real exchange rate adjustment. According to the estimates, a large part of the U.S. current account deficit (nearly 2 percentage points of the 2004 deficit of 5 1/2 percent of GDP) will undergo an adjustment process that involves real depreciation in its exchange rate. For Japan, a little more than 1 percentage point (of GDP) of the current account surplus is found to require an exchange rate movement (real appreciation) as the surpluses adjust down. For the Euro area, less than half a percentage point of its current account surplus is found to require an adjustment via real appreciation. |
| JEL: | F31 F41 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11853&r=ifn |
| By: | Giancarlo Corsetti; Luca Dedola; Sylvain Leduc |
| Abstract: | This paper develops a quantitative, dynamic, open-economy model which endogenously generates high exchange rate volatility, whereas a low degree of pass-through stems from both nominal rigidities (in the form of local currency pricing) and price discrimination. We model real exchange rate volatility in response to real shocks by reconsidering and extending two approaches suggested by the quantitative literature (one by Backus Kehoe and Kydland [1995], the other by Chari, Kehoe and McGrattan [2003]), within a common framework with incomplete markets and segmented domestic economies. Our model accounts for a variable degree of ERPT over different horizons. In the short run, we find that a very small amount of nominal rigidities--consistent with the evidence in Bils and Klenow [2004--lowers the elasticity of import prices at border and consumer level to 27% and 13%, respectively. Still, exchange rate depreciation worsens the terms of trade -- in accord with the evidence stressed by Obstfeld and Rogoff [2000]. In the long run, exchange-rate pass-through coefficients are also below one, as a result of price discrimination. The latter is an implication of distribution services, which makes the goods demand elasticity market specific. |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:845&r=ifn |
| By: | Hakan Kara; Fethi Ogunc |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0510&r=ifn |
| By: | Balázs Égert (Oesterreichische Nationalbank; MODEM, University of Paris X-Nanterre and William Davidson Institute); László Halpern (Institute of Economics, Hungarian Academy of Sciences; CEPR, Central European University and William Davidson Institute); Ronald MacDonald (University of Glasgow and CESifo) |
| Abstract: | In this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies. Amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual Balassa-Samuelson effect, such as the behaviour of the real exchange rate of the open sector and regulated prices. We then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model, namely: differences in the theoretical underpinnings; differences in the econometric estimation techniques; and differences relating to the time series and cross-sectional dimensions of the data. The ensuing three-dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size. |
| Date: | 2005–11–15 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:106&r=ifn |
| By: | Ozge Akinci; Olcay Yucel Culha; Umit Ozlale; Gulbin Sahinbeyoglu |
| URL: | http://d.repec.org/n?u=RePEc:tcb:wpaper:0505&r=ifn |
| By: | Matteo Bugamelli (Banca d’Italia); Roberto Tedeschi (Banca d’Italia) |
| Abstract: | This paper estimates a pricing-to-market equation for Italy over the period 1990-99 with the aim of assessing the degree of exchange rate pass-through (ERPT). As compared to previous works, we minimize aggregation and selection biases using export data on all products (about 700 from 4 digits of SITC) and all destination markets (about 70). On average, ERPT is asymmetric: Italian exporters did not reduce their profit margins, and thus did not defend their market shares, when the Italian lira got appreciated (complete ERPT); on the contrary, they did raise margins – in the order of 30 per cent of the exchange rate variation – after a depreciation. Disaggregating in terms of destination markets and products, ERPT is incomplete when exports are directed to industrial countries and originate in oligopolistic industries, more precisely high-tech and economies of scale sectors. Despite large overlappings, the same results hold for industries where firms are bigger and more productive than average. Sales of traditional competitive products to non-industrial countries display an almost complete ERPT. |
| Keywords: | exchange rate pass-through, pricing-to-market, market structure |
| JEL: | F14 F3 L1 |
| Date: | 2005–11 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_563_05&r=ifn |
| By: | Federico Marongiu (Universidad de Buenos Aires) |
| Abstract: | Currency and financial crises are determinants of growth and development, mainly in developing countries subject to shocks, contagion and volatility. A relevant issue when trying to do the implementation of development policies is to anticipate or forecast the occurrence of currency crises that could turn good ideas into failure. This type of crises have strong negative economic, social and political consequences. This paper takes a look in the leading indicators literature and shows that this approach failed in predicting the Argentinean collapse of 2001-2002. We also show that particular features of the Argentinean economy needed of different indicators to forecast the collapse of the currency board system. The paper also developes some new indicators to include in an Early Warning System that can take on account specific features of Argentina´s economy. This indicators can be integrated into a wider set in order to be a useful tool for policymakers and authorities in Argentina and in other developing countries in the planification and implementation of development policies and programs. |
| Keywords: | currency crisis - exchange rate - leading indicators - Argentina |
| JEL: | D6 D7 H |
| Date: | 2005–12–23 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwppe:0512011&r=ifn |