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on International Finance |
| By: | Balázs Égert; ; |
| Abstract: | This paper investigates the importance of the Balassa-Samuelson effect for two acceding countries (Bulgaria and Romania), two accession countries (Croatia and Turkey) and two CIS countries (Russia and Ukraine). The paper first studies the basic assumptions of the Balassa-Samuelson effect using yearly data, and then undertakes an econometric analysis of the assumptions on the basis of monthly data. The results suggest that for most of the countries, there is either amplification or attenuation, implying that any increase in the open sector’s productivity feeds onto changes in the relative price of non-tradables either imperfectly or in an over-proportionate manner. With these results as a background, the size of the Balassa-Samuelson effect is derived. For this purpose, a number of different sectoral classification schemes are used to group sectors into open and closed sectors, which makes a difference for some of the countries. The Balassa-Samuelson effect is found to play only a limited role for inflation and real exchange rate determination, and it seems to be roughly in line with earlier findings for the eight new EU member states of Central and Eastern Europe. |
| Keywords: | Balassa-Samuelson effect, productivity, inflation, real exchange rate, transition, South Eastern Europe, CIS, Turkey |
| JEL: | E31 O11 P17 |
| Date: | 2005–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-796&r=ifn |
| By: | Luc, BAUWENS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Genaro, SUCARRAT |
| Abstract: | The general-to-specific (GETS) approach to modelling is widely employed in the modelling of economic series, but less so in financial volatility modelling due to computational complexity when many explanatory variables are involved. This study proposes a simple way of avoiding this problem and undertakes an out-of-sample forecast evaluation of the methodology applied to the modelling of weekly exchange rate volatility. Our findings suggest that GETS specifications are especially valuable in conditional forecasting, since the specification that employs actual values on the uncertain information performs particularly well. |
| Keywords: | Exchange Rate Volatility, General to Specific, Forecasting |
| JEL: | C53 F31 |
| Date: | 2006–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2006013&r=ifn |
| By: | Rasmus Fatum (School of Business, University of Alberta); Michael M. Hutchison (Department of Economics, University of California Santa Cruz) |
| Abstract: | Studies of central bank intervention are complicated by the fact that we typically observe intervention only during periods of turbulent exchange markets. Furthermore, entering the market during these particular periods is a conscious “self-selection” choice made by the intervening central bank. We estimate the “counterfactual” exchange rate movements that allow us to determine what would have occurred in the absence of intervention and we introduce the method of propensity score matching to the intervention literature in order to estimate the “average treatment effect” (ATE) of intervention. Specifically, we estimate the ATE for daily Bank of Japan intervention over the January 1999 to March 2004 period. This sample encompasses a remarkable variation in intervention frequencies as well as unprecedented frequent intervention towards the latter part of the period. We find that the effects of intervention vary dramatically and inversely with the frequency of intervention: Intervention is effective over the 1999 to 2002 period, ineffective during 2003 and counterproductive during the first quarter of 2004. |
| Keywords: | foreign exchange intervention; Bank of Japan; self-selection, matching methods |
| JEL: | E58 F31 G15 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:06-04&r=ifn |
| By: | Javier Gómez Pineda |
| Abstract: | Capital flows often confront central banks with a dilemma: to contain the exchange rate or to allow it to float. To tackle this problem, an equilibrium model of capital flows is proposed. The model captures sudden stops with shocks to the country risk premium. This enables the model to deal with capital outflows as well as capital inflows. From the equilibrium conditions of the model, I derive an expression for the accounting of net foreign assets, which helps study the evolution of foreign debt under di¤erent policy experiments. The policy experiments point to three main conclusions. First, interest rate defenses of the exchange rate can deliver recessions during capital outflows even in financially resilient economies. Second, during unanticipated reversals in capital inflows, the behavior of foreign debt is not necessarily improved by containing the exchange rate. Third, an economy can gain resilience not by simply shifting the currency denomination of debt, but by both, shifting the denomination and floating the currency. |
| Keywords: | Sudden stops; Credit booms; Country risk; Fear of floating; Debt sustainability |
| JEL: | F41 F32 G15 H62 H63 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:395&r=ifn |
| By: | Komarek, Lubos (Czech National Bank); Komarkova, Zlatuse (Prague School of Economics); Melecky, Martin (University of New South Wales) |
| Abstract: | According to economic theory, the capital inflows reversal – so-called sudden stop – has a significant negative effect on economic growth. This paper investigates the direct impact of current account reversals on growth in Central and Eastern European countries. Two steps to conduct the analysis are applied. In the first step we estimate the standard growth equation augmented by an effect of the current account reversal. We find that after a current account reversal the growth rate declines by 1.10 percentage points in the current year. The subsequent analysis of the adjustment dynamics builds upon the notion of convergence. We find the unconditional and conditional convergence coefficients to be - 0.47 and -0.52, respectively. This implies that the consequences of the reversal are likely eliminated after 3.3 years when the actual growth rate is back at its equilibrium level, ceteris paribus. Finally, the cumulative loss associated with a sudden stop in capital flows is about 2.3 percentage points. We infer that Central and Eastern European countries are relatively flexible in terms of adjustment and reallocation of resources given the findings in similar literature examining either a more general sample or concentrating on rather different regions. |
| Keywords: | Current Account Reversals ; Economic Growth ; Emerging Market Economies ; Adjustment Dynamics ; Panel Data Analysis |
| JEL: | F32 C23 O40 O52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:736&r=ifn |
| By: | Michael Brandmeier |
| Abstract: | The real economic effects of the considerably high appreciation in Central European Economies (CEE) are controversially disputed in the eve of the European Monetary Union (EMU) entry of several CEE economies. The Balassa-Samuelson-effect was made responsible for the expectation of higher inflation rates in CEE than in the EMU in the next years. Higher inflation rates will deteriorate the price competitiveness of the export sectors in the CEE countries because of real appreciation. This paper focuses on the effects of labour productivity differences in several industrial and service sectors on the consumer prices. Labour productivity changes are affected by the technology impact on labour demand and by the relative wage increases following from tensions of regional labour markets because of rising prices and skilled labour shortage. Real appreciation is determined by labour productivity differences and by capital good imports. We conclude that the negative coherence between real appreciation and the endangered price competitiveness of the export sectors in CEE has to be taken into account, unless the negative experience of loss of competitiveness because of sudden real appreciation in Eastern Germany will take place on a large scale in the eastern part of the enlarged euro area. |
| Keywords: | European Monetary Union, inflation differences, Balassa-Samuelson-effect, Central and Eastern Europe |
| JEL: | E31 F33 F41 |
| Date: | 2006–06–02 |
| URL: | http://d.repec.org/n?u=RePEc:got:cegedp:55&r=ifn |
| By: | Roman Horvath |
| Abstract: | This paper estimates the medium-term determinants of the bilateral exchange rate variability and exchange rate pressures for 20 developed countries in the 1990s. The results suggest that the optimum currency area criteria explain the dynamics of bilateral exchange rate variability and pressures to a large extent. Next, we predict exchange rate volatility and pressures for the Central and Eastern European Countries (CEECs). We find that the CEECs encounter exchange rate pressures at approximately the same level as the euro area countries did before they adopted the euro. |
| Keywords: | Euro Adoption, Exchange Rates, GMM, Optimum Currency Area. |
| JEL: | F15 F31 E58 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2005/08&r=ifn |
| By: | Balázs Égert,; László Halpern; Ronald MacDonald |
| Abstract: | In this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies. Amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual Balassa-Samuelson effect, such as the behaviour of the real exchange rate of the open sector and regulated prices. We then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model, namely: differences in the theoretical underpinnings; differences in the econometric estimation techniques; and differences relating to the time series and cross-sectional dimensions of the data. The ensuing three-dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size. |
| Keywords: | equilibrium exchange rate, Purchasing Power Parity, trend appreciation, Balassa-Samuelson effect, productivity, inflation differential, tradable prices, regulated prices, Fundamental Equilibrium Exchange Rate, Behavioural Equilibrium Exchange Rate, Permanent Equilibrium Exchange Rate, NATREX, CHEER, transitional economies, euro. |
| JEL: | C15 E31 F31 O11 P17 |
| Date: | 2005–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-793&r=ifn |
| By: | David M. Kemme; Saktinil Roy; |
| Abstract: | A model of the long run equilibrium real exchange rate based upon macroeconomic fundamentals is employed to calculate real exchange rate misalignments for Poland and Russia during the 1990s using the Beveridge and Nelson (1981) decomposition of macrofundamentals into transitory and permanent components. Short run movements of the real exchange rate are estimated with ARIMA and GARCH error correction specifications. The different nominal exchange rate regimes of the two countries generate different levels of misalignment and different responses to exogenous shocks. The average misalignment in Russia is substantially greater than that in Poland, indicating incipient pressures to devalue the ruble immediately preceding the August 1998 crisis. The half life of an exogenous shock is found to be much shorter for Poland than for Russia in the pre-crisis period. Dynamic forecasts indicate that the movements of the real exchange rate in the post-crisis period are significantly different from those in the pre-crisis period. Thus, the currency crisis in Russia could not be anticipated with the movements of the real exchange rate estimated with the macroeconomic fundamentals. |
| Keywords: | Russia, Poland, equilibrium real exchange rates, misalignment, cointegration, exogenous shocks, macroeconomic crises |
| JEL: | F31 F36 P17 |
| Date: | 2005–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-797&r=ifn |
| By: | Balazs Egert; Lubos Komarek |
| Abstract: | This paper studies the impact of daily official foreign exchange interventions on the Czech koruna's exchange rate vis-a-vis the euro (the German mark prior to 1999) from 1997 to 2002. Both the event study methodology, extended with official interest rate moves, and a variety of GARCH models reveal that central bank interventions, especially koruna purchases, seem to have been relatively ineffective from 1997 to mid-1998 compared to the size of the interventions. From mid-1998 to 2002, however, koruna sales turn out to be effective in smoothing the path of the exchange rate up to 60 days. Nevertheless, the event study approach indicates that the success of FX interventions may be intimately related to the coordination of intervention and interest rate policies. |
| Keywords: | Central bank intervention, Czech Republic, event study, foreign exchange intervention, GARCH, interest rate policy, transition economies. |
| JEL: | F31 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2005/07&r=ifn |
| By: | Lubos Komarek; Martin Melecky |
| Abstract: | The behavioural equilibrium exchange rate (BEER) model of the Czech koruna is derived in this paper and estimated by three methods suitable for non-stationary time series. The potential determinants of the real equilibrium exchange rate considered are the productivity differential, the interest rate differential, the terms of trade, net foreign direct investment, net foreign assets, government consumption and the degree of openness. We find that the Czech koruna was on average undervalued over the period 1994 to 2004 by about 7 percent with respect to the estimated BEER. The significant determinants of the equilibrium exchange rate of the Czech koruna appear to be the productivity differential, the real interest rate differential, the terms of trade and net foreign direct investment. |
| Keywords: | Czech Republic, equilibrium exchange rate modelling, ERM II, exchange rate misalignments, time-series analysis. |
| JEL: | C52 C53 E58 E61 F31 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2005/05&r=ifn |
| By: | Katerina Arnostova; Jaromir Hurnik |
| Abstract: | Due to significant lags between a monetary policy action and the subsequent responses in the economy, understanding the transmission mechanism is of primary importance for conducting monetary policy. This paper analyses the monetary policy transmission mechanism using VAR models - the most widely used empirical methodology for analyzing the transmission mechanism in the Czech economy. Using the VAR methodology, the paper tries to evaluate the effects of an exogenous shock to monetary policy. The results show that an unexpected monetary policy tightening leads to a fall in output, whereas prices remain persistent for a certain time. The exchange rate reaction then heavily depends on the data sample used. Although it is clear that due to the rather short time span of the data, the results should be taken with caution, they at least show that the basic framework of how monetary policy affects the economy does not differ significantly either from what would be predicted by the theory or from the results obtained for more developed economies. |
| Keywords: | Impulse response, monetary policy, transmission mechanism, vector autoregressions. |
| JEL: | E37 E52 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2005/04&r=ifn |
| By: | Komarek, Lubos (Czech National Bank); Melecky, Martin (University of New South Wales) |
| Abstract: | This paper investigates the possible negative effect of external crises, sudden stops in capital flows and currency crises in emerging market economies. We find that a current account reversal has an important effect, both direct and indirect, on economic growth, and depresses GDP by about 1 percentage point in the current year, when using a broad group of emerging markets. On the other hand, currency crises themselves, identified as a sharp depreciation, do not appear to have a significant direct impact on growth. Their overall effect on growth is positive, though rather insignificant from an economic point of view. The joint occurrence of the currency crisis and the current account reversal appears to be the most damaging event for economic growth. Both the direct and compounded effects are about 5 times larger than those of the reversal in the current year. The estimated cumulative losses for current account reversals and the joint crisis are 2 and 21 percentage points, respectively. The time necessary for the adjustment of actual growth back to its equilibrium rate is roughly 2.5 years after the current account reversal and 6.5 years after the joint occurrence of the currency crisis and the reversal. |
| Keywords: | External Crises ; Economic Growth ; Open Transition Economy ; Panel Data |
| JEL: | F32 C23 O40 O52 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:wrk:warwec:735&r=ifn |