nep-ifn New Economics Papers
on International Finance
Issue of 2006‒05‒27
eight papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. A Simultaneous Model of the Swedish Krona, the US Dollar and the Euro By Lindblad, Hans; Sellin, Peter
  2. Exchange Rates and External Adjustment: Does Financial Globalization Matter? By Philip Lane; Gian Maria Milesi-Ferretti
  3. The Contribution of Growth and Interest Rate Differentials to the Persistence of Real Exchange Rates By Dimitrios Malliaropulos; Ekaterini Panopoulou; Nikitas Pittis; Theologos Pantelidis
  4. The U.S. current account deficit and the expected share of world output By Charles Engel; John H. Rogers
  5. Central bank intervention and exchange rate volatility, its continuous and jump components By Michel Beine; Jérôme Lahaye; Sébastien Laurent; Christopher J. Neely; Franz C. Palm
  6. Fundamental volatility is regime specific By Ivo J.M. Arnold; Ronald MacDonald; Casper G. de Vries
  7. Explaining the Euro's Effect on Trade? Interest Rates in an Augmented Gravity Equation By Tommaso Mancini Griffoli
  8. Modeling direct investment valuation adjustments and estimating quarterly positions By Jane Ihrig; Jaime Marquez

  1. By: Lindblad, Hans (Sveriges Riksdag); Sellin, Peter (Monetary Policy Department, Central Bank of Sweden)
    Abstract: In this paper we simultaneously estimate the real exchange rates between the Swedish Krona, the US Dollar and the Euro. A prime candidate for explaining the exchange rate movements is relative potential output. Since this variable is unobservable, cyclical and potential output are estimated in an unobserved components framework together with a Phillips curve. Our empirical exchange rate results are in line with theory. Increases in relative potential output and the terms of trade strengthen the exchange rate, while a relative increase of the fraction of middle-aged people in the population and budget deficits depreciate the exchange rate. The estimates suggest that the recent deterioration of the relative budget situation for the US versus Europe is a prime candidate for explaining the USD/EUR exchange rate change lately.
    Keywords: Equilibrium real exchange rate; expectations augmented Phillips curve; unobserved-components model
    JEL: C32 E31 F31 F41
    Date: 2006–05–01
  2. By: Philip Lane; Gian Maria Milesi-Ferretti
    Abstract: This paper addresses the implications of financial globalization for exchange rate behavior. We highlight two dimensions: first, a wider dispersion in net foreign asset positions implies stronger long-term trends in real exchange rates; second, the impact of currency movements on net external wealth is an increasing function of the scale of international balance sheets.
    Keywords: Financial integration, exchange rates
    JEL: F31 F32
    Date: 2006–05–22
  3. By: Dimitrios Malliaropulos; Ekaterini Panopoulou; Nikitas Pittis; Theologos Pantelidis
    Abstract: This paper employs a new methodology for measuring the contribution of growth and interest rate differentials to the half-life of deviations from Purchasing Power Parity (PPP). Our method is based on directly comparing the impulse response function of a VAR model, where the real exchange rate is Granger caused by these variables with the impulse response function of a univatiate ARMA model for the real exchange rate. We show that the impulse response function of the VAR model is not, in general, the same with the impulse response function obtained from the equivalent ARMA representation, if the real exchange rate is Granger caused by other variables in the system. The difference between the two functions captures the effects of the Granger-causing variables on the half-life of deviations from PPP. Our empirical results for a set of four currencies suggest that real and nominal long term interest rate differentials and real GDP growth differentials account for 22% to 50% of the half-life of deviations from PPP.
    Keywords: real exchange rate; persistence measures; VAR; impulse response function; PPP.
    Date: 2006–05–23
  4. By: Charles Engel; John H. Rogers
    Abstract: We investigate the possibility that the large current account deficits of the U.S. are the outcome of optimizing behavior. We develop a simple long-run world equilibrium model in which the current account is determined by the expected discounted present value of its future share of world GDP relative to its current share of world GDP. The model suggests that under some reasonable assumptions about future U.S. GDP growth relative to the rest of the advanced countries -- more modest than the growth over the past 20 years -- the current account deficit is near optimal levels. We then explore the implications for the real exchange rate. Under some plausible assumptions, the model implies little change in the real exchange rate over the adjustment path, though the conclusion is sensitive to assumptions about tastes and technology. Then we turn to empirical evidence. A test of current account sustainability suggests that the U.S. is not keeping on a long-run sustainable path. A direct test of our model finds that the dynamics of the U.S. current account -- the increasing deficits over the past decade -- are difficult to explain under a particular statistical model (Markov-switching) of expectations of future U.S. growth. But, if we use survey data on forecasted GDP growth in the G7, our very simple model appears to explain the evolution of the U.S. current account remarkably well. We conclude that expectations of robust performance of the U.S. economy relative to the rest of the advanced countries is a contender -- though not the only legitimate contender -- for explaining the U.S. current account deficit.
    Keywords: Budget deficits ; Equilibrium (Economics) ; Econometric models
    Date: 2006
  5. By: Michel Beine; Jérôme Lahaye; Sébastien Laurent; Christopher J. Neely; Franz C. Palm
    Abstract: We analyze the relationship between interventions and volatility at daily and intra-daily frequencies for the two major exchange rate markets. Using recent econometric methods to estimate realized volatility, we decompose exchange rate volatility into two major components: a continuously varying component and jumps. Some coordinated interventions affect the temporary (jump) part of the volatility process. Most coordinated operations are associated with an increase in the persistent (continuous) part of exchange rate volatility.
    Date: 2006
  6. By: Ivo J.M. Arnold; Ronald MacDonald; Casper G. de Vries (Nyenrode Business Universiteit)
    Abstract: A widely held notion holds that freely floating exchange rates are excessively volatile when judged against fundamentals and when moving from fixed to floating exchange rates. We re-examine the data and conclude that the disparity between the fundamentals and exchange rate volatility is more apparent than real, especially when the Deutsche Mark, rather than the dollar is chosen as the numeraire currency. We also argue, and indeed demonstrate, that in cross-regime comparisons one has to account for certain ‘missing variables’ which compensate for the fundamental variables’ volatility under fixed rates.
    Keywords: Exchange rates; Exchange rate regimes; Excess volatility.
    Date: 2006
  7. By: Tommaso Mancini Griffoli (IUHEI, The Graduate Institute of International Studies, Geneva)
    Abstract: If the Euro has boosted intra Euro-Area trade, what exactly in the new currency is responsible for such an effect? Most explanations focus on a decrease in exchange rate volatility or in transaction costs, receiving mixed empirical support. After briefly surveying the relevant literature, this paper points to a novel channel of transmission: the sharp decrease in real interest rates that accompanied the Euro. The argument is that lower interest rates spurred investment spending and manufacturing value added, as in Flam and Helpman (1987), and induced a greater number for firms to enter the export market, ultimately boosting trade. This phenomenon is captured in a simple model with fixed costs, where the number of firms or varieties supported in a market is endogenous. The model is used to augment the traditional trade gravity equation. In the end, empirical results are presented in support of the interest rate's role at explaining the "Rose effect".
    Keywords: Gravity equation, International Trade, Common Currency, Instability tests in Panel data, Euro Area.
    JEL: F1 F4 C23 C52
    Date: 2006–05
  8. By: Jane Ihrig; Jaime Marquez
    Abstract: This paper takes an in-depth look at U.S. direct investment valuation adjustments. We develop a methodology to generate valuation adjustments at the quarterly frequency, which can be combined with the Bureau of Economic Analysis's quarterly direct investment flows to obtain quarterly estimates of direct investment assets and liabilities. Our methodology involves two steps. First, we estimate valuation adjustment models with annual data. Our models rely on variables that reflect terms used by the Bureau of Economic Analysis in their data construction: exchange-rate changes, changes in the price of products, and changes in stock-market prices. Second, we apply quarterly data to the estimated models to generate quarter valuations and implement a procedure that ensures that the estimated valuations for the four quarters in a given year sum to the reported annual valuation adjustments. With this framework we consider how asset price shocks affect the net direct investment position and, hence, net international investment position.
    Keywords: Investments, Foreign ; Investments
    Date: 2006

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