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on International Finance |
| By: | J. Isaac Miller (Department of Economics, University of Missouri-Columbia) |
| Abstract: | We show that typical tests for purchasing power parity (PPP) using exchange rates governed by a target zone regime are inherently misspecified. Regardless of whether or not long-run PPP holds, the real exchange rate cannot be mean-reverting in the usual sense, since the nominal exchange rate is generated by a nonlinear transformation of a nonstationary economic fundamental. As an alternative, we propose basing the real exchange rate (and thus a PPP test) on conditional expectations of this unobservable fundamental. As an illustration, we test for long-run PPP between Denmark and the Euro area. |
| Keywords: | Target Zone Exchange Rates, Purchasing Power Parity, Nonlinear Transformations, Extended Kalman Filter |
| JEL: | C13 C22 C32 |
| Date: | 2006–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:0604&r=ifn |
| By: | Kenji Aramaki (University of Tokyo) |
| Abstract: | This paper reviews Japan's experiences with the liberalization of capital accounts, and tries to identify their implications to China. Liberalization of capital accounts proceeded very gradually in Japan from the adoption of a system of general prohibition of foreign exchange and capital transactions in 1949 through the shift to a generally liberalized system in 1979. Meantime, Japan was exposed to the turbulent international financial markets due to the move from a peg to a float system of its currency and two oil crises. In response to the massive short-term capital flow in and out of the country caused by these shocks, Japan, which was generally headed for the liberalization of the capital accounts, was frequently forced to resort to foreign exchange and capital control measures to stabilize the market. These experiences by Japan seems to give valuable implications to China, for which significant enhancement of the flexibility of its exchange rate movement under the recently revised formal exchange rate regime and the liberalization of capital accounts continue to be important policy agenda in the years to come. |
| Keywords: | trade liberialiazation, China, Japan, capital accounts, China, peg system, float system, foreign exchange, |
| JEL: | F13 F14 F31 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:eab:financ:669&r=ifn |
| By: | Takatoshi Ito (Faculty of Economics, University of Tokyo); Kiyotaka Sato (Faculty of Economics, Yokohama National University) |
| Abstract: | The pass-through effects of exchange rate changes on the domestic prices in the East Asian countries are examined using a VAR analysis including several price indices and domestic macroeconomic variables as well as the exchange rate. Results from the VAR analysis show that (1) the degree of exchange rate pass-through to import prices was quite high in the crisis-hit countries; (2) the pass-through to CPI was generally low, with a notable exception of Indonesia: and (3) in Indonesia, both the impulse response of monetary policy variables to exchange rate shocks and that of CPI to monetary policy shocks are positive, large and statistically significant. Thus, Indonesia's accommodative monetary policy as well as the high degree of the CPI responsiveness to exchange rate changes was important factors that resulted in the spiraling effects of domestic price inflation and sharp nominal exchange rate depreciation in the post-crisis period. |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2006cf406&r=ifn |
| By: | Gara Minguez-Afonso |
| Abstract: | First generation models assume that the level of reserves of a Central Bank in a fixed exchange rate regime is common knowledge among consummers, and therefore the timing of the attack on the currency, in an economy with persistent deficit, can be correctly anticipated. In these models, the collapse of the peg leads to no discrete change in the exchange rate. We relax the assumption of perfect information and introduce uncertainty about the willingness of a Central Bank to defend the peg. In this new setting, there is a unique equilibrium at which the fixed exchange is abandoned. In our model, the lack of common knowledge will lead to a discrete devaluation of the local currency once the peg finally collapses. |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:fmg:fmgdps:dp555&r=ifn |
| By: | Gongpil Choi (Korea Institute of Finance); Deok Ryong Yoon (Korea Institute for Internation Economic Policy) |
| Abstract: | Given the increasing importance of capital market development for financial stability and multilateral cooperation for sustained growth, a country's choice of exchange rate regime is hardly trivial. Instead of relying on a series of individually managed floats, it would be better for each country to target its currency against a basket of other currencies. A still much better alternative would be to form a regional block, which would tie Asian currencies together and create a regional currency while allowing them to float against major currencies. Whether the type is an individual peg to a tailored basket or a multilateral peg to a common basket remains to be determined. Under any plausible scenario, some type of regional currency needs to be developed to promote an environment suitable for financial and monetary cooperation that is, in turn, conducive to capital market development. Since conditions in the region are increasingly favourable for an OCA (Optimal Currency Area), such cooperation would be mutually beneficial as well as globally desirable. |
| Keywords: | ACU, Asian Exchange rate, |
| JEL: | F33 F36 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:682&r=ifn |
| By: | Jane E. Ihrig; Mario Marazzi; Alexander D. Rothenberg |
| Abstract: | This paper examines the current thinking on exchange-rate pass-through to both import prices and consumer prices and estimates the extent to which they have fallen in the G-7 countries since the late 1970s and 1980s. For import-price pass-through we find that all countries experience a numerical decline in the responsiveness of import prices to exchange-rate movements; for nearly half of these countries the decline between 1975-1989 and 1990-2004 is statistically significant. We estimate that while a 10 percent depreciation in the local currency would have increased import prices by nearly 7 percent on average across these countries in the late 1970s and 1980s, it would have only increased import prices by 4 percent in the last 15 years. The responsiveness of consumer prices to exchange-rate movements declines for nearly every country, with the decline being statistically significant for two countries. Specifically, while a 10 percent depreciation in the local currency would have increased consumer prices by almost 2 percent on average in the late 1970s and 1980s, it would have had a neutral effect on consumer prices in the last 15 years. |
| Keywords: | Foreign exchange rates ; Pricing ; Group of Seven countries |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:851&r=ifn |
| By: | Fernando Alvarez; Andrew Atkeson; Patrick J. Kehoe |
| Abstract: | Under mild assumptions, the data indicate that time-varying risk is the primary force driving nominal interest rate differentials on currency-denominated bonds. This finding is an immediate implication of the fact that exchange rates are roughly random walks. A general equilibrium monetary model with an endogenous source of risk variation—a variable degree of asset market segmentation—can produce key features of actual interest rates and exchange rates. In this model, the endogenous segmentation arises from a fixed cost for agents to exchange money for assets. As inflation varies, so does the benefit of asset market participation, and that changes the fraction of agents participating. These effects lead the risk premium to vary systematically with the level of inflation. This model produces variation in the risk premium even though the fundamental shocks have constant conditional variances. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:371&r=ifn |
| By: | Gavin Cameron; Prasanna Gai; Kang Yong Tan |
| Abstract: | This paper explores the determinants of sovereign bond yields during the classical gold standard period (1872-1913). Using the Pooled Mean Group methodology, we find that the main benefit of the gold standard was as a short-sighted device that enhanced a country's reputation in international capital markets. By conveying important information to investots and enhancing the speed of adjustment of sovereign bond spreads to long-run equilibrium levels, the gold standard allowed country risk to be priced more effectively. In contrast to other studies, our results suggest that fundamental factors were more important in determining a country's creditworthiness in the long-run than the exchange rate regime per se. |
| JEL: | F33 F34 F41 N10 N20 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:pas:camaaa:2006-11&r=ifn |
| By: | Mukesh Ralhan (Department of Economics, University of Victoria) |
| Abstract: | There are two basic approaches to identifying the determinants of capital flows, viz. the traditional and the portfolio (or modern) approach. Although most econometric models have by now forsaken the traditional capital flow equations in favour of modelling financial linkages via arbitrage type interest rate parity relations, the importance of fundamentals in explaining particular capital flow developments cannot be denied (International Monetary Fund, 1992). This paper identifies the determinants of capital flows using the conventional approach, and is based on a cross-sectional study of eight countries, viz. Australia, India, Indonesia, Argentina, Brazil, Chile, Columbia and Mexico. Non-linear Seemingly Unrelated Regression estimation has been used to allow for cross-country effects in the error structure. |
| Keywords: | Capital Flows, Seemingly Unrelated Regressions (SUR) Model |
| JEL: | C3 F21 |
| Date: | 2006–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:vic:vicewp:0601&r=ifn |
| By: | Christopher Bowdler (Nuffield College, Oxford University) |
| Abstract: | A number of theoretical models predict that the slope of the Phillips curve increases with trade openness, but cross-country studies provide little evidence for such a correlation. We highlight two reasons for this finding. Firstly, the strength of the relationship may depend on the extent of exchange rate adjustment, which is a potential determinant of output and inflation dynamics in open economies, but previous studies have not made a distinction between fixed and floating exchange rate regimes. Secondly, existing estimates of the Phillips curve slope are based on data from the 1950s through the 1980s, and are therefore likely affected by price and wage controls, inflationary oil price hikes and the role played by fiscal policy in driving output and inflation (the underlying theory requires that monetary shocks dominate). We calculate new measures of the Phillips curve slope using data from 1981-98, a period during which these factors were arguably less important. Regressions based on the new measures indicate that the Phillips curve slope increases with trade openness amongst countries maintaining flexible and semi-flexible exchange rate regimes, but is unrelated to openness amongst countries maintaining fixed exchange rate regimes. |
| Keywords: | Openness, inflation, Phillips curve, sacrifice ratio, exchange rate regime. |
| JEL: | E31 E32 F41 |
| Date: | 2005–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0525&r=ifn |
| By: | Sophie Saglio (University of Paris 13); Yonghyup Oh (Department of International Economics and Finance of Korea Institute for International Economic Policy); Jacques Mazier (University of Paris 13) |
| Abstract: | This paper presents a simple macroeconomic model of international interdependency describing Korea, Japan, China, and the rest of East Asia in their relations with the United States and the rest of the world. The model includes both a foreign trade block and an internal demand block analysing demand formation and the price-wage-employment adjustment process. Exchange rates are fixed, but can be manipulated exogenously. The main features of the East Asian trade structure are integrated into the model, and foreign trade price elasticises are higher for Korea and China and smaller for Japan. |
| Keywords: | Multinational model, East Asian interdependency, exchange rates, asymmetric shocks |
| JEL: | C52 F15 F17 F42 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:eab:macroe:683&r=ifn |
| By: | Manoj Atolia (Department of Economics, Florida State University) |
| Abstract: | The paper uses a currency substitution model to explain the stylized macroeconomic facts associated with productivity-enhancing reforms in countries of Africa. The model, when calibrated to Ghana and Uganda results in current account deficit and private capital inflows as well as changes in real interest rate, real exchange rate, and inflation comparable to those in data. Thus, currency substitution is important to understand macroeconomic dynamics in countries of Africa as many of them are currently undertaking such reforms. The paper also implements a new technique to solve for global nonlinear saddlepath for perfect foresight models with two state variables. The technique combines reverse shooting with the bisection method in two dimensions to systematically shoot for the trajectory in the state space that corresponds to the desired saddlepath. |
| Keywords: | Africa, Currency Substitution, Real Interest Rates, Capital Inflows, Nonlinear dynamics |
| JEL: | C63 F32 F41 O55 |
| Date: | 2003–10 |
| URL: | http://d.repec.org/n?u=RePEc:fsu:wpaper:wp2003_10_02&r=ifn |
| By: | Christopher Bowdler (Nuffield College, Oxford University); Adeel Malik (Centre for the Study of African Economies, University of Oxford) |
| Abstract: | Recent decades have seen a considerable expansion of global trade and a simultaneous decline in inflation volatility. This paper investigates whether greater openness to trade helps achieve inflation stability. Using panel data for a sample of developing and industrial countries over the period 1961-2000, we document a negative and statistically significant effect of openness on inflation volatility. This relationship is estimated after controlling for the potential endogeneity of openness, and the average rate of inflation. We conduct a battery of robustness tests, showing in particular the robustness of our conclusions to controlling for the choice of exchange rate regime. A sub-sample analysis suggests that the relationship between openness and inflation volatility is more pronounced in developing and emerging market economies than in OECD countries. We also identify potential channels underpinning this relationship. In particular, we provide evidence that openness may promote inflation stability through dampening monetary and terms of trade shocks. |
| Keywords: | Openness, inflation, globalization, volatility, panel data. |
| JEL: | E31 F41 O57 |
| Date: | 2005–03–15 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0514&r=ifn |
| By: | Toshihiro Okubo (IUHEI, The Graduate Institute of International Studies, Geneva) |
| Abstract: | Despite world-wide bloc economies after the Depression, Japan had a tight relationship with the British Commonwealth and created tight connections with the Sterling and the Gold blocs in the late 1930s. The world-wide bloc economies did not isolate Japan. |
| Keywords: | International Economics; Exchange Rates; Trade; Whatever Related |
| Date: | 2006–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heiwp05-2006&r=ifn |