nep-ifn New Economics Papers
on International Finance
Issue of 2006‒06‒17
eleven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Monetary Policy, Exchange Rate Overshooting, and Endogenous Physical Capital By Habib Ahmed; C. Paul Hallwood; Stephen M. Miller
  2. Inflation Targeting and the Role of Exchange Rate Pass-through By Reginaldo P. Nogueira Jnr
  3. Pricing-to-market or hysteresis?: an empirical investigation of German exports By Emilia Penkova
  4. The impact of monetary policy signals on the intradaily Euro-dollar volatility. By Darmoul Mokhtar
  5. Currency Mismatches, Default Risk, and Exchange Rate Depreciation: Evidence from the End of Bimetallism By Michael D. Bordo; Christopher M. Meissner; Marc D. Weidenmier
  6. Measuring Efficiency externalities from Trade and Alternative Forms of Foreign Investment By Krishna G. Iyer; Alicia N. Rambaldi; Kam Ki Tang
  7. Optimal Monetary and Exchange Rate Policies in Crisis-Prone Small Open Economies By Rajesh Singh; Joydeep Bhattacharya
  8. Exchange rates and transition economies` export prices: is there evidence for pricing-to-market behaviour? By Emilia Penkova
  9. Adopting a common currency basket arrangement into the 'ASEAN plus three' By Eiji Ogawa; Kentaro Kawasaki
  10. The Open Economy Consequences of U.S. Monetary Policy By John Bluedorn; Christopher Bowdler
  11. The IMF and the Liberalization of Capital Flows By Joseph P Joyce; Ilan Noy

  1. By: Habib Ahmed (Islamic Development Bank); C. Paul Hallwood (University of Connecticut); Stephen M. Miller (University of Connecticut and University of Nevada, Las Vegas)
    Abstract: We develop an open economy macroeconomic model with real capital accumulation and microeconomic foundations. We show that expansionary monetary policy causes exchange rate overshooting, not once, but potentially twice; the secondary repercussion comes through the reaction of firms to changed asset prices and the firmsâ decisions to invest in real capital. The model sheds further light on the volatility of real and nominal exchange rates, and it suggests that changes in corporate sector profitability may affect exchange rates through international portfolio diversification in corporate securities.
    Keywords: physical capital, open economy macroeconomic, monetary policy, exchange rate
    JEL: F31 F32
    Date: 2006–06
  2. By: Reginaldo P. Nogueira Jnr
    Abstract: The paper presents evidence on the exchange rate pass-through for a set of emerging and developed economies before and after the adoption of Inflation Targeting. We use an ARDL model for a sample of developed and emerging market economies to estimate the short-run and the long-run effects of depreciations on prices. The results support the view of the previous literature that the pass-through is higher for emerging than for developed economies, and that it has decreased after the adoption of Inflation Targeting. This reduction, however, does not mean that the pass-through is no longer existent for developed and emerging market economies, especially when it comes to the long-run. This finding highlights the importance of using dynamic models when dealing with the inflation-depreciation relationship. The results also show the important role of foreign producer costs for the imports pricing behaviour in developed economies, and of inflation stability in emerging markets.
    Keywords: Inflation Targeting, Exchange Rate Pass-through
    JEL: E31 E52 F31 F41
    Date: 2006–01
  3. By: Emilia Penkova
    Abstract: The paper initiates a new area of research: both concepts of hysteresis and pricing-to-market are simultaneously investigated in relation to German exports into Belgium, France, Italy, UK, Spain and Sweden over the period 1975 to 1994 at 4-digit ISIC level. There is abundant empirical evidence that German exports price-to-market. Part of this observed limited exchange rate pass-through, however, might be due to hysteresis as well. A dynamic panel estimation is undertaken, a new concept "pricing-to-market due to hysteresis in quantities" is introduced, and a method for capturing it is proposed. A test for measuring hysteresis in prices is also suggested. There is evidence that hysteresis and pricing-to-market deserve a better empirical modelling.
  4. By: Darmoul Mokhtar (Centre d'Economie de la Sorbonne)
    Abstract: In this paper, we investigate the impact of monetary policy signals stemming from the ECB Council and the FOMC on the intradaily Euro-dollar volatility, using high-frequency data (five minutes frequency). For that, we estimate an AR(1)-GARCH(1,1) model, which integrates a polynomials structure depending on signal variables, starting from the deseasonalized exchange rate returns series. This structure allows us to test the signals persistence one hour after their occurence and to reveal a dissymmetry between the effect of the ECB and Federal Reserve signals on the exchange rate volatility.
    Keywords: Exchange rates, official interventions, monetary policy, GARCH models.
    JEL: C22 E52 F31 G15
    Date: 2006–06
  5. By: Michael D. Bordo; Christopher M. Meissner; Marc D. Weidenmier
    Abstract: It is generally very difficult to measure the effects of a currency depreciation on a country’s balance sheet and financing costs given the endogenous properties of the exchange rate. History provides at least one natural experiment to test whether an exogenous exchange rate depreciation can be contractionary (via an increased real debt burden) or expansionary (via an improved current account). France’s decision to suspend the free coinage of silver in 1876 played a paramount role in causing a large exogenous depreciation of the nominal exchange rates of all silver standard countries versus gold-backed currencies such as the British pound—the currency in which much of their debt was payable. Our identifying assumption is that France’s decision to end bimetallism was exogenous from the viewpoint of countries on the silver standard. To deal with heterogeneity we implement a difference in differences estimator. Sovereign yield spreads for countries on the silver standard increased in proportion to the potential currency mismatch. Yield spreads for silver countries increased ten to fifteen percent in the wake of the depreciation. Basic growth models suggest that the accompanying reduction in investment could have decreased output per capita by between one and four percent relative to the pre-shock trajectory. This also illustrates that a substantial proportion of the decrease in spreads gold standard countries identified in the “Good Housekeeping” literature could be attributable to the increase in exchange rate stability. Finally, if emerging markets are going to embrace international capital flows, the most export oriented countries will manage to mitigate the negative effects of a currency mismatch.
    JEL: N1 N2 F3
    Date: 2006–06
  6. By: Krishna G. Iyer; Alicia N. Rambaldi; Kam Ki Tang (CEPA - School of Economics, The University of Queensland)
    Abstract: The literature has concentrated on evaluating technological spillovers from trade and inflows of foreign direct investment (FDI). Little effort has been directed towards identifying efficiency externalities arising from international linkages. We evaluate these for a sample of 20 OECD countries between 1982 and 2000 using a stochastic frontier approach. The analysis includes trade, inflows and outflows of FDI, foreign portfolio investment (FPI), and other foreign investment (OFI), and a measure of the absorptive capacities of host economies. We find trade and all foreign investment inflows to lead to increased efficiency. Outflows of FDI are found to exacerbate inefficiency.
    Date: 2005–06
  7. By: Rajesh Singh; Joydeep Bhattacharya
    Keywords: banking crises, fixed versus flexible regimes
    JEL: F41
    Date: 2005
  8. By: Emilia Penkova
    Abstract: The paper tests for potential pricing-to-market for a wide range of export industries in selected transition economies, namely Poland, Hungary and Bulgaria, at the four-digit level over the period 1990-1998. Panel estimation is undertaken and a fixed-effects linear model is estimated. The empirical evidence reported here offers new evidence for transition economies that have not been investigated before. Given the industries sampled, more price discrimination across destination is observed in Bulgaria than in Poland and Hungary. There is no evidence showing pricing-to-market in relation to common industries across source countries.
  9. By: Eiji Ogawa; Kentaro Kawasaki
    Abstract: East Asian countries, for example "ASEAN plus three countries" (China, Korea, and Japan), have been well cognizant of importance of the regional financial cooperation since the Asian currency crisis in 1997. They have established the Chiang Mai Initiative (CMI) to manage currency crises. However, the CMI is not designed for "crisis prevention" because it includes no more than soft surveillance process as well as a network of currency swap arrangements. The surveillance process should be conducted over intra-regional exchange rates and exchange rate policies of the regional countries in order to stabilize intra-regional exchange rates in a situation of a strong economic relationship among the regional countries. On one hand, the regional exchange rate stability is related with an optimum currency area. Based on a Generalized PPP model, which detects a cointegration relationship among real effective exchanges rates, we investigate whether the region composed of "ASEAN plus three countries" is an optimum currency area. In the investigation, our interest is focused on an issue whether the Japanese yen could be regarded as an "insider" currency as well as other East Asian currencies. Or, is the Japanese yen still an "outsider" which is used as a target currency of foreign exchange rate policy for other East Asian countries. We employ a Dynamic OLS to estimate the long-term relationship among the East Asian currencies in a currency basket. Our empirical results indicate that the Japanese yen works as an exogenous variable in the cointegration system during a pre-crisis period while it works as an endogenous one during a post-crisis period. It implies that the Japanese yen could be regarded as an insider currency as well as other East Asian currencies after the crisis although it is regarded as an outsider currency as well as the US dollar and the euro before the Asian crisis.
    Date: 2006–06
  10. By: John Bluedorn (Nuffield College and Department of Economics, University of Oxford); Christopher Bowdler (Nuffield College and Department of Economics, University of Oxford)
    Abstract: We characterize the channels by which a failure to distinguish intended/unintended and anticipated/unanticipated monetary policy may lead to attenuation bias in monetary policy's open economy effects. Using a U.S. monetary policy measure which isolates the intended and unanticipated component of federal funds rate changes, we quantify the magnitude of the attenuation bias for the exchange rate and foreign variables, finding it to be substantial. The exchange rate appreciation following a monetary contraction is up to 4 times larger than a recursively-identified VAR estimate. There is stronger evidence of foreign interest rate pass-through. The expenditure-reducing effects of a U.S. monetary policy contraction dominate any expenditure-switching effects, leading to a positive conditional correlation of international outputs and prices.
    JEL: E52 F31 F41
    Date: 2006–06–01
  11. By: Joseph P Joyce (Department of Economics, Wellesley College); Ilan Noy (Department of Economics, University of Hawaii)
    Abstract: Using data from a panel of developing economies from the 1982-98 period, the claim that the International Monetary Fund precipitated financial crises during the 1990s by pressuring countries to liberalize their capital accounts prematurely is evaluated. Examining whether the changes in the regime governing capital flows took place during participation in IMF programs, evidence finds that IMF program participation is correlated with capital account liberalization episodes during the 1990s. Alternative indicators of capital account openness were used to test the robustness of the results by comparing the economic and financial characteristics of countries that decontrolled during IMF programs with those of countries who did so independently to determine whether decontrol was premature.
    JEL: F3

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