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on International Finance |
| By: | M. Hashem Pesaran; Ron P. Smith; Takashi Yamagata; Liudmyla Hvozdyk |
| Abstract: | In this paper we adopt a new approach to testing for purchasing power parity, PPP, that is robust to base country effects, cross-section dependence, and aggregation. Given data on N +1 countries, i, j = 0, 1, 2, ..., N, the standard procedure is to apply unit root or stationarity tests to N relative prices against a base country, 0, e.g. the US. The evidence is that such tests are sensitive to the choice of base country. In addition, the analysis is subject to a high degree of cross section dependence which is difficult to deal with particularly when N is large. In this paper we test for PPP applying a pairwise approach to the disaggregated data set recently analysed by Imbs, Mumtaz, Ravan and Rey (2005, QJE). We consider a variety of tests applied to all possible N(N +1)/2 pairs of real exchange rate pairs between the N + 1 countries and estimate the proportion of the pairs that are stationary, for the aggregates and each of the 19 commodity groups. This approach is invariant to base country effects and the proportion that are non-stationary can be consistently estimated even if there is cross-sectional dependence. To deal with small sample problems and residual cross section dependence, we use a factor augmented sieve bootstrap approach and present bootstrap pairwise estimates of the proportions that are stationary. The bootstrapped rejection frequencies at 26%-49% based on unit root tests suggest some evidence in favour of the PPP in the case of the disaggregate data as compared to 6%-14% based on aggregate price series. |
| Keywords: | purchasing power parity, panel data, pairwise approach, cross section dependence |
| JEL: | C23 F31 F41 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1704&r=ifn |
| By: | Frait, Jan (Czech National Bank, Prague); Komarek, Lubos (Czech National Bank, Prague); Meleck, Martin (University of New South Wales, Sydney) |
| Abstract: | The paper focuses on the developments of real exchange rates and their fundamental determinants in the five new EU Member States (Czech Republic, Hungary, Poland, Slovakia, and Slovenia). First, the approaches that can be used for estimation of equilibrium real exchange rates are briefly discussed. Then, we use well-established determinants of real exchange rates associated with the behavioral equilibrium exchange rate (BEER) approach to assess misalignments of the real exchange rates for the five new EU Member States. The estimates of the equilibrium exchange rates are obtained by means of both purely statistical approaches (HP filter, band-pass filter) and applying several multivariate estimation methods to our reduced-form BEER model. The results obtained indicate that the tendency towards appreciation of real exchange rates in the economies under consideration have been driven primarily by fundamental determinants. |
| Keywords: | Exchange rate misalignments ; equilibrium exchange rates ; ERM II ; Central European Countries |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:739&r=ifn |
| By: | Balázs Égert; Amalia Morales-Zumaquero; |
| Abstract: | This paper attempts to analyze the direct impact of exchange rate volatility on the export performance of ten Central and Eastern European transition economies as well as its indirect impact via changes in exchange rate regimes. Not only aggregate but also bilateral and sectoral export ows are studied. To this end, we rst analyze shifts in exchange rate volatility linked to changes in the exchange rate regimes and second, use these changes to construct dummy variables we include in our export function. The results suggest that the size and the direction of the impact of forex volatility and of regime changes on exports vary considerably across sectors and countries and that they may be related to specic periods. |
| Keywords: | exchange rate volatility, export, trade, transition, structural breaks |
| JEL: | F31 |
| Date: | 2005–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-782&r=ifn |
| By: | Jose Luiz Rossi Junior |
| Abstract: | Abstract Recent financial crises showed that emerging countries are extremely vulnerable to sudden swings in international capital flows. In these countries, commonly, periods of relative tranquility, characterized by substantial capital inflows and real GDP growth, are followed by periods when capital flows abroad, and output plummets . In some countries, such crises led not only to economic downturns but also to social unrest. Although there is a consensus among economists that emerging markets should take measures to reduce their external vulnerability, there is no agreement about the role of the choice of the exchange rate regime in this matter. At the center of this debate is the fact that due to the widespread problem of the dollarization of liabilities, depreciations of the home currency in emerging markets would cause a collapse in companies’ balance sheets, leading to a fall in output . Therefore, one mechanism through which the choice of the exchange rate regime could affect countries’ vulnerability would be to exert influence on corporate financial policies. One hypothesis in the international finance literature is that fixed exchange rate regimes would increase countries’ vulnerability by leading companies to disregard the exchange rate risk, biasing their borrowing towards foreign currency denominated debt , and/or reducing their hedging activities. According to this hypothesis, floating regimes would help to reduce countries’ vulnerability by inducing creditors and debtors to take seriously their exchange rate exposure. On the other hand, the so-called ‘original sin’ theory argues that, independently of the exchange rate regime, emerging countries will always be vulnerable to external shocks. There will always be a currency mismatch on companies’ balance sheets, since domestic companies would never be allowed to borrow in the domestic currency, and most of their revenues come from domestic activities. Since the theoretical literature has not reached a consensus, at the end of the day, the answer for this question should be empirical, as pointed out by Eichengreen and Hausmann (1999), ''...gathering survey (and other) data on hedged and unhedged exposures and analyzing their determinants should be a high priority for academics'' . This paper tries to shed light on this question by analyzing the behavior of foreign currency exposure for a sample of non-financial Brazilian companies from 1996 to 2002. This includes a period under a fixed exchange rate regime (1996-1998), and a period under a floating regime (1999-2002). I analyze whether companies’ exposure varies with the choice of the exchange rate regime. Moreover, I discriminate among the several determinants of companies’ exchange rate exposure, and finally I study the relationship among corporate financial policies, the choice of the exchange rate regime, and the exchange rate exposure. Brazil provides a perfect natural experiment for analyzing the relationship between foreign currency exposure and the choice of exchange rate regime in emerging markets. Brazil is one of the largest emerging markets economies, and had a fixed exchange rate regime from 1995 to January 1999. After that the currency was allowed to float freely, currency derivatives were available in both periods and companies kept substantial levels of foreign currency denominated debt. Finally, I know of no studies combining analysis of the exposure of companies, the determinants of that exposure and the role of the exchange rate regime in an emerging market economy in which fluctuations in the exchange rate and risk management policies are of major importance to the real economy. The main results can be summarized as follows. Fluctuations in the exchange rate are indeed problematic for emerging markets like Brazil; about 40% of Brazilian companies are exposed to changes in the exchange rate, and, unlike those in the US, Brazilian companies do not on average benefit from devaluations of the home currency. A 1% change in the exchange rate leads to a 0.22% fall in the average company’s stock market returns. This paper also shows that the floating exchange rate regime has been able to reduce such exposure. Under the fixed exchange rate regime about 60% of the companies are exposed to fluctuations on the real exchange rate; this proportion drops to 23% under the floating exchange rate regime. The results confirm that the high proportion of foreign currency denominated debt to total debt is the main source of risk for Brazilian companies, and that foreign sales and hedging activities are able to mitigate the negative exposure that comes from the impact of the fluctuations of the exchange rate on companies’ foreign liabilities. This paper also associates the reduction in the number of companies exposed to changes in the exchange rate with an improvement in companies’ risk management activities associated with the change of the exchange rate regime. Under the floating regime, not only do more companies hedge their exchange rate exposure, but these firms also hedge a larger proportion of their foreign currency denominated debt. Following the optimal hedging literature, I find that companies’ hedging activities are linked to the attempt to reduce their foreign currency exposure. Companies with higher ratio of foreign debt to total debt are more likely to use currency derivatives. Moreover, using a model developed by Holmstrom and Tirole (1997), and extended by Martinez and Werner (2003), I find that the fixed exchange rate regime induced companies to incur mismatches in their balance sheets, whereas the floating regime has been able to reduce such mismatches by leading companies to take seriously their exposure to fluctuations in the exchange rate. |
| Keywords: | Exchange rate regime, hedging, exposure, debt composition |
| JEL: | F31 F41 G15 |
| Date: | 2004–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecm:latm04:163&r=ifn |
| By: | Joachim Coche (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matti Koivu (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ken Nyholm (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Vesa Poikonen (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper studies the implications of introducing an explicit policy objective to the management of foreign reserves at a central bank. A dynamic model is developed which links together reserves management and the exchange rate by foreign exchange interventions. The exchange rate is modelled as a mean-reverting autoregressive process incorporating a linear response to interventions. The premise is that it is the objective of the central bank to prevent undervaluation of its currency. Given this objective, the model is formulated in a one- and a multi-period setting and solved to find the optimal asset allocation. The results show that asset allocation can significantly help in achieving the desired policy objective. |
| Keywords: | Foreign reserves management, foreign exchange intervention, exchange rate modelling, optimal asset allocation. |
| JEL: | G11 F31 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060624&r=ifn |
| By: | Paolo Vitale (Department of Economics and Land History, Gabriele D‘Annunzio University, Viale Pindaro 42, 65127 Pescara (Italy).) |
| 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 influences 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 i) that in extreme circumstances large scale foreign exchange intervention can have destabilizing effects for the functioning of FX markets and ii) that the route chosen for the implementation of official intervention has important implications for its impact on exchange rates and on market conditions. |
| Keywords: | Official Intervention, Order Flow, Foreign Exchange Micro Structure, Exchange Rate Dynamics. |
| JEL: | D82 G14 G15 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060629&r=ifn |
| By: | Amina Lahrèche-Révil (University of Picardie); Juliette Milgram (Department of Economic Theory and Economic History, University of Granada.) |
| Abstract: | Compared to the new European members (NEM) and to the new candidate countries, the Middle-East and North African (MENA) countries are a very heterogeneous and fragmented EU frontier. As far as monetary issues are concerned, exchange rate regimes are very different and bilateral exchange rates quite volatile. Moreover, weak trade integration and generalized capital controls constitute major obstacles to economic and financial integration. Existing works yet suggest that anchoring to the euro would undoubtedly be the best exchange-rate strategy for most MENA countries. Monetary integration and trade integration are interdependent. This is especially the case when trade flows are sensitive to the volatility of exchange rates or to movements in relative prices. The objective of this paper is to evaluate the potential of monetary integration in the South Mediterranean area, in a context of trade liberalization and of a strong orientation of trade flows towards the EU. The empirical part of the paper would rely on a gravity equation of trade which would include exchange rates volatility and relative prices, in order to gauge the impact of de facto exchange-rate and monetary conditions on trade integration. The sample of countries is large (OECD, NEM, MENA and Asian countries) in order both to have robust estimates and to investigate whether the MENA countries exhibit a specific sensitivity of trade flows to exchange-rate volatility and exchange-rate misalignments. The impact of the competitiveness of third countries will also be investigated. This latter issue is especially important, though seldom assessed, when it comes to the potential trade-diverting effect of the latest EU enlargement on MENA trade wit the EU. The gravity setting also allows simulating the consequences for the trade of MENA countries of a deeper monetary integration, by comparing the impact on trade of a regional monetary integration and of a euro peg. |
| Keywords: | Exchange rate regime, trade, regional integration, Euro, MENA |
| JEL: | F15 F31 F33 |
| Date: | 2006–05–31 |
| URL: | http://d.repec.org/n?u=RePEc:gra:wpaper:06/07&r=ifn |
| By: | Kisu Simwaka (Reserve Bank of Malawi, P.O. Box 30063, Lilongwe, Malawi) |
| Abstract: | This study investigates the main determinants of real effective exchange rate in Malawi and South Africa. In our empirical analysis, we conducted unit root and cointegration test in order to determine the time series properties of the data and establish whether there is a long run relationship between real effective exchange rate and explanatory variables. Having ascertained that almost all variiables are integrated of order one and cointegrated, an error correction model is formulated and estimated for the two real effective exchange rate equations using the Ordinary Least Squre (OLS) method. The empirical results for both Malawi and South Africa are highly supportive of the real exchange rate model. In particular, we find a negative and significant relationship between real effective exchange rate and the degree of openness for both countries. On the other hand, while there is an inverse relationship between real effetcive exchange rate and governmernt consumption in the case of Malawi, a positive ralationship between real effective exchange rate and government consumption obtains in the case of South Africa. Additionally, whereas there is a positive relationship between real effetcive exchange rate and international capital flows in the case of Malawi, a negative realtionship obtains in the case of South Africa.. However, results from both countries indicate a positive relationship between real exchange rate one hand and excess domestic credit and lagged real effective exchange rate on the other hand. They also indicate a negative relationship between real effective exchange rate and nominal devaluation in both countries. The study yields some policy implications. First, it has been learnt that excessive domestic credit causes the real exchange rate to appreciate for both countries. This therefore calls for prudent fiscal and monetary policy measures. Such measures include mopping out excess liquidity from the market to stem the growth of money supply. For both countries, the most powerful policy is just an intermediate policy and can only be successful if there is fiscal discipline. With fiscal discipline there can be no excess liquidity. Second, the study has found that policies aimed at eliminating trade restrictions depreciate the REER. One policy implication that can be drawn from this finding is that the government should continue implementing trade liberalisation policies that it had already started in 1988. Furthermore, developments in the external sector of the economy (changes in terms of trade, degree of openness anf international capital flows) which are not under the control of domestic authorities seemingly contribute more to changes in real effective exchange rate. The policy implications are that the government ability in influencing the behaviour of real effective exchange rate is limited. This is because the ability of a small open economy like that of Malawi to insulate itself from external shock is limited, at best. In the long- run however, appropriate structural changes and conducive competitive policy could be designed and implemented. These may include export diversification (to counter deteorating terms of trade in specific commodities) and implementing measures to limit market imperfection. Based on the available evidence, it can be concluded that macroeconomic fundamentals play a vital role in explaining changes in real effective exchange rate in both Malawi and South Africa. Keywords: real effective exchange rate, cointegration; error correction model |
| Keywords: | real effective exchange rate, cointegration; error correction model |
| JEL: | F3 F4 |
| Date: | 2004–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpif:0407009&r=ifn |
| By: | Kisukyabo Simwaka (Reserve Bank of Malawi, P.O. Box 30063, Lilongwe, Malawi) |
| Abstract: | This study investigates the main determinants of real effective exchange rate in Malawi and South Africa. In our empirical analysis, we conducted unit root and cointegration test in order to determine the time series properties of the data and establish whether there is a long run relationship between real effective exchange rate and explanatory variables. Having ascertained that almost all variables are integrated of order one and cointegrated, an error correction model is formulated and estimated for the two real effective exchange rate equations using the Ordinary Least Square (OLS) method. The empirical results for both Malawi and South Africa are highly supportive of the real exchange rate model. In particular, we find a negative and significant relationship between real effective exchange rate and the degree of openness for both countries. On the other hand, while there is an inverse relationship between real effective exchange rate and governmernt consumption in the case of Malawi, a positive ralationship between real effective exchange rate and government consumption obtains in the case of South Africa. Additionally, whereas there is a positive relationship between real effective exchange rate and international capital flows in the case of Malawi, a negative relationship obtains in the case of South Africa.. However, results from both countries indicate a positive relationship between real exchange rate one hand and excess domestic credit and lagged real effective exchange rate on the other hand. They also indicate a negative relationship between real effective exchange rate and nominal devaluation in both countries. The study yields some policy implications. First, it has been learnt that excessive domestic credit causes the real exchange rate to appreciate for both countries. This therefore calls for prudent fiscal and monetary policy measures. Such measures include mopping out excess liquidity from the market to stem the growth of money supply. For both countries, the most powerful policy is just an intermediate policy and can only be successful if there is fiscal discipline. With fiscal discipline there can be no excess liquidity. Second, the study has found that policies aimed at eliminating trade restrictions depreciate the REER. One policy implication that can be drawn from this finding is that the government should continue implementing trade liberalisation policies that it had already started in 1988. Furthermore, developments in the external sector of the economy (changes in terms of trade, degree of openness anf international capital flows) which are not under the control of domestic authorities seemingly contribute more to changes in real effective exchange rate. The policy implications are that the government ability in influencing the behaviour of real effective exchange rate is limited. This is because the ability of a small open economy like that of Malawi to insulate itself from external shock is limited, at best. In the long- run however, appropriate structural changes and conducive competitive policy could be designed and implemented. These may include export diversification (to counter deteriorating terms of trade in specific commodities) and implementing measures to limit market imperfection. Based on the available evidence, it can be concluded that macroeconomic fundamentals play a vital role in explaining changes in real effective exchange rate in both Malawi and South Africa. Key words: real effective exchange rate, stationarity, cointegration |
| Keywords: | real effective exchange rate, stationarity, cointegration |
| JEL: | F1 F2 |
| Date: | 2004–07–19 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpit:0407006&r=ifn |
| By: | Paul De Grauwe; Agnieszka Markiewicz |
| Abstract: | In this paper, we investigate the behavior of the exchange rate within the framework of an asset pricing model. We assume boundedly rational agents who use simple rules to forecast the future exchange rate. They test these rules continuously using two learning mechanisms. The first one, the fitness method, assumes that agents evaluate forecasts by computing their past profitability. In the second mechanism, agents learn to improve these rules using statistical methods. First, we find that both learning mechanisms reveal the fundamental value of the exchange rate in the steady state. Second, both mechanisms mimic regularities observed in the foreign exchange markets, namely exchange rate disconnect and excess volatility. Fitness learning rule generates the disconnection at different frequencies, while the statistical method has this ability only at the high frequencies. Statistical learning can produce excess volatility of magnitude closer to reality than fitness learning but can also lead to explosive solutions. |
| JEL: | C32 F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1717&r=ifn |
| By: | Christian Dreger (German Institute for Economic Research (DIW) Berlin, 14191 Berlin, Germany.); Hans-Eggert Reimers (Hochschule Wismar, University of Technology, Business and Design, PF 1210, 23952 Wismar, Germany.); Barbara Roffia (Directorate General Economics, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Generally speaking, money demand models represent a natural benchmark against which monetary developments can be assessed. In particular, the existence of a well-specified and stable relationship between money and prices can be perceived as a prerequisite for the use of monetary aggregates in the conduct of monetary policy. In this study a money demand analysis in the new Member States of the European Union (EU) is conducted using panel cointegration methods. A well-behaved long-run money demand relationship can be identified only if the exchange rate as part of the opportunity cost is included. In the long-run cointegrating vector the income elasticity exceeds unity. Moreover, over the whole sample period the exchange rates vis-à-vis the US dollar turn out to be significant and a more appropriate variable in the money demand than the euro exchange rate. The present analysis is of importance for the new EU Member States as they are expected to join in the future years the euro area, where money is deemed to be highly relevant - within the two-pillar monetary strategy of the European Central Bank (ECB) - in order to detect risks to price stability over the medium term. |
| Keywords: | Money demand, new EU Member States, exchange rate, panel cointegration. |
| JEL: | C23 E41 E52 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060628&r=ifn |
| By: | Dominick Stephens (Reserve Bank of New Zealand) |
| Abstract: | Previous research has suggested that including exchange rate stabilisation within the goals of monetary policy significantly increases the volatility of inflation, output and interest rates, and that the benefits of exchange rate stabilisation therefore do not justify the costs. The current paper tests whether this finding is robust when various alternative models of exchange rate determination are considered. The analysis is carried out in the context of optimal full-information monetary policy rules in a New Keynesian model that is calibrated to represent the New Zealand economy. For the models that feature rational expectations, we support the conclusion that seeking to avoid exchange rate volatility would have more costs than benefits. Indeed, a major cost of including the exchange rate within the goals of monetary policy is that inflation expectations become less anchored to the inflation target, meaning that larger movements in nominal interest rates are required to control inflation. |
| JEL: | E52 E58 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2006/05&r=ifn |
| By: | Ian Babetskii; Balázs Égert; |
| Abstract: | This paper investigates the equilibrium exchange rate of the Czech koruna using the reduced form equation of the stock-ow approach advocated, for instance, by Faruqee (1995) and Alberola and others (1999). We investigate whether or not the observed real exchange rate of the Czech koruna is close to its equilibrium value over the period from 1993 to 2004. Our empirical approach is tantamount to the Behavioural Equilibrium Exchange Rate (BEER) popularised by MacDonald (1997) and Clark and MacDonald (1998) in that the Czech real exchange rate vis-à-vis the euro is regressed on the dual productivity differential and the net foreign assets position, based on which actual and total misalignment gures are derived in a time series context. In other words, we check the quality of the Czech BEER. We also study the impact of a possible initial undervaluation on the estimated equilibrium exchange rate. Employing monthly time series from 1993:M1 to 2004:M9 and applying several alternative cointegration techniques, we identify a period of an overvaluation in 1997 and in 1999, an increasing overvaluation till 2002, an undervaluation in 2003 and a correction towards equilibrium in the second half of 2004 |
| Keywords: | Equilibrium exchange rate; real exchange rate; behavioral equilibrium exchange rate; Czech koruna, transition economies; stock-ow approach; productivity. |
| JEL: | F31 |
| Date: | 2005–07–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-781&r=ifn |
| By: | James Twaddle; David Hargreaves; Tim Hampton (Reserve Bank of New Zealand) |
| Abstract: | We use the Reserve Bank of New Zealand's macroeconomic model (FPS) to look at the feasibility of using monetary policy to reduce variability in output, the exchange rate and interest rates while maintaining an inflation target. Our experiment suggests that policy could be altered to increase the stability of interest rates, the exchange rate, inflation, or output, relative to the base case reaction function in FPS, but such a policy would incur some cost in terms of the variability of the other variables. In particular, we find that greater exchange rate stability would have relatively large costs in terms of the stability of all three other variables, primarily because monetary policy that leans too dramatically against exchange rate disturbances can create significant real economy variability. Relative to West (2003), we find larger costs of operating monetary policy to achieve exchange rate stabilisation. We attribute this finding to the relatively inertial inflation expectation process in FPS. |
| JEL: | E52 E58 F47 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:nzb:nzbdps:2006/04&r=ifn |
| By: | Mende, Alexander; Menkhoff, Lukas |
| Abstract: | This study examines profits and speculation in the USD/EUR trading of a bank in Germany over a four-month period. Dealing activity at the bank generates profits but speculation does not seem to contribute to this. We find that speculative positions fail to become profitable within a 30-minutes' horizon. Also, the suggestion that exchange rate volatility would foster speculative profits cannot be confirmed. To explain daily revenues, neither the bank's speculative trading volume nor its inventory position, but only customer trading emerges as a significant determinant. Furthermore, a spread analysis reveals that there is hardly any room for revenues from speculation. |
| Keywords: | foreign exchange markets, speculation, profits, market microstructure, flow analysis |
| JEL: | G15 F31 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:han:dpaper:dp-339&r=ifn |
| By: | Xiaozhong Zhai |
| Abstract: | Putting the theory of price system on the relationship among price, wage, labor time, interest rate and GNP (or GDP), four main variables in economics, Four-Rate Formula and Exchange Rate Formula are created (Xiaozhong Zhai 2003). Two formulas applying to analyses of economy and calculation can show some valuable data to macroeconomics, economist and policymaker. They can produce a proof to demonstrate that single currency, for example, single European currency with different value and interest rate in different conditions and regions, can not certainly benefit price stability, sound public finances, low interest rates, incentives for growth, investment and employment. Two formulas are very simple, practical and easy to deal with the complex phenomenon in economy. Exchange Rate Formula has an immediate signification in the international trade economy. |
| Keywords: | wage, price, GNP, interest rate, Four-Rate Formula and Exchange Rate Formula |
| JEL: | E |
| Date: | 2004–10–23 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpma:0410007&r=ifn |
| By: | M. Martin Boyer; Simon van Norden |
| Abstract: | Several recent papers have underlined the importance of the microstructure effects in understanding exchange rate behavior by documenting stable long-run relationships between cumulated order flows and spot exchange rates. This stands in contrast to the widely-studied failure of exchange rates to conform to the long-run behavior implied by “conventional” macroeconomic models and is consistent with the prediction of micro-structure models. We reexamine the evidence for stable long-run relationships. We find that such evidence exists only for a small number of the major currencies we examine and that is it statistically fragile. We conclude that this implication of microstructure models does not fit the data as well as previous studies suggest. <P>Plusieurs études récentes ont souligné l’importance de la microstructure des marchés pour la compréhension des comportements des taux de change en documentant les relations stables à long terme entre les flux des commandes cumulées et les taux de change courants. Les résultats contrastent avec ceux de nombreuses études sur l’échec des taux de change de se conformer au comportement à long terme que supposent les modèles macroéconomiques « conventionnels » et sont conformes à la prédiction des modèles microstructurels. Nous réexaminons l’évidence de relations stables à long terme et constatons que celle-ci n’existe que dans un petit nombre des taux de change étudiés et qu’elle est fragile du point de vue statistique. Nous concluons que l’implication des modèles microstructurels ne correspond pas aux données aussi bien que des études précédentes laissent supposer. |
| Keywords: | cointegration, foreign exchange rates, order flow, microstructure, cointégration, flux de commandes, microstructure, taux de change |
| JEL: | F31 G15 |
| Date: | 2006–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:cir:cirwor:2006s-07&r=ifn |
| By: | Byeongseon Seo |
| Abstract: | The smooth transition autoregressive (STAR) model was proposed by Chan and Tong (1986) as a generalization of the threshold autoregressive (TAR) model, and since then it has attracted wide attention in the recent literature on the business cycles and the equilibrium parity relationships of commodity prices, exchange rates, and equity prices. Economic behavior is affected by asymmetric transaction costs and institutional rigidities, and thus a large number of studies - for example, Neftci (1984), Terasvirta and Anderson (1992), and Michael, Nobay, and Peel (1997) - have shown that many economic variables and relations display asymmetry and nonlinear adjustment. One of the most crucial issues in models of this kind is testing for the presence of nonlinear adjustment with the null of linearity. Luukkonen, Saikkonen, and Terasvirta (1988) expanded the transition function and proposed the variable addition tests as the tests of linearity against smooth transition nonlinearity, and the tests have been used in many empirical studies. However, the test statistics are based on the polynomial approximation, and the approximation errors may affect statistical inference depending on the parameter values of transition rate and location. Furthermore, the tests are not directly related to the smooth transition model, and thus we cannot retrace what causes the rejection of linearity. This paper considers the direct tests for nonlinear adjustment, which are based on the exact specification of smooth transition. The smooth transition model entails transition parameters, which cannot be identified under the null hypothesis. However, the optimality issue in the smooth transition model has not been treated extensively. The optimality issue regarding unidentified parameters has been developed by Davies (1987), Andrews (1993), and Hansen (1996). Hansen (1996) particularly considered the optimality issue in threshold models. The threshold parameter cannot be identified under the null hypothesis, and as a result the likelihood ratio statistic has the nonstandard distribution. The smooth transition model generalizes the threshold model, and thus this paper develops the appropriate tests and the associated distribution theory based on the optimality argument. Many empirical studies have found evidence on the presence of stochastic nonlinear dependence in equilibrium relations such as purchasing power parity. For example, Michael, Nobay, and Peel (1997), considering the equilibrium model of real exchange rate in the presence of transaction costs, found strong evidence of nonlinear adjustment, which conforms to the exponential smooth transition model. There exists a huge literature, and it is growing in this area. However, the econometric methods and the formal theory have been limited. This paper proposes the tests for nonlinear adjustment in the smooth transition vector error correction models, and thereby fills the deficiency in the literature. One technical difficulty is to estimate the smooth transition model. As noted by Haggan and Ozaki (1981) and Terasvirta (1994), it is difficult to estimate the smooth transition parameters jointly with the other slope parameters. The gradient of the transition parameter forces its estimate to blow up to infinity; thus, we cannot depend on the standard estimation algorithm. Our tests are based on the Lagrange multiplier statistic, which can be calculated under the null hypothesis. Therefore, our tests are easy to implement and thus useful. This paper finds that our tests have the asymptotic distribution, which is based on the Gaussian process. However, the asymptotic distribution depends on the nuisance parameters and the covariances are data-dependent; thus, the tabulation of asymptotic distribution is not feasible. This paper suggests the bootstrap inference to approximate the sampling distribution of the test statistics. Simulation evidence shows that the bootstrap inference generates moderate size and power performances |
| Keywords: | Nonlinearity; Smooth Transition; VECM |
| JEL: | C32 |
| Date: | 2004–08–11 |
| URL: | http://d.repec.org/n?u=RePEc:ecm:feam04:749&r=ifn |
| By: | Nicholai Benalal (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Juan Luis Diaz del Hoyo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Beatrice Pierluigi (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Nikiforos Vidalis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany) |
| Abstract: | The aim of this study is to investigate the extent to which the dispersion of real GDP growth rates has changed over the past few years and whether the synchronisation of business cycles has increased among the euro area countries. The study is divided into two main parts. The f irst focuses on the dispersion of real GDP growth rates across the euro area countries, while the second studies the synchronisation of business cycles within the euro area. The study shows first that dispersion of real GDP growth rates across the euro area countries in both unweighted and weighted terms has no apparent upward or downward trend during the period 1970-2004 as a whole. Second, since the beginning of the 1990s, the dispersion of real GDP growth rates across the euro area countries has largely reflected lasting trend growth differences, and less so cyclical differences, with some countries persistently exhibiting output growth either above or below the euro area average. Among other things, this might be due to different trends in demographics, as well as to differences in structural reforms undertaken in the past. Thirdly, the degree of synchronisation of business cycles across the euro area countries seems to have increased since the beginning of the 1990s. This f inding holds for various measures of synchronisation applied to overall activity and to the cyclical component, for annual and quarterly data, as well as for various country groupings. In particular, the degree of correlation currently appears to be at a historical high. In addition to these main findings, certain other stylised facts on dispersion and synchronisation are presented. JEL Classification: C10; E32; O40. |
| Keywords: | Dispersion of GDP growth across the euro area countries; trend and cycle; synchronisation of business cycles within the euro area. |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20060045&r=ifn |
| By: | Anne-Marie Brook |
| Abstract: | The Maastricht criteria for accession to the euro area can be difficult for any economy to achieve, not least because of the challenges posed by the “impossible trinity”, which suggests that it is not possible to target both a stable exchange rate and stable inflation at the same time as maintaining free capital mobility. But for poorer economies which are catching up to the living standards of the wealthier EMU members, the challenges are magnified. This is because economies with very high productivity growth may have larger Balassa-Samuelson effects, resulting in higher steady state inflation rates as well as gradually appreciating equilibrium real exchange rates. While some nominal appreciation is permitted during ERM-II membership, the rules do not make it easy to signal the magnitude of expected appreciation. This may lead to poorly anchored exchange rates, making the catching-up economies more vulnerable to the challenges of the impossible trinity. Moreover, countries that have recently introduced fully-funded pension pillars which involve high transition costs, may find it difficult to meet the Maastricht criteria for government finances. It is unclear whether recent changes to the Stability and Growth Pact will alleviate the short-term fiscal pressure on countries that have improved the long-term sustainability of their government finances at the cost of short-term deterioration to their fiscal deficits. The example of Slovakia is used to illustrate these points, and a number of policy guidelines are proposed to minimise the risks. This Working Paper relates to the 2005 OECD Economic Survey of the Slovak Republic (www.oecd.org/eco/surveys/slovakia). <P>Problèmes posés aux pays en phase de rattrapage par l'adhésion à l'UME Toute économie peut éprouver des difficultés à répondre aux critères de Maastricht pour adhérer à la zone euro, surtout en raison des problèmes posés par l’«impossible trinité», selon laquelle il n’est pas possible de poursuivre à la fois les objectifs de stabilité du taux de change et de l’inflation tout en maintenant la liberté des mouvements de capitaux. Cependant, pour les économies plus défavorisées qui sont en train de rattraper le niveau de vie des membres les plus riches de l’UME, les difficultés sont encore amplifiées. Cela s’explique par le fait que les économies dont la croissance de la productivité est très rapide peuvent enregistrer des effets Balassa-Samuelson plus marqués, se traduisant par des taux d’inflation constamment plus élevés ainsi que par une appréciation progressive des taux de change réels d’équilibre. Si une certaine appréciation nominale est autorisée durant la phase de participation au MCE-II, les réglementations applicables ne permettent pas aisément d’indiquer l’ampleur de l’appréciation attendue. Cela peut se traduire par une instabilité des taux de change et rendre les économies en phase de rattrapage plus vulnérables aux défis de l’impossible trinité. De plus, les pays qui ont instauré récemment des piliers de système de retraite par capitalisation entraînant des coûts de transition élevés pourraient éprouver des difficultés à respecter les critères de Maastricht en matière de finances publiques. On ne sait pas encore si les modifications récentes du Pacte de stabilité et de croissance allègeront la pression fiscale à court terme sur les pays qui ont amélioré la viabilité à long terme de leurs finances publiques au prix d’une détérioration à court terme de leurs déficits budgétaires. L’exemple de la Slovaquie est utilisé pour illustrer ces points et un certain nombre d’orientations de politique économique sont proposées pour minimiser les risques. Ce Document de travail se rapporte à l'Étude économique de l'OCDE de la République slovaque, 2005 (www.oecd.org/eco/etudes/slovaquie). |
| Keywords: | stability and growth pact, pacte de stabilité et de croissance, impossible trinity, Balassa-Samuelson effect, EMU accession, Maastricht criteria, impossible trinité, effet Balassa-Samuelson, adhésion à l'UME, critère de Maastricht |
| JEL: | F31 F33 O52 |
| Date: | 2005–09–21 |
| URL: | http://d.repec.org/n?u=RePEc:oec:ecoaaa:444-en&r=ifn |
| By: | Michael Ehrmann; Marcel Fratzscher |
| Abstract: | The paper shows that US monetary policy has been an important determinant of global equity markets. Analysing 50 equity markets worldwide, we find that returns fall on average around 3.8% in response to a 100 basis point tightening of US monetary policy, ranging from a zero response in some to a reaction of 10% or more in other countries, as well as significant cross-sector heterogeneity. Distinguishing different transmission channels, we find that in particular the transmission via US and foreign short-term interest rates and the exchange rate play an important role. As to the determinants of the strength of transmission to individual countries, we test the relevance of their macroeconomic policies and the degree of real and financial integration, thus linking the strength of asset price transmission to underlying trade and asset holdings, and find that in particular the degree of global integration of countries – and not a country’s bilateral integration with the United States – is a key determinant for the transmission process. |
| Keywords: | global financial markets, monetary policy, transmission, financial integration, United States, advanced economies, emerging market economies |
| JEL: | F30 F36 G15 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1710&r=ifn |