nep-ifn New Economics Papers
on International Finance
Issue of 2006‒02‒26
six papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Exchange rate regimes and exchange market pressure in the new EU member countries By Van Poeck A.; Vanneste J.; Veiner M.
  2. Exchange Rate Targeting in a Small Open Economy By Mette Ersbak Bang Nielsen
  3. Exchange Rates, Foreign Trade Prices and PPs in OECD Countries: An Analysis of the period 1960-2003 By Guisan, Carmen
  4. An Equilibrium Model of "Global Imbalances" and Low Interest Rates By Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas
  5. Capital Controls: An Evaluation By Carmen Rienhart
  6. Vying for Foreign Direct Investment: A EU-type Model of Tax Competition By Assaf Razin; Efraim Sadka

  1. By: Van Poeck A.; Vanneste J.; Veiner M.
    Date: 2005–06
  2. By: Mette Ersbak Bang Nielsen
    Abstract: The paper develops a New Keynesian Small Open Economy Model charac- terized by external habit formation and Calvo price setting with dynamic inflation updating. The model is used to analyze the e¤ect of nominal ex- change rate targeting on optimal policy and impulse responses. It is found that even moderate exchange rate concerns are capable of changing both sign and magnitude of the optimal instrument response to variables, and that whether the concern is with respect to the level or first di¤erence has much impact on monetary policy. Also, the cost of exchange rate stabilization in terms of output and inflation is evident in the model, and impulse responses under moderate exchange rate targeting are not simple combinations of those under a float and a regime that cares almost only for meeting the exchange rate target.
    Keywords: Flexible inflation targeting, exchange rates, fear of floating
    JEL: E52 F41
  3. By: Guisan, Carmen
    Abstract: We analyse the evolution of Exchange Rates of Euro and previous national currencies of Euro Zone, as well as those corresponding to other currencies of OECD countries, with particular emphasis on the reaction of exchange rates to inflation differences, and the consequences of those changes on foreign trade and economic growth. We also compare the evolution of Exchange Rates and Purchasing Power Parities in those countries for the period 1960-2003. We present main comparative data and some econometric models which show the strong inverse relationships between the movements of relative domestic prices and exchange rates of domestic currencies to dollar, and test for homogeneity of this relationship among OECD countries.
    Date: 2005
  4. By: Ricardo J. Caballero; Emmanuel Farhi; Pierre-Olivier Gourinchas
    Abstract: Three of the most important recent facts in global macroeconomics -- the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolio -- appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) heterogeneity in these regions' capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. Unlike the conventional wisdom, in the absence of a large change in (a) or (b), our model does not augur any catastrophic event. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.
    JEL: E0 F3 F4 G1
    Date: 2006–02
  5. By: Carmen Rienhart
    Abstract: The literature on capital controls has (at least) four very serious apples-to-oranges problems: (i) There is not unified theoretical framework to analyze the macroeconomic consequences of controls; (ii) there is significant heterogeneity across countries and time in the control measures implemented; (iii) there are multiple definitions of what constitutes a "success" and (iv) the empirical studies lack a common methodology -- furthermore these are significantly "overweighter" by a couple of country cases (Chile and Malaysia). In this paper, we attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls. Also, given that success is measured so differently across studies, we sought to "standardize" the results of over 30 empirical studies we summarize in this paper. The standardization was done by constructing two indices of capital controls: Capital Controls Effectiveness Index (CCE Index), and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies only in that the WCCE controls for the differentiated degree of methodological rigor applied to draw conclusions in each of the considered papers. Inasmuch as possible, we bring to bear the experiences of less well known episodes than those of Chile and Malaysia.
    JEL: F21 F31
    Date: 2006–01
  6. By: Assaf Razin; Efraim Sadka
    Abstract: This paper brings out the special mechanism through which taxes influence bilateral FDI, when investment decisions are two-fold in the presence of fixed setup flows costs. For each pair of source-host countries, there is a set of factors determining whether aggregate FDI flows will occur at all, and a different set of factors determining the volume of FDI flows (provided they occur). We develop a two-country tax competition model which yield an asymmetric Nash-equilibrium with high corporate tax rate and high level of public good provision in the rich source country for FDI outflows and with low corporate tax rate and low level of public good provision in the poor host country for FDI outflows. This is akin to the asymmetry among the EU 15 and EU 10 in the enlarged European Union, as of 2004. We also demonstrate that the notion that the mere international tax differentials are a key factor behind the direction and magnitude of FDI flows, the traditional race to the bottom argument in tax competition are too simple.
    JEL: F0
    Date: 2006–01

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