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on International Finance |
| By: | Vitale, Paolo |
| Abstract: | We formulate a market microstructure model of exchange determination we employ to investigate the impact of foreign exchange intervention on exchange rates and on foreign exchange (FX) market conditions. With our formulation we show i) how foreign exchange intervention in°uences exchange rates via both a portfolio-balance and a signalling channel and ii) derive a series of testable implications which are coherent with a large body of empirical research. Our investigation also proposes some normative recommendations, as we show that central bank intervention can be destabilizing for the functioning of FX markets and that the route chosen for the implementation of o±cial intervention has important implications for its impact on exchange rates and on market conditions. |
| Keywords: | exchange rate dynamics; foreign exchange microstructure; official intervention; order flow |
| JEL: | D82 G14 G15 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5468&r=ifn |
| By: | Tony Cavoli (School of Economics, University of Adelaide, Australia); Ramkishen S. Rajan (School of Public Policy, George Mason University, VA, USA) |
| Abstract: | Since the Asian crisis it has been recognized that exchange rate and monetary policy strategies must involve a “fairly high” element of flexibility rather than a single-minded defense of a particular rate. One way this flexibility might be introduced is by a country adopting an open economy inflation targeting arrangement. This particular policy regime has been officially implemented in several Asian countries in recent years, but the normative implications of inflation targeting appear at times to be at odds with the requirements regarding exchange rate flexibility. This paper presents an analysis of some of the issues relevant to Asian central banks implementing an inflation targeting arrangement with specific focus on the role of the exchange rate. |
| Keywords: | Asia, exchange rate regime, inflation targeting arrangement, fear of floating, monetary policy rule, pass through |
| URL: | http://d.repec.org/n?u=RePEc:sca:scaewp:0603&r=ifn |
| By: | Yin-Wong Cheung; Kon S. Lai |
| Abstract: | Engel and Rogers (1996) find that crossing the US-Canada border can considerably raise relative price volatility and that exchange rate fluctuations explain about one-third of the volatility increase. In re-evaluating the border effect, this study shows that cross-country heterogeneity in price volatility can lead to significant bias in measuring the border effect unless proper adjustment is made to correct it. The analysis explores the implication of symmetric sampling for border effect estimation. Moreover, using a direct decomposition method, two conditions governing the strength of the border effect are identified. In particular, the more dissimilar the price shocks are across countries, the greater the border effect will be. Decomposition estimates also suggest that exchange rate fluctuations actually account for a large majority of the border effect. |
| Keywords: | price volatility, exchange rate volatility, national border, distance, dissimilar shocks |
| JEL: | F31 F41 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1640&r=ifn |
| By: | Chernyshoff, Natasha; Jacks, David S.; Taylor, Alan M |
| 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. |
| Keywords: | gold standard |
| JEL: | F33 F41 N10 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5430&r=ifn |
| By: | Obstfeld, Maurice; Rogoff, Kenneth |
| Abstract: | We show that the when one takes into account the global equilibrium ramifications of an unwinding of the US current account deficit, currently running at more than 6% of GDP, the potential collapse of the dollar becomes considerably larger than our previous estimates (Obstfeld and Rogoff 2000a) - as much as 30% or even higher. It is true that global capital market deepening appears to have accelerated over the past decade (a fact documented by Lane and Milesi-Ferreti (2003, 2004) and recently emphasized by outgoing US Federal Reserve Chairman Alan Greenspan), and that this deepening may have helped allowed the United States to a record-breaking string of deficits. Unfortunately, however, global capital market deepening turns out to be of only modest help in mitigating the dollar decline that will almost inevitably occur in the wake of global current account adjustment. As the analysis of our earlier papers (2000a,b) showed, and the model of this paper reinforces, adjustments to large current account shifts depend mainly on the flexibility and global integration of goods and factor markets. Whereas the dollar’s decline may be benign as in the 1980s, we argue that the current conjuncture more closely parallels the early 1970s, when the Bretton Woods system collapsed. Finally, we use our model to dispel some common misconceptions about what kinds of shifts are needed to help close the US current account imbalance. For example, faster growth abroad helps only if it is relatively concentrated in nontradable goods; faster productivity growth in foreign tradable goods will actually exacerbate the US adjustment problem. |
| Keywords: | external imbalance; net foreign assets; real exchange rate; sustainability; US current account deficit |
| JEL: | F21 F32 F36 F41 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5416&r=ifn |